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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-1’ NEW DELHI
Before: SHRI SUDHANSHU SRIVASTAVA & SHRI O.P. KANT
PER O.P. KANT, A.M.:
This appeal by the assessee is directed against final assessment order dated 26/11/2014 passed by the Deputy Commissioner of Income-tax, Circle-10(1), New Delhi [in short ‘the Assessing Officer’] pursuant to the direction of the learned Dispute Resolution Panel (in short ‘the DRP’) for assessment year 2010-11. Following grounds have been raised in the appeal:
A. Software Development Segment [Rs.1,94,67,549] 1. On the facts and in law, the Ld. TPO/AO and Hon’ble DRP erred in determining the adjustment of Rs.1,94,67,549/- to the value of
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international transactions pertaining to Software Development Services Segment. 2. That on facts and in law, the Hon’ble DRP and Ld. TPO/AO failed to appreciate the business model and business realities of the Appellant and its Associated Enterprises (“AE”) while conducting the transfer pricing analysis and adopted an entirely flawed approach to reach a conclusion that the Appellant is not compensated at arm’s length for its Software Development Services Segment. 3. On the facts and in law, the Ld. TPO erred in not discharging his statutory onus to establish that any of the conditions specified in clause (a) to (b) of section 92C(3) of the Act have been satisfied before disregarding the arm’s length price determined by the Appellant and proceeding to determine the arm’s length price himself. 4. On the facts and in law, the Hon’ble DRP and Ld. TPO/AO have erred in rejecting the economic analysis undertaken by the Appellant without proper justification and conducting a fresh search using arbitrary filters for identifying companies comparable to the Appellant. 5. On the facts and in law, the Ld. TPO/AO and Hon’ble DRP grossly erred in not accepting the comparable companies proposed by the Appellant, as the said comparable companies met the FAR (functions performed, assets employed and risk assumed) test stated under Rule 10B(2) of the Income Tax Rules, 1962 (“the Rules”) 6. On facts and inlaw, the Ld. AO/TPO erred in violating the provisions of Rule 10B92) of the Rules by introducing new comparables without considering the differences in the functions performed, assets employed and risks assumed by such companies vis-à-vis the Appellant, thereby resorting to cherry picking of comparables. 7. On the facts and in law, the Ld.AO/TPO erred in incorrectly computing the operating margins of the comparables companies by treating certain items as operating/non-operating. 8. On the facts and in law, the Ld. AO/TPO and Hon’ble DRP erred in not providing the benefit envisaged under section 92C(2) of the Act. 9. On the facts and in lw, the Ld. TPO and Ld. AO erred in not allowing a risk adjustment to the Appellant thereby contravening the provisions of Rule 10B(1)(e)(iii) and Rule 10B(3) of the Rules. 10. On the facts and in law the Ld. TPO, Ld. AO and the Hon’ble DRP erred in using the data for the current year (i.e. financial year 2008- 09) which was not contemporaneous and which was not available in the public domain at the time of preparing the TP documentation by the Appellant, thereby grossly misinterpreting the requirement of ‘contemporaneous’ data in the Rules to necessarily imply current year data, thereby breaching the principles of natural justice and ‘impossibility of performance.’
B. SIM Card Assembly Segment [Rs.3.90,60,721] 11. On facts and in law, the Hon’ble DRP and Ld. AO/TPO grossly erred in passing anon-speaking order without appreciating the correct
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facts and legal position in utter disregard of the principles of natural justice. 12. On the facts and in law, the Hon’ble DRP and Ld. AO/TPO erred in making an adjustment of Rs.3,90,60,721/- to the total income of the Appellant on account of the difference in arm’s length price of the international transactions pertaining to SIM Card Assembly segment. 13. Without prejudice, on facts and in law, the order of the Ld. AO/TPO is erroneous to the extent of not incorporating the binding directions of the Hon’ble DRP that the treatment of foreign exchange gain/loss should be considered as a non-operating item, while finalizing the order section 143(3) read with section 144C of the Act. 14. Without prejudice, on facts and in law, the Ld. AO/TPO and Hon’ble DRP erred in not appreciating that adjustment, if any, in computing the profit margin of SIM card Assembly Segment ought to have been restricted to international transaction with AE’s and not the whole segment. 15. On facts and in law, the Hon’ble DRP and Ld. TPO/AO ered in applying the profit margin of comparable companies to that of the Appellant without taking into account economic & commercial reasons and factual data to support the losses incurred in the SIM card assembly segment. 16. On facts and in law, the Hon’ble DRP and the Ld. TPO/AO have failed to make appropriate adjustments to account for varying risk profiles of the Appellant vis-à-vis the comparables and in the process also neglected the Indian transfer princing regulations, OECD guidelines on transfer pricing and judicial procedure. 17. On the facts and in law, the Hon’ble DRP and the Ld. TPO/AO grossly erred in taking the margin on SIM Card assembly segment and comparing the margin of comparables, without giving any benefit on account of high competition in market, capacity under utilization, low sales, realization due to falling prices etc, 18. Without prejudice to our other grounds of appeal, the Ld. TPO ought to have considered that in view of the peculiar facts of the matter. AE should have been taken as ‘Tested Party’ for the purpose of benchmarking international transaction in respect to SIM Card assembly segment. 19. Without prejudice to our other grounds of appeal, the Ld. TPO ought to have considered that pursuant to rule 10B of Income-tax Rules, 1962 and OECD guidelines the ‘Tested Party’ is one with less complex function analysis where profitability can be reliably ascertained with lease adjustments.
Corporate Tax Grounds
A. Disallowance of export commission [Rs.39,47,160/-]
On the facts and in law, the Ld. AO erred in determining and the Hon’ble DRP erred in confirming the adjustment of Rs.39,47,160/- to the total income of the Appellant on account of disallowance of payment of export commission under Section 40(a)(ia) of the Act.
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On the facts and in law, the Ld. AO and the Hon’ble DRP grossly erred in not appreciating that the marketing support service were rendered outside India and as such the income of the payee neither accrued nor arose in India and hence, was not taxable in India. 22. On the facts and in law, the Ld. AO and the Hon’ble DRP erred in concluding that the payment of export commission by the Appellant partakes the character of “fees for technical services” and is covered by the provisions of the section 9(1)(vii)(b) of the Act. 23. On the facts and in law, the Ld. AO and the Hon’ble DRP grossly erred in concluding that the payment of export commission by the Appellant to a non-resident is covered by the provisions of Section 195 of the Act, which requires for deduction of TDS on payment to a non-resident.
B. Addition on account of Bad Debts [Rs.29,73,346]
On the facts and in law, the Ld. AO and the Hon’bel DRP erred in concluding that the Appellant had failed to prove that the bad debts had been actually written off and also income corresponding to such bad debts had also been offered to tax in the earlier year and hence had to be disallowed under Section 36(1)(vii) of the Act. 25. On facts and in law, the Ld. AO and the Hon’ble DRP grossly erred in not appreciating that the Appellant had actually written off Debtors aggregating to Rs.29,73,346/- as bad debts which represents income relating to earlier year’s which remained unpaid and could not be realized and hence written off.
C. Other Grounds
On the facts and in the circumstances of the case, the Ld. AO erred in levying interest under section 234B and 234D of the Act. 27. On the facts and in law, the Ld. AO and the Hon’ble DRP erred on facts and in law in initiating penalty under section 271(1)(c) of the Act.
Briefly stated facts of the case are that the assessee company is engaged in the business of trading of ‘currencies verification’ and ‘currency processing machines’, its after sales warranty services and software services etc. For the year under consideration, the assessee filed return of income on 07/10/2010 declaring total income of Rs.17,77,56,570/-. The return of income filed by the assessee was selected for scrutiny assessment and statutory notices under the Income-tax Act, 1961 (in short ‘the
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Act’) were issued and complied with. In view of the international transactions undertaken by the assessee with its Associated Enterprises (AEs), the learned Assessing Officer referred the matter of determination of the arm’s-length price of those international transactions to the learned Transfer Pricing Officer (TPO). The TPO after going through the transfer pricing study of the assessee and after providing an opportunity of being heard in his order dated 16/01/2014 under section 92CA of the Act, proposed transfer pricing adjustment of Rs.1,94,67,549/- to the transaction of the software development service and of Rs.3,90,60,721/-to the SIM card assembly segment , totaling to Rs.5,85,28,270/-. The Assessing Officer in the draft assessment order dated 21/03/2014, in addition to the transfer pricing adjustment proposed of Rs.5,85,28,270/-, also proposed disallowance of export commission of Rs.39,47,160/- on account of non-deduction of TDS and addition on account of the bad debt of Rs.29,73,346/-. Against the draft assessment order, the assessee filed objection before the learned DRP. The Learned DRP, rejected various objection of the assessee against the filters applied by him for short-listing the comparables but issued direction for excluding certain comparables. On the direction of the learned DRP, the learned TPO computed transfer pricing adjustment to Rs.4,81,38,645/-. The disallowance of export commission of Rs.39,47,160/- and addition of bad debt of Rs.29,73,346/- was confirmed by the learned DRP. Pursuant to the direction of the Learned DRP, the Assessing Officer passed the impugned final assessment order. Aggrieved with the additions/disallowance made in the impugned final assessment
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order, the assessee is in appeal before the Tribunal raising the grounds as reproduced above. 3. The ground No.1 to 10 of the appeal relates to transfer pricing adjustment to the transaction of software development services. 3.1 Before us, the Ld. Counsel of assessee filed a Paper-book containing pages 1 to 783in two volumes and submitted that in relation to transfer pricing adjustment of software development services, the assessee referred only to exclusion of comparable namely M/s Infosys Ltd. 3.2 The functions, assets and risk (FAR) profile of the assessee reported by the assessee in transfer pricing study in relation to international transaction of provision of the software development services of Rs.15,94,04,791/-, available on page 92 to 100 of the paper book is reproduced as under: “5.3.1 Functions G&D India renders software development services to G&D GmbH wherein it develops application software(s) for G&D GmbH. In this regard, G&D India has entered into a ‘software development agreement’ effective from December 12, 2005. G&D India is primarily engaged in the following software business: • Development of software for the Smartcard module, which is sold to G&D GmbH. The chip set module software is developed as per the general requirements of the markets and is primarily developed for G&D GmbH. About 90% of the total development activity relates to the development software used as a part of the Smartcard module and is sold as a part of the Smartcard. The software development process for the development of the chip set module is further explained in the following parts. • Development of application software as per the specific requirements of the clients of G&D group. The services are offered to G&D GmbH and Giesecke & Devrient Asia Pte Ltd. Further, these services are provided to the SIM card distribution division of G & D India. This accounts for about 10 per cent of the total revenue.
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The financial roles with respect to the software development process are mentioned below:
5.3.1.1 Role G&D India G&D India is engaged in the business of development of smart card related software. The software is built of Assembler C and Java using embedded software technology. The software developed is primarily used in the telecom segment (about 80%). The other verticles in which the company operates are banking and government solutions. The software developed by G&D India does not find any standalone application without the Smartcards. The transfer of software happen through multi-site date transfer systems.
5.3.1.2 Role of G&D GmbH G&D GmbH conceptualizes the need for a particulars software application to be used in providing services to its end customers. G&D GmbH then defines the basic design of software, project content, delivery time, etc. for developing the particular software. The software so developed by G&D India is finally inserted by G&D GmbH in the Smartcards. G&D GmbH is also responsible for the overall supervision of the software developed. G&D GmbH has defined the whole Product Life Cycle (“PLC”) Procedure. The PLC Procedure covers the entire development process from “cradle to grave”, it defines the major milestones which link multiple departments at G&D GmbH through reviews, hand off etc. This procedure applies not only to new products, but also to products that required modifications, feature enhancements and new package options. The Product Life Cycle is broken down into a traditional phased approach. Each Phase is made up of major deliverables and or milestones and these milestones are defined by G&D Gmbh.
The activity diagram in relation to the software development service rendered by G&D India is shown below:
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5.3.1.3 Software Development Life-Cycle
5.3.1.3.1 Marketing G&D GmbH determines the opportunities for new telecom products and the software for the same on the basis of research conducted by the marketing team.
5.3.1.3.2 Product Definition G&D GmbH undertakes the Product Definition, wherein it defines description of the product (software) to be developed. The Research & Development (“R&D”) team at G&D GmbH is approached to take the produce development forward. R&D team draws the product functions/features, target applications, high level architectures, cost estimates and product definition plan (“PDP”) which defines resources and deliverables required to complete the product. Initial product idea is presented along with the business case, requirements, architecture and project plan before the management of G&D GmbH. This process allows management to control the allocation of resources to a project starting from its approval and till it is ready to be launched into development. The time schedule as to when to complete each phase of the module is also decided along with the management approval.
5.3.1.3.3 Software specification and Requirement analysis G&D GmbH defines the exact specifications/requirement of the project, methodologies and tools to be used in the project, time lines for the completion of the project and standards thereof. The function pertaining to the conceptualization of services is a key aspect and is undertaken by G&D GmbH. G&D Indian provides its inputs in the requirement analysis phase of the software development process, but this is restricted to the information required by G&D GmbH. Thus, G&D GmbH is wholly responsible for defining the specifications and requirements of the software developed by G&D India.
5.3.1.3.4 Product Validation and Data Flow Test After receiving product specifications, charts and diagrams from G&D GmbH, G&D India performs coding function which involves translation of the solutions provided by systems designers into detailed program specifications. G&D India also undertakes program design activities including data and module definition, specification of input and output between systems, and error message arrangements.
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G&D India performs tests mandated prior to release of the product/software to the customers. Once demo product is developed and is shown to the customer/prospective customer (activity co-ordinated by G&D GmbH team), demo chip undergoes a regressive testing in India based on customer’s feedback. G&D India is responsible for testing all maintenance processes (existing software applications) as well as new development activity to ensure that it meets the specifications/requirements of G&D GmbH.
5.3.1.3.5 Development and Documentation G&D India undertakes the development of software module and documentation function with respect to the software modules that it develops. However, G&D GmbH plans, supervises and manages the production and documentation function performed by G&D India.
5.3.1.3.6 Testing Post-development of module, quality assurance team tests and verifies and developed software.
5.3.1.3.7 Integration G&D GmbH with assistance from G&D India integrates the individual modules, if required, and performs the integration and testing. The final software developed, post validation and testing in India, is supplied to G&D GmbH or to the chip manufacturer. This software is embedded into the chips. These chips are then packed and tested for quality check and finally sold to customers by G&D GmbH.
5.3.1.4 Research & Development G&D GmbH undertakes research activities required in respect of the software development services rendered by G&D India. G&D India does not perform any function which may lead to the creation of significant intangibles.
5.3.1.5 Project management G&D GmbH performs feasibility studies on each product and develops written requirements to provide direction for product development and highlighting the product functions, product perspective, and unique position the product intends to fill in the market place. At the time of finalization of work to be done by G&D India, G&D GmbH identifies the resources required to undertake the project and also identifies the areas where G&D India’s assistance would be required. G&D GmbH deploys a Senior R&D and Marketing Management team to analyze the software requirement and design an architecture based on the analysis.
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The project team at G&D India works in close co-ordination with the project team at G&D GmbH. The resources are mobilized depending upon the requirements of the project. Thus, the overall project responsibility remains with G&D GmbH which is also responsible for monitoring and managing the entire project.
5.3.1.6 Support Services As per the services agreement entered into between G&D GmbH and G&D India, G&D GmbH may specify post- delivery support obligations. With regard to the support services, based on follow-up with customers, if there is any but in the software, the customers would reach out to Sales & Marketing team of G&D GmbH are subsequently the Engineering Team is informed of the problem in the software. G&D GmbH then takes a call on which team shall be appointed to resolve the software bungs.
5.3.2 Assets G&D India maintains and deploys necessary human resources and infrastructure for development of software. However, G&D India does not own any valuation non- routine intangibles. Further, all intangibles including patents, trademarks and trade secrets etc. are the sole and exclusive property of G&D GmbH. G&D India’s assets includes computers, office equipment, etc. for its business operations. The company carries out its activities from its centre at Pune, which is designated STPI unit.
5.3.2.1 Human resource In respect of software development services, human resource is the most critical asset. During 2009-10, the company had employed around 73 software developers with a staff of 9 persons looking after the managerial functions and a support staff of 5 persons. The qualification requirements for developers employed by G&D India are person with BE, B.Tech and MCA.
5.3.2.2 Other assets G&D India also employs other hardware/software for provision of software development services to G&D GmbH
Risk Analysis 5.3.3 The various risks associated with this international transaction are as under:
5.3.3.1 Market risk G&D GmbH is responsible for marketing its services worldwide. It interacts with customers, faces competition and is responsible for penetrating newer markets and
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introducing new products/services to widen its customers base. As G&D India provides services only to G&D GmbH and Giesecke&Devrient Asia Pte Ltd., it does not have to market its services. Therefore, AEs bear the full market risk in relation to software development services.
5.3.3.2 Contract Risk G&D GmbH enters into contracts with its customers in its own name for the final product sold, which includes the software developed by G&D India. Therefore, the contract risk is borne by G&D GmbH.
5.3.3.3 Capacity utilization risk G&D India has hired employees/invested in infrastructure based on specified R&D budget/work allocated to G&D India. As the decision regarding the work to be performed by G&D India is driven from G&D GmbH (with inputs from G&D India) and as G&D India works on a cost plus model, the capacity utilization risk vests with G&D GmbH.
5.3.3.4. Technology Risk This risk arises if the market in which the company operates is sensitive to introduction of new products technologies. Hence, in that case, business units may face loss of potential revenues due to inefficiencies arising from obsolete products. G&D GmbH bears the technology risk as it is the owner of the final software product developed. As the technology is ever-evolving, G& D GmbH is constantly upgrading the software.
5.3.3.5 Manpower Risk G&D India has skilled workforce to perform various functions relating to development of software. There is a risk of trained manpower leaving the company. Software industry is plagued with high risk of attrition. Thus, G&D India bears the manpower risk. However, since G&D India functions as a captive unit, G&D GmbH in turn also faces manpower risk.
5.3.3.6 Service liability risk Service liability risk refers to the risk associated with the possibility of facing legal action form customers, due to defects in the products provided. G&D India provides software services only to its AEs. The risk of service liability to customers of G&D GmbH rests with G&D GmbH. However, in case of any default, G&D India is liable to rework.
5.3.3.7 Credit risk
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Since G&D GmbH sells the products to third party customers on credit terms, any risk such as bad debts arising out of credit transactions are borne by G&D GmbH. G&D India does not bear any credit risk as it provides services only to its AEs.
5.3.3.8 Foreign exchange risk G&D India invoices G&D GmbH for its services in Euros, which is different from its functional currency (i.e. INR). Thus, the foreign exchange risk is borne by G&D India.
Type of Risk G&D India G&D GmbH Market Risk Indirectly exposed Yes to this risk Contract Risk No Yes Capacity Utilization Risk No Yes Technology Risk No Yes Manpower Risk Yes Yes Service Liability Risk No Yes Credit Risk No Yes Foreign Exchange Yes Non Fluctuation Risk
5.3.4 Decision Making Matrix
5.3.4.1 Organizational decision matrix The decisions regarding the organization and the reporting structure of the software development centre at G&D India, is looked after by G&D GmbH. The software development head at G&D India has reporting to G&D GmbH, in addition to direct reporting to the management of G&D India.
5.3.4.2 Capacity decision The decision regarding utilization of resources and the planning of resources is a function of G&D GmbH; G&D India only acts as a service provider given the requirements and needs by G&D GmbH. G&D India participates in the decision-making process with the final decision vesting with G&D GmbH.
5.3.4.3 Budged Process G&D India is allocated a budget by G&D GmbH, which forms a part of the Global R&D budget of the G&D Group.
5.3.4.4 Capex Decision The decision to set-up the software development centre in G&D India was taken by G&D GmbH.
5.3.4.5 Key result areas (KRA) of the software development team.
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The KRA of the software development head at G&D India is delivery of software as per the requirements of G&D GmbH and cost control. The work to be outsourced to India is decided by G&D GmbH. 5.3.5 Characteristics of G&D India’s risk-n-reward matrix. On detailed examination of the functional matrix of software development services rendered by G&D India, as outlined in section 5.3.1 above, we understand that G&D India is a low risk service provider which is not vested with the capacity utilization decision/risk. The key characteristics of the risk-n- reward matrix of software development services rendered by G&D India are: • G&D India executes defined tasks; • The KRA of the software head of G&D India is linked to the quality of service delivery and he is not responsible to source work from group entities; • The software developed by G&D India is not sold as a standalone product and is used by G&D GmbH as a part of the final deliverable; • G&D India only participates in the decision-making process regarding capacity utilization with the final decision vesting with G&D GmbH; • G&D India is allocated a specific budged in the Group’s global R&D scheme; • G&D India determines the number of employees to be employed in its software development centre based as deductive analysis of the work outsourced by G&D GmbH; and • The capex decision in relation to the software development centre at G&D India was taken by G&D GmbH.”
3.3 The assessee used Transactional Net Margin Method (TNMM) and net operating profit margin based on cost as profit level indicator (PLI). The assessee selected eight comparables with an average PLI of 10.60% using multiple year data. The assessee computed its own margin (PLI) at 12.00% for the software development services and concluded that in view of its margin (PLI) being higher than the average margin of the comparables, the International transaction of the software developer services was at arm’s length. The learned TPO rejected few comparables
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chosen by the assessee and selected few comparables from his side. In the final accept /reject matrix, the learned TPO selected 15 comparables with average margin(PLI) of 24.38% using current year data and accordingly made adjustment of Rs.1,85,27,602/-. Pursuant to the directions of the learned DRP of accepting/rejecting the comparables, the adjustment was reduced to Rs.4,81,38,645/-. Before us, the assessee has sought only to exclude the comparable M/s Infosys Technologies Ltd. 3.4 Before the Learned TPO, the assessee objected inclusion of the M/s Infosys Technologies Ltd on the ground of functional dissimilarity, Brand profit, on-site revenue, employee cost to cost ratio, research and development expenses and significantly higher turnover. The learned TPO rejected the objection of the assessee and observed that 90% of revenue of the Infosys comes from maintenance or enhancement of the software and not from the end-to-end solutions. He observed that operational size has no impact on the profit margins. According to him in software development service sector “teams of software employees” are formed to work upon the software development services contracts received and accordingly, more the contracts more team are formed, therefore basic working remains the “team” in all the companies in the software sector. In view of the basic unit of business being the same i.e .‘the team’, he rejected the contention of the assessee that the difference between taxpayer and the Infosys due to Infosys might be having more teams than the taxpayer to render software development services. The contention of the functional difference on account of the on-site revenue was also rejected by the Learned TPO. According to Ld TPO, this filter was not applied while selecting/rejecting the comparables. He
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also submitted that majority of the revenue of the Infosys was from off-site activities. 3.5 The objection of the assessee of the significant brand value of Infosys also rejected by the Learned TPO. The Learned TPO held that brand building expenses (Rs. 57 crores) and marketing expenses (Rs. 15 crores) constitute only 0.34% of the total revenue. He also held that brand may have helped Infosys in increasing its No. of clients and retention of the existing client and thus increasing its market, but it has not necessary resulted in better profit margins and there are several other factors which go into the profitability of a concern. Regarding the argument of the assessee that Infosys has incurred substantial R&D expenditure and is developing intellectual property and therefore it is different from the taxpayer, the learned TPO held that R&D expenses (Rs. 438 crores) constitute only 2.07% of the revenue, which cannot be said to be substantial by any standard. In view of the observations, the learned TPO included the company as comparable. 3.6 Before the Learned DRP, the assessee contested that Infosys sells software product for banking industry in the name of the “Finnacle”, and thus being mixed product and software development segment, the company cannot be treated as comparable at the entity level. The learned DRP, however rejected this contention of the assessee holding that revenue from software product was of Rs. 925 Crores out of its operating revenue of Rs 21,140 crores, which constitute only 4.3% of the operating revenue. The contention of high turnover of the Infosys and renders end to end solutions was also rejected by the learned
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DRP. The objection on the ground of expenditure on R&D was also rejected by the learned DRP. 3.7 Before us, the learned Counsel of the assessee submitted that the company M/s Infosys Technologies Ltd has been rejected by the Tribunal in the case of the assessee itself for assessment year 2008-09 and assessment year 2011-12. The learned Counsel also referred to the Annual Report of the company available on page 366 to 462 to support that in the year under consideration there is no change in the function of the company and therefore relying on the order of the Coordinate bench of the Tribunal in assessment year 2008-09 and 2011-12, the company might be excluded from the set of the comparables. 3.8 The Learned DR, on the other hand, relied on the finding of the lower authorities. 4. We have heard rival submissions of the parties on the issue in dispute and perused the relevant material on record. We find that there is no significant change in the activities of the company as compared to earlier years. In assessment year 2008-09, the coordinate bench of Tribunal in ITA No. 5924/del/2012, following the decision of the Tribunal in the case of Nokia Siemens network India private limited (supra) excluded M/s Infosys Technologies Ltd from the set of the comparables observing as under:
“3.2.25 We have heard the rival submissions and perused the relevant material on record. We notice that on similar set of facts coordinate Bench of Tribunal in the case of Nokia Siemens Networks India Pvt. Ltd. vs. ACIT in ITA No. 333/Del/2013, has excluded this comparable by observing as follows: "78. This company is undoubtedly a corporate giant with its large scale of operations vis-à-vis the Assessee company; that it had a brand impact to determine the premium pricing; that it has a different model of revenue recognition. It is submitted on
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behalf of the assessee that this comparable has been rejected in Assessee’s own case in immediately preceding year, i.e. AY 2007- 08 by the Tribunal on account of different risk profile, scale, nature of services, revenue ownership of branded/ proprietary products, onsite and offshore services etc. This fact is not contradicted by the revenue. 79. Further, the Assessee has placed reliance on Aircom (supra), in order to exclude this comparable company on the basis of its magnitude. The coordinate bench has rejected this comparable by making following observations:-
“17.2. We have considered the rival submissions and perused the relevant material on record. It can be seen that the TPO has included this company in the list of comparables by rejecting the assessee’s contentions. The assessee is providing and assigning software services to its AE alone without acquiring any intellectual property rights in the work done by it in the development of software. The Hon’ble Delhi 31 ITA NO. 5924/Del/2012 (Giesecke&Devrient India Pvt. Ltd.) High Court in CIT vs. Agnity India Technologies (P) Ltd. (2013) 219 Taxmann 26 (Del) considered the giantness of Infosys Ltd., in terms of risk profile, nature of services, number of employees, ownership of branded products and brand related profits, etc. in comparison with such factors prevailing in the case of Agnity India Technologies Pvt. Ltd., being, a captive unit providing software development services without having any IP rights in the work done by it. After making comparison of various factors as enumerated above, the Hon’ble Delhi High Court held Infosys Ltd. to be non- comparable with Agnity India Technologies Pvt. Ltd. The facts of the instant case are similar to the extent that the extant assessee is also not owning any branded products and having no expenditure on R&D etc. When we consider all the above factors in a holistic manner, there remains absolutely no doubt that Infosys Technologies Ltd. is not comparable with the assesse company. Respectfully following the judgment of the Hon’ble jurisdictional High Court in Agnity India (supra), we hold that Infosys Technologies Ltd., cannot be treated as comparable with the assessee company. This company is, therefore, directed to be excluded from the list of comparables.”
The diversified activities of business, its deployment of capital, resources and the brand name make this company not comparable with the assessee and, therefore, this company has to be excluded from the final set of comparable companies for benchmarking international transaction related to software segment."
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3.2.26 Respectfully following the view taken by the coordinate Bench, whilst, following the judgment of the Hon'ble Delhi High Court, as afore mentioned, we direct the AO/ TPO to exclude Infosys from the final list of comparables.”
4.1 Respectfully, following the view taken by the Coordinate bench in assessment year 2008-09, we direct the Ld AO/TPO to exclude M/s Infosys Technologies Ltd. from the final set of the comparables. The ground No. 1 to 10 of the appeal of the assessee are accordingly allowed. 5. The ground Nos. 11 to 19 of the appeal are related to adjustment made to SIM Card Assembly segment. The Learned Counsel before us submitted that said adjustment has already been deleted by the Ld. AO wide its rectification order dated 22/06/2015 (copy of which is available on page 357 to 360 of the PB). In view of the deletion of the addition by the learned AO, the learned Counsel of the assessee did not press the ground No. 11 - 19 of the appeal, accordingly same are dismissed as infructuous. 6. The ground Nos. 20-23 of the appeal relates to disallowance of the export commission on account of non-deduction of the tax at source. 6.1 The assessee submitted before the Assessing Officer that it paid commission amounting to Rs.39,47,160/- to M/s G & D LLC, Egypt, for forwarding the sales order to the assessee for sales in the region of Middle East and North Africa. It submitted that the services are carried out by the G & D Egypt outside India and not qualify as “fee for technical services” or “royalty” as defined under section 9(1) of the Act. It further submitted that payment for such services was also received by the G & D Egypt outside India. Therefore, it was submitted that as a non-resident operates out of India, no part of its income accrues arises in India
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and accordingly such sum would not be liable for withholding tax under the provisions of the section 195 of the Act. Further the assessee relied on the Circular No. 23 of 1969 issued by the Central Board of the Direct Taxes (CBDT) and subsequently reiterated by the CBDT in Circular No. 786 of 2000. 6.2 The Learned Assessing Officer rejected the contention of the assessee. According to him in view of section 9(1)(vii)(b) of the Act the income by way of fees for technical services payable by a resident, except where services are utilized outside India or for the purpose of making of earning an income from any source outside India, then such income shall be deemed to accrue or arise in India. The learned Assessing Officer held that payment by the resident assessee in connection with his business in India to a person outside India making use of his expertise in sale of goods in a particular country is nothing but a fee which has been paid by the resident assessee to the non-resident for services rendered by him, which is construed as fee for technical services. According to the Assessing Officer there is element of consultancy, technical and managerial services for which said commission was paid and therefore it was squarely covered by section 9 of the Act, and thus as per section 195 of the Act, the assessee was required to deduct tax at source. The Assessing Officer held that in view of non-deduction of tax at source on the commission payable/paid to non-resident of Rs.39,47,160/-is disallowed under section 40(a)(i) of the Act. 6.3 The learned DRP examined the issue in detail. The learned DRP examined various terms of the agreement between the assessee and M/s G & D Egypt and concluded that there existed
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a business connection between G&D Egypt and G & D India. The relevant finding of the learned DRP is reproduced as under:
“From the above, it is evident that the said agreement is part of the overall design by the MNC Group namely Giesecke & Devrient (G&D) by which GD Egypt is responsible for the reason of Middle East and North Africa as subsidiary of G&D Gmbh and solely entitled to cover marketing and sales in that region. This preamble therefore, indicates that an artificial restraint and conditions have been put on GD India to pay commission to GD Egypt and GD Egypt has been granted exclusive rights by the principal G&D Gmbh to market the products of GD India in that region. Article 3.4 clarifies the position that GD India cannot sell any products in that region without involving GD Egypt. From the above, it is evident that the consideration paid to GD Egypt is against the right which it is exercising to sell the products in that region.
11.4.3In this backdrop, it is to be examined if the consideration paid by GD India to GD Egypt against a right vested in it, the value being computed with reference to the value of the orders, is chargeable to tax in terms of section 5 read with section 9 or not.
11.4.4Considering the facts of the case, it can be said that there is a strong business connection between GD India and GD Egypt. The sale order received by GD India is not possible without honoring the agreement with GD Egypt. GD Egypt is allegedly obtaining and forwarding the orders for GD India for the region. GD Egypt, in terms of the agreement carries out necessary tasks in that region by deputing its representatives etc. to the prospective customers. Thus, the principles laid down by various courts on the issue of ‘business connection’ when applies to the taxpayer’s case do lead to a logical conclusion that there is a strong and vibrant business connection between the taxpayer and the GD Egypt. In this context, the decision in ADIT Vs. Star Cruise India Travel Services, wherein ITAT Mumbai held that: “the expression ‘business connection’ does not cover mere canvassing for business by an agent in India. It postulates a real and intimate relation between business activity carried on outside India and business activity within India, the relation between the two contributing to the earning of income by the non-resident in his business activity. The business operations carried out outside India and inside India must have such a relationship as to contribute to business operations as a whole.” It is also a fact that a transaction cannot be finalized until and unless GD Egypt is involved and therefore, the relationship between the two is such that the action cannot be completed without the payment of the said payment of the said commission to GD Egypt.
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Under these facts, the Panel holds that there is a business connection between GD Egypt with GD India.”
6.4 Further, the learned DRP held that services rendered by GD Egypt are in the nature of managerial, consultancy and technical observing as under: “11.4.5 That taxpayer has objected to the fact that the amounts, remitted by the taxpayer to the GD Egypt is not FTS u/s 9(1)(vii) of the Act, as held by the AO. The amount paid by the taxpayer to the GD Egypt is FTS because FTS means any consideration for rendering of any managerial, technical or consultancy services. These terms have not been defined in the Act. However, the meaning of these terms has to be understood in the light of the purpose which these are going to serve, particularly in the light of the present times when the law is being applied. Supreme Court in the case of CIT Vs. Podar Cement Private Limited while interpreting the law, adopted the ambulatory approach for interpreting the term owner. The ambulatory approach gives due important to the advancement in technology. In the backdrop, there has been considerable overlap between the three terms namely managerial, consultancy and technical service. The AAR in the case of Intertek Testing Services India Pvt. Limited 307 ITR 418 has observed that consultancy services could also be technical in nature and these two expressions are not to be treated as water tight compartments. The AAR in the case of P. No. 28 of 1999 242 ITR 208 observed as follows: “By technical services, we mean in this context services requiring expertise in technology. By consultancy services, we mean in this context advisory services. The category of technical and consultancy services are to some extent overlapping because a consultancy services could also be technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in technology is required to perform it.” The ITAT Hyderabad in case of Tecumseh Products (I) Ltd. Vs. DCIT, 86 ITD 791 has observed that ‘technical services’ does not include providing some technical knowledge for manufacturing alone. Technical knowledge includes management or consultancy services. In view of the above, and considering the nature of services rendered by GD Egypt, it can be said that the services rendered are such which require expertise and knowledge in the specific area of work, such expertise cannot be developed overnight but is the result of long period of work in this line of activities coupled with accumulated experience of operations. The Panel therefore, believes that the payments made by the taxpayer to GD Egypt partakes the character of FTS under the domestic law.”
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6.5 Further, the learned DRP held that in view of the explanation below section 9(2), which has been inserted by the Finance Act 2010 with retrospective effect from 01/06/1976, even the income of non-resident deemed to accrue or arise in India irrespective of whether or not business connection in India or the non-resident has rendered services outside India. According to the learned DRP in view of the explanatory memorandum to the Finance Bill 2010, the situs of rendering services is not relevant and it is the situs of the payer and the situs of utilization of the services which will determine the taxability of such services in India. 6.6 The learned DRP held that the provision of section 9(1)(vii) are applicable in the case of the assessee observing as under:
“11.4.7 Thus, it is established that amounts remitted are chargeable to tax in India. The next step to ascertain is if the case of the taxpayer is covered under clause (b) of section 9(1)(vii) of the Act or not? According to the said section, FTS payable by a resident are deemed to accrue or arise in India where the royalty/fee is payable to a non-resident except where these are payable in respect of any right, property or information used or services utilized: • For the purposes of a business or profession carried on by such person outside India. or • For the purpose of making or earning any income from any source outside India. Both these eventualities are not cumulative but are in the alternative to each other and therefore on non-satisfaction of any one, the deeming fiction shall come into play in the case. The issue for consideration is the meaning of the expression ‘such person’ appearing in section 9(1)(vii)(b) of the Act. In this context reference is made to the decision of Delhi High Court in the case of CIT Vs. Havels India Ltd. 352 ITR 376 wherein Hon’ble High Court held that in order to fall within the exception provided in section 9(1)(vii)(v) of the Act, the source of income, and not the receipt, should be situated outside India. Regarding the exception of section 9(1)(vii)(b), the Court held that in order to get the benefit of first exception it is necessary for the taxpayer (resident) to show that the technical services were utilized in a business carried
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outside India. Indirectly, the ratio decidendi has been that ‘such person’ appearing in section 9(1)(vi)/(vii)(b) of the Act refers to the resident payer of the said fee and not the non-resident recipient.
In the context, reference is made to the CBDT Circular No. 202 Dt. 5.7.1976, which reads as under:
“Source rule for “fees for technical services”- Section 9(1)(vii) 16.1 As in the case of royalty, the Finance Act, 1976 has amended the Income-tax Act clearly specifying the circumstances in which income by way of “fees for technical services” will be deemed to accrue or arise in India and also defining the expression “fees for technical services”. For this purpose, a new clause (vii) has been inserted in section 9(1). 16.2 Under the new provision, income by way of “fees for technical services” of the following types will deemed to accrue or arise in India:
(a) fees for technical services payable by the Central Government or any State Government; (b) fees for technical services payable by a resident, except where the payment is relatable to a business or profession carried on by him outside India or to any other source of his income outside India; and (c) fees for technical services payable by a non-resident if the payment is relatable to a business or profession carried on by him in India or to any other source of his income in India.
16.3 The expression ‘fees for technical services’ has been defined to mean;
16.4 The aforesaid amendment has come into force with effect form 1-6-1976, and will apply in relation to the assessment year 1977-76 and subsequent years.
In view of the above, it is evident that the intention of the legislature clarified by the Explanatory circular on the introduction of the amendment in the Act has been to consider “such person” appearing in section 9(1)(vii)9b) with reference to the resident payer for the said amount because the expression “if the payment is relatable to a business or profession carried on by him outside India” refers to the business or profession carried out by him vis. Resident payer in this context and not the non-resident payee.
In view of the clear disposition of the relevant provisions of the Act and that the payments are being made by the resident taxpayer is not for any business carried out by it outside India but from India, the Panel holds that the taxpayer’s claim on this account is not on sound footing and cannot be accepted. Thus, the Panel holds that
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the provision of section 9(1)(vii)(b) of the Act are also satisfied and the case of the taxpayer is not covered by either of the exceptions.”
6.7 In view of the above discussion, the learned DRP upheld the disallowance of commission in terms of section 40(a)(i) of the Act. 6.8 Before us, the learned Counsel of the assessee submitted that identical issue of disallowance of commission on procuring export orders has been allowed in favour of the assessee by the Tribunal in assessment year 2009-10 holding that payment made to foreign agents prior to the applicability of circular No. 7 of 2009, could not be brought to tax in India. 6.9 The learned Counsel submitted that in following decisions, commission received for the services of procuring export order by non-resident from outside India has been held not to be in the nature of Fee for Technical Service: (i) ACIT vs Pahilajrai Jaikishin (2016) 66 taxmann.com 30 (ii) ACIT vs Evergreen international Ltd (2018) 91 taxmann.com 111(delhi-Trib) (iii) DCIT Vs Welspun Corporation(2017)77 taxmann.com 165 (Ahmedabad-Trib)
6.10 On the other hand, the Learned DR relied on the finding of the lower authorities and submitted that for payment to be in the nature of the commission, the relationship between the parties should be of principal and agent, whereas in the case it is evident from the terms of the agreement that the agreement for rendering services is between two principal parties. He supported the finding of the learned DRP regarding existence of the business connection and according to him the services are in the nature of the consultancy.
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6.11 The learned Counsel in the rejoinder submitted that nature of the export commission has never been doubted by the authorities and only issue in dispute is whether the said commission payment for the services are in the nature of the Fee for Technical Services (FTS). According to the assessee, the payment was for only securing orders and not for rendering any managerial technical consultancy services and thus not liable for Fee for Technical services. 6.12 We have heard rival submission of the parties on the issue in dispute. In the case, the assessee has made payment to non- resident company M/s GD Egypt for procuring export order for the assessee. The claim of the assessee that M/s GD Egypt has rendered services out of the India and payment has been also made to the said company outside India. The claim of the assessee that payment in the hands of M/s GD Egypt is not taxable in India and therefore no tax was deducted at source on said payment. The contention of the Revenue is that said payment is income taxable in India in the hands of M/s GD Egypt due to following reasons: (i) The payment is income deemed to accrued u/s 9(1) of the Actin view of the business connection in India (ii) The payment is in the nature of ‘ Fee for technical services FTS)” in terms of section 9(1)(vii)(b) as deemed income
6.13 According to the Revenue , therefore sum paid to M/s GD Egypt is chargeable under the provisions of the Act and tax was to be deducted on said payment in terms of section 195 of the Act and deduction of the tax has attracted applicability of section
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40(a)(i) of the Act for disallowance of said expenditure on commission. 6.14 Though, the identical issue was there in assessment year 2009-10, but in the said assessment year, the Tribunal held that in view of the circular no. 23 of 1969 and 786 of 2000, issued by the Central Board of the direct taxes (CBDT) , the commission paid by the Indian exporters to a foreign agent was not taxable in India. However the said circulars have been withdrawn by way of circular No. 7/2009 dated 22/10/2009. Since in the year under consideration those circulars are not applicable, the issue in dispute has to be decided in the light of the provisions of the Act and judicial decisions on the issue in dispute. 6.15 According to the section 9(1)(i) of the Act , all income accruing or arising whether directly or indirectly, through or from any business connection in India shall be deemed to accrue or arise in India. Further explanation-1 below section 9(1)(i) of the Act has explained the term business connection for the purpose of the section. The explanation (a) is relevant in the facts of the present case. The said explanation is reproduced as under:
“Income deemed to accrue or arise in India. 9. (1) The following incomes shall be deemed to accrue or arise in India :— (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. Explanation 1.—For the purposes of this clause— (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India ;”
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6.16 Further, according to the Explanation -2 below the section 9(1)(i) also business activity need to carried out in India by any other person on behalf of the non-resident. In the case, there are no such allegation that business activity has been carried out in India by any other person on behalf of GD Egypt. 6.17 Thus, according to the explanation if part of the business operation are carried out in India then such part of the income which is attributable to the operations carried out in India , shall accrue or arise in India. 6.18 The coordinate bench of Tribunal in the case of Evergreen International Ltd (supra) has referred to decisions in the case of GVK industries Ltd Vs. ITO 228 ITR 564 wherein the term“ business connection has been analysed as under:
“4.8.3 Further, Hon’ble Andhra Pradesh High Court in the case of GVK Industries Ltd. versus Income Tax Officer, (1997) 228 ITR 564 analysed various decisions of the courts and laid certain principles to decide existence of ‘business connection’, as under: “12. Clause (i) of sub-s. (1) of s. 9, extracted above, brings within the fold of the said expression all income accruing or arising, whether directly or indirectly, through or from any business "connection in India," or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. Here the contention of Mr. Dhanuka that the NRC had no business connection requires examination. 13. "The expression business connection" is also used in s. 163(1)(b) which regards every person in India, who has any business connection with the nonresident, as an agent of that non-resident. 14. The import of that expression has been explained in various judicial pronouncements. 15. In CIT vs. R. D. Aggarwal and Co. (1965) 56 ITR 20 (SC), the expression "business connection," as used in s. 42 of the Indian IT Act, 1922, fell for consideration of the Supreme Court. It is observed that the question whether there is "business
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connection" from or through which the income, profits or gains arise or accrue to a non-resident must be determined upon the facts and circumstances of the case and it is pointed out that the expression business connection postulates a real and intimate relation between the trading activity carried on outside the taxable territories and the trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity. "Business connection contemplated by s. 42 of the 1922 Act, it is explained," involves a relation between a business 14 carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains ; there must be an element of continuity between the business of a non-resident and the activity in the taxable territories and a stray or isolated transaction is not to be regarded as business connection."
In Carborandum Co. vs. CIT 1977 CTR (SC) 209 :(1977) 108 ITR 335 (SC), a foreign company entered into an agreement with an Indian company for rendering technical and know-how services to the Indian company. In lieu of those services, the foreign company was to receive from the Indian company an annual fee equal to three per cent. of the net sale proceeds of the products manufactured by the Indian company every year. The question was how much of the money received by the foreign company would be taxable under the provisions of the Act. The Indian company employed personnel made available by the foreign company, who worked under the direct control of the Indian company. The Supreme Court held that the services of the foreign company in making the employees available were rendered wholly outside India and that the activities of the foreign personnel lent or deputed by the foreign company did not amount to a business activity carried on by the foreign company in India. It was further held that the fee did not accrue or arise in India nor could it be deemed to have accrued or arisen in India and that to rope in the income of a non-resident under the deeming provision of s. 42(1) of the 1922 Act it must be shown by the Department that some of the operations were carried out in India in respect of which the income is sought to be assessed.
In CIT vs. Hindustan Shipyard Ltd. 1975 CTR (AP) 97 : (1977) 109 ITR 158 (AP), the respondent-company entered into an agreement with a Polish company for the purchase of diesel engines with accessories. The agreement provided that the Polish company would render services for the effective fulfillment of the contract of sale, which included organizing of a training course in Poland for technical employees of Hindustan Shipyard at the expense of the Polish company. In the context of the question referred to this Court under s. 256(1) of the Act, the
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Division Bench which dealt with the case, considered the scope of the expression business connection within the meaning of ss. 9(1)(i) and 163(1)(b) of the Act and held that to conform to the requirements of that expression it is necessary that the common thread of mutual interest must run through the fabric of the trading activities carried on outside and inside the taxable territory which has been described as a real and intimate connection and that there must be something more than a mere transaction of purchase and sale between principal and principal in order to bring the transaction within the purview of the expression.
In Barendra Prasad Ray vs. ITO (1981) 22 CTR (SC) 157 : (1981) 129 ITR 295 (SC), a firm of solicitors at Calcutta was instructed by certain solicitors in London who were acting for a German corporation. On their instructions the solicitors in India retained a barrister of London in the suit pending before the Calcutta High Court. The barrister argued the case for 15 days and went back to London without making any arrangement for payment of Indian income-tax on the fees earned by him. On the ITO initiating proceedings to treat the firm of 15 solicitors as the agent of the said barrister, the firm of solicitors filed a writ petition challenging the said proceedings which was dismissed by a learned single judge. An appeal against the judgment of the learned single judge, was also dismissed taking the view that there was a "business connection" between the firm of solicitors and the barrister. On further appeal to the Supreme Court it was held that there was connection between the Indian solicitor and the barrister which was real and intimate and not a casual one and that the barrister earned the fee arguing the case in India only due to that connection. E. S. Venkataramiah J. (as he then was) speaking for the Supreme Court, observed that, in that case the test laid down by the Supreme Court in Aggarwals case (supra), was satisfied and in the "professional connection there was a business connection."
In Addl. CIT vs. New Consolidt. Gold Fields Ltd. (1983) 143 ITR 599 (Patna), the assessee-company and the foreign company entered into an agreement under which the foreign company was to be technical adviser of the assessee-company in the matter of exploration, mining and mineral dressing operations. The foreign company was to be paid a retainers fee at the rate of £ 7,000 per annum in London. The ITO treated the assessee-company as the agent of the foreign-company within the meaning of s. 163 of the IT Act and treated £ 7,000 payable by the assessee-company to the foreign company as its income accruing in the hands of the assessee-company. On appeal, the AAC held that even if the assessee-company was to be treated as an agent within the meaning of s. 163(1), there was no business connection within the meaning of s. 9(1) of the Act so
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the income accruing to the non-resident foreign company could not be assessed through its agent. That order was affirmed by the Tribunal. On a reference to the High Court of Patna, it was held that the sum of £ 7,000 was not the income which the foreign-company had received in India or an income which had accrued to the foreign company within the meaning of s. 5(2) of the Act and that the sum paid to the foreign company at London for technical advice given from London could not be attributed to the operation carried on in India. It was further held that there was no continuity between the business of the non-resident and the activity in the taxable territories in respect of the income and, therefore, there was no business connection between the foreign company and the assessee- company and the income could not be deemed to accrue or arise to the foreign company in India within the meaning of s. 9(1) as such, the said sum paid to the foreign company at London was not assessable in the hands of the assessee-company even as agent of the foreign company. 20. From the above discussion the following principles emerged: (i) whether there is a business connection between an Indian company and a non-resident (company) is a mixed question of fact and law which has to be determined on the facts and circumstances of each case ; (ii) the expression business connection is too wide to admit of any precise definition ; however it has some well known attributes ; (iii) the essence of 16 business connection is the existence of close, real, intimate relationship and commonness of interest between the NRC and the Indian person ; (iv) where there is control of management or finances or substantial holding of equity shares or sharing of profits by the NRC of the Indian person, the requirement of principle (iii) is fulfilled ; (v) to constitute business connection there must be continuity of activity or operation of the NRC with the Indian party and a stray or isolated transaction is not enough to establish a business connection.
6.19 Further, the learned DRP has relied on the decision of the Tribunal in the case of ADIT Vs Star Cruise India Travel Services (supra)wherein the term “business connection “ has been explained as under:
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“the expression ‘business connection’ does not cover mere canvassing for business by an agent in India. It postulates a real and intimate relation between business activity carried on outside India and business activity within India, the relation between the two contributing to the earning of income by the non-resident in his business activity. The business operations carried out outside India and inside India must have such a relationship as to contribute to business operations as a whole.”
6.20 Thus for having any business connection in India , what we are required to examine as to out of the entire business activity whether any part has been carried out by the non-resident entity in India. We find that for having business connection in India the business operations carried out side India and inside India must have relationship as to contribute the business operations as a whole. 6.21 But in the instant case, M/s GD Egypt is responsible for marketing and sales for assessee in the region of middle east and north Africa and has procured sales for the assessee. The business operation of the M/s GD Egypt of procuring sales order for the assessee and its entire activity has been carried out from outside India and no part of the business activity has been carried out in the India by M/s GD Egypt. The business connection has to be looked into the business operations of M/s GD Egypt in India and not business connection between the operation of the GD Egpyt and business of the assessee in India, because any workfor which the assessee is making payment will always be associated and part of the business of the assessee. Obviously, in the instant case no business connection exist and thus the finding of the learned DRP on the issue is set aside. 6.22 Further, the learned DRP has held that the services rendered by M/s GD Egypt require expertise and knowledge in
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the specific area of work and such expertise cannot be developed overnight, but it is the result of long period of the work in this line of activities coupled with accumulated experience of operations and therefore the payment made by the assessee to GD Egypt partakes the character of the FTS under domestic law. 6.23 In the instant case, the assessee has not invoked any Double Taxation Avoidance Agreement (DTAA) and therefore we are examining only the FTS under domestic law. 6.24 This issue has been examined by the Tribunal in the case of Evergreen international Ltd.(supra) as under:
“4.8.6 Thus, in the instant case, the first issue arises, whether the services of procuring export order by the non-resident outside India falls under the definition of fee for technical services. Evidently, the services of procuring export order does not fall either in the technical or consultancy services. The contention of the Assessing Officer is that said services are managerial services and thus falls under fee for technical services. The Assessing Officer has not made any attempt as how the said services of procuring order are managerial services. The Assessing Officer has failed to discharge his onus in this regard. 4.8.7 According to the assessee, the managerial services though not defined in the Act, but as per normal ordinary business meaning, it covers services rendered in performing management functions which relates to running a business or handling of manpower and related affairs 18 etc. but it cannot cover the services of foreign agent of procuring export orders, in the instant case.
4.8.8 On perusal of the submission of the assessee and order of the lower authorities, we find that the non-resident has rendered services of booking export order from foreign buyers. In the process of procuring export orders, the non-resident displays or demonstrates the goods of the assessee to the foreign buyers. If the foreign buyer place any order for purchase of those goods, the non- resident agent forward those purchase orders to the assessee. For rendering the services of procuring orders, the assessee pays certain commission at the rate of percentage agreed by the non-resident agent. In our opinion, this entire process of procuring orders by the non-resident cannot be termed as managerial service, which could fall under fee for technical services as defined in Explanation -2 below the section 9(1)(vii) of the Act.
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4.8.9 Further, we find that the assessee has claimed that no part of services was rendered in India. The contention of the Ld. DR is that in view of the Explanation inserted below the section 9(2), now even if services are rendered outside India, same may fall under fee for technical services. The relevant explanation is reproduced as under: “Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,— (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India.”
6.25 In view of the above decision, the payment made for procuring of export sale order for Indian taxpayer by any foreign entities from outside India cannot be held as Fee for Technical Services. 6.26 In view of holding that payment for services of GD Egypt are not in the nature of Fee for Technical Services (FTS) , the other finding of the learned DRP of the applicability of explanation below section 9(2) i.e. there is no requirement of rendering services in India for income deemed to accrue or arise in India as per section 9(1)(vii) of the act, are rendered merely academic, and we are not required to examine applicability of the same in the year under consideration. 6.27 In view of the above, the payment made by the assessee is not chargeable under the provisions of the Act in the hands of GD Egypt, no tax is required to be deducted in terms of section 195of the Act and consequently no disallowance could be made under section 40(a)(i) of the Act for non-deduction of the tax at source. 6.28 The grounds No. 20 to 23 of the appeal are accordingly allowed.
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The ground No. 24 and 25 are in relation to bad debt of Rs.29,73,346/-. 7.1 Before us, the learned Counsel of the assessee has submitted that bad debt written off in books of accounts are to be allowed in terms of decision of the Hon’ble Supreme Court in the case of TRF ltd, if following two conditions are satisfied:
(i) The debt is written off in the books of accounts of the assessee (ii) The debt was considered as income and offered to tax in any previous/ earlier assessment year.
7.2 The learned Counsel submitted that in respect of the bad debt claims both the conditions are satisfied, however the Assessing Officer has not allowed the claim of the bed debt. He further submitted that the learned DRP is not correct in holding that the assessee was required to prove that the debt from Reserve bank of India and other banks becomes bad. 7.3 The Learned DR, on the other hand, submitted that the assessee has not provided before the Assessing Officer the supporting documents to explain whether the amount corresponding to the bad debts were taken into account as income in earlier years for the purpose of the tax, and therefore issue may be restored back to the file of the Assessing Officer for verification. 7.4 We have heard rival submission of the parties on the issue in dispute. The finding of the Assessing Officer in draft assessment order, which is reproduced in para 5.2 is extracted as under:
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“5.2 The reply of the assessee company has been considered. It has been observed a specific query with regard to the write off of the bad debts has been asked vide question number 17 of the questionnaire dated 23 January 2014. Here it is important to mention that the assessee had failed to provide response on the following points:
Details asked from the assessee Response of assessee Details of bad debts Assessee had only provided a list of bad debts amounting to Rs.29,73,346 wherein party- wise amounts have been mentioned without any documents. Supporting documents to Assessee had not provided any substantiate whether income documentary evidence.- pertaining to such write off had been offered to tax in any previous/earlier assessment year
7.5 It is evident that no documentary evidence in support of the claim that income pertaining to such write off had been offered to tax as required under the provisions of the Act. In view of the above circumstances, we feel it appropriate to restore this issue back to the file of the learned Assessing Officer with the direction to the assessee to produce all necessary documents in support of its claim before the Assessing Officer, who then will decide the issue in accordance with law. It is needless to mention that the assessee shall be afforded adequate opportunity of being heard. The ground Nos. 24 and 25 of the appeal accordingly allowed for statistical purposes. 8. The ground No. 26 is consequential nature and ground No. 27 is premature at this stage, thus, both these grounds are dismissed as infructuous.
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In the result, the appeal of the assessee is allowed partly for statistical purposes. Order pronounced in the open court on 1st May, 2020.
Sd/- Sd/- (SUDHANSHU SRIVASTAVA) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 1st May, 2020. RK/-(D.T.D.S) Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi