DCIT, BANGALORE vs. M/S INFINEON TECHNOLOGIES INDIA PVT. LTD.,, BANGALORE

The first issue that needs adjudication in these appeals is the correctness of determination of ALP in respect of an international transaction between the assessee and its AE of rendering software development services [SWD services] u/s. 92 of the Act. The grounds of appeal

The assessee is a company. It is a subsidiary of Infineon Technologies Asia Pacific P. Ltd. The assessee rendered Software Development Services (SWD services) and marketing support services. During the previous year relevant to AY 2010-11, the assessee rendered SWD services to its Associated Enterprise [AE]. As required under the IT(TP)A Nos.405 & 474/Bang/2015 Page 5 of 19 provisions of section 92 of the Act, the assessee has to establish that the price received in the international transaction from the AE was at arm’s length. The assessee in support of its claim that the price received was at arm’s length filed a TP analysis in which the assessee adopted Transactional Net Margin Method (TNMM) as the most appropriate method for determination of ALP. The Profit Level Indicator (PLI) chosen for the purpose of comparing the assessee’s profit margin with that of the comparable companies was Operating Profit to Operating Cost (OP/OC). The AO referred the question of determination of ALP to the Transfer Pricing Officer (TPO) as is required under the provisions of Sec.92C of the Act. There is a dispute with regard to OP/OC as computed by the assessee and that of the TPO. The computation by the assessee and the TPO is as follows:- Particulars Computation of Computation of net margin net margin as per the assessee as per the TPO (INR) (INR) Income : Operating Income 1,575,133,244 1,575,133,44 Total Operating revenue 1,575,133,244 1,575,133,244

It is the plea of the assessee that a sum of Rs.2,24,63,388 was a retirement provision written back which was considered by the TPO as non- operating in nature; whereas the assessee has considered the same as operating in nature and that is the reason for the difference in the computation of PLI between the assessee and the department.

The assessee in support of its claim that the price received in the international transaction was at arm’s length chose 12 comparable companies and compared the average arithmetic mean profits of those 12 companies with the assessee to justify the price received as at arm’s length. The TPO accepted 4 out of 12 comparables chosen by the assessee. The TPO on his selected 7 other comparable companies and arrived at a set of 11 comparables. The average arithmetic profit mean of 11 comparable companies chosen by the TPO was as follows:- Sl. Name PLI No.

The TPO computed the ALP and the suggested addition to the total income as follows:-

The addition suggested by the TPO on a reference by the AO u/s. 92CA of the Act was incorporated by the AO in the draft order of assessment. Against the draft order of assessment, the assessee filed an appeal before the DRP. The DRP excluded some of the comparable companies chosen by the TPO and also did not agree with the prayer of the assessee for inclusion of certain comparable companies.

Besides the above, the DRP also gave a direction to the TPO to compute the working capital adjustment as per the actual computation and not to restrict the grant of working capital adjustment to the average arithmetic working adjustment mean of the comparable companies. One of the grievance of the assessee before the DRP was with regard to computation of working capital adjustment, apart from the grievance with regard to TPO adopting the working capital adjustment by restricting it to IT(TP)A Nos.405 & 474/Bang/2015 Page 8 of 19 average arithmetic mean working capital adjustment of the comparable companies. That dispute was with regard to the question whether advances received from AE should be ignored while computing the average trade payables, which was specifically raised as Objection No.16 before the DRP, but was not decided by the DRP. The assessee and the revenue are aggrieved by the directions of the DRP and have preferred the present appeals before the Tribunal.

As far as ground No.4 raised by the revenue is concerned, the ld. counsel for the assessee drew our attention to a decision of this Tribunal rendered in the case of CSG Systems International (I) P. Ltd. v. DCIT, order dated 31.7.2016 (the Assessee in that case was also a SWD service provider such as the Assessee and the same comparables chosen in the case of the Assessee in this appeal was also chosen as comparable company by the TPO in that case) wherein the comparability of the aforesaid 4 companies with the SWD services company such as the assessee came up for consideration. The Tribunal excluded Infosys Ltd. from the list of comparables vide para 19 of its order on the ground that Infosys Ltd. was having a huge brand value and intangibles as well as bargaining power and the same cannot be compared with assessee who is providing only SWD services to its AE. Vide para 20 of the very same aforesaid order of the Tribunal, Persistent Systems Ltd. & Sasken Communication Technologies Ltd. was excluded from the list of comparable companies on the ground that these companies were engaged in diversified activities and earning revenue from various activities including licensing of products and income from maintenance contracts. Sasken Communication Technologies Ltd. was having income from 3 segments and there was no segmental reporting so that the operating margins of SWD services of this company can be compared with the assessee. As far

As for ground No.5 of the revenue is concerned, in the aforesaid order of Tribunal i.e., CSG Systems International (I) P. Ltd. (supra), vide para 9, the Tribunal held that Tata Elxsi cannot be regarded as a comparable company on the ground that this company was engaged in diverse activities in the software development segment. This company was held to be dealing in software products also and segmental details of revenue were not available. Following the aforesaid decision, we find no merit in ground No.5 raised by the revenue.

As far as Grd.No.6 regarding inclusion of R S Software (India) Ltd. is concerned, it was brought to our notice that this company was directed to be included in the list of comparable companies by this Tribunal in the case of Inteva Products India Automative P. Ltd. v. DCIT, [2016] 72 taxmann.com 163 [Bang Trib.] vide para 24. The Assessee in that case was also a SWD service provider such as the Assessee and the same comparables chosen in the case of the Assessee in this appeal was also chosen as comparable company by the TPO in that case. The ld. counsel for the assessee has no objection to inclusion of this company in the list of comparables. Accordingly, ground No.6 of the revenue is allowed.

The only ground that remains for adjudication in the revenue’s appeal is ground Nos. 2 & 3. These grounds do not emanate from the order of the DRP and was not part of the either grounds raised by the IT(TP)A Nos.405 & 474/Bang/2015 Page 10 of 19 Assessee before DRP or TPO. Hence these grounds are dismissed as not arising out of the order of the DRP.

In the result, the appeal by the revenue is treated as partly allowed.

As far as the appeal of the assessee is concerned, in ground No.3(b) the assessee has sought exclusion of Larsen & Toubro Infotech Ltd. from the list of comparable companies. The Tribunal in the aforesaid decision in the case of CSG Systems International (I) P. Ltd. (supra) vide para 21 dealt with comparability of Larsen & Toubro Infotech Ltd. with the software service provider such as the assessee and hold that this company has revenue from software services and products and segmental information was not available. In para 23 the Tribunal directed exclusion of Larsen & Toubro Infotech Ltd. from the list of comparable companies.

In ground No.3(c), the assessee seeks inclusion of 2 companies, but at the time of hearing the ld. counsel for the assessee pressed for exclusion of Akshay Software Technologies Ltd. alone. This Tribunal in the case of Inteva Products India Automative P. Ltd. (supra) vide paras 25 to 28 remanded the issue with regard to exclusion of this company from list of comparable companies. Following are the relevant observations:- “25. The assessee is seeking inclusion of another company viz. Akshay Software Technology Ltd. which was rejected by the TPO. 26. The learned Authorised Representative of the assessee has submitted that the TPO has rejected this company on the ground that this company has 90% of the revenue earned from Dubai office whereas the assessee has earned 100% revenue from India operations. The learned Authorised Representative has pointed out that this fact has been inappropriately interpreted by the TPO as the Annual Report of the company clearly stated that the company has its offices only in Mumbai and USA and no office

On the other hand, the learned Departmental Representative has submitted that these facts were not specifically pointed out before the DRP and therefore the DRP has not given finding on these facts.

Following the aforesaid decision, we remand the question of comparability of Akshay Software Technologies Ltd. to TPO/AO for fresh consideration.

In ground No.7, the Assessee has sought for inclusion of R Systems Ltd. This company was excluded on the reason that this company had a different financial year ending. The law by now is settled that if from the available data in the public domain it is possible to compute OP/OC of this IT(TP)A Nos.405 & 474/Bang/2015 Page 12 of 19 company by culling out the data of the previous year of the assessee; then the company should be regarded as a comparable. The AO/TPO can exercise powers u/s. 133(6) of the Act to get the required details. The ld. counsel for the assessee has submitted that he will make the necessary details available to the AO. Hence the comparability of this company is set aside to the AO/TPO for fresh consideration on the basis of the available data of the company comparable with the previous year of the assessee.

Regarding ground No.10 raised by the revenue relating erroneous working capital adjustment by not considering the advances received from AEs while computing the average trade payables. In view of the decision of the tribunal rendered in the case of CGI Information Systems & Management Consultants (P) Ltd. IT(TP)A.No.346/Bang/2015 order dated 26.10.2016 the TPO is directed to consider the advance received from AE as trade payable and considered for working capital adjustment. It was held in the said decision that advances received from AE par take the character of trade payables which is to be adjusted against future invoice. The advance received from the AE dispenses with the necessity to borrow for working capital and has direct bearing on the profitability of the concerned. The grievance of the assessee is accordingly allowed. The AO is directed to compute the working capital adjustment by considering the advances received from AE as part of the average trade payable.

The next aspect to be considered is Ground No.13 with regard to computation of OP/OC of the assessee. The plea of the assessee is that OP/OC should be computed as done by the assessee by considering the retirement provision written back as part of operating expenditure. The assessee’s claim that for earlier AY its operating profit was considered after treating the provision for retirement benefit no longer required as part of operating expenses. This aspect was not verified either by the IT(TP)A Nos.405 & 474/Bang/2015 Page 13 of 19 DRP/AO/TPO. Hence we deem it fit and appropriate to set aside the issue to TPO/AO for consideration of the claim of assessee with regard to past treatment of similar write back for computing its operating profit. The AO/TPO will afford opportunity of being heard to the assessee, before deciding the issue of determination of ALP in accordance with the directions contained in this order.

The other corporate ground by the assessee which requires adjudication vide ground No.14 reads as follows:- “14. Disallowance of Project Specific Costs amounting to INR 76,139.4591-under section 40(a)(i) of the Act. • The learned AO erred in disallowing the expenditure of INR 76,139,459/- incurred by the appellant towards the usage of EDA (Electronic Design Automation) software tools in software development, under section 40(a) of the Act. • The learned AO ought to have appreciated that the EDA software licenses are purchased by Infineon Technologies AG Germany. The ultimate parent company of the appellant, from the vendors as a standard off-the-shelf product and are not transferred to the appellant company. The appellant company only uses the licenses owned by Infineon Technologies AG, Germany. • The learned AO ought to have appreciated that the payments made by the appellant company to Infineon Technologies AG, Germany for usage of EDA software tools is towards reimbursement of costs incurred by Infineon Technologies AG, Germany without any mark up, and therefore no tax is required to be deducted on the same. • Further, the learned AO has erred in not placing reliance on the ruling of Honorable Income-tax

The facts are that the assessee is a company is engaged in the business of software development services of electronic integrated circuits and support services to Infineon Singapore. For the assessment year 2010- 11, the assessee filed the return of income on 8th October, 2010 declaring a total income of Rs. 78,696,350/-. During the course of assessment proceedings, the AO has requested the assessee company to provide information on whether taxes have been withheld on GLM charges (project specific costs) of Rs. 78,696,346/- debited to the Profit & Loss Account. In response, a detailed submission dated 26.02.2014 was made by the Assessee. The Assessee explained that the payments towards usage charges of Electronic Design Automation (EDA) tools (software) by the Assessee were initially paid by Infineon Technologies AG, Germany ("Infineon Germany") and cross-charged to the assessee without any mark- up depending on their software tools usage. The assessee company reimburses these charges to Infineon Germany, without any mark up. The payment being a pure reimbursement does not result in income; therefore, there is no requirement for tax to be deducted at source. Hence, the provisions of section 195 of the Act are not applicable. Alternatively it was submitted that the payment is towards the usage charges of copyrighted

The AO held that the assessee is liable to deduct tax at source as there are plethora of judicial precedents supporting the fact that TDS compliance is mandatory even if the expenditure is incurred by the way of reimbursements and that the payment made for right to use computer software was in the nature of royalty and hence chargeable to tax in India in the hands of the recipient non-resident. The AO placed reliance on decision of the Hon’ble Karnataka High Court in the case of CIT (IT) v. Samsung Electronics India (P.) Ltd. 345 ITR 494 (Karnataka) wherein it was held that payment for purchase of off the shelf software was akin to a payment for right to use software and was in the nature of royalty and the person making payment to a non-resident has to deduct tax at source on such payment.

The DRP confirmed the order of AO. In appeal before the Tribunal, the submission made was that even assuming that the payment in question is not in the nature of reimbursement, but was a consideration for purchase of standard off-the-shelf product and in the nature of royalty, the assessee did not deduct tax at source on the ground that as on 31.3.2010, the last date of the previous year, the law in this regard was that payment for purchase of off-the-shelf software was not in the nature of royalty and therefore there was no obligation to deduct tax at source from payments made to non-residents. In this regard, the ld. counsel for the assessee placed reliance on the decision of ITAT Bangalore Bench in the case of Ingersoll Rand (I) P. Ltd. [2019] 112 taxmann.com 743 [Bang Trib.] wherein it was held that as on the date of payment to the non-resident there was no obligation to deduct tax at source but on a subsequent date due to retrospective application of a law or on the basis of decision rendered subsequent to the date of payment an obligation is imposed on the payer,

We have carefully considered the rival submissions. The payment in question was made to the non-resident in the previous year relevant to AY. 10-11. Therefore the law as on 31.3.2010 the last date of the previous year was that payment for purchase of off shelf software was not in the nature of royalty. In Sonata Information Technology Ltd. v. ACIT (103 ITD 324) decision rendered on 31.1.2006, it was held that payments for software licenses do not constitute royalty under the provisions of the Act and hence disallowance under section40(a) (ia) of the Act would not be applicable. The change in the legal position on taxation of computer software was on account of the ruling of the Karnataka High Court in CIT v. Samsung Electronics Co. Ltd. (320 ITR 209), which was pronounced on 15.10.11 that is much later than the closure of the FY 2010- 11. Subsequently, the Finance Act 2012 also introduced, retrospectively, Explanation 4 to section 9(1 (vi) of the Act to clarify that payments for, inter alia. License to use computer software would qualify as royalty. During the FY 10-11, the assessee did not have the benefit of clarification brought by the respective amendment. As such, for the FY 2010-11, in light of the provisions of section 9(1)(vi) of the Act read with judicial guidance on the taxation of computer software payments, tax was not required to be deducted at source. Given the practice in prior assessment years, the assessee was of the bona fide view that the payment of software license fee was not subject to tax deduction at source under section1941/195 of the Act. Liability to deduct tax at source cannot be fastened on the assessee on the basis of retrospective amendment to the Act (Finance Act 2012 amendment the definition of royalty with retrospective effect from 01.04.1976) or a subsequent ruling of a court (the Karnataka HC

The above decisions have been considered and discussed in the case of Ingersoll Rand (India) Ltd. (supra) by the Bangalore Bench of the ITAT and it was held therein that prior to the decision of Hon'ble jurisdictional High Court in the case of CIT v. Samsung Electronics Co. Ltd. (supra) which was passed on 15.10.2011 transactions carried out on purchase of off the shelf software are not liable to TDS and hence there can be no disallowance u/s.40(a)(ia) of the Act based on subsequent development of law after the date on which payments are made.

In the result, the appeal by the assessee is partly allowed.

In the combined result, both the appeals by the assessee and the revenue are partly allowed.