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Facts
The Revenue filed appeals against the CIT(A)'s order for AY 2012-13 & 2013-14 concerning Network Systems & Technologies Pvt. Ltd., engaged in software services. The case involved various disallowances made by the AO under Sections 14A, 40(a)(i), and 36(1)(iii), and an upward adjustment by the TPO related to international transactions. The CIT(A) partly allowed the assessee's appeal, restricting or deleting several additions.
Held
The Tribunal dismissed the Revenue's appeals against the CIT(A)'s deletion of disallowances under Section 14A (finding sufficient reserve funds) and Section 40(a)(i) (for foreign payments as services were rendered abroad without a Permanent Establishment in India). The restricted disallowance under Section 36(1)(iii) was also upheld. However, the issue of transfer pricing adjustment for commission and post-support services was remanded to the AO/TPO for fresh consideration, taking into account a previous Tribunal order.
Key Issues
Key legal issues included the validity of disallowances under Section 14A, Section 40(a)(i) for foreign payments without TDS, Section 36(1)(iii) for advances, and the appropriateness of transfer pricing adjustment for international transactions.
Sections Cited
92CA, 143(3), 144C, 14A, 40(a)(i), 36(1)(iii), DTAA Article 12
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Income Tax Appellate Tribunal, COCHIN BENCH
Before: SHRI INTURI RAMA RAO, AM & SHRI PRAKASH CHAND YADAV, JM
O R D E R Per: Inturi Rama Rao, AM These appeals filed by the Revenue are directed against the orders of the Commissioner of Income Tax (Appeals)-1, Kochi [CIT(A)] dated 17.09.2020 for Assessment Years (AY) 2012-13 & 2013-14.
Since identical issues and facts are involved in these appeals, they are heard together and disposed of by this common order.
& 03/Coch/2021 Nretwrok Systems & Technologies P. Ltd. 3. For the sake of convenience and clarity the facts relevant to the appeal bearing for AY 2012-13 are stated herein.
The brief facts of the case are that the appellant is a company incorporated under the provisions of Companies Act, 1956. It is engaged in the business of providing software services. The return of income for AY 2012-13 was filed on 30.11.2012 declaring total income of Rs. 37,70,47,100/-. The appellant company also reported the following international transactions: -
Sr. Name of the AE Nature of Total amount Method adopted No. international transaction 1 Nest GmbH Provisions of Rs.1,74,47,726 Cost plus method 2 Nihon Nest Corporation Services Rs.29,68,24,261 Cost plus method 3 Nestrides Co. Ltd. Rs. 19,75,212 Cost plus method 4 Nest Technologies Inc Rs.1,36,91,978 Cost Plus method 5 Operna AM Rs. 70,74,489/- Cost Plus method 6 SFO Technologies Corp Rs. 1.06,21,995 Cost Plus method 7 Nest GmbH Advances Rs. 2,82,60,841/- CUP 8 Nihon Nest Corporation Commission Rs.12,09,19,144 CUP 9 Nihon Nest Corporation Post Support Rs, 6,04,59,572 CUP Services 10 Nihon Nest Corporation Reimbursement Rs. 80,56,963 CPM 11 Nest Technologies Inc of Expenses Rs. 8,91,01,229 CPM
On noticing the above international transactions the DCIT, Corporate Circle-2(1), Kochi (hereinafter called "the AO") referred the matter to the Transfer Pricing Officer (TPO) u/s. 92CA(3) of the Income Tax Act, 1961 (the Act) for the purpose of benchmarking the above international transactions. The TPO, vide order dated & 03/Coch/2021 Nretwrok Systems & Technologies P. Ltd. 29.01.2016 pass u/s. 92CA of the Act suggested upward adjustment in respect of commission on post services offered paid to Nihon Nest Corporation of Rs. 14,27,86,929/-. On receipt of the TPO’s order the AO passed the assessment order dated 31.03.2016 u/s. 143(3) r.w.s. 144C of the Act at a total income of Rs. 53,52,54,016/- While doing so the AO made several disallowances, which includes the disallowance u/s. 14A of Rs.1,59,40,787/-.
Being aggrieved, an appeal was filed before the CIT(A), who vide the impugned order restricted the adjustment to Rs. 1,93,79,686/- and directed the AO to delete the addition made u/s. 40a(i) of the Act. Thus, partly allowed the appeal.
Being aggrieved, the appellant is in appeal before this Tribunal in the present appeal.
Ground of appeal No. 2 challenges the decision of the CIT(A) deleting the addition made u/s. 14A of the Act. The CIT(A), on examination of the factual details of investments made a categorical finding that reserve funds far exceeds the investments made by the assessee. Therefore, no disallowance of interest can be made u/s. 14A of the Act. The decision of the CIT(A) is in consonance with the well settled position of law. Therefore, we do not find any reason to interfere with the findings of the CIT(A). Ground of appeal No. 2 dismissed.
& 03/Coch/2021 Nretwrok Systems & Technologies P. Ltd.
Ground No. 3 challenges the decision of the CIT(A) upholding the addition u/s. 40(a)(i) of the Act in respect of payments of royalty and technical services. The factual background of the case is that the appellant had paid money towards services rendered by Nihon Nest Corporation, Japan. There is no dispute about the fact that the appellant had paid the money in consideration of services rendered by Nihon Nest Corporation to Toshiba Medical Systems, which is a customer of the appellant in Japan. Services haves been rendered in Japan, therefore, the amount does not become chargeable in India. He does not have Permanent Establishment in India. The services fall under Article 12 of DTAA entered into by India and Japan. Therefore, there is no obligation of deduct tax at source. We do not find any illegality in the findings of the CIT(A) in deleting the addition of Rs. 18,13,78,717/-. Ground of appeal No. 3 stands dismissed.
Ground No. 4 challenges the findings of the CIT(A) deleting the addition made u/s. 36(1)(iii) of the Act. The CIT(A), after examining the submission made before him confirmed the disallowance in respect of the advance made aggregating to Rs. 11.41 lakhs. Accordingly, restricted the disallowance to Rs. 72,427,823/-. The finding of the CIT(A) is based on the factual submissions made on behalf of the respondent assessee. Therefore, we do not find any illegality. Ground of appeal No. 4 stands dismissed.
& 03/Coch/2021 Nretwrok Systems & Technologies P. Ltd. 11. Ground of appeals Nos. 5,6,7 & 8 challenge the restriction of TP adjustment of Rs. 1,93,79,686/-. The relevant finding of the CIT(A) is as under: -
“However, the Appellant submission by itself stipulates that they follow an 85:15 model with respect to the business done through the AE. The commission and post support service incurred by the appellant is 15% commission and 7.50% post support service based on the calculation submitted. However, the appellant himself has made a 5% suo-motto disallowance. We still find that the amount paid to the AE in Japan is more by 2.50% as compared to transaction with other AE's where the transactions have already been determined as arms length by the assessing officer. Accordingly, I confirm that the disallowance of commission to the extant of 2.50% of the total commission paid and delete the disallowance made on post support services. The total commission paid by the appellant @ 15% is Rs.11,62,78,120/- and accordingly, the disallowance under transfer pricing on such commission shall be restricted to Rs.1,93,79,686/- (11,62,78,120 *2.5/15). Accordingly I confirm that the transfer pricing disallowance be restricted to Rs. 1,93,79,686/-, The Grounds of Appeal is Partly Allowed.” However, the CIT(A) ignored the order passed by this Tribunal in assessee’s own case for preceding year on the same issue. Therefore, we remand this issue back to the file of the CIT(A) to benchmark the international transactions of commission and post support taking into consideration the order passed by this Tribunal for AY 2008-09. This issue is restored to the file of the AO/TPO to consider the issue afresh after affording reasonable opportunity of hearing to the appellant. Appeal stands partly allowed.
& 03/Coch/2021 Nretwrok Systems & Technologies P. Ltd. 12. Since identical issues and facts are involved in Revenue’s appeal our findings in ITA No. 02/Coch/2021 shall apply mutatis mutandis to this appeal also.
In the result, the appeals filed by the Revenue stand partly allowed.
Order pronounced in the open court on 27th June, 2025.