SAS Institute (India) Pvt. Ltd. Vs ACIT (ITAT Mumbai)
Conclusion: Compensation received by foreign companies from assessee for loss of business/profit would constitute business receipts in the hands of foreign companies but the same was not liable for TDS under section 195 as the foreign companies did not have permanent establishment in India.
Held: Assessee had made certain payment to the foreign companies in the form of “compensatory payment” as per agreement entered by its parent company. Since the assessee had supplied software products beyond its territory, the business and profits of the foreign companies would get affected. In order to compensate the loss in business, the agreement provided for payment of compensation. Hence, the impugned payment would constitute business receipts in the hands of foreign companies, as it was in the nature of compensation received for loss of business/profit. Since, the foreign companies did not have permanent establishment in India, impugned payments were not liable for taxation in their hands in India, in which case, assessee was not liable to deduct tax at source u/s. 195.
FULL TEXT OF THE ITAT JUDGMENT
Both the appeals filed by the assessee are directed against the order passed by the Assessing Officer in pursuance of direction given by learned DRP and they relate to A.Ys. 2011-12 and 2012-13. Both the appeals were heard together and are being disposed of by this common order, for the sake for convenience.
2. The common issue urged in both the appeals relates to the Transfer pricing adjustment made to the license fee paid by the assessee. The facts relating thereto are that the assessee is engaged in the business distribution of software developed by its parent company SAS Institute Inc, USA. The assessee paid 50% of the license fees collected by it as “royalty” to its parent company. The assessee adopted CUP method for benchmarking above said international transaction and for that purpose, it took the case of another distributor appointed in Israel as comparable. It was shown that the Israeli distribution has also paid 50% of license fees as royalty. The TPO did not accept CUP method and proceeded to determine arm’s length price by using TNMM method in both the years. The same was upheld by DRP in both the years.
3. The Learned AR submitted that an identical issue arose in A.Ys. 2008-09 & 2010-11 i.e. in those years also, the TPO rejected CUP method adopted by the assessee and proceeded to determine arm’s length price under TNMM method. In those years also, the TPO did not assign any reason for rejecting CUP method adopted by the assessee. Under these set of facts, the Coordinate Bench has restored the matter in both the years to the file of the TPO to examine this issue afresh by passing a speaking order.
4. The Learned AR further submitted that in A.Y. 2013-14 also, the TPO rejected the CUP method adopted by the assessee and determined arm’s length price under TNMM method. However, learned DRP has deleted the adjustment so made by the TPO and accepted CUP method as most appropriate method. Accordingly, the learned AR submitted that the issue contested in these two years may be decided by following decision rendered by learned DRP in A.Y. 2013-14.
5. On the contrary, learned DR submitted that the assessee has taken foreign entity as comparable entity for determining arm’s length price under CUP method. He submitted that the assessee did not furnish details of volume of transactions, difference in geographic conditions etc., which are essential features that need to be considered in order to examine as to whether the Israel-company can be taken as comparable. He further submitted that the assessee has furnished only distribution agreement of earlier years and did not furnish agreement relevant to the year under consideration. The Learned DR further submitted that distribution agreement provides for terms and condition for distribution, provision for various services and payment of royalty. Even though the assessee was providing different kind of services, it is necessary to adopt integrated approach for determining arm’s length price as held by Hon’ble Punjab & Haryana High Court in the case of Knorr-Bremse India (P) Ltd vs. ACIT (2016) 380 ITR 307. Accordingly, the learned DR submitted that the issue may be restored to the file of the Assessing Officer/TPO for examining it afresh, as held by Coordinate Bench of Tribunal in assessee’s own case for A.Y. 2008-09 & 2010-11.
6. We have heard the rival contentions on this issue. We noticed that the Coordinate Bench of the Tribunal has restored an identical issue to the file of the Assessing Officer/TPO in A.Y. 2008-09 in ITA No. 6842/Mum/2012 dated 24.4.2016 with following bservations :-
“15. We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant paper books filed before us. The undisputed facts are that the TPO has not given any reasons for rejecting the CUP/RPA methods adopted by the assessee in respect of ‘royalty’ and other international transactions. It is also a fact that the TPO travelled in the wrong presumption that the assessee used TNMM method for benchmarking the transaction as evident from the language used in the order of the TPO. It is undisputedly wrong as the TP study indicates the application of different methods for different transactions by the assessee, which are already extracted and placed in the above paras of this order. The aggregation approach of benchmarking the international transactions by the TPO is not sustainable as per the today’s legal position. It is trait law that the transactions have to be independently benchmarked applying the appropriate method in benchmarking of the transactions. We also perused the submissions of the assessee before the TPO wherein it was categorically submitted by the assessee that the reasons for rejection of the CUP and RPA methods should be given to the assessee and the same is part of the submissions. But, either the Assessing Officer or the TPO/DRP is bothered to furnish the same. In fact, as seen from para 7.3 of the DRP order, the onus is kept on the assessee by mentioning that the assessee agreed for substituting the TNMM method as an appropriate method, which is not proper. Considering the above deficiencies, inaccurate and incompleteness, we are of the opinion the matter should be set aside to the file of the TPO/Assessing Officer for fresh adjudication of the above referred Ground Nos. 8,9 and 10. Assessing Officer/TPO shall grant a reasonable opportunity of being heard to the assessee as per the setprinciples of natural justice. In the set aside proceedings, the Assessing Officer/TPO is directed not to resort repeating of the same additions without passing a speaking order on the following issues which are connected to the grounds raised above.
1. Whether the CUP method, used by the assessee is most appropriate on in respect of the assessee’s international transaction? if not, reasons for rejecting the same
2. Whether the TNMM method, which is considered by the TPO, is the most appropriate method for benchmarking the software licensing revenue segment? If yes, reasons for considering the same?
3. Whether the transfer pricing adjustment should be made only to the value of the assessee’s international transactions with its AEs or on the total turnover of the software licensing revenue segment?
4. Any other relevant issue, if any.
16. Accordingly, the said ground Nos. 8,9 and 10 are allowed for statistical purposes.”
7. The decision rendered by the Tribunal in A.Y. 2008-09 was followed by the Tribunal in A.Y. 2010-11 in ITA No. 1598/Mum/2015. Even though learned AR submitted that the order passed by learned DRP in A.Y. 2013-14 may be followed, yet we prefer to follow the decision rendered by the Coordinate Bench in A.Y. 2008-09 & 2010-11. Accordingly, we set aside the order passed by the Assessing Officer on this issue and restore the same to the file of the Assessing Officer/TPO with identical direction as given in A.Y. 2008-09
8. In A.Y. 2012-13, the assessee is also contesting the decision of the learned CIT(A) in confirming the disallowance of ` 73 lakhs made u/s. 40(a)(ia) of the Act. The Assessing Officer noticed that the tax auditor has reported a sum of ` 375.83 lakhs as the amount disallowable u/s. 40(a) of the Act. The Assessing Officer noticed that the assessee has disallowed only ` 191.09 lakhs and did not disallow following amount paid to non-residents:
