CASE LAWS

2016-TII-440-ITAT-DEL-TP

ITO Vs INTERRA INFOTECH INDIA PVT LTD: DELHI ITAT (Dated: August 23, 2016)

Income Tax - Sections 92CA(1) & (3).

Keywords - TNMM - external bench marking - profit margin - transactions with AE - unrelated parties - operating profit margin - provision of software development services.

Whether the comparables used for determination of ALP in a particular year may be considered as appropriate comparables for determination of ALP in the succeeding year also , without analysing the change in circumstances - NO: ITAT

The assessee company was engaged in the business of development of computer software. It had filed return of income declaring income of Rs. 3,25,396/-. AO noticed that during the year under consideration the assessee had entered into international transaction of Rs. 11,34,95,073/- with M/s Interra Information Technologies Inc., USA. AO required the assessee to work out the value of international transaction. Assessee pointed out that it was required to compute the ALP of the international transaction, undertaken by the assessee during FY 2008-09 in accordance with the order passed by the TPO for AY 2008-09. The assessee also pointed out that comparables used for determination of ALP in a particular year may not be appropriate comparables for determination of ALP in the succeeding year. Accordingly, it was submitted that ALP of the international transactions undertaken by the assessee during FY 2008-09 cannot be computed on the basis of comparables selected for the purpose of computing the ALP of the international transactions undertaken during FY 2007-08. It had further pointed out that it had undertaken detailed bench marking analysis in accordance with the provisions of Chapter X of the act. Assessee compared the operating profit margin/OC earned by it from transactions undertaken with its AE with the operating profit margin earned by it from transactions with unrelated entities. Further, it was pointed out that assessee had also undertaken external bench marking wherein operating profit margin earned by the assessee from transactions with AEs was compared with the operating profit margin earned by comparable uncontrolled entities. Accordingly, it was submitted that international transactions of provision of software development services entered into by Interra Infotech with Interra IT Inc. were, therefore, at ALP applying TNMM. AO pointed out that since the assessee was engaged in the same business and there were no abnormal changes, the comparables adopted by the TPO for AY 2008-09 were to be applied for computing ALP.

On appeal, CIT(A) held that the PLI earned by the assessee from the transactions with uncontrolled entities was within ± 5% range of the operating margins of 8.03% earned from transactions with AEs. As regards external comparables, CIT(A) observed that applying TNMM the PLI of assessee was 5.40% as against average PLI of -1.07% noted earlier. He further observed that only two companies, namely, Saven Technologies Ltd. and Zylog Systems (India) Ltd. were having declining sales considering March 2007 as the base year. He pointed out that even if these two companies were excluded the PLI of the remaining 9 companies comes to -1.71% with the single year data. CIT(A), accordingly, upheld the TP analysis of assessee.

Having heard the matter, the Tribunal held that,

+ we are in agreement with the observations of CIT(A) that the AO was not justified in adopting the comparables selected for AY 2008-09 without undertaking proper analysis. We have gone through the detailed order passed by CIT(A) and find that he has elaborately considered external bench marking analysis as well as internal bench marking analysis of assessee and also considered the comparables selected by TPO. He has also considered in detail the profile of comparables selected by assessee and in that regard we find considerable force in the submissions of counsel for the assessee as noted earlier. CIT(DR) has not controverted any fact mentioned by CIT(A) in his order for arriving at his conclusion and, therefore, since the PLI on the basis of external benchmarking was 5.40% of assessee as compared to -1.71% of comparables and on the basis of internal bench marking the PLI earned by the assessee from internal transaction entered into with AEs was 8.03% while the PLI from transactions with for unrelated parties was 9.78%, therefore, international transaction undertaken by the assessee was at ALP. We, accordingly, confirm the order of CIT(A). As far as CIT(DR)’s plea that matter has been restored back to the file of AO in AY 2008-09 is concerned, we are in agreement with the submissions advanced by counsel for the assessee that in AY 2008-09 the matter was restored under entirely different scenario and in this year the said exercise has no relevance to the facts obtaining in this year. Accordingly, we see no reason to interfere with the order of CIT(A) and the same is upheld. In the result revenue’s appeal is dismissed.

Revenue's appeal dismissed

 

2016-TII-196-ITAT-AHM-INTL

ITO Vs SUSANTO PURNAMO: AHMEDABAD ITAT (Dated: August 4, 2016)

Income tax - Sections 90(2) & 115A - India-US DTAA - Articles 12(4), 12(5) & 15.

Keywords - Independent services - Make available clause - Professional services - Period of stay - PE & status of resident.

Whether software development service rendered by an individual which essentially requires predominantly intellectual skill and is dependent on individual characteristics of the person pursuing software development and based on specialized and advanced education and expertise, is also a professional service - YES: ITAT

Whether the status of the recipient as to an individual or any other entity, can influence the applicability of Article 15 of the India-US DTAA in respect of rendering of 'professional services' - YES: ITAT

Whether where by the virtue of exclusion clause in Article 12(5)(e) of the Indo US DTAA which provides that the income from professional services rendered by an individual is not subject to tax under Article 15, the consideration for these services cannot be taxed under Article 12(4) either - YES: ITAT

The assessee is an individual fiscally domiciled in, and carrying on business in the name of his sole proprietorship concern by the name of 'Transforme', in the USA. During the relevant previous year, the assessee had provided certain services to Fuse+Media Pvt Ltd, a business entity based in India. As to the nature of services rendered by the assessee, it was submitted that Transforme had been requested to provide a software development service to design, build and maintain a complete video streaming website and all of its administrative applications. This system was called Fuse+Media Web Application (FMWA). During the course of scrutiny assessment, the AO noticed that while the assessee had received a sums aggregating to Rs 2,23,96,667/- for the services rendered to FMPL, the assessee had not paid any taxes in India in respect of the same. The claim of the assessee, as noted by the AO, was that the income earned by the assessee in India was in the nature of business income taxable under article 7 of the treaty, which, in the absence of a PE in India, could not brought to tax in India. While the AO had no issues with the treaty protection available to the assessee, his case was that, on the facts of this case, the assessee was not protected by Article 15 inasmuch as the services rendered by the assessee were "not in the nature of independent services" and that the make available condition was fulfilled on the facts of this case inasmuch as "the mere fact that such a service had enabled the user of the service in applying the technology (not owning it) was sufficient to demonstrate that the technical knowledge had been made available". The AO thus concluded that the income of the assessee was taxable in India, though on gross basis @10% u/s 115A, and that the education cess@ 2% and secondary education cess @1% was also payable on the tax so charged. On appeal, the CIT(A) held that since conditions of Article 15 with regard to availability of fixed base in India or stay in India for a period of more than 90 days in the relevant previous year, were not satisfied on the facts of this case, the income could not be brought to tax in India under Article 15. As for the contentions of the assessee, with respect to 'make available' clause not being satisfied on the facts of this case, the CIT(A) held the same to be infructuous.

Having heard the parties, the Tribunal held that,

+ there is no dispute that the assessee has the protection of Indo-US tax treaty. There is also no dispute that in the event of the provisions of the applicable tax treaty being more beneficial to the assessee vis-à-vis the provisions of the Income Tax Act, the provisions of the Act cannot be invoked; Section 90(2) specifically provides in a situation in which assessee is entitled to a tax treaty protection, "the provisions of the Income tax Act shall apply to the extent they are more beneficial to that assessee". The short issue is therefore to examine whether the assessee is liable to tax under the provisions of the Indo-US tax treaty. While the case of the AO is that the assessee is taxable u/s Article 12(4) of the Indo-US tax treaty, the CIT(A) has granted the impugned relief on the basis that the assessee had rendered professional services which can be taxed, if at all, under Article 15, but then since taxability under Article 15 fails on the facts of this case, the income in the hands of the assessee cannot be taxed at all. A careful look at the treaty provisions would show that in the event of our coming to the conclusion that the services rendered by the assessee are in the nature of independent personal services under article 15, it is wholly academic whether or not these services are covered by article 12 and satisfy the make available clause. It is so for the reason that (a) it is uncontroverted claim of the assessee that the conditions precedents for taxability under Article 15 are not satisfied inasmuch as neither the assessee had any fixed base available to him in India nor the assessee visited India for more than 90 days in the relevant previous year, and (b) under article 12(5), which states that "fees for included services will not include amounts paid…..(e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent personal services)", once an amount is found to be of such a nature as can be covered, in an appropriate case, by article 15, the same shall stand excluded from the ambit of article 12. Taking note of this treaty provision, we may mention that the CIT(A) has referred to article 12(6) in support of this proposition, and to that extent he is not right because article 12(6) refers to a situation in which the services are rendered through the fixed base or through the permanent establishment, and the consequent taxability arises under Article 15 or Article 7 respectively. The dispute, in such a situation, is essentially confined to the taxability under Article 12 on one hand, or under Article 15 or Article 7, on the other hand. That is not an issue which is relevant in the present context. The CIT(A)'s reliance on Article 12(6) is, therefore, certainly incorrect but his conclusions are correct because of the impact of Article 12(5)(e);

+ the crucial question, therefore, is as to what constitutes 'independent personal services' for the purpose of Article 15 and whether the services rendered by the assessee can fall in this category of services. This issue, regarding the scope of article 15 of Indo-US tax treaty, came up for consideration, almost one and a half decade ago, before a coordinate bench of this Tribunal in the case of Graphite India Ltd Vs DCIT, wherein it was observed that: "....The definition of 'professional services', which are termed as 'independent personal services' in the phraseology employed in tax treaties, is, however, not defined in tax treaties or even official commentaries on UN and OECD Model Conventions. 'The Law Lexicon' edited by Justice Y.V. Chandrachud defines 'profession', inter alia, as involving 'the idea of an occupation requiring either purely intellectual skill or if any manual skill, as in painting and sculpture or surgery, skill controlled by the intellectual skill of the operator, as distinguished from an occupation which is substantially the production or sale or arrangements for the production or sale of commodities'. Referring to Bombay High Court's judgment in the case of Sakharam Naryan Kherdekar vs. City of Nagpur Corporation, the Law Lexicon further states that 'an activity to be profession must be one carried on by an individual by his personal skill, intelligence and dependent on individual characteristics'. The school of thought thus emerging from these deliberations is that, broadly speaking, a profession will imply any vocation carried on by an individual, or group of individuals, requiring predominantly intellectual skills, dependent on individual characteristics of the person(s) pursing that vocation, requiring specialized and advanced education or expertise...." There is no change in the legal position; nothing contrary to the decision so rendered has been brought to our notice. Viewed in the light, software development service rendered by an individual, which essentially requires predominantly intellectual skill, dependent on individual characteristics of the person pursuing software development, and based on specialized and advanced education and expertise, is also a professional service. As regards the objection of the AO that software development is not specifically covered by Article 15(2), as evident from the opening words of this provision to the effect "the term 'professional services' includes", the specific professions set out therein are only illustrative and not exhaustive. The emphasis is essentially on the nature of services, but then, that test is satisfied on the facts of this case. While dealing with the scope of services which are covered by Article 15, it is important to bear in mind the fact that there could indeed be overlapping effect of the scope of services covered by the other articles but as long as the services are rendered by an individual or group of individuals, generally rendition of such services is covered by Article 15. The exclusion clause set out in article 12(5)(e) typically exemplifies this approach;

+ the applicability of Article 15, therefore, is also substantially influenced by the status of the recipient i.e. whether he is an individual or whether he is a corporate entity. In the light of all these discussions, in our considered view, the services rendered by the assessee are in the nature of professional services but then since the conditions set out in Article 15(1) are admittedly not satisfied on the facts of this case, the taxability under Article 15 does not arise. As a corollary to our finding that the services in question are in the nature of professional services, and by the virtue of exclusion clause in Article 12(5)(e), which provides that the income from professional services rendered by an individual or group of individuals cannot be subjected to tax under Article 15, the consideration for these services cannot be taxed under Article 12(4) either. Revenue's case for taxability under Article 12(4) is thus clearly unsustainable in law and on the facts of this case.

Revenue's appeal dismissed