TII Instant Update - 2017-TII-INSTANT-ALL-511

2017-TII-43-SC-INTL

CIT Vs ASPECT SOFTWARE INC: SUPREME COURT OF INDIA (Dated: December 1, 2017)

Income tax - Section 9(1)(vii) & India-USA DTAA - Article 12(4)

Keywords - supply of customized software - royalty - seperate invoicing

The Revenue Department preferred present SLP challenging the judgment, whereby the High Court had held that the payment for supply of customized software would not be treated as "royalty" under Article 12(3) of the Indo-US DTAA r/w/s 9(1)(vi) of the I-T Act, merely because there was separate invoicing for purchase & other transactions.

Having heard the parties, the Supreme Court condones the delay and issued notice to the respective parties directing their appearences for further hearing on the issue of treatment of customised software.

Notice issued

2017-TII-42-SC-INTL

TRAVELPORT L P USA Vs CIT: SUPREME COURT OF INDIA (Dated: December 1, 2017)

Income tax - attribution of income - PE - non resident assessee

The assessee, engaged in providing online airline booking services, is a USA based limited partnership concern. Upon analysing the revenue generated by assessee in India, the AO determined the net taxable income to be USD 73,376/- upon which, after conversion, the taxable income was determined at Rs.13,24,707/- in ITA No.604/2016 and the net taxable income determined to be USD 7,14,039/- upon which, after conversion, the taxable income was determined at Rs. 3,28,45,794/- in ITA No.603/2016. On appeal, the CIT(A) rejected the plea of the assessee to carry out on an upward refund based upon additional material furnished by it under Rule 46A. On further appeal, the ITAT held that the assessee had a PE within the meaning of Article 5 of the DTAA between India and USA, and attributed 15% income to the assessee's India operations. When High Court was approached, it was held that when the AO had determined the attribution of income by PE of a foreign entity, on the basis of figures furnished by the said entity, it was not open to the ITAT to disturb the said order without rendering any finding.

Having heard the parties, the Supreme Court condones the delay and issued notices to respective parties directing their appearences for further hearing on the issue of attribution of income by PE of a foreign entity.

Notice issued

2017-TII-101-HC-DEL-TP

PR CIT Vs BC MANAGEMENT SERVICES PVT LTD: DELHI HIGH COURT (Dated: November 28, 2017)

Income tax - ALP - forex gains - notional interest - exclusion of comparables - segmental information

The Assessee company which is engaged in providing IT enabled services i.e. Application and infrastructure development and testing, system and performance operations management and support etc. to its AEs. Consequent to declaration of its total income of Rs. 2,98,06,000/-, the matter was referred to the TPO who made certain adjustments to the tune of Rs. 2,89,52,326/- after taking into account the margins earned by the comparable industry/assessee, the detail and data of which was available. The assessee preferred its objections to the DRP, which granted partial relief in the sense of direction to delete the comparable i.e. Accentia. The AO then completed the assessment u/s 143(3). On appeal, the ITAT granted relief with respect to assessee’s appeals by directing the exclusion of all four comparables and rejected the Revenue’s appeals. Likewise, the additions made by AO on the ground of foreign exchange gains, as well as additions of notional interest were deleted.

On appeal, the HC held that,

Whether foreign exchange gains can be given treatment as per Safe Harbour Rules, if it was found to be notified by Revenue authority after processing of impugned assessment - NO: HC

+ as far as foreign exchange and notional interest are concerned, they are no longer res integra in terms of the order made by the DB of this Court in Principal Commissioner of Income Tax Vs. Cashedge India Pvt. Ltd - 2016-TII-30-HC-DEL-TP. In the case of Principal Commissioner of Income Tax Vs. Ameriprise India Private Limited, this Court had held that foreign exchange gains earned by assessee which is in relation to trading items and emanating from international transactions, direct value derived from it cannot be treated as Non-Operating losses and gains. This Court notices that Revenue seeks to rely on the Safe Harbour Rules which were notified by the Revenue authority and came into force in 2013. In these circumstances, given that the present assessment period covers AY 2011-12, the treatment cannot be in accordance with those rules as held in ‘Principal Commissioner of Income Tax Vs. M/s Cashedge India Pvt. Ltd. Consequently, no question of law arises;

Whether notional income on account of delayed payment made by AO can be treated as part of the income of Assessee - NO: HC

+ with respect to the treatment of notional interest by the TPO/AO, the Court is of the opinion that no question of law arises. In an identical situation, in Principal Commissioner of Income Tax Vs. Bechtel India Pvt. Ltd - 2017-TII-13-SC-TP, the Court had held that such notional income on account of delayed payment made by the AO cannot be treated as part of the income and made the subject matter of the adjustments. The question therefore does not arise for consideration;

Whether functionaly different companies can be selected as comparables, in absence of availability of segmental data - NO: HC

+ so far as question with respect to exclusion of four comparables is concerned, we notice that E-clerx was excluded on two grounds i.e. no segmental data was available, and it was functionally different as it was providing high end/BPO services. This Court further notes that E-clerx is to provide financial services such as consultancy business solution and testing. The Assessee provides IT abled services in infrastructure development and testing, system and performance operations management and support etc. The ITAT excluded E-clerx as comparable after noticing that it provided high value financial services relating to consultancy business and solution testing besides the web content management merchandising execution, web analytics, etc. This functional dissimilarity, and absence of segmental data led to its exclusion as a comparable. Those are findings of facts based upon record. Consequently, exclusion of E-Clerx was in order and cannot be interfered with;

+ the exclusion of second comparable ICRA Techno Analytics Ltd. was on the basis that it had engaged itself in processing and providing software development and consultancy and engineering services/web development services. The reasons for execution were functional dis-similarities and that segmental data were unavailable. Again the findings of the ITAT are reasonable and based on record. The third comparable that the AO/TPO excluded is TCS E-serve. The ITAT observed that though there is a close functional similarity between that entity and the assessee, however, there is a close connection between TCS E-serve and TATA Consultancy Service Ltd. which was high brand value; that distinguished it and marked it out for exclusion. The ITAT recorded that the brand value associated with TCS Consultancy reflected impacted TCS E-serve profitability in a very positive manner. This inference too in the opinion of Court, cannot be termed as unreasonable. The rationale for exclusion is therefore upheld. The assessee was aggrieved by the inclusion of Accentia a Software Development Company. The Revenue is aggrieved by the exclusion of Accentia from the TP analysis. The DRP had directed its deletion. We observe that the ITAT has noticed the unavailability of the segmental data so far as these comparables are concerned. Furthermore, the functionality of this entity was concerned, it is different from that of the assessee; Accentia was engaged in KPO services in the healthcare sector.

Revenue's appeal dismissed