Infotech Enterprises Limited, Hyderabad V. Addl.CIT, Hyderabad

ITA 115/HYD/2011

• Counselvise Citation: 11522514 RSA 2011
• Duration Of Justice: 2 year(s) 11 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-01-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 06-07-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 25-01-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P SOMASEKHAR REDDY
• Assessee Lawyers: M V R PRASAD
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; Double taxation relief; International transaction; Bonafide belief; Retrospective amendment; Permanent establishment; Cost of acquisition; Commercial expediency
• Section: 143(3); 92B; 142(1); 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA.NO.115/HYD/2011 ASSESSMENT YEAR 2006-2007 INFOTECH ENTERPRISES LIMITED, HYDERABAD PAN AAACI4487J VS. ADDL. CIT, RANGE-2, HYDERABAD (APPELLANT) (RESPONDENT) ITA.NO.2184/HYD/2011 ASSESSMENT YEAR 2007-2008 INFOTECH ENTERPRISES LIMITED, HYDERABAD PAN AAACI4487J VS. ASST. CIT, CIRCLE 2(1), HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI MVR PRASAD FOR REVENUE : SHRI P.SOMASEKHAR REDDY DATE OF HEARING : 29.10.2013 DATE OF PRONOUNCEMENT : 16.01.2014 ORDER PER SMT. ASHA VIJAYARAGHAVAN, J.M. THESE APPEALS ARE FILED BY THE ASSESSEE AGAINST T HE ORDER OF THE DISPUTES RESOLUTION PANEL, HYDERABAD D ATED 29.09.2010 FOR THE ASSESSMENT YEARS 2006-2007 AND 2007-2008. SINCE, COMMON ISSUES ARE INVOLVED IN THESE APPEALS, THE APPEALS A RE CLUBBED AND HEARD TOGETHER AND ARE BEING DISPOSED OF BY THE SIN GLE CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. FIRST, WE WILL TAKE-UP ITA.NO.115/HYD/2011 FOR THE ASSESSMENT YEAR 2006-2007. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE-COMPANY FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. 2006-2007 ON 29.11.2006 ADMITTING TOTAL INCOME OF R S.16,37,87,601/-. THE RETURN WAS PROCESSED UNDER SECTION 143(1) ON 28 .03.2008. SUBSEQUENTLY, THE CASE WAS CONVERTED INTO SCRUTINY AND NOTICE UNDER SECTION 143(2) WAS ISSUED ON 17.10.2007. THEREAFTER , NOTICES WERE ALSO ISSUED UNDER SECTION 142(1) AND 143(2) ALONG W ITH QUESTIONNAIRE CALLING FOR INFORMATION. 3. THE ISSUE OF INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WAS REFERRED TO THE TPO AFTER OBTAINING TH E PRIOR APPROVAL FROM THE CIT-II, HYDERABAD. THE TRANSFER PRICING OF FICER (IN SHORT TPO) IN HIS ORDER DATED 30.10.2009 HAS DETERMINED THE DIFFERENCE IN ARMS LENGTH PRICE AT RS.13,04,00,900/-. WITH REGAR D TO ADJUSTMENT IN RESPECT OF LOAN TRANSACTION AND GUARANTEES A LETTER WAS ADDRESSED TO THE ASSESSEE ON 18.11.2009 PROPOSING TO MAKE ADDITI ONS ON ACCOUNT OF SHORTFALL IN LOAN TRANSACTION AND GUARANTEES. TH E ASSESSEE- COMPANY REITERATED ITS SUBMISSIONS WHICH WERE ALREA DY PUT-FORTH BEFORE THE DISPUTES RESOLUTION PANEL (IN SHORT DRP ) AND AFTER CONSIDERING, THE DRP HAS PASSED THE ORDER UNDER SEC TION 92CA(3) OF THE ACT. AS PER THE ORDER OF THE DRP, THE DIFFERENC E IN ARMS LENGTH PRICE (IN SHORT ALP) AT RS.27,68,740/- WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. THE DRAFT ASSESSMENT ORDER UNDER S ECTION 143(3) READ WITH SECTION 144C OF THE INCOME TAX ACT, 1961 WAS PASSED ON 30.12.2009 AND THE ASSESSEE FILED ITS OBJECTIONS BE FORE THE DRP UNDER SECTION 144C OF THE I.T. ACT, 1961. THE DRP P ASSED AN ORDER UNDER SECTION 144C(5) DATED 29.09.2010 GRANTING REL IEF OF RS.9,03,674/- ON THE ADJUSTMENT MADE BY THE TPO IN RESPECT OF ALP DETERMINED ON INTEREST. THE A.O. PASSED THE FINAL A SSESSMENT ORDER UNDER SECTION 143(3) READ WITH SECTION 92CA AND 144 C OF THE I.T. ACT, 1961 ON 29.11.2010. 3 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. 4. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. GROUND NO.1 AND 9 ARE GENERAL IN NATURE AND IT NEEDS NO AD JUDICATION. GROUND NO.2 READS AS FOLLOWS : 2. THE DISPUTE RESOLUTION PANEL HAS ERRED IN GRANT ING RELIEF OF ONLY RS.9,03,674/- FROM THE ARMS LENGTH PRICE DETERMINED BY THE TRANSFER PRICING OFFICER AT RS.27,68,740/- IN RESPECT OF INTEREST CHARGED ON TH E LOAN GRANTED TO THE SUBSIDIARY COMPANY IEAI (USA). (B) THE DISPUTE RESOLUTION PANEL OUGHT TO HAVE APPL IED THE LIBOR OF INDIA AND NOT THAT OF USA. THE LIBOR IN INDIA AT THE MATERIAL TIME WAS 4.17% ONLY AS AGAINST THE LIBOR IN USA OF 5.2476%. (C) THE ADDITION OF 2% OVER LIBOR RATE IS NOT JUSTI FIED. LIBOR RATE ALONE SHOULD HAVE BEEN APPLIED. (D) THE DISPUTE RESOLUTION PANEL (DRP) AND THE TRANSFER PRICING OFFICER (TRP) ERRED IN APPLYING TH E ALP FOR A TWELVE MONTHS PERIOD WHILE THE LOAN IS IN EXISTENCE ONLY FOR A PERIOD OF 9 MONTHS DURING THE PREVIOUS YEAR. (E) EVEN OTHERWISE, THE PROVISIONS OF SEC. 37(1) AP PLY AND THE CONCESSIONAL RATE IF ANY IS DICTATED BY COMMERCIAL EXPEDIENCY. PROVISIONS OF CHAPTER X DO NOT OVERRIDE PROVISIONS OF SEC. 37(1) OF THE I.T. A CT. 5. THE FACTS ARE THAT THE ASSESSEE HAD ADVANCED LO AN TO ITS SUBSIDIARY OF US $ 3,00,000 AND CHARGED INTEREST @ 4.29% PER ANNUM. A TRANSFER PRICING ADJUSTMENT HAS BEEN MADE BY THE A.O. AND THE TPO ADOPTING THE INDIAN RATE OF INTEREST AS THE COMPARABLE UNDER THE COMPARABLE UNCONTROLLED PRICE (IN SHORT CUP) METHOD. THE TPO DETERMINED THE ALP AT 14% P.A. WHICH WORKED OUT TO RS.18,73,620/- RESULTING IN AN ADJUSTMENT OF RS.14, 90,045/-. THE DRP HAS GIVEN PARTIAL RELIEF ADOPTING A RATE AT 7.247% (THE US INTER BANK OFFERED RATE OF 5.2476% + 2%). 6. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT THE DRP SHOULD HAVE ADOPTED ONLY THE LIBOR OF 4.17% AS THE 4 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. BASE IN THE LIGHT OF DECISION OF THE HYDERABAD A BENCH OF THE TRIBUNAL IN THE CASE OF FOUR SOFT LIMITED, HYDERABA D VS. DCIT IN ITA.NO.1495/HYD/2010 DATED 09.09.2011. IT WAS FURTH ER SUBMITTED THAT DIFFERENTIAL INTEREST WAS CHARGED BY ALL THE AUTHOR ITIES FOR THE ENTIRE PERIOD OF ONE YEAR WHEREAS, THE LOAN WAS ADVANCED O N 27 TH JULY, 2005 AND SO THE DIFFERENTIAL INTEREST SHOULD BE LEVIED O NLY FOR THE RELEVANT PERIOD. 7. THE LEARNED D.R. ON THE OTHER HAND RELIED ON TH E ORDERS OF THE REVENUE AUTHORITIES. 8. WE HAVE HEARD BOTH PARTIES AND PERUSED THE MATT ER AVAILABLE ON RECORD. THE ISSUE IN FOUR SOFT LTD.(SU PRA) RELIED UPON BY ASSESSEE WAS THE RATE OF LIBOR, WITH THE ACTUAL LIB OR RATE AS PER ASSESSEE BEING 4.42% WHEREAS DRP HAD TAKEN LIBOR AT 5.7%, THE TRIBUNAL HAS DIRECTED THE AO TO EXAMINE THE CORRECT RATE OF LIBOR AND ADOPT LIBOR + RATE IN THAT CASE. THE COORDINATE BENCHES SUCH AS DR.REDDYS LABORATORIES LTD. VS. ACIT (MA NO. 217/H YD/2013 IN ITA NO.1605/HYD/2010 DATED 29-11-2013), SIVA INDUSTRIES 59 DTR 182 (CHE), TECH MAHINDRA 46 SOT 141 (MUM) & TATA AUTOCO MP SYSTEMS 73 DTR 220 (MUM) ARE APPROVING ON DIFFERENT FACTUAL SITUATION, LIBOR + 1% TO 3% AND CONSIDERING THAT, W E FEEL THAT REASONABLE RATE WOULD BE LIBOR + 2% AND DIRECT THE AO TO ADOPT THE SAME. 9. WE ALSO DIRECT THE ASSESSING OFFICER TO EXAMINE AND CALCULATE THE DIFFERENTIAL INTEREST TO BE LEVIED FO R THE RELEVANT PERIOD INSTEAD OF CHARGING DIFFERENTIAL INTEREST FOR THE E NTIRE PERIOD OF ONE YEAR. WITH THIS DIRECTION, WE SET ASIDE THE ISSUE T O THE FILE OF THE ASSESSING OFFICER. GROUND NO.2 IS ALLOWED FOR STATI STICAL PURPOSES. 5 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. 10. GROUNDS NO. 3 AND 4 ARE READS AS FOLLOWS : 3. THE ASSESSING OFFICER AND THE DRP HAVE ERRED I N HOLDING THAT THE GUARANTEES OFFERED BY THE ASSESSEE TO THE BANKERS OF ITS SUBSIDIARIES IN USA AND GERMANY COME UNDER THE PROVISIONS OF CHAPTER ASSESSEE OF THE IT ACT. 4. THE DRP AND THE TPO ERRED IN ESTIMATING 2% OF TH E AMOUNT AS THE ALP FOR WHICH THE ASSESSEE OFFERED GUARANTEE TO THE BANKERS OF SUBSIDIARIES BY RELYING ON AN ISOLATED TRANSACTION. 11. IT WAS SUBMITTED BEFORE US BY THE LEARNED COUN SEL FOR THE ASSESSEE THAT THE A.O. AND DRP HAVE HELD THAT THE C ORPORATE GUARANTEES ISSUED BY THE ASSESSEE TO CITY BANK OF I NDIA FOR THE BENEFIT OF ITS US SUBSIDIARY, IS AN INTERNATIONAL T RANSACTION WITHIN THE MEANING OF SECTION 92B AND MADE AN ADDITION TOWARDS ARMS LENGTH PRICE OF RS.12,78,695/- WORKED OUT AT 2% OF THE GUA RANTEED AMOUNT. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO FILED WRI TTEN SUBMISSIONS BEFORE US CONTENDING INTER ALIA THAT EVEN THE RETRO SPECTIVE INSERTION OF THE EXPLANATION TO SEC. 92B BY THE FINANCE ACT, 201 2 W.E.F. 01.04.2002 DOES NOT HELP THE REVENUE FOR THE REASON THAT THIS IS NOT A TRANSACTION BETWEEN THE ASSESSEE AND ITS US SUBSIDI ARY BUT ITS A TRANSACTION BETWEEN THE ASSESSEE AND THE CITI BANK INDIA, EVEN THOUGH IT IS MEANT FOR THE BENEFIT OF THE US SUBSID IARY. ONE OF THE PARTIES TO THE TRANSACTION HAS NECESSARILY TO BE A NON RESIDENT FOR IT TO BE CATEGORIZED AS AN INTERNATIONAL TRANSACTION WI THIN THE MEANING OF SEC. 92B IN THE LIGHT OF THE DECISION OF HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF SWARNAANDHRA IJMII INTEGRAT ED TOWNSHIP DEVELOPMENT VS. DCIT (TOP 100 INCOME TAX RULINGS OF 2012 (CCH) (TAX SUTRA) (A WOLTERS KLUWER BUSINESS) (PAGE 208). AS THE ASSESSEE AND THE CITI BANK INDIA ARE BOTH RESIDENTS OF INDIA , THE CORPORATE GUARANTEE IN QUESTION CANNOT BE REGARDED AS AN INTE RNATIONAL 6 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. TRANSACTION. A COPY OF BOARD RESOLUTION TOWARDS GUA RANTEE IS ALSO FILED IN THE PAPER BOOK AT PAGE 142 BEFORE THE TRIBUNAL. 12. THE LEARNED COUNSEL FURTHER SUBMITTED THAT TH E CORPORATE GUARANTEE APPROVED BY THE ASSESSEE-COMPANY DOES NOT FALL WITHIN THE DEFINITION OF INTERNATIONAL TRANSACTION IN THE LIGH T OF DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF FOU R SOFT LIMITED (SUPRA). 13. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN THE PRESENT CASE THOUGH THE IMMEDIATE TRANSACTION IS THAT OF THE ASSESSEE AND CITI BANK I NDIA THE BENEFIT OF THE GUARANTEE IS FOR THE US SUBSIDIARY AND HENCE TH E ASSESSEE HAS RENDERED A SERVICE TO ITS US SUBSIDIARY FOR WHICH I T MUST CHARGE FEES AT AN ARMS-LENGTH. THIS SAME LOGIC WAS APPLIED IN NIMBUS COMMUNICATIONS VS. ACIT (34 TAXMANN.COM 298 MUMBAI TRIB.). WE ALSO NOTE THE INTRODUCTION OF RETROSPECTIVE AMENDME NT IN SECTION 92B EXPLANATION (I)(C) WHICH SPECIFICALLY COVERS SUCH G UARANTEE PAYMENTS. FURTHERMORE THE DECISION OF SWARNADHARA IJMII INTEG RATED TOWNSHIP DEVELOPMENT VS. DCIT (TOP 100 INCOME TAX RULINGS OF 2012 (CCH) (TAX SUTRA) WAS IN AN ALTOGETHER DIFFERENT FACTUAL MATRIX CONCERNING THE ASSESSEE (AN INDIAN JOINT VENTURE) REIMBURSING CORPORATE GUARANTEE FEES PAID BY ITS MALAYSIAN AE. WE DRAW S UPPORT FROM THE ORDER OF MUMBAI TRIBUNAL IN GLENMARK PHARMACEUTICAL S VS. ACIT (ITA NO.5031/MUM/2012 DATED 13.11.2013) WHICH HAS ANALYZ ED THIS ISSUE IN DETAIL AND HELD THAT 0.53% CORPORATE GUARANTEE R ATE IN THAT CASE WAS APPROPRIATE. WE THEREFORE SET ASIDE THE ISSUE T O THE TPO TO DECIDE THE QUANTUM OF CORPORATE GUARANTEE RATES IN THE INSTANT CASE FOLLOWING THE METHOD ADOPTED IN GLENMARK (SUPRA). 7 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. 14. GROUND NO. 5 READS AS UNDER : 5.(A) THE AO HAS ERRED IN HOLDING THAT THE AMOUNT O F RS. 52,55,881/- PAID TO GE NETWORK SOLUTIONS, THE NETHERLANDS BASED COMPANY TOWARDS PURCHASE OF ITS PRODUCT SMALL WORLD SOFTWARE TO CATER TO THE REQUIREMENTS OF THE INDIAN CUSTOMERS IS A PAYMENT OF ROYALTY. (B) THE A.O. HAS ERRED IN HOLDING THAT THERE WAS AN Y PATENT, INVENTION, MODEL DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY INVOLVED IN PURCHASE OF THE SMALL WORLD SOFTWARE. (C) THE SOFTWARE PURCHASED FROM GE NETWORK SOLUTIONS AND PASSED ON TO THE GIS BASED COMPANIES IN INDIA FOR THEIR PERMANENT USE WITHOUT ANY LIMITATION DOES NOT CONSTITUTE MERE OBTAINING OF LICENSE FOR THE SAME. THE TRANSACTION IS AN OUTRIGHT PURCHASE OF SMALL WORLD SOFTWARE. (D) EVEN OTHERWISE, THE SOFTWARE PURCHASED DOES NOT INVOLVE USE OF ANY COPY RIGHT BUT IT IS OUTRIGHT PURCHASE OF A COPY OF THE COPY RIGHTED ARTICLE OR THING. (E) HAVING HELD THAT THE FACTS OF THE CASE ARE EXACTLY SIMILAR TO THOSE IN SONATA INFORMATION TECHNOLOGY LIMITED VS ADDL. CIT (103 ITD 324) (BANG) THE DRP IS NOT JUSTIFIED IN NOT GIVING A DECISION HOLDING THAT IT IS SUB JUDICE BEFORE THE KARNATAKA HIGH COURT. THE DRP SHOULD HAVE APPLIED THE DECISION OF THE ITAT IN THAT CASE. 15. THROUGH THIS GROUND NO.5, THE ASSESSEE OBJECTS TO THE ADDITION OF RS.52,55,881/- UNDER SEC TION 40(A)(I) OF THE I.T. ACT. BRIEF FACTS ARE THAT THE ASSESSEE PURCHASED THE SOFTWARE CALLED SMALL WORLD SOFTWARE FROM THE DUTCH COMPANY AND BUNDLED IT WITH ITS OWN SOFTWARE AND THUS CUSTOMIZED IT AND SOLD IT TO ITS OWN 8 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. CUSTOMERS, BOTH IN INDIA AND ABROAD. AS THE PAYMENT IS MADE TO A NON-RESIDENT COMPANY, THE A.O. HELD THAT THE PAYMENT REPRESENTED, NOT THE PURCHASE PRICE OF THE SOFTWARE BUT, ACTUALLY, ROYALTY PAYMENT TO THE DUTC H COMPANY. THE A.O. NOTICED THAT THE TAX WAS NOT DEDUCTED AT SOURCE ON THE ALLEGED ROYALTY PAYMENT UNDER SECTION 195(1) OF THE INCOME TAX ACT, AND SO INVOKED THE PROVISIONS OF SECTION 40(A)(I) AND, ACCORDINGLY, DISALLOWED THE EXPENDITURE ON THE SAID ROYALTY PAYMENT. THE LEARNED COUNSEL FOR THE ASSESS EE CONTENDED BEFORE THE DRP THAT THE A.O. ERRED IN HOL DING THAT THE AMOUNT OF RS.52,55,881/- PAID TO M/S. GE NETWORK SOLUTIONS, NETHERLANDS IS DISALLOWABLE UNDE R SECTION 40(A)(I) OF THE I.T. ACT, 1961. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER OBJECTED TO THE DISALLOWAN CE PROPOSED BY THE A.O. AS FOLLOWS : I) THAT THE TAX PAYER OFFERS SOFTWARE SOLUTIONS TO ITS CUSTOMERS IN INDIA AND ABROAD. THESE SOLUTIONS INCLUDE SUPPLY OF PRODUCT SOFTWARE MARKETED BY OTHER COMPANIES BUNDLED WITH ITS SOFTWARE SERVICES. II) IT ENTERED INTO AN AGREEMENT WITH GE NETWORK SOLUTIONS, A NETHERLANDS BASED COMPANY WHICH HAD DEVELOPED AND WAS MARKETING 'SMALL WORLD SOFTWARE'. BY THE ABOVE AGREEMENT, IT WAS APPOINTED THE SOLE DISTRIBUTOR FOR MARKETING SUCH SOFTWARE IN INDIA. III) IT WAS ENTITLED TO A MARGIN UPTO 30% OF THE LISTED PRICE. IV) IT PROCURED ORDERS FROM CUSTOMERS FOR SUPPLYING MODULES OF THE SOFTWARE AND PLACED ORDERS ON GE NETWORK SOLUTIONS. V) THE SOFTWARE WAS LICENSED TO THE END CUSTOMER. LICENSE WAS IN THE NATURE OF PERPETUAL LICENSE AND 9 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. THE OWNERSHIP WAS TRANSFERRED TO THE END CUSTOMER. AS SUCH, THERE WAS NO ROYALTY PAYMENT FOR USING THE SOFTWARE CONSIDERING THAT THE OWNERSHIP IS TRANSFERRED TO THE END CUSTOMER PERMANENTLY. VI) BY ANY STRETCH OF IMAGINATION, IT CANNOT BE TRE ATED AS A PAYMENT MADE IN RESPECT OF A PATENT OR INVENTION OR SCIENTIFIC WORK OR SECRET FORMULA OR PROCESS THAT AMOUNTS TO PAYMENT OF ROYALTY CHARGEABLE TO TAX WITHIN THE SCOPE OF SECTION 9(1)(VI) OF THE I.T. ACT. VII) AS THERE WAS NO INCOME CHARGEABLE TO TAX UNDER THE PROVISIONS OF INCOME TAX ACT, NO TDS WAS REQUIRED TO BE MADE. HENCE, THE PROVISIONS OF SECTION 195 OF THE LT. ACT DO NOT HAVE ANY APPLICATION TO ITS CAS E. IN THE ABSENCE OF APPLICABILITY OF SECTION 195 OF T HE I.T. ACT, THE PROVISIONS OF SECTION 40(A)(I) OF THE I.T. ACT DO NOT COME INTO OPERATION. VIII) THE DEPARTMENT WAS AWARE OF THE PAYMENTS MADE TO THE CONCERNS IN THE EARLIER YEARS ALSO. THE STAN D OF THE TAXPAYER WAS ACCEPTED BY NOT INITIATING ANY PROCEEDINGS OR NOT MAKING ANY DISALLOWANCE IN THIS REGARD. IX) RELIANCE IS PLACED RELIANCE ON THE FOLLOWING DECISIONS : SONATA INFORMATION TECHNOLOGY LTD. VS. ADDI.CIT, 10 3 ITD 324 (BANGALORE). LUFTHANSA CARGO INDIA (P1 LTD. VS. DCIT, 274 IT R 20 (AT) (DELHI). 16. AGGRIEVED, THE ASSESSEE FILED OBJECTIONS BEFOR E THE DRP. THE DRP OBSERVED AS FOLLOWS : WE HAVE CONSIDERED THE ORDER OF THE AO AND THE SUBMISSIONS MADE BY THE TAXPAYER. THE ISSUE INVOLVE D IN THE PRESENT CASE IS IDENTICAL TO THE ISSUE IN THE C ASE OF SONATA INFORMATION TECHNOLOGY LTD. VS. ADDI.CIT. IN THIS CASE, THE AO FOUND THAT THE ASSESSEE WAS A DISTRIBU TOR OF SOFTWARE FOR A FOREIGN COMPANY. THE AO FOUND THAT T HE ASSESSEE WAS LIABLE TO DEDUCT TAX U/S. 195 OF I.T. ACT AND 10 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. FAILED TO DO SO INVITING DISALLOWANCE U/S 40(A)(I) OF THE IT ACT. THE CIT(A) UPHELD THE FINDING OF THE AO. THE I TAT HELD THAT SUCH SUM PAID BY THE ASSESSEE TO THE FORE IGN SOFTWARE SUPPLIER WAS NOT A ROYALTY AND THAT THE SAME DID NOT GIVE RAISE TO ANY 'INCOME' TAXABLE IN INDIA AND THEREFORE, THE ASSESSEE WAS NOT LIABLE TO DEDUCT TA X AT SOURCE. HOWEVER, THE HIGH COURT CONCLUDED THAT TILE MOMENT THERE WAS REMITTANCE, AN OBLIGATION TO DEDUC T TAX AT SOURCE AROSE AND ACCORDINGLY OVERRULED THE DECIS ION OF THE ITAT. THE MATTER WAS CONSIDERED BY THE OF HON'BLE SUPREME' COURT IN THE CASE OF GE TECHNOLOGY CENTRE PVT. LTD. VS. CIT AND ANOTHER (CIVIL APPEAL NOS.7541, 75 42 OF 2010) DATED 09.09.2010. THE SUPREME COURT HELD THAT THE HIGH COURT DID NOT GO INTO THE MERITS OF THE CASE O N THE QUESTION OF PAYMENT OF ROYALTY, IE., WHETHER THE AM OUNT WAS CHARGEABLE TO TAX UNDER THE PROVISIONS OF THE I NCOME TAX ACT. IT SET ASIDE THE JUDGMENT OF THE HIGH COUR T FOR DE NOVO CONSIDERATION ON MERITS. IT HAD EVEN FRAMED TH E GROUND FOR DECISION BY THE. HIGH COURT AS UNDER: 'WHETHER ON FACTS AND CIRCUMSTANCES OF THE CASE THE ITAT WAS JUSTIFIED IN HOLDING THAT THE AMOUNT(S) PA ID BY THE APPELLANT(S) TO THE FOREIGN SOFTWARE SUPPLIERS WAS NOT ROYALTY AND THAT THE SAME DID NOT GIVE RISE TO ANY 'INCOME' TAXABLE IN INDIA AND, THEREFORE, THE APPELTENT/S) WAS NOT LIABLE TO DEDUCT ANY TAX AT SO URCE ?' THE MATTER WAS CONSIDERED BY THE HIGH COURT AND THE SUPREME COURT AND IS NOW PENDING BEFORE THE HIGH COURT OF KARNATAKA. AS THE MATTER IS SUB JUDICE, AN D THE DECISION OF THE ITAT HAVING BEEN OVERRULED, WE REFRAIN FROM ALLOWING THE CLAIM OF THE TAXPAYER. TH E GROUND OF THE TAXPAYER IS REJECTED. 17. AGGRIEVED, THE ASSESSEE FILED APPEAL BEFORE THE TRIBUNAL. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE DECISION OF GE INDIA TECHNOLOGY CENTR E PVT. LTD. VS. CIT 327 ITR 456 WHEREIN IT HAS BEEN H ELD AS FOLLOWS : 11 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. THE EXPRESSION CHARGEABLE UNDER THE PROVISIONS OF THE ACT IN SECTION 195(1) SHOWS THAT THE REMITTANCE HAS GOT TO BE OF TRADING RECEIPT, THE WHOLE OR PART OF WHICH IS LIABLE TO TAX IN INDIA. I F TAX IS NOT SO ASSESSABLE, THERE IS NO QUESTION OF TAX A T SOURCE BEING DEDUCTED . 18. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT THE ISSUE OF TAXABILITY OF RS.52,55, 881/- HAS TO BE CONSIDERED BOTH IN TERMS OF SECTION 9(1)( I) AND 9(1)(VI) OF THE I.T. ACT AND ALSO DTAA BETWEEN INDI A AND NETHERLANDS. IT WAS SUBMITTED THAT THE ASSESSEE CAN NOT MEDDLE WITH THE SOURCE CODE OF THE SOFTWARE IN THE PROCESS OF CUSTOMISATION AND IT CAN BUNDLE ONLY ITS OWN SOFTWARE WITH THE SMALL WORLD SOFTWARE UTILISING AVAILABLE FACILITIES IN THE SAID SMALL WORD SOFTWAR E. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAS TO PURC HASE THE SAID SOFTWARE EACH TIME IT WANTED TO SELL THE B UNDLED SOFTWARE TO ITS CUSTOMERS AND THE ASSESSEE DID NOT GET ANY RIGHTS TO THE COPYRIGHT TO THE SAID SOFTWARE. F URTHER, THE ASSESSEE DID NOT OBTAIN ANY LICENSE IN RESPECT OF SOFTWARE PURCHASED FROM GE NETWORK SOLUTIONS, NETHERLAND. IT WAS SUBMITTED THAT THERE IS NO BUSIN ESS CONNECTION AT ALL BETWEEN THE ASSESSEE AND THE NETHERLANDS COMPANY AND THEY ARE NOT ASSOCIATED ENTERPRISES (AE) AND THE AMOUNT OF RS.52,55,881/- I S SIMPLY THE PURCHASE COST OF TRADING GOODS AND NOT ROYALTY PAYMENT AND HENCE, THERE IS NO LIABILITY TO DEDUCT TAX AT SOURCE AND SECTION 40(A)(I) IS NOT ATTRACTED . 19. FURTHER IT WAS SUBMITTED THAT THE ASSESSEE IS ENTITLED FOR BENEFIT OF DTAA AGREEMENT BETWEEN INDI A AND NETHERLANDS AND RELIED ON THE DECISION OF ASIA 12 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. SATTELITE TELECOMMUNICATION COMPANY LIMITED VS. DCI T 332 ITR 340. THE ASSESSEE SUBMITTED THAT THERE IS A DISTINCTION BETWEEN THE RIGHT TO COPYRIGHT OF AN ARTICLE/WORK/PROGRAMME AND THE RIGHT TO A COPYRIGH TED ARTICLE/WORK/ PROGRAMME AND RELIED ON THE DECISIONS IN THE CASES OF LUCENT TECHNOLOGIES LTD. 91 ITD 366 (BANG.) (2) SAMSUNG ELECTRONICS CO. 94 ITD 91 (BANG .) (3) SONATA INFORMATION TECHNOLOGIES LIMITED VS. ADD L. CIT 103 ITD 324 (4) MOTOROLA INC. VS. DC 95 ITD 269 (DEL.)(SB). 20. IT WAS FURTHER SUBMITTED THAT THE PURCHASES EFFECTED BY THE ASSESSEE FROM GE, NETHERLANDS ARE O F COPYRIGHTED ARTICLES AND NOT PURCHASES OF COPYRIGHT AND THERE CANNOT BE AS IN THE PRESENT CASE, MULTIPLE PURCHASE OF COPYRIGHT. IT WAS ALSO SUBMITTED AS FOL LOWS : FURTHER, SOFTWARE IS NOT INCLUDED IN THE LIST OF ITEMS MENTIONED IN ARTICLE 12 OF THE DTAA. THE ARTICLE COVERS THE COPYRIGHT OF ITEMS LIKE LITERARY , ARTISTIC OR SCIENTIFIC WORK ETC., IT DOES NOT COVER THE COPY RIGHT OF SOFTWARE. SO, THE PAYMENT OF RS.52,55,881/- TO M/S. GE NETWORK SOLUTIONS, NETHERLANDS CANNOT BE REGARDED AS ROYALTY INCOME IN THE HANDS OF SAID NON-RESIDENT IN TERMS OF THE SAID DTAA. IN THE DOMESTIC LAW, IN THE COPYRIGHT ACT 1957, TH E DEFINITION OF 'LITERARY WORK' HAS BEEN AMENDED WITH EFFECT FROM 1994 (WIDE ACT 38 OF 1994) TO INCLUDE COMPUTER PROGRAMS. THIS AMENDMENT IN THE DOMESTIC LAW IS SUBSEQUENT TO THE DATE OF DTAA WITH NETHERLANDS AND SO CANNOT BE READ INTO THE DTAA IN THE LIGHT OF THE DE CISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF M/S SANOFI PASTEUR HOLDING SA VS. THE DEPT. OF REVENUE (WP NO. 14212 OF 2010 ETC) IN WHICH IT WAS HELD THAT 'RETRO SPECTIVE AMENDMENTS TO THE INCOME TAX ACT (VIDE THE FINANCE ACT 2012) HAVE NO IMPACT ON INTERPRETATION OF DTAA'. 13 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. ANALOGOUSLY, RETROSPECTIVE AMENDMENTS IN OTHER DOME STIC LAWS ALSO HAVE NO IMPACT ON INTERPRETATION OF A DT AA. THE SAID AMENDMENT TO THE DEFINITION OF 'LITERARY W ORK' IS NOT EVEN RETROSPECTIVE. IT IS SIMPLY SUBSEQUENT TO THE DATE OF THE DTAA. SIMILAR IS THE RATIO OF THE DECISION I N WNS NORTH AMERICA INC. VS ASSISTANT DIRECTOR OF INCOME TAX(LNTERNATIONAL TAXATION). SIMILARLY, EXPLANATION 4 TO CLAUSE (VI) OF SECTION 9(1) WHICH HAS BEEN RETROSPE CTIVELY INTRODUCED BY THE FINANCE ACT 2012 WITH EFFECT FROM 01.06.1976 CANNOT BE READ INTO THE DTAA AS IT IS AN UNILATERAL ACTION OF THE INDIAN LEGISLATURE. FURTHE R, THIS EXPLANATION IS APPLICABLE IN THE CONTEXT OF ONLY 'R OYALTY' INCOME AND NOT BUSINESS INCOME AND WHAT THE VENDOR COMPANY DERIVED, AS CLAIMED HEREINABOVE, IS BUSINES S PROFIT AND NOT ROYALTY INCOME. SO, THE AMOUNT OF RS.52,55,881/- IS NOT TAXABLE IN THE HANDS OF THE N ON- RESIDENT. 21. IT WAS FURTHER SUBMITTED THAT PARAGRAPH 2 OF A RTICLE 3 OF THE DTAA BETWEEN INDIA AND NETHERLANDS READS AS UND ER : 'AS REGARDS THE APPLICATION OF THE CONVENTION BY ONE OF THE STATES ANY TERM NOT DEFINED HEREIN SHALL, UNLESS TH E CONTEXT OTHERWISE REQUIRES, HAVE THE MEANING WHICH IT HAS U NDER THE LAW OF THAT STATE CONCERNING THE TAXES TO WHICH THE CONVEN TION APPLIES.' 22. THE TERM 'ROYALTY' IS DEFINED IN THE DTAA WITH NETHERLANDS AND SO, IN THE LIGHT OF THE ABOVE PROVI SION, CHANGES IN DOMESTIC LAW, LIKE THE INDIAN COPYRIGHT ACT, 1957, HAVE NO BEARING ON THE DEFINITION OF THE TERM 'ROYALTY.' ACTUALLY, WE CANNOT GO BEYOND THE DEFINITION OF 'ROYALTY' GIVEN IN THE SAID DTAA. AS ALREADY MENTIONED, THE SAID DEFINITION OF 'ROYALTY' IN THE DTAA DOES N OT COVER SOFTWARE. IT WAS FURTHER CONTENDED THAT IF THE SAID AMOUNT IS HE LD TO BE TAXABLE ROYALTY INCOME IT HAS TO BE TAXED IN TERMS OF PARA 2 OF ARTICLE 12 AT ONLY 15% OF THE SAID AMOUNT AS AGAINST THE ASSESSEE AS IT ADOPTED BY THE A.O. AND THE RATE WHICH IS MORE BENEFICIAL TO T HE ASSESSEE IS TO BE ADOPTED. 14 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. 23. THE LEARNED D.R. ON THE OTHER HAND, RELIED ON THE ORDER OF THE DISPUTES RESOLUTION PANEL. 24. WE HAVE HEARD THE PARTIES AND PERUSED THE MATE RIAL AVAILABLE ON RECORD. WE FIND THAT THE DECISION IN T HE CASE OF GE INDIA TECHNOLOGY CENTRE PVT. LTD. VS. CIT 327 ITR 456 HAS CLEARLY STATED THAT THE OBLIGATION TO DEDUCT TAX AT SOURCE IS HOWE VER LIMITED TO APPROPRIATE PROPORTION OF INCOME CHARGEABLE UNDER T HE ACT FORMING PART OF THE GROSS SUM OF MONEY PAYABLE TO THE NON-R ESIDENT. IN OTHER WORDS, IF THE TAX IS NOT SO ASSESSABLE, THERE IS NO QUESTION OF TAX AT SOURCE BEING DEDUCTED. HENCE, THE SHORT POINT IS T HAT ONE HAS TO SEE WHETHER THE AMOUNT OF RS.52,55,881/- REPRESENTS AMO UNT CHARGEABLE TO TAX IN THE HANDS OF THE NON-RESIDENT BOTH IN TER MS OF SEC.9(1)(I) AND 9(1)(VI) OF THE I.T. ACT AND ALSO DTAA BETWEEN INDI A AND NETHERLANDS. 25. WE FIND THAT THE AMOUNT IN QUESTION IS NOT TA XABLE U/S 9(1)(I) BECAUSE EVEN ASSUMING FOR A MOMENT THERE IS A BUSINESS CONNECTION BETWEEN THE ASSESSEE AND THE FOREIGN SOF TWARE SUPPLIER THERE ARE NO OPERATIONS IN INDIA OF THE FOREIGN COM PANY TO WHICH INCOME MAY BE REASONABLY ATTRIBUTED TO AS REQUIRED UNDER EXPLANATION 1(A) TO SECTION 9(1)(I). HENCE WE FIND THERE IS NO APPLICABILITY OF S.9(1)(I) IN THE INSTANT CASE. 26. NOW WE ADDRESS THE ISSUE OF CHARACTERIZATION O F THESE PAYMENTS AS ROYALTY SO AS TO FALL UNDER SECTION 9(1 )(VI) OR ARTICLE 12 OF INDIA-NETHERLANDS DTAA. WE FIND THAT THE ASSESS EE HAS PURCHASED THE SMALL WORLD SOFTWARE FROM NETHERLANDS AND BUNDLED IT WITH ITS OWN SOFTWARE AND THUS CUSTOMISED IT AND SO LD IT TO ITS OWN CUSTOMERS BOTH IN INDIA AND ABROAD. THE ASSESSEE CA NNOT MEDDLE WITH THE COPIES OF THE SOFTWARE IN THE PROCESS OF I TS CUSTOMIZATION. WE ALSO OBSERVE THAT THE ASSESSEE HAS TO PURCHASE THE SAID SOFTWARE EACH TIME IT WANTED TO SELL THE BUNDLED SOFTWARE TO ITS CUSTOMERS AND 15 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. IF IT HAD GOT ANY RIGHT TO THE COPYRIGHT TO THE SA ID SOFTWARE IT WOULD NOT HAVE BOUGHT IT EVERY TIME WHEN IT WANTED TO SEL L. FURTHER, PERUSING THE BOOKS OF THE ASSESSEE AT PAGES 170 TO 175 OF THE PAPER BOOK, WE FIND THAT THERE ARE MULTIPLE PURCHASES OF SOFTWARE DURING THE YEAR AND EACH PURCHASE OF SINGLE ITEM ON SOFTWARE I S MERELY ONE THOUSAND RUPEES AND NOT HUGE AMOUNT. HENCE, WE ARE OF THE OPINION THAT THEY ARE SIMPLY PURCHASE COST OF TRADING GOODS ESPECIALLY WHEN THE LICENCE IN RESPECT OF SOFTWARE IS NOT OBTAINED BY THE ASSESSEE AND THE PERPETUAL LICENCE IS GIVEN DIRECTLY TO THE END CUSTOMER BY THE VENDOR COMPANY. COPIES OF THE INVOICE RAISED BY NET WORK SOLUTIONS ON THE ASSESSEE AND AT PAPER BOOK 176 TO 178 SUPPOR T THE VIEW OF THE ASSESSEE WHERE THE INVOICE MENTIONING NAME OF THE E ND CUSTOMER SUPPORTS OUR VIEW. HENCE, IN OUR OPINION, WHEN THER E IS NO TRANSFER OF EVEN THE LICENSE TO THE ASSESSEE EVEN THOUGH IT IS THE PURCHASER, IT CANNOT BE SAID THAT THERE IS ANY ROYALTY PAYMENT BY THE ASSESSEE TO THE VENDOR COMPANY. THE AMOUNT OF RS.52,55,81/- IS SIMPLY THE COST OF IMPORTED TRADING GOODS AND NOT ROYALTY PAYMENT. 27. IT IS THEREFORE CLEAR THAT THE PAYMENTS MADE BY ASS ESSEE TO THE NETHERLANDS COMPANY WILL NOT FALL UNDER THE AMBIT OF ROYALTY AS PER ARTICLE 12 OF THE INDIA-NETHERLANDS DTAA. HENCE THE RE IS NO QUESTION OF TAX WITHHOLDING REQUIRED BY THE ASSESSEE AND HEN CE S.40(A)(I) DISALLOWANCE IS ERRONEOUS. ACCORDINGLY, GROUND NO.5 IS ALLOWED. 28. GROUND NO.6 READS AS UNDER : 6(A) THE LEARNED AO IS NOT JUSTIFIED IN DISALLOWING THE EXPENDITURE OF RS. 19,48,02,907/- (WHICH INCLUDES RS. 7,02,62,853/- RELATABLE TO NON-10A UNDERTAKINGS) BY APPLYING THE PROVISIONS OF SEC 40(A)(IA) R.W.S 9( L)(I) AND 9( L)(VII) OF THE IT A CT. (B) THE LEARNED AO IS NOT JUSTIFIED IN HOLDING THAT THE PROVISIONS OF EXPLANATION 2 TO SEC 9(1)(I) 16 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. APPLY WITHOUT APPRECIATING THAT THE ASSESSEE DID NOT HABITUALLY BOOK ORDERS IN INDIA FOR ITS SUBSIDIARY. THEREFORE THERE IS NO BUSINESS CONNECTION WITHIN MEANING OF EXPLANATION TO SEC 9(L)(I) AS HELD BY THE A.O. (C) EVEN ASSUMING WITHOUT ADMITTING THAT THERE IS A BUSINESS CONNECTION, SINCE THE FOREIGN SUBSIDIARIES DO NOT HAVE P.ES IN INDIA THEIR INCOMES ARE EXEMPT UNDER THE PROVISIONS OF DTAAS (DOUBLE TAXATION AVOIDANCE AGREEMENTS) WITH THE FOREIGN COUNTRIES. THE DTAAS ARE TREATIES WHICH OVER RIDE THE PROVISIONS OF THE I.T. ACT. (D) THE LEARNED DRP HAS ERRED IN HOLDING THAT THE PAYMENTS BY THE ASSESSEE TO ITS SUBSIDIARIES ARE TO BE CONSIDERED AS TECHNICAL SERVICES CONING U/S 9(I)(VII) OF THE IT ACT READ WITH EXPLANATION THERE-UNDER WHEREAS THE AO DID NOT INVOKE PROVISIONS OF THAT SUB-SECTION. (E) UNDER SECTION 9(1)(VII)(B), THE PAYMENTS FOR TECHNICAL SERVICES ABROAD FOR EARNING INCOME ABROAD ARE EXCEPTED BY THE PROVISIONS OF SEC 9( L)(VII) OF THE IT ACT. (F) THE DRP HAS ERRED IN HOLDING THAT THE EXPLANATION TO SEC 9(L)(VII) INCORPORATED THROUGH THE FINANCE ACT 2010 APPLIES TO THE FACTS OF THE CASE. THE INCOME MUST BE FIRST DEEMED TO ACCRUE OR ARISE BEFORE THE EXPLANATION CAN BE INVOKED. U/S 9(1)(VII)(B), THE INCOME FROM A SOURCE OUTSIDE INDIA IS EXCEPTED FROM THE DEEMING PROVISION OF ACCRUAL OR ARISAL. (G) AT ANY RATE THE DRP AND THE AO FAILED TO NOTICE THAT UNDER THE DTAAS THE PAYMENTS MADE TO THE FOREIGN SUBSIDIARIES ARE TAXABLE IN THOSE COUNTRIES. (H) THE LEARNED AO IS NOT JUSTIFIED IN DOUBTING THE INCLUSION OF THE RECEIPTS BY THE FOREIGN SUBSIDIARIES IN THEIR RETURNS FILED IN THOSE COUNTRIES. HE SHOULD HAVE GIVEN OPPORTUNITY TO PROVE THE INCLUSION OF THE SAID RECEIPTS IF HE HAD 17 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. A DOUBT. THE DRP HAS ALSO COMMITTED THE SAME ERROR. (I) THE DRPS ORDER IS VAGUE. ON ONE HAND IT SAYS ALL THE EVIDENCE COULD NOT BE OBTAINED FOR LACK OF TIME. ON THE OTHER IT INVOKES EXPLANATION TO SECTION 9(1)(VII) WITHOUT REFERENCE TO EVIDENCE. 29. THE ASSESSEE TAKES OBJECTION TO THE DISALLOWANCE OF RS.19,48,02,907/- UNDER SECTION 40( A)(I) OF THE I.T. ACT. DURING THE YEAR, THE TAXPAYER INCU RRED AN EXPENDITURE OF RS.19,48,02,907/- TOWARDS TECHNICAL CONSULTANCY CHARGES PAID IN FOREIGN EXCHANGE TO THE CONCERNS (AES) OUTSIDE INDIA. THE PAYMENTS MADE ARE AS UNDER : S. N O. PARTY UNIT 1 (RS.) UNIT 3 RS.) BANGALOR E (RS.) TOTAL (RS.) 1. INFOTECH ENTERPRISES AMERICA INC. (IEAI), USA 5,70,34,785 11,91,05,050 57,65,916 18,19,05,752 2. INFOTECH ENTERPRISES GMBH, (IEG), GERMANY 90,97,638 90,97,638 3. INFOTECH ENTERPRISES EUROPE LTD. (IEEL), UK 15,01,875 15,01,875 4. VARGIS LLC, USA 22,97,641 22,97,641 TOTAL 6,99,31,940 11,91,05,050 57,65,916 19,48,02,906 18 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. 30. THE A.O. DISALLOWED THE ENTIRE EXPENDITURE. CONSEQUENT TO THE DISALLOWANCE, INCOME OF THE RESPECTIVE UNITS HAD INCREASED BY THE CORRESPONDING AMOUNTS. UNIT 3 AND UNIT AT BANGALORE ARE ELIGIBLE FOR EXEMPTION U/S. 10A OF THE I.T. ACT. THE A.O. ALLOWE D EXEMPTION RELATING TO THE ABOVE DISALLOWANCES TO TH E 2 UNITS AS UNDER : I) UNIT 3 RS.11,89,85,945/- II) BANGALORE UNIT RS. 55,54,109/- TOTAL RS. 12,45,40,054/- AS A RESULT, OUT OF THE DISALLOWANCE OF RS.19,48,02,907/-, MADE BY THE A.O., RS.12,45,40,054/- GOT ALLOWED AS EXEMPTION U/S. LOA OF I.T. ACT. THE REMAINING AMOUNT OF RS. 7,02,62,853/- ' GOT ADDED TO THE TOTAL INCOME. THE A.O. FOUND THAT DURING THE PAST FEW YEARS, THE TAXPAYER ENTERED INTO AGREEMENTS WITH FOREIGN CONCERNS FOR SUPPLY AND SERVICES OF COMPUTER SOFTWA RE. IT HAD HABITUALLY ENGAGED ITS SUBSIDIARIES, THE FOU R COMPANIES MENTIONED IN THE ABOVE TABLE, TO RENDER SOFTWARE SERVICES AND CONSULTANCY SERVICES TO THE FOREIGN PARTIES ABROAD. THE FOREIGN SUBSIDIARIES WE RE PAID PERIODICALLY BY THE TAXPAYER FOR THE SERVICES RENDERED. THE AO ON THESE FACTS HELD THAT THE INCOM E OF THE SUBSIDIARIES HAD DEEMED TO HAVE BEEN ACCRUED OR ARISEN IN INDIA DURING THE YEAR. HE APPLIED THE PROVISIONS OF SECTION 9(1)(I) OF THE LT. ACT TO HOL D THAT THE NON-RESIDENT COMPANIES HAD BUSINESS CONNECTION WITH THE TAXPAYER AND THE INCOME AROSE DUE TO SUCH BUSINESS CONNECTION. WHILE DEALING WITH THE COMMUNICATION EXPENSES, THE AO OPINED THAT THE PAYMENTS MADE BY THE TAXPAYER ARE IN THE NATURE OF FEES FOR TECHNICAL SERVICES. ONCE THE PAYMENTS EITH ER ARISING THROUGH BUSINESS CONNECTION OR WITH REFEREN CE TO TECHNICAL SERVICES, SUCH AMOUNTS ARE CHARGEABLE TO TAX UNDER THE PROVISIONS OF THE INCOME TAX ACT. CONSEQUENTLY, THE PROVISIONS OF SECTION 195 OF THE I.T. 19 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. ACT ARE APPLICABLE. THE A.O. FOUND THAT THE, TAXPAY ER DID NOT DEDUCT TAX AT SOURCE AND CONSEQUENTLY APPLI ED THE PROVISIONS OF SECTION 40(A)(I) OF THE I.T. ACT AND DISALLOWED THE ENTIRE AMOUNT. THE TAXPAYER OBJECTED THE TREATMENT GIVEN BY THE AO IN RESPECT OF THE CLA IM OF RS.19,48,02,907/-. THE SUBMISSIONS ARE BRIEFLY AS, UNDER : EVEN THOUGH THE AO HELD THAT THERE WAS BUSINESS CONNECTION BETWEEN THE NON-RESIDENT SUBSIDIARY AND THE PAYMENT MADE, NO SUCH BUSINESS CONNECTION EXISTED WITH REFERENCE TO EXPLANATION (2 ) TO SECTION 9(1)(I) OF THE I.T. ACT. IT FURNISHED A COPY OF THE AGREEMENT BETWEEN THE TAXPAYER AND INFOTECH ENTERPRISES AMERICA INC. (IEAI) WHICH GOVERNS THE TRANSACTIONS BETWEEN THE TAXPAYER AND THE SUBSIDIARY IN USA. IT FURNISHED COPIES OF RETURNS OF IEAI FILED IN US A FOR THE CALENDAR YEARS 2003 AND 2005. NO PROFITS AROSE TO THE NON-RESIDENT SUBSIDIARIES IN INDIA BECAUSE THEY DID NOT CARRY OUT ANY BUSINESS ACTIVITY EITHER BY THEMSELVES OR THROUGH THE TAXPAYER. THE A.O. PROCEEDED UNDER THE MISTAKEN IMPRESSION THAT EVEN THOUGH THE PAYMENTS MIGHT NOT BE TAXABLE IN INDIA YET TAX WAS DEDUCTIBLE UNLESS A CERTIFICAT E U/S. 195(2) OF THE I.T. ACT WAS APPLIED FOR AND OBTAINED. EVEN UNDER THE PROVISIONS OF DTAA WITH THE RESPECTIVE COUNTRIES IN WHICH THE SUBSIDIARIES ARE LOCATED, THE PAYMENT IN RESPECT OF TECHNICAL SERVICES ARE SUBJECT TO TAX IN THE STATE OF RESIDEN CE AND HENCE, THE SAME ARE TAXABLE IN THE RESPECTIVE COUNTRY AND NOT UNDER THE INDIAN LAW. SO FAR NO PROCEEDINGS FOR ASSESSMENT OF THE NON- RESIDENT COMPANIES WERE INITIATED BY THE DEPARTMENT BECAUSE OF THE REASON THAT THE NON RESIDENTS ARE NOT LIABLE TO TAX IN INDIA. 31. THE DRP HELD AS FOLLOWS : WE HAVE CONSIDERED THE SUBMISSIONS MADE BY THE TAXPAYER. IT IS CLEAR FROM THE ASSESSMENT ORDER AS WELL AS THE SUBMISSIONS MADE BY THE TAXPAYER THAT THE TAXPAYER HAD HABITUAL BUSINESS RELATIONS WITH THE NON- 20 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. RESIDENT SUBSIDIARIES OVER SEVERAL YEARS AND PAYMEN TS OF SIMILAR NATURE ARE BEING PAID OVER ALL THESE YEA RS. FROM THE FACTS PLACED BEFORE US, IT IS NOT CLEAR WH ETHER THE TAXPAYER IS BOOKING ORDERS FOR THE NON-RESIDENT S IN RESPECT OF WORK GIVEN TO THEM. COPIES OF THE MASTER AGREEMENTS ENTERED INTO BY THE TAXPAYER WITH THE US CONCERNS FOR EXECUTION OF THE WORK ARE NOT AVAILABL E. AT THE SAME TIME, PURCHASE ORDERS GIVEN BY THE TAXPAYE R IN RESPECT OF EACH SUCH ORDER RECEIVED BY THE TAX P AYER ARE ALSO NOT PLACED BEFORE US. ONCE THESE AGREEMENT S ARE AVAILABLE, AN OPINION COULD BE FORMED WHETHER T HE ENTIRE AGREEMENT ENTERED INTO BY THE TAXPAYER WITH THE US CLIENTS WAS EXECUTED BY THE NON-RESIDENT SUBSIDIARIES AND WHETHER THE TAX PAYER ENTERED INTO SUCH AGREEMENTS ON BEHALF OF THE SUBSIDIARIES. MOREOVER, AGREEMENT WITH ONLY ONE OUT OF 4 SUBSIDIARIES IS PRODUCED. THE TAX PAYER COULD NOT PRODUCE THE CORRESPONDING INVOICES RECEIVED FROM TH E SUBSIDIARIES VIS-A-VIS THE INVOICES RAISED BY IT ON FOREIGN CLIENTS IN RESPECT OF THE WORK DUE TO TIME CONSTRAINT. THE COPIES OF RETURNS AND THE AGREEMENT BETWEEN ONE OF THE SUBSIDIARIES IN USA FURNISHED BY THE TAXPAYE R WERE FORWARDED TO THE A.O. FOR HIS COMMENTS. HE HAS STATED THAT NOTHING IS DISCERNABLE FROM THE DOCUMEN TS SO FILED. THE AGREEMNE4TS SPEAK ABOUT THE PURCHASE ORDERS THOUGH WHICH ORDERS WERE GIVEN TO THE SUBSIDIARIES. SUCH PURCHASE ORDERS WERE NOT FURNISH ED ALONG WITH THE AGREEMENT. WITHOUT SUCH PURCHASE ORDERS, IT IS NOT POSSIBLE TO UNDERSTAND THE NATURE OF WORK GIVEN TO THE SUBSIDIARIES BY THE TAXPAYER. FUR THER, THE A.O. STATED THAT THE COPIES OF RETURNS DO NOT R EFLECT WHETHER THE PAYMENTS MADE BY THE TAXPAYER WERE REFLECTED IN SUCH RETURNS IN THE ABSENCE OF ANY RECONCILIATION AND WORKING, IN TERMS OF RUPEES CONSIDERING THAT THE RETURNS IN USA WERE FILED IN U S DOLLARS AND ON CALENDAR YEAR BASIS : THE AO HAS GIVEN A FINDING THAT THE TAXPAYER HAS BE EN HAVING A 'HABITUAL' BUSINESS CONNECTION WITH THE SUBSIDIARIES. IN THE ABSENCE OF ALL THE RELEVANT FA CTS BEFORE US, WE ARE UNABLE TO EXAMINE THE ISSUE AND GIVE A FINDING. THE AO HAS CONSIDERED THE PAYMENTS AS FEE FOR TECHNICAL SERVICES WHILE DEALING WITH TH E COMMUNICATION EXPENSES. THOUGH ELABORATE 21 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. DISCUSSION WAS NOT MADE ABOUT THE APPLICABILITY OF SECTION 9(1)(VII)(B) OF THE LT. ACT, SUCH PROVISION IS APPLICABLE IN RESPECT OF FEE FOR TECHNICAL SERVICES . IT REQUIRES TO BE EXAMINED WHETHER THE CASE OF THE TAXPAYER FALLS WITHIN THE EXCEPTIONS PROVIDED IN TH E SAID SECTION. THE FIRST EXCEPTION IS IN RESPECT OF SERVICES UTILIZED IN A BUSINESS OR PROFESSION CARRI ED ON BY THE TAXPAYER OUTSIDE INDIA. IN THE PRESENT CASE, THE BUSINESS OF THE TAXPAYER IS CARRIED OUT IN INDIA AN D IT WAS ONLY GETTING ORDERS FROM USA FOR EXECUTION. IT HAS ENOUGH CAPACITY AND CAPABILITY TO EXECUTE SUCH ORDE RS FROM/IN INDIA. IN SUCH A CASE, WHETHER IT COULD BE SAID THAT BUSINESS OR PROFESSION WAS CARRIED ON BY THE TAXPAYER OUTSIDE INDIA. THE OTHER EXCEPTION PROVIDE D IS IN RESPECT OF THE PURPOSE OF THE PAYMENT FOR MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA. WHETHER THE ORDERS RECEIVED BY THE TAXPAYER FOR EXECUTION OF TILE WORK FROM CLIENTS LOCATED IN USA COULD BE SAID TO BE A SOURCE OF THE TAXPAYER OUTSID E INDIA. ALL THESE ASPECTS REQUIRE A MUCH DEEPER EXAMINATION OF ALL THE RELATED FACTS, WHICH ARE NOT AVAILABLE TO US IN THE LIMITED TIME. IT IS INCIDENT ALLY MENTIONED HERE THAT THE CASE CAME UP FOR HEARING ON 22.09.2010 JUST A WEEK PRIOR TO THE TIME LIMIT FOR PASSING THE ORDER. THE PROVISIONS OF SECTION 9(1)(VII) OF THE IT ACT ' ARE TO BE READ WITH EXPLANATION TO SECTION 9 WHICH IS INCORPORATED AT THE END OF THE SECTION THROUGH THE FINANCE ACT 2010 WITH RETROSPECTIVE EFFECT FROM 01.06.1976. AS PER THE EXPLANATION, IT IS IMMATERIA L WHETHER NON-RESIDENT HAS A RESIDENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTION IN INDIA OR THE NON - RESIDENT HAS RENDERED SERVICES IN INDIA, FOR THE PURPOSE OF SECTION 9(1)(VII) OF THE IT ACT. IN VIEW OF THE EXPLANATION, THE PAYMENT MADE BY THE TAXPAYER WOULD BE SUBJECT TO THE PROVISIONS OF INCOME TAX ACT. AS SUCH, IT ATTRACTS THE PROVISIONS OF SECTION 195 OF THE I.T. ACT WARRANTING DEDUCTION OF TAX AT SOURCE. FAI LURE TO COMPLY WITH THE PROVISIONS OF SECTION 195 OF THE I.T. ACT ATTRACTS THE PROVISIONS OF SECTION 40(A)(I) OR THE I.T. ACT WARRANTING DISALLOWANCE OF THE ENTIRE PAYMENT. CONSIDERING ALL THE CIRCUMSTANCES, WE UPHOLD THE DECISION OF THE AO IN MAKING THE DISALLOWANCE OF TH E ENTIRE PAYMENT U/S. 40(A)(I) OF THE I.T. ACT. 22 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. 32. AGGRIEVED, ASSESSEE IS IN APPEAL BEFORE US. IT WAS SUBMITTED THAT THE ASSESSEE HAS NOT HABITUALLY SECURED ORDERS FOR ITS FOREIGN SUBSIDIARY IEAI, USA . IT HAD ONLY PARCELLED OUT PORTION OF THE WORK ENTRUSTE D IT PRATT & WHITNEY (PWC) TO IEAI USA. IT WAS SUBMITTED THAT EXPLANATION 2 TO SECTION 9(1)(I) CAN BE INVOKED ONLY WHEN THE INDIAN COMPANY SECURED ORDERS FOR THE BENEFIT OF NON-RESIDENT. WHEREAS, THAT IS N OT THE FACT IN THE PRESENT CASE. ONE OF THE REASONS FOR SU B- CONTRACTING TO IEAI IS THAT IEAI HAS ITS OFFICE IN CALIFORNIA WHICH IS NEAR TO PWC DELIVERY CENTRE. IT WAS ALSO SUBMITTED THAT EACH-WORK ORDER SHALL BE SUPPOR TED BY THE END CUSTOMERS ORDER COPY. FURTHER, THE FOREI GN SUBSIDIARY DID NOT WORK EXCLUSIVELY FOR THE ASSESSE E AND THEY HAVE THEIR OWN ORDERS OBTAINED FROM OTHER FORE IGN PARTIES. IT WAS ALSO POINTED OUT THAT THE A.O. / T. P.O. HAS FOUND THAT THE OPERATIONAL TRANSACTIONS WERE EFFECT ED AT ARMS LENGTH PRICE. FURTHER IT WAS SUBMITTED THAT TH ERE IS NO OPERATIONS HAVE BEEN UNDERTAKEN BY FOREIGN SUBSIDIARIES IN INDIA AND SO NO INCOME OF THE FOREI GN SUBSIDIARY IS TAXABLE IN INDIA IN TERMS OF EITHER S ECTION 9(1)(I) OF THE I.T. ACT OR THE CONCERNED ARTICLES R ELATING TO BUSINESS PROFITS IN THE RESPECTIVE DTAAS. IT WAS SUBMITTED THAT CIRCULAR 29 DATED 23.07.1969 IT IS MENTIONED THAT FORMING A LOCAL SUBSIDIARY COMPANY TO SELL THE PRODUCTS OF THE NON-RESIDENT PARENT COMPAN Y IS ONE OF THE INDICATIVE FACTORS FOR THE EXISTENCE OF BUSINESS CONNECTION WITHIN THE MEANING OF SECTION 9 OF THE I.T. ACT. IT WAS POINTED OUT THAT IN THE EXAMPL E GIVEN BY THE BOARD, THE NON-RESIDENT IS THE PARENT COMPAN Y WHICH IS ALTOGETHER A DIFFERENT MATTER. THE APPELLA NT HAS 23 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. NOT SOLD THE PRODUCTS OF ITS US SUBSIDIARY OR ANY O THER FOREIGN SUBSIDIARY. SO, THE PRESENT CASE DOES NOT F ALL WITHIN THE EXAMPLE GIVEN BY THE BOARD. FURTHER, THE BOARD PROCEEDED TO CLARIFY AS UNDER AT ITEM 2 OF TH E SAID CIRCULAR. FURTHER, IT WAS SUBMITTED THAT THERE IS N O INCENTIVE FOR THE ASSESSEE TO DIVERT ITS PROFITS BY WAY OF PAYMENT OF FEES FOR TECHNICAL SERVICES TO FOREIGN G ROUP COMPANIES BECAUSE THE RATE OF CORPORATE TAX IN USA IS HIGHER THAN IN INDIA. IT IS FURTHER SUBMITTED THAT SECTION 9(1)(I) AND 9(1)(VII) OF THE I.T. ACT CANNOT BE INV OKED SIMULTANEOUSLY AS VARIOUS CLAUSES OF SECTION 9(1) A ND 9(1)(VII) OF THE I.T. ACT CANNOT BE INVOKED SIMULTA NEOUSLY AS THE VARIOUS CLAUSES OF SECTION 9(1) ARE MUTUALLY EXCLUSIVE. WITH RESPECT TO SECTION 9(1)(VII) IT WAS SUBMITTED THAT PAYMENTS TO FOREIGN SUBSIDIARIES HA VE BEEN MADE TO EARN INCOME FROM PRATT & WHITNEY WHICH IS A SOURCE OUTSIDE INDIA AND AS SUCH IS COV ERED BY THE EXCLUSIONARY PART OF CLAUSE (B) OF SECTION 9(1)(VII). THE ASSESSEE RELIED FOR THIS PROPOSITION ON THE DECISIONS OF TITAN INDUSTRIES VS. ITO 11 SOT 206 (B ANG), HINDALCO INDUSTRIES LTD. VS. ITO 91 ITDS 64 (MUM.) CIT VS. AKTIENGESELLSCHAFT KUHNLE KOPP AND KAUSCH W. GERMANY 125 TAXMANN 928 (MAD.) AND IBM WORLD TRADE CORPN. VS. DDIT 54 SOT 39 (BANG.) 33. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE IS ALSO ENTITLED FOR THE BENEFIT OF DTAA BETWEEN INDIA AND THE CONCERNED COUNTRY. SINCE THE FOREIGN SUBSIDIARY HAVE NO PERMANENT ESTABLISHMENT IN INDIA WITHIN THE MEAN ING OF ARTICLE 5 OF THE RESPECTIVE DTAA AGREEMENT, THE PAYMENT OF RS.19,48,02,907/- CANNOT BE REGARDED AS 24 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. BUSINESS PROFITS OF THE NON-RESIDENT IN TERMS OF AR TICLE 7 OF THE RESPECTIVE AGREEMENTS. IT WAS SUBMITTED THAT THE SAID PAYMENT CAN ALSO NOT BE REGARDED AS PAYMENT FO R TECHNICAL SERVICES UNDER THE DTAA. ARTICLE 12 OF TH E AGREEMENT WITH USA DEALS WITH ROYALTIES AND INCLUDE D SERVICES. PAYMENT MADE IN QUESTION BY THE ASSESSEE TO ITS US SUBSIDIARY IS NOT TECHNICAL SERVICES EVEN WI THIN THE MEANING OF ARTICLE 12(3)(A). ACTUALLY THE PAYME NT IS ONLY BUSINESS PROFIT OF RECIPIENT COMPANY BY IT HAS BEEN WRONGLY DESCRIBED BY THE ASSESSEE AS CONSULTANCY FE ES. IT WAS SUBMITTED THAT NO TECHNICAL KNOWLEDGE HAS BE EN MADE AVAILABLE (BY THE NON-RESIDENT TO THE ASSESSEE ) AND ONLY NON-RESIDENT HAS SIMPLY EXCLUDED PORTION O F WORK PARCELLED OUT TO IT BY THE ASSESSEE. THE ASSES SEE RELIED ON THE DECISION OF INTER TECH TESTING SERVIC ES INDIA PVT. LTD. 307 ITR 418. IT WAS SUBMITTED THAT PROVISIONS OF SECTION 40(A)(IA) ARE NOT ATTRACTED I N THE LIGHT OF DECISION OF THE TRIBUNAL IN THE CASE OF GE INDIA TECHNOLOGY PVT. LTD. VS. CIT 327 ITR 456 WHEREIN I T WAS HELD THAT AN AMOUNT OF RS.19,48,02,907/- PAID TO TH E NON RESIDENT, CANNOT BE HELD TO BE TAXABLE IN INDIA EIT HER AS BUSINESS PROFITS OR INCOME BY WAY OF TECHNICAL SERV ICES IF EITHER UNDER THE DOMESTIC LAW OR DTAA WITH USA. 34. THE LEARNED D.R. ON THE OTHER HAND RELIED ON THE ORDER OF THE DISPUTES RESOLUTION PANEL. 35. WE HAVE HEARD BOTH THE PARTIES. WE FIND THAT THE A.O. DISALLOWED THE AMOUNT OF RS.19,48,02,907/- ON THE GROUND THAT THERE IS A BUSINESS CONNECTION IN T ERMS OF EXPLANATION 2 TO SECTION 9(1)(I) OF THE I.T. ACT 25 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. BETWEEN THE ASSESSEE AND ITS CONCERNED FOREIGN SUBSIDIARIES TO WHOM THE SAID AMOUNT HAS BEEN PAID. HE HELD THAT THE ASSESSEE HAS BEEN HABITUALLY/ SECURI NG ORDERS IN INDIA FOR THE BENEFIT OF NON-RESIDENT IN TERMS OF CLAUSE (C) OF THE SAID EXPLANATION. 36. WITH RESPECT TO IEAI USA, WE FIND THAT FACTUALLY THE ASSESSEE HAS SECURED THE ORDERS FROM PRATT (PWC) FOR ITS OWN BENEFIT AND IT ONLY PARCELL ED OUT A PORTION OF THE WORK ENTRUSTED TO IT BY PRATT & WHITNEY TO IEAI USA. THE SAID EXPLANATION TO SECTIO N 9(1)(I) CAN BE INVOKED ONLY WHEN THE INDIAN COMPANY SECURES ORDERS FOR THE BENEFIT OF NON-RESIDENT. IN THE PRESENT CASE, THE ASSESSEE HAS NOT CANVASSED / SECU RED ANY ORDERS FOR ITS NON RESIDENT SUBSIDIARIES. HENCE , SECTION 9(1)(I) CANNOT BE INVOKED. 37. WE HAVE GONE THROUGH THE COPY OF THE MASTER TERMS AGREEMENT (IN SHORT MTA) ENTERED INTO BY T HE ASSESSEE WITH UNITED TECHNOLOGY CORPORATION (PWC) WHICH IS FILED AT PAGES 179 TO 196 OF THE PAPER BOO K. SIMILARLY, WE HAVE PERUSED INTERCOMPANY AGREEMENT ENTERED INTO BY THE ASSESSEE WITH ITS SUBSIDIARIES PLACED IN THE PAPER BOOK AT PAGE 197 TO 222. THIS PROVES T HAT THE ASSESSEE OBTAINED ORDERS ON ITS OWN BEHALF AND IT HAS ONLY PARCELLED OUT A PORTION OF ITS WORK TO ITS FOREIGN SUBSIDIARIES. AS PER THE TERMS OF THE AGREEMENT, TH E ASSESSEE SHALL RELEASE THE WORK ORDER BEFORE THE COMMENCEMENT OF THE WORK BY IEAI USA AND EACH WORK ORDER SHALL BE SUPPORTED BY END CUSTOMERS ORDER COP Y. CLAUSE 3 OF THE AGREEMENT READS AS UNDER : 26 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. COMMENCING ON THE DATE(S) SPECIFIED IN EACH WORK ORDER, IEAI WILL ALLOCATE QUALIFIED PERSONNEL THROUGH SOFTWARE SERVICES REQUIREMENTS STATEMENTS AND REGULAR PROJECT MEETINGS, WHICH MAY BE MODIFIED FROM TIME TO TIME BY IEL. IEAI SHALL INFORM IEL AT THE TIME OF THE REQUEST, OR AS SOON THEREAFTER AS THAT THE INFORMATION BECOMES AVAILABLE, SHOULD IT BE UNABLE TO DELIVER THE QUALIFIED PERSONNEL SPECIFIED IN THE WORK ORDER. PARTIES SHALL WITHIN 30 DAYS NEGOTIATE IN GOOD FAIT H A REVISED WORK ORDER MUTUALLY AGREEABLE TO BOTH PARTIES, HOWEVER IF NO SUCH AGREEMENT CAN BE REACHED EITHER PARTY MAY TERMINATE THAT WORK ORDER ACCORDING TO PROVISIONS OF SECTION 1. OBLIGATIONS O F IEL AND IEAI UNDER THIS AGREEMENT ARE DETAILED IN THE ANNEXURE. 38. FURTHER, WE FIND THAT THE TPO HAS FO UND THAT THE OPERATION TRANSACTION WERE EFFECTED AT ARMS LENGTH PRICE. WE ALSO OBSERVE THAT THE FOREIGN SUBSIDIARIES DO NOT W ORK EXCLUSIVELY FOR THE ASSESSEE AND THEY OBTAIN ORDERS ON THEIR OWN FROM OTHER FOREIGN PARTIES AND ALSO SUB CONTRAC T THE WORK TO THE ASSESSEE DEPENDING ON EXIGENCIES. 39. WE ALSO FIND THAT NO OPERATIONS HAVE BE EN UNDERTAKEN BY FOREIGN SUBSIDIARIES IN INDIA AND NO ENGINEERS HAVE BEEN DEPUTED BY THEM TO INDIA AND EVEN THEY DO NOT HAVE PERMANENT ESTABLISHMENT IN INDIA. IN TERMS OF THE RESPECTIVE DTAA, NO INCOME OF THE FOREIGN SUBSIDIAR Y IS TAXABLE IN INDIA IN TERMS OF EITHER SECTION 9(1)(I) OF THE I.T. ACT OR THE CONCERNED ARTICLES RELATING TO BUSINESS PROF ITS (ARTICLE 7 R.W. ARTICLE 5) IN THE RESPECTIVE DTAAS. AS SUBMITT ED BY THE ASSESSEE, THE BOARD CIRCULAR NO. 29 DATED 27.3.1969 IS INAPPLICABLE TO THE PRESENT CASE AS THE EXAMPLE GIV EN BY THE BOARD, THE NON-RESIDENT IS THE PARENT COMPANY WHE REAS, IN 27 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. THE PRESENT CASE, THE INDIAN COMPANY IS THE PARENT COMPANY AND THE ASSESSEE HAS NOT SOLD THE PRODUCTS OF ITS U S SUBSIDIARIES OR ANY OTHER FOREIGN SUBSIDIARIES. THE CONTENTION OF THE ASSESSEE THAT THE RATE OF TAX IN INDIA IS LE SSER THAN THE RATES IN USA IS ALSO WELL TAKEN. HENCE THERE IS NO INCOME TAXABLE IN INDIA U/S 9(1)(I) AND HENCE NO REQUIREME NT FOR TDS AND THERE CAN BE NO APPLICATION OF S.40(A)(I). 40. THE AO SEEMS TO HAVE INVOKED S.9(1 )(VII) ONLY ON THE COMMUNICATION EXPENSES INCURRED AND IN SUCH A C ASE THE ASSESSEE IS RIGHT IN AS MUCH AS SAID AMOUNT OF COMMUNICATION EXPENSES SHOULD BE EXCLUDED WHILE ASS ESSING THE PURVIEW OF TAXABILITY OF INCOME U/S.9(1)(I). HO WEVER, WE POINT OUT THAT THE DRP IN ITS ORDER SEEM TO HAVE HE LD THAT THE ENTIRE AMOUNT PAID BY ASSESSEE TO ITS FOREIGN COMPA NIES MAY BE REGARDED AS FEES FOR TECHNICAL SERVICES U/S.9(1) (VII). SO WHILE WE HAVE HELD ALREADY THAT S.9(1)(I) IS INAPPL ICABLE IN THE INSTANT CASE, WE NOW HAVE TO DEAL WITH THE ALTERNAT E OF THE ENTIRE AMOUNT BEING DISALLOWED U/S.9(1)(VII) (OR AR TICLE 12) AS FEES FOR TECHNICAL SERVICES. 41. FIRSTLY, UNDER THE ACT, THE PAYMENTS MADE TO T HE SUBSIDIARIES MAY INDEED BE CONSTRUED AS FEES FOR TE CHNICAL SERVICES. HOWEVER THIS IS ONLY DUE TO THE FACT OF T HE RETROSPECTIVE AMENDMENT BY FINANCE ACT 2010. PRIOR TO THAT, THE HONBLE SUPREME COURT IN ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD., VS DIT (2007)[288 ITR 408] HAD HELD THAT SECTION 9(1)(VII) AS IT STOOD THEN ENVISAGED TWO CO NDITIONS WHICH NEED TO BE MET SIMULTANEOUSLY NAMELY THAT SER VICES HAVE TO BE RENDERED IN INDIA AND SAID SERVICES HAVE TO BE UTILIZED IN INDIA. THE APEX COURT HELD THAT MERELY THE SOURCE 28 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. OF INCOME BEING LOCATED IN INDIA WOULD NOT RENDER S UFFICIENT NEXUS TO TAX THE INCOME FROM THAT SOURCE. THE APEX COURT HELD THAT THERE MUST BE A DIRECT LIVE LINK BETWEEN THE SERVICES RENDERED AND INDIA. THE GOVERNMENT SUBSEQUENTLY INT RODUCED A RETROSPECTIVE AMENDMENT IN FINANCE ACT 2007 WHICH READ- FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED T HAT FOR THE PURPOSES OF THIS SECTION, WHERE INCOME IS DEEME D TO ACCRUE OR ARISE IN INDIA UNDER CLAUSE (V), (VI) AND (VII) OF SUB-SECTION (1), SUCH INCOME SHALL BE INCLUDED IN T HE TOTAL INCOME OF THE NON-RESIDENT, WHETHER OR NOT TH E NON- RESIDENT HAS A RESIDENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTION IN INDIA -TO OVERCOME THE EFFECT OF THE ISHIKAWAJIMA-HARIMA DECISION (SUPRA) BUT IN THE DECISIONS OF CLIFFORD CHANCE VS. DCIT (176 TAXMANN 458) AS WELL AS JINDAL THERMAL POWER COMPAN Y VS. DCIT (182 TAXMANN 252 KARNATAKA HC) IT WAS HELD THA T THE FINANCE ACT 2007 AMENDMENT DID NOT CHANGE ISHIKAWAJ IMAS (SUPRA) APPLICATION. IN RESPONSE, THE GOVERNMENT SUBSEQUENTLY INTRODUCED A MODIFIED EXPLANATION TO S .9(1) VIA FINANCE ACT 2010 AND IT STANDS TILL DATE READING AS UNDER: EXPLANATION.FOR THE REMOVAL OF DOUBTS, IT IS HERE BY DECLARED THAT FOR THE PURPOSES OF THIS SECTION, INC OME OF A NON-RESIDENT SHALL BE DEEMED TO ACCRUE OR ARISE I N INDIA UNDER CLAUSE (V) OR CLAUSE (VI) OR CLAUSE (VI I) OF SUB-SECTION (1) AND SHALL BE INCLUDED IN THE TOTAL INCOME OF THE NON-RESIDENT, WHETHER OR NOT, (I) THE NON-RESIDENT HAS A RESIDENCE OR PLACE OF B USINESS OR BUSINESS CONNECTION IN INDIA; OR (II) THE NON-RESIDENT HAS RENDERED SERVICES IN IND IA. 29 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. 42. THUS, IT IS SEEN CLEARLY THAT AT THE TIME OF T HE PAYMENT IN THE INSTANT CASE ISHIKAWAJIMA-HARIMA (SUPRA) WAS THE LAW OF THE LAND AND THE TWIN CONDITION LAID DOW N OF RENDERING AND UTILIZING THE TECHNICAL SERVICE IN IN DIA WAS CLEARLY NOT SATISFIED IN THE ASSESSEES CASE AS THE FOREIGN SUBSIDIARIES RENDERED THE SERVICE WHICH WAS UTILIZE D BY THE CLIENTS (SUCH AS PWC). THUS THE ASSESSEE COULD HAVE BEEN OF THE BONAFIDE BELIEF THAT TDS WAS NOT NECESSARY ON P AYMENTS TO THE FOREIGN SUBSIDIARIES. FURTHERMORE, THE ASSES SEE COULD NOT HAVE BEEN EXPECTED TO KNOW THAT TDS SHOULD HAVE BEEN DEDUCTED IN ACCORDANCE WITH A LAW THAT WAS TO BE BR OUGHT IN SUBSEQUENTLY. HENCE ANY DISALLOWANCE U/S 40(A)(I) B ASED ON THE APPLICATION OF A RETROSPECTIVE AMENDMENT WHICH THE ASSESSEE COULD NOT HAVE FORESEEN IS WHOLLY ERRONEOU S. THIS RATIONALE IS UPHELD BY VARIOUS DECISIONS OF THE TRI BUNALS WHICH WE RELY ON SUCH AS CHANNEL GUIDE (139 ITD 49) & STERLING ABRASIVES (IT NO.2243, 2244/AHD/ 2008 DATED 23-12-2 010) AND METRO & METRO VS. ACIT (ITA NO.393/AGRA/2012 DATED 1- 11-2013) . HENCE UNDER THE ACT THE DISALLOWANCE U/S 40(A)(I) FOR FTS PAYMENTS CANNOT BE UPHELD. 43. WE ALSO POINT THAT EVEN UNDER THE INDIA-USA AN D INDIA-UK TREATIES (NOT THE INDIA-GERMANY TREATY THO UGH) DUE TO THE PRESENCE OF THE MAKE AVAILABLE CLAUSE IN THES E TWO TREATIES THE PAYMENTS MADE BY THE ASSESSEE WILL NOT FALL UNDER FTS. THIS IS BECAUSE NO TECHNICAL KNOWLEDGE H AS BEEN MADE AVAILABLE BY THE NON-RESIDENT TO THE ASSESSEE. FURTHER, NO TECHNICAL PLAN OR TECHNICAL DESIGN PLACEMENT HAS BEEN TRANSFERRED BY US SUBSIDIARY TO THE ASSESSEE. WHAT IEAI DID WAS ONLY IN FULFILMENT OF CONTRACTUAL REQUIREMENT W ITH PRATT & WHITNEY AND NOT FOR THE BENEFIT OF THE ASSESSEE. THE NON- 30 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. RESIDENT HAS SIMPLY EXECUTED THE PORTION OF WORK PA RCELLED OUT TO IT BY THE ASSESSEE. THE KARNATAKA HIGH COURT IN CIT VS. DE BEERS INDIA MINERALS PVT. LTD. (ITA NO.549 OF 2007 DATED 15TH MAY 2012) LUCIDLY EXPLAINED THE CONCEPT OF MAKE AV AILABLE AS FOLLOWS: WHAT IS THE MEANING OF MAKE AVAILABLE. THE TECHN ICAL OR CONSULTANCY SERVICE RENDERED SHOULD BE OF SUCH A NATURE THAT IT 'MAKES AVAILABLE' TO THE RECIPIENT T ECHNICAL KNOWLEDGE, KNOW-HOW AND THE LIKE. THE SERVICE SHOUL D BE AIMED AT AND RESULT IN TRANSMITTING TECHNICAL KNOWLEDGE, ETC., SO THAT THE PAYER OF THE SERVICE C OULD DERIVE AN ENDURING BENEFIT AND UTILIZE THE KNOWLEDG E OR KNOW-HOW ON HIS OWN IN FUTURE WITHOUT THE AID OF TH E SERVICE PROVIDER. IN OTHER WORDS, TO FIT INTO THE TERMINOLOGY 'MAKING AVAILABLE', THE TECHNICAL KNOWL EDGE, SKILLS, ETC., MUST REMAIN WITH THE PERSON RECEIVING THE SERVICES EVEN AFTER THE PARTICULAR CONTRACT COMES T O AN END. IT IS NOT ENOUGH THAT THE SERVICES OFFERED ARE THE PRODUCT OF INTENSE TECHNOLOGICAL EFFORT AND A LOT O F TECHNICAL KNOWLEDGE AND EXPERIENCE OF THE SERVICE PROVIDER HAVE GONE INTO IT. THE TECHNICAL KNOWLEDGE OR SKILLS OF THE PROVIDER SHOULD BE IMPARTED TO AND AB SORBED BY THE RECEIVER SO THAT THE RECEIVER CAN DEPLOY SIM ILAR TECHNOLOGY OR TECHNIQUES IN THE FUTURE WITHOUT DEPE NDING UPON THE PROVIDER. TECHNOLOGY WILL BE CONSIDERED 'M ADE AVAILABLE' WHEN THE PERSON ACQUIRING THE SERVICE IS ENABLED TO APPLY THE TECHNOLOGY. THE FACT THAT THE PROVISION OF THE SERVICE THAT MAY REQUIRE TECHNICAL KNOWLEDGE, SKILLS, ETC., DOES NOT MEAN THAT TECHNOL OGY IS MADE AVAILABLE TO THE PERSON PURCHASING THE SERVICE , WITHIN THE MEANING OF PARAGRAPH (4)(B). SIMILARLY, THE USE OF A PRODUCT WHICH EMBODIES TECHNOLOGY SHALL NOT PE R SE BE CONSIDERED TO MAKE THE TECHNOLOGY AVAILABLE. IN OTHER WORDS, PAYMENT OF CONSIDERATION WOULD BE REGARDED A S 'FEE FOR TECHNICAL INCLUDED SERVICES' ONLY IF THE T WIN TEST OF RENDERING SERVICES AND MAKING TECHNICAL KNOWLEDG E AVAILABLE AT THE SAME TIME IS SATISFIED.' 44. IN THE INSTANT CASE, THE UK AND USA SUBSIDIARI ES DID ONLY CONTRACTUAL WORK PARCELLED OUT TO IT WHOSE RESULTS 31 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. WERE GIVEN TO CLIENTS DIRECTLY AND NO TECHNICAL KNO WLEDGE WAS MADE AVAILABLE TO ASSESSEE. HENCE, EVEN UNDER THE RESPECTIVE DTAA, THE PAYMENTS MADE TO UK AND US SUBSIDIARIES/COMPANIES WOULD NOT FALL UNDER THE AMB IT OF FTS. 45. IN ANY CASE, AS WE HAVE SHOWN ABOVE, UNDER THE IT ACT, NONE OF THE PAYMENTS MADE BY THE ASSESSEE CAN BE DISALLOWED U/S 40(A)(I) BASED ON EFFECT OF RETROSPE CTIVE AMENDMENT OF EXPLANATION TO S.9(1). ACCORDINGLY, GR OUND NO.6 IS ALLOWED IN FAVOUR OF THE ASSESSEE. 46. GROUND NO.7 READS AS UNDER : 7. THE A.O. IS NOT JUSTIFIED IN EXCLUDING THE COMMUNICATION EXPENSES OF RS.1,16,67,429 FROM THE EXPORT TURNOVER. (B) AS THE ASSESSEE DID NOT PROVIDE TECHNICAL SERVI CES BUT ONLY DEVELOPED COMPUTER SOFTWARE FOR ITS CLIENT S ABROAD, THE PROVISIONS THAT THE COMMUNICATION EXPENSES SHOULD BE REDUCED FROM THE TURNOVER DOES NOT APPLY. (C) WHETHER IT IS FOR DEVELOPMENT OF SOFTWARE AS CLAIMED BY THE ASSESSEE OR FOR PROVIDING TECHNICAL SERVICES AS HELD BY DRP. THE COMMUNICATION EXPENSES HAVE NOT BEEN INCLUDED IN THE EXPORT INVOICES ON WHICH THE EXPORT TURNOVER IS BASED. THEREFORE, THERE CAN BE NO QUESTION OF EXCLUSION OF THE COMMUNICATION EXPENSES PAID IN FOREIGN EXCHANGE. (D) ALTERNATIVELY THE SAID AMOUNT SHOULD HAVE BEEN EXCLUDED FROM THE TOTAL TURNOVER ALSO. (E) HAVING NOTICED SEVERAL JUDICIAL DECISIONS ON TH E ISSUE, THE DRP IS NOT JUSTIFIED IN NOT GRANTING REL IEF ON THE GROUND THAT THE DEPARTMENT IS IN APPEAL BEFORE THE HIGH COURT/S ON THE ISSUE. 32 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. 47. IT MAY BE NOTICED THAT THE SO-CALLED TELECOMMU NICATION CHARGES ARE ACTUALLY SOFT LINK CHARGES FOR AVAILING A DEDICATED CABLE LINE FROM THE INTERNET SERVICE PROVIDER. WHAT IS TO BE EXCLUDED IN TERMS OF THE DEFINITION OF THE 'EXPORT TURNOVER' IN CLAUSE (IV) OF EXPLANATION 2 TO SECTION 10A IS 'TELECOMMUNICATION CHARGES' AND NOT SOFT LINK CHARGES. IT WAS FURTHER SUBMITTED THAT TE LECOMMUNICATION CHARGES CANNOT BE IDENTIFIED WITH SOFT LINK CHARGES . THE FORMER RELATES TO TELEPHONIC EXPENDITURE WHEREAS THE LATTER RELATE S TO INTERNET. STRICTLY, THEY ARE DIFFERENT AND SO THE SOFT LINK C HARGES INCURRED BY THE ASSESSEE ARE NOT LIABLE TO BE EXCLUDED IN TERMS OF THE SAID DEFINITION. EVIDENTLY, THE SAID AMOUNT OF RS.1,16,67,429/- DOES N'T REPRESENT FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE FOR IT TO HAVE TO BE REDUCED FROM THE EXPORT TURNOVER. IF AT ALL, IT HAS TO BE CONSIDERED AS EXPENSES INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA. THE OBJECTION AGAINST SUCH CONSIDERATION IS THAT THE ASSESSEE HAS NOT PROVIDED ANY TECHNICAL SE RVICES. THE ASSESSEE HAS ONLY RENDERED SOFTWARE DEVELOPMENT SER VICES OR EXPORTED SOFTWARE TO ITS CUSTOMERS OUTSIDE INDIA AN D HAS NOT RENDERED ANY TECHNICAL SERVICES. THE ALLEGATION OF THE ASSES SING OFFICER IS THAT THE ASSESSEE HAS RECEIVED THE TECHNICAL SERVICES FR OM IT'S US SUBSIDIARY (IEAI) AND PAID RS.19,48,02,907/-. SO, I F AT ALL, THE APPELLANT HAS RECEIVED TECHNICAL SERVICES AND NOT R ENDERED ANY SO AS TO ATTRACT THE DISALLOWANCE OF RS.1,16,67,429/- FRO M THE EXPORT TURNOVER. IN CASE OF PATNI TELECOM (P) LTD. VS ITO 120 ITD 105, THE COORDINATE BENCH OF THE HYDERABAD TRIBUNAL HAS MADE THE FOLLOWING DISTINCTION : THE ASSESSEE DID NOT RENDER ANY INDEPENDENT TECHNI CAL SERVICES. IT DEVELOPED SOFTWARE ON CONTRACT BASIS AS PER THE AGREEMENT AND HANDED OVER THE SAME TO THE CUSTOMER........ THERE IS SOFTWARE DEVELOPMENT AGRE EMENT BETWEEN THE CLIENT AND THE ASSESSEE. THE EXPENDITUR E INCURRED IS FOR DEVELOPMENT OF SOFTWARE .... SUCH 33 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. EXPENSES INCURRED CANNOT BE SAID TO BE EXPENDITURE FOR TECHNICAL SERVICES. IF THE TECHNICAL SERVICES ARE R ENDERED INDEPENDENTLY WHICH ARE BEING AGREED TO BE SEPARATE LY CHARGED IN ADDITION TO THE PRICE OF THE GOODS, IN SUCH CIRCUMSTANCES, EXPENDITURE INCURRED COULD BE IN THE NATURE OF EXPENDITURE FOR THE PURPOSE OF TECHNICAL SERVICES...... SUCH EXPENDITURE IS NOT IN THE NATUR E OF EXPENDITURE FOR TECHNICAL SERVICES. SINCE THE EXPEN DITURE IS NOT FOR TECHNICAL SERVICES, THERE IS NO NEED TO EXCLUDE THESE EXPENDITURES FROM CONSIDERATION RECEIVED IN CONVERTIBLE FOREIGN EXCHANGE FOR THE PURPOSE OF CALCULATING 'EXPORT TURNOVER' AS DEFINED IN CL. (IV) OF EXPLN 2 TO S. 10A'. 48. IT WAS FURTHER SUBMITTED BY THE LEARNED COUNSE L FOR THE ASSESSEE THAT MORE IMPORTANTLY, THE AMOUNT OF RS.1, 16,67,429/- IS A PAYMENT MADE BY THE ASSESSEE WHICH HAS NOT BEEN CHA RGED TO THE CUSTOMERS. IT IS NOT INCLUDED IN THE INVOICES RAISE D BY THE ASSESSEE ON THE CUSTOMERS. IT IS SEPARATELY DEBITED TO THE P&L ACCOUNT. IT IS NOT INCLUDED IN THE EXPORT TURNOVER. WHAT IS NOT INCLUD ED IN THE EXPORT TURNOVER CANNOT BE REDUCED FROM IT FOR WORKING OUT THE DEDUCTION UNDER SEC.10A. IN THE CASE OF PATNI TELECOM PVT LTD . VS. INCOME TAX OFFICER (SUPRA), THE TRIBUNAL HELD THAT EXPENSES WH ICH ARE NOT INCLUDED IN THE CONSIDERATION RECEIVED IN CONVERTIB LE FOREIGN EXCHANGE CANNOT BE REDUCED FROM THE EXPORT TURNOVER. FURTHER , WHEN THE A.O. EXCLUDED THE SAID AMOUNT OF RS.1,16,67,429/- FROM E XPORT TURNOVER, THE A.O. SHOULD HAVE, IN THE INTEREST OF FAIRNESS, EXCLUDED IT FROM THE TOTAL TURNOVER ALSO FOR COMPUTING THE DEDUCTION UND ER SECTION 10A(4). IN THIS CONTEXT, THE LEARNED COUNSEL FOR THE ASSESS EE RELIED UPON THE JUDGMENT OF HON'BLE HIGH COURT OF KARNATAKA IN THE CASE OF COMMISSIONER OF INCOME TAX VS. TATA ELXSI LTD. [2 012] 17 TAXMANN.COM 100 (KAR.) WHICH FOLLOWS THE DECISION O F THE APEX COURT IN THE CASE OF CIT V. LAKSHMI MACHINE WORKS ([2007] 290 ITR 667 / 160 TAXMAN 404). 34 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. 49. IN VIEW OF THE DECISION OF OF THE HYDERABAD IT AT IN PATNI TELECOM PVT. LTD. VS. ITO (120 ITD 105), WE DIRECT THE AO TO NOT REDUCE THE FIGURE OF RS. 1,16,67,429/- FROM THE EXP ORT TURNOVER WHILE COMPUTING DEDUCTION U/S. 10A 50. ACCORDINGLY, GROUND NO.7 IS ALLOWED FOR STATI STICAL PURPOSES. 51. GROUND NO. 8 READS AS UNDER : 8. THE LEARNED A.O. AND THE LEARNED DRP ARE NOT JUSTIFIED IN HOLDING THAT THE PROFIT OF RS.8,52,831/- RESULTING ON ACCOUNT OF THE FOREIGN EXCHANGE FLUCTUATION TO TELE ATLAS, (A COMPANY ACQUIRED BY ASSESSEE IN THE PREVIOUS YEAR) HAS TO BE REDUCED FROM THE EXPORT PROFITS. THEY FAILED TO NOTICE AND APPLY THE RATIO OF THE DECISION OF THE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR. 52. THE ASSESSEE IS IN APPEAL CONTENDING THAT THE LEARNED DRP IS NOT JUSTIFIED IN HOLDING THAT THE PROFIT OF RS.8,52,831/- BEING THE FOREIGN EXCHANGE FLUCTUATION GAIN IN THE HANDS OF THE ASSESSEE HAS TO BE REDUCED FROM BOTH THE 'PROFIT OF THE BUSI NESS' AND THE 'TOTAL TURNOVER' FOR WORKING OUT THE DEDUCTION UNDER SECTI ON 10A OF THE I.T. ACT. IT IS SO HELD ON THE GROUND THAT THIS GAIN AC CRUED ON THE CONVERSION OF EURO EEFC ACCOUNT BALANCE BELONGING T O A MERGED COMPANY INTO INDIAN RUPEES AND, AS SUCH, IT DID NOT HAVE ANYTHING TO DO 'WITH THE BUSINESS OPERATIONS OF THE TAX PAYER'. IT WAS SUBMITTED THAT THIS REASONING IS UNTENABLE. EEFC IS THE ACRON YM FOR EXCHANGE EARNERS FOREIGN CURRENCY I.E. THE FOREIGN CURRENCY ALLOWED BY THE RBI TO BE RETAINED ABROAD BY AN EARNER. EVIDENTLY, THE EARNER IS ONE WHO EARNED THE EXCHANGE BY EXPORTS. SO THE SOURCE OF TH E EEFC BALANCE COULD ONLY BE SALE PROCEEDS BY WAY OF EXPORTS. IT W AS FURTHER SUBMITTED THAT THE DEPOSIT OF CURRENCY IN FOREIGN E XCHANGE HAS 35 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. EVERYTHING TO DO 'WITH THE / BUSINESS OPERATIONS OF THE TAX PAYER'. SO THE SAID GAIN OF RS.8,52,831/- SHOULD NOT BE REDUCE D FROM THE BUSINESS PROFIT IN THE LIGHT OF THE DECISION OF SAN YO LSI TECHNOLOGY INDIA PRIVATE LTD. VS. DEPUTY COMMISSIONER OF INCOM E TAX ITA NO.977/BANG/2010 DATED 13.5.2011 53. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THE ORDER IN THE CASE OF SANYO LSI TECHNOLOGY INDIA PRIVATE LIMITED (SUPRA) IS SQUAREL Y APPLICABLE TO THE FACTS OF THE PRESENT CASE AND THE RELEVANT OBSERVAT IONS ARE EXTRACTED BELOW: 8.1.4 . (III) WITH REGARD TO THE FOREIGN EXCHANGE FLUCTUATI ON IS A PART OF PROFITS FROM BUSINESS AND PROFESSION, THE HONBLE APEX COURT IN ITS RULING IN THE CASE OF SUTLEJ COTTON MILLS LTD. V. CIT CITED SUPRA, HAD HELD THUS THE LAW MAY, THEREFORE, NOW BE TAKEN TO BE WELL SE TTLED THAT WHERE PROFIT OR LOSS ARISES TO AN ASSESSEE ON ACCOUNT OF APPRECIATION OR DEPRECIATION IN THE VALUE OF FOR EIGN CURRENCY HELD BY IT, ON CONVERSION INTO ANOTHER CURRENCY, SUCH PROFIT OR LOSS WOULD ORDINARILY BE T RADING PROFIT OR LOSS IF THE FOREIGN CURRENCY IS HELD BY T HE ASSESSEE ON REVENUE ACCOUNT OR AS A TRADING ASSET O R AS PART OF CIRCULATING CAPITAL EMBARKED IN THE BUSINES S. BUT, IF ON THE OTHER HAND, THE FOREIGN CURRENCY IS HELD AS A CAPITAL ASSET OR AS FIXED CAPITAL, SUCH PROFIT OR L OSS WOULD BE OF CAPITAL NATURE. IN CONSONANCE WITH THE ABOVE RULING, THE HONBLE SU PREME COURT IN ITS SUBSEQUENT VERDICT IN THE CASES OF (I) CIT V. WOODWARD GOVERNOR INDIA (P) LIMITED AND (II) IN CIT V. HONDA SIEL POWER PRODUCTS LIMITED REPORTED IN (2009) 312 ITR 254 (SC) OBSERVED THUS 15. FOR THE REASONS GIVEN HEREINABOVE, WE HOLD THA T, IN THE PRESENT CASE, THE LOSS SUFFERED BY THE ASSESS EE ON ACCOUNT OF THE EXCHANGE DIFFERENCE AS ON THE DATE O F THE 36 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. BALANCE SHEET IS AN ITEM OF EXPENDITURE UNDER S. 37 (1) OF THE 1961 ACT. 8.1 .5. TAKING INTO ACCOUNT THE FACTS OF THE ISSUE AND ALSO IN CONFORMITY WITH THE LEGAL POSITION OF VARIOUS JUDIC IARIES REFERRED IN THE FORE-GOING PARAGRAPHS, WE OBSERVE THAT (I) THE FOREIGN EXCHANGE GAIN WAS I NCOME DERIVED BY EXPORT BUSINESS OF THE ASSESSEE, AND, HE NCE, ELIGIBLE FOR DEDUCTION U/S 10A OF THE ACT; & (II) THE FOREIGN EXCHANGE GAINS HAS T O BE TAXED UNDER THE HEAD INCOME FROM BUSINESS AND PROFESSION . IT IS ORDERED ACCORDINGLY. 54. ACCORDINGLY, GROUND NO. 8 OF THE ASSESSEE IS A LLOWED. 55. IN THE RESULT, APPEAL OF THE ASSESSEE ITA.NO.115/HYD/2011 IS PARTLY ALLOWED FOR STATISTIC AL PURPOSES. ITA NO.2184/HYD/2011 : ASST YEAR 2007-08 56. IN THIS APPEAL FOR ASSESSMENT YEAR 2007-08, GR OUNDS NO.1 AND 9 ARE GENERAL AND NEED NO ADJUDICATION. 57. GROUND NO.2 RELATES TO AN ADDITION OF RS.12,13, 868 AND THE CONTENTION OF THE ASSESSEE IS THAT THE LEARNED DRP ERRED IN SUSTAINING THE ADOPTION OF THE RATE OF 14% ON THE LOAN TRANSAC TION BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISE THEREBY SUST AINING THE DISALLOWANCE OF RS.12,13,868 COMPUTED BY THE TRANSF ER PRICING OFFICER. GROUND NO.2 (CONSISTING OF 2(A) AND 2(B)) IS IDENTICAL TO GROUND NO. 2 OF ITA NO.115/HYD/2011 FOR AY 2006-07 WHEREIN WE HAVE HELD AS UNDER IN PARA 8 8. WE HAVE HEARD BOTH PARTIES AND PERUSED THE MATTER AVAILABLE ON RECORD. THE ISSUE I N FOUR SOFT LTD.(SUPRA) RELIED UPON BY ASSESSEE WAS THE RATE OF LIBOR, WITH THE ACTUAL LIBOR RATE AS PER ASSESSEE BEING 4.42% WHERE AS DRP HAD TAKEN LIBOR AT 5.7%, THE TRIBUNAL HAS DIRECTED THE AO TO EXAMINE 37 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. THE CORRECT RATE OF LIBOR AND ADOPT LIBOR + RATE IN THAT CASE. THE COORDINATE BENCHES SUCH AS DR.REDDYS LABORATORIES LTD. VS. ACIT (MA NO. 217/HYD/2013 IN ITA NO.1605/HYD/2010 DATED 29-11-2013), SIVA INDUSTRIES 59 DTR 182 (CHE), TECH MAHINDRA 46 SOT 141 (MUM) & TATA AUTOCOMP SYSTEMS 73 DTR 220 (MUM) ARE APPROVING ON DIFFERENT FACTUAL SITUATION, LIBOR + 1% TO 3% AND C ONSIDERING THAT, WE FEEL THAT REASONABLE RATE WOULD BE LIBOR + 2% AND D IRECT THE AO TO ADOPT THE SAME THE SAME DIRECTIONS AS ABOVE EXTRACTED SHALL APPLY FOR THIS GROUND 2 IN ITA NO. 2184/HYD/2011 FOR AY 2 007-08. HENCE THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 58. GROUND NO. 3 (CONSISTING OF 3(A), 3(B) AND 3(C) ) RELATES TO ADDITION OF RS.13,04,400/- IN RESPECT OF THE CORPOR ATE GUARANTEE GIVEN BY THE ASSESSEE IN FAVOUR OF THE BANKERS OF THE AE (ASSOCIATED ENTERPRISE). THIS IS SIMILAR TO GROUNDS NO. 3 AND 4 OF ITA NO.115/HYD/2011 FOR AY 2006-07 WHEREIN WE HAVE HEL D AS UNDER IN PARA 13 AS FOLLOWS : 13 WE THEREFORE SET ASIDE THE ISSUE TO THE TPO TO DECIDE THE QUANTUM OF CORPORATE GUARANTEE RATES IN THE INS TANT CASE FOLLOWING THE METHOD ADOPTED IN GLENMARK (SUPRA) . THE SAME DIRECTIONS AS ABOVE EXTRACTED SHALL APPLY FOR THIS GROUND I.E., GROUND 3 IN ITA NO. 2184/HYD/2011 FOR AY 2007 -08. HENCE THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 59. GROUND NO.4 (CONSISTING OF 4(A) TO 4(E)) RELATE S TO DISALLOWANCE OF RS.45,88,384/- BY APPLY PROVISIONS OF S.40(A)(I) R.W.S. 9(1)(VI) OF THE IT ACT. WE HAVE DISCUSSED AN IDENTICAL ISSUE IN PARAS 24 TO 27 IN ITA NO. 115/HYD/2011 (AY 2006-07) AND CONCLUDED THA T 27. IT IS THEREFORE CLEAR THAT THE PAYMENTS MADE BY ASS ESSEE TO THE NETHERLANDS COMPANY WILL NOT FALL UNDER THE AMBIT OF ROYALTY AS PER ARTICLE 12 OF THE INDIA-NETHERLANDS DTAA. HENCE THERE IS NO QUESTION OF TAX WITHHOLDING REQUIRED BY THE ASSESSEE 38 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. AND HENCE S.40(A)(I) DISALLOWANCE IS ERRONEOUS. ACCORDINGLY, GROUND NO.5 IS ALLOWED. . HENCE FOLLOWING THE ABOVE, THE ASSESSES GROUND IS ALLOWED. 60. GROUND NO. 5 (CONSISTING OF 5(A) TO 5(G)) RELAT ES TO DISALLOWANCE OF RS.3,96,96,366/- PAID TO FOREIGN SU BSIDIARIES (OUT OF RS.28,83,74,256/-( WHICH IS INCLUSIVE OF TH E EXEMPTIONS ALLOWED U/S 10A OF THE ACT. WE HAVE DISCUSSED AN IDENTICAL ISSUE IN PARAS 35 TO 45 RELATING TO GROU ND 6 OF ITA NO. 115/HYD/2011 (AY 2006-07) AND CONCLUDED AS FOLLOWS : 45. IN ANY CASE, AS WE HAVE SHOWN ABOVE, UNDER THE IT ACT, NONE OF THE PAYMENTS MADE BY THE ASSESSEE CAN BE DI SALLOWED U/S 40(A)(I) BASED ON EFFECT OF RETROSPECTIVE AMEND MENT OF EXPLANATION TO S.9(1). ACCORDINGLY, GROUND NO.6 IS ALLOWED IN FAVOUR OF THE ASSESSEE . WE THEREFORE FOLLOW THE SAME AND ALLOW THIS GROUND IN FAVOUR OF THE ASSESSEE. 61. GROUND NO. 6 (CONSISTING OF 6(A) TO (E)), RELA TES EXCLUDING THE SOFTLINK CHARGES OF RS.1,74,60,398/- BOOKED UNDER T HE HEAD COMMUNICATION EXPENSES OF RS.3,49,44,783/- FROM THE EXPORT TURNOVER. WE HAVE DISCUSSED AN IDENTICAL ISSUE IN I TA NO 115/HYD/2011 (AY 2006-07) WHEREIN WE HAD DISCUSSED THE SAME IN PARAS 49 TO 50 AND HELD AS FOLLOWS: 49. IN VIEW OF THE DECISION OF OF THE HYDERABAD IT AT IN PATNI TELECOM PVT. LTD. VS. ITO (120 ITD 105), WE DIRECT THE AO TO NOT REDUCE THE FIGURE OF RS..1,16,67,429/- FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S. 10A 50. ACCORDINGLY, GROUND NO.7 IS ALLOWED FOR STATIST ICAL PURPOSES . FOLLOWING THE ABOVE, WE ISSUE THE SAME DIRECTIONS I N THIS GROUND TO THE AO TO NOT REDUCE THE SOFTLINK CHARGES OF RS.1,7 4,60,398/- BOOKED UNDER THE HEAD COMMUNICATION EXPENSES OF RS.3,49,44 ,783/- FROM THE 39 ITA.NO.115 & 2184/HYD/2011 INFOTECH ENTERPRISES LIMITED, HYD. EXPORT TURNOVER AND HENCE THIS GROUND IS ALLOWED FO R STATISTICAL PURPOSES GROUND NO. 7 IS GENERAL AND WE ARE NOT ADJUDICATING THE SAME. 62. GROUND NO. 8 RELATES TO THE DISALLOWANCE OF PIC NIC EXPENSES OF RS.8,40,444/- ON THE GROUND THAT RELEVANT VOUCHERS WERE NOT PRODUCED. WE SET ASIDE THIS ISSUE TO THE AO TO GIVE ONE MORE OPPORTUNITY TO THE ASSESSEE TO SUBSTANTIATE ITS CLA IM AND THE AO ON THE SATISFACTION OF EVIDENCE PRODUCED SHALL GIVE AP PROPRIATE RELIEF. 63. IN THE RESULT, THIS APPEAL IS ALLOWED FOR STATI STICAL PURPOSES. 64. TO SUM UP, APPEAL IN ITA NO. 115/HYD/2011 IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES AND ITA NO. 2184/HYD/2011 IS A LLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 16/01/2014 SD/- SD/- (B. RAMAKOTAIAH) (ASHA VIJAYARAGHAVAN ) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATE 16 TH JANUARY, 2014 VBP/- COPY TO 1. INFOTECH ENTERPRISES LIMITED, 4 TH FLOOR, A WING, PLOT NO.11, SOFTWARE UNITS LAYOUT, INFOCITY, MA DHAPUR, HYDERABAD. C/O. SHRI MVR PRASAD, ADVOCATE, FLAT NO.603, 6 TH FLOOR, CYBER HEIGHTS, ROAD NO.2, BANJARA HILLS, HYDERABAD 500 033. 2. ADDL. COMMISSIONER OF INCOME TAX, RANGE-2, HYDER ABAD. 3. DISPUTES RESOLUTION PANEL, 4A, I.T. TOWERS, A.C. GUARDS, HYDERABAD 500 004. 4. ADDL. CIT (TRANSFER PRICING), HYDERABAD 5. D.R. A BENCH, ITAT, HYDERABAD.