Sophos Technologies Private Limited, (Formerly Known as Cyberoam Technologies Private Limited), Ahmedabad V. The Dy. CIT, Circle-4(1)(1), Ahmedabad

ITA 1565/AHD/2017

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 2001 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 4 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-11-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2012-2013
• Appeal Filed On: 23-06-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VINOD TALWANI
• Keywords: Business income; Transfer pricing; Double taxation relief; International transaction; Royalty expenses; Notional interest
• Section: 92C; 143(3)

Judgement Text

ITA NO. 1565/AHD/2017 SOPHOS TECHNOLOGIES PVT LTD VS. DCIT ASSESSMENT YEAR: 2012-13 PAGE 1 OF 9 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH, AHMEDABAD [CORAM: JUSTICE P P BHATT, PRESIDENT AND PRAMOD KUM AR, VICE PRESIDENT] ITA NO. 1565/AHD/2017 ASSESSMENT YEAR: 2012-13 SOPHOS TECHNOLOGIES PRIVATE LIMITED ......... .........APPELLANT (FORMERLY KNOWN AS CYBEROAM TECHNOLOGIES PVT LTD), SOPHOS HOUSE, SAIGULSHAN COMPLEX, GULBAI TEKRA RAAD, NEAR PANCHVATI CROSS ROADS, AHMEDABAD-380015 [PAN : AACCC 7727 M] VS. DY. COMMISSIONER OF INCOME-TAX ............................ RESPONDENT CIRCLE 4 (1)(1), AHMEDABAD APPEARANCES BY: DHINAL SHAH, FOR THE APPELLANT VINOD TALWANI, FOR THE RESPONDENT DATE OF CONCLUDING THE HEARING : 31.10.2018 DATE OF PRONOUNCING THE ORDER : 16.11.2018 O R D E R 1. BY WAY OF THIS APPEAL, THE ASSESSEE-APPELLANT HA S CHALLENGED CORRECTNESS OF THE ORDER DATED 12 TH APRIL 2017 PASSED BY THE CIT(A)-8, AHMEDABAD IN TH E MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE INCOME-TAX A CT, 1961, FOR THE ASSESSMENT YEAR 2012-13. 2. IN THE FIRST GROUND OF APPEAL, THE ASSESSEE HAS RAISED FOLLOWING GRIEVANCES:- 1. GROUND NO. 1 - TRANSFER PRICING ADJUSTMENT 1.1. ON DIE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) HAS ERRED IN CONFIRMING THE ACTION OF THE L EARNED AO / TPO OF MAKING UPWARD ADJUSTMENT OF RS 2,04,090 UNDER SECTION 92CA (3) OF THE ACT. 1.2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) HAS ERRED IN CONFIRMING THE ACTION OF THE LEARNED A O / TPO IN CONSIDERING THE AMOUNT RECEIVABLE FROM AE FOR MORE THAN 90 DAYS AS A SEPARATE INTERNATIONAL TRANSACTION. ITA NO. 1565/AHD/2017 SOPHOS TECHNOLOGIES PVT LTD VS. DCIT ASSESSMENT YEAR: 2012-13 PAGE 2 OF 9 THE APPELLANT SUBMITS THAT THE OUTSTANDING RECEIVAB LES ARE A RESULT OF THE MAIN INTERNATIONAL TRANSACTION OF SALE OF SOFTWARE/SERVI CES AND HENCE ARE CLOSELY LINKED TO THE MAIN INTERNATIONAL TRANSACTION OF SALES. 1.3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT (A) HAS ERRED IN CONFIRMING THE ACTION OF THE LEARNED A O / TPO IN NOT APPRECIATING THE FACT THAT EVEN AFTER THE DELAYED RECEIVABLES, THE W ORKING CAPITAL ADJUSTED OPERATING MARGINS OF THE APPELLANT ARE HIGHER THAN THAT OF THE COMPARABLE COMPANIES AND HENCE NO SEPARATE ADJUSTMENT IS WARRA NTED. 1.4. WITHOUT PREJUDICE TO THE ABOVE, ON THE FACT S AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) HAS ERRED IN CONFIR MING THE ACTION OF THE LEARNED AO / TPO IN REJECTING INTERNAL COMPARABLE UNCONTROL LED PRICE ('CUP') METHOD AS THE MOST APPROPRIATE METHOD. THE APPELLANT SUBMITS THAT IT HAS NOT CHARGED ANY I NTEREST ON THE OUTSTANDING RECEIVABLES FROM NON AES BEYOND THE CREDIT PERIOD A ND HENCE INTERNAL CUP SHOULD BE APPLIED AS THE MOST APPROPRIATE METHOD. 1.5. WITHOUT PREJUDICE TO THE ABOVE, ON THE FACT S AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) HAS ERRED IN CONFIR MING THE ACTION OF THE LEARNED AO / TPO IN APPLYING EXTERNAL CUP AS THE MOST APPRO PRIATE METHOD. 1.6. WITHOUT PREJUDICE TO THE ABOVE, ON THE FACT S AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) HAS ERRED IN CONFIR MING THE ACTION OF THE LEARNED AO / TPO IN MAKING ADHOC ADJUSTMENT WITHOUT ANY BAS IS OF 100 BPS ON ACCOUNT OF FOREIGN EXCHANGE RISK. 3. TO ADJUDICATE ON THIS ISSUE ONLY A FEW MATERIAL FACTS NEED TO BE TAKEN NOTE OF. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DEVELOPM ENT OF NETWORK SECURITY SOFTWARE PRODUCT BY THE NAME OF CYBEROAM. DURING THE RELEVA NT PREVIOUS YEAR, THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTIONS IN RESP ECT OF SALE OF ITS PRODUCT TO ITS ASSOCIATED ENTERPRISE (AE) ABROAD. THESE TRANSACTIO NS WERE BENCHMARKED USING TRANSACTIONAL NET MARGIN METHOD (TNMM). IN THE COU RSE OF PROCEEDINGS BEFORE THE TRANSFER PRICING OFFICER (TPO), WHILE THE TPO ACCEP TED THE BENCHMARKING OF THESE SALE TRANSACTIONS, HE NOTED THAT IN SOME OF THE CASES TH E REALIZATION OF BILLS WAS BEYOND 90 DAYS. THE TPO WAS OF THE VIEW THAT REALIZATION OF B ILLING DUES BEYOND 90 DAYS CONSTITUTES AN INTERNATIONAL TRANSACTION AND ACCORD INGLY MADE AN ADJUSTMENT OF RS.2,04,090/- IN RESPECT OF DELAY IN REALIZATION OF SALE INVOICES. 4. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN AP PEAL BEFORE THE LEARNED CIT(A) BUT WITHOUT ANY SUCCESS. LEARNED CIT(A) WAS OF THE VIEW THAT IF THE FUNDS ARE REPATRIATED TO INDIA, THE ASSESSEE WOULD HAVE BEEN IN A POSITION TO EARN BETTER PROFIT ITA NO. 1565/AHD/2017 SOPHOS TECHNOLOGIES PVT LTD VS. DCIT ASSESSMENT YEAR: 2012-13 PAGE 3 OF 9 FROM APPROPRIATE INVESTMENT OF THOSE REPATRIATED FU NDS AND THIS POTENTIAL LOSS IS DEFINITELY A FACTOR TO BE CONSIDERED WHILE EVALUATI NG THE FINANCIAL IMPACT OF THE INTERNATIONAL TAXATION CONCLUDED BY THE ASSESSEE . LEARNED CIT(A) FURTHER RELIED UPON THE DECISION OF CHENNAI BENCH OF THIS TRIBUNAL IN T HE CASE OF PROFESSIONAL ACCESS SOFTWARE DEVELOPMENT (P.) LTD VS. DCIT [(2017) 79 T AXMANN.COM 25(CHENNAI-TRIB)]. THE ALP ADJUSTMENT OF RS.2,04,090/- WAS THUS CONFIR MED. THE ASSESSEE IS NOT SATISFIED AND IS IN FURTHER APPEAL BEFORE US. 5. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE AP PLICABLE LEGAL POSITION. 6. AS LEARNED COUNSEL RIGHTLY POINTS OUT, THIS ISSU E IS NOW COVERED, IN FAVOUR OF THE ASSESSEE, BY A DECISION OF AHMEDABAD BENCH OF THIS TRIBUNAL IN THE CASE OF MICRO INKS LIMITED VS. ACIT, [2016] 157 ITD 132 (AHMEDABAD - T RIB.), WHEREIN, AFTER TAKING INTO ACCOUNT HONBLE JURISDICTIONAL HIGH COURTS JUDGMEN T IN THE CASE OF NIRMA INDUSTRIES LTD. VS.. DCIT, [2006] 283 ITR 402 AND THE HONBLE DELHI HIGH COURTS JUDGEMENT IN THE CASE OF SONY ERICSSON MOBILE CORPN. (P.) LTD. V. CI T, [2015] 374 ITR 118, THE CO- ORDINATE BENCH HAS, INTER ALIA, OBSERVED AS UNDER:- 5. WE FIND THAT THIS ISSUE IS COVERED, IN FAVOUR O F THE ASSESSEE, BY A DECISION OF THE COORDINATE BENCH IN ASSESSEE'S OWN CASE FOR THE ASS ESSMENT YEAR 2002-03 [REPORTED AS MICRO INKS LTD. V. ASSTT. CIT [2013] 1 44 ITD 610/36 TAXMANN.COM 50 (AHD.), WHILE DELETING SIMILAR ADDITION, THE COORDI NATE BENCH HAD OBSERVED AS FOLLOWS: '20. THE ONLY OTHER ALP ADJUSTMENT IN APPEAL BEFORE US IS WITH RESPECT TO, WHAT THE AUTHORITIES BELOW HAVE TREATED AS, EXCESS CREDI T PERIOD ALLOWED TO MICRO USA. THIS ADJUSTMENT MUST BE DELETED FOR THE SHORT REASON THAT IT WAS PART OF THE ARRANGEMENT THAT SPECIFIED CREDIT PERIOD WAS AL LOWED AND THUS THE COST OF FUNDS BLOCKED IN THE CREDIT PERIOD WAS INBUILT IN T HE SALE PRICE. THERE IS NO DISPUTE THAT SIMILAR PRODUCTS ARE NOT SOLD TO ANY O THER CONCERN, AT SAME PRICE OR EVEN ANY OTHER PRICE, AND INTEREST IS LEVIED ON THE SIMILAR CREDIT PERIOD ALLOWED TO THOSE INDEPENDENT PARTIES BUT NOT TO MICRO USA. THE QUESTION OF EXCESS CREDIT PERIOD ARISES ONLY WHEN THERE IS A STANDARD CREDIT PERIOD FOR THE PRODUCT SOLD AT THE SAME PRICE AND THE CREDIT PERIOD ALLOWE D TO THE ASSOCIATED ENTERPRISES IS MORE THAN THE CREDIT PERIOD ALLOWED TO INDEPENDENT ENTERPRISES. THAT IS NOT THE CASE HERE. THE CREDIT PERIOD FOR FI NISHED GOODS CANNOT BE COMPARED WITH CREDIT PERIOD FOR UNFINISHED GOODS AN D RAW MATERIALS, AND IN ANY CASE, WHEN PRODUCTS ARE NOT THE SAME, THERE CANNOT BE ANY QUESTION OF PRICES BEING THE SAME. UNLESS THE PRICES OF THE PRODUCT AN D THE PRODUCT ARE THE SAME, AND YET EXTRA CREDIT PERIOD IS ALLOWED, THERE CANNO T BE ANY OCCASION FOR MAKING ALP ADJUSTMENT ON THE BASIS OF THE EXCESS CREDIT PE RIOD. NONE OF THE ITA NO. 1565/AHD/2017 SOPHOS TECHNOLOGIES PVT LTD VS. DCIT ASSESSMENT YEAR: 2012-13 PAGE 4 OF 9 AUTHORITIES BELOW HAVE EVEN DISPUTED THAT THE INGRE DIENTS, RAW MATERIALS AND SEMI-FINISHED GOODS SOLD TO MICRO USA ARE NOT SOLD TO ANY OTHER CONCERN. THE VERY FOUNDATION OF IMPUGNED ADDITION IN ARM'S LENGT H PRICE ON ACCOUNT OF EXCESS CREDIT PERIOD IS THUS DEVOID OF ANY LEGALLY SUSTAINABLE MERITS OR FACTUAL BASIS. WHEN ALL THESE FACTORS WERE POINTED OUT TO T HE LEARNED DEPARTMENTAL REPRESENTATIVE, HE DID NOT HAVE MUCH TO SAY EXCEPT TO PLACE HIS BLAND BUT DUTIFUL RELIANCE ON THE ORDERS OF THE AUTHORITIES B ELOW. HOWEVER, FOR THE REASONS SET OUT ABOVE AND IN THE ABSENCE OF ANY COMPARATIVE PRICE AND CREDIT PERIOD FIGURES ON COMPARABLE PRODUCT TO SUPPORT THE CASE O F THE REVENUE, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE ASSESS ING OFFICER TO DELETE THIS ALP ADJUSTMENT. THE ASSESSEE GETS THE RELIEF ACCORD INGLY.' 6. LEARNED COUNSEL FOR THE ASSESSEE SUBMITS THAT TH E ISSUE BEING SQUARELY COVERED, IN FAVOUR OF THE ASSESSEE AND ON ADMITTEDLY SIMILAR SET OF FACTS, THERE IS NO OCCASION TO RECONSIDER THE MATTER. WE ARE URGED TO FOLLOW TH E SAID DECISION AND DELETE THE IMPUGNED ADJUSTMENT. ON THE OTHER HAND, WHILE LEARN ED DEPARTMENTAL REPRESENTATIVE DOES NOT DISPUTE THAT THIS ISSUE IS SQUARELY COVERED BY THE AFORESAID DECISION, HE SUBMITS THAT THE AFORESAID DECISION IS 'SEVERELY FLAWED' AS NO MATTER WHAT IS THE GOODS SOLD, 'A CREDIT PERIOD IS A CREDI T PERIOD'. IT IS ALSO SUBMITTED THAT 'THE CREDIT PERIOD FOR SALE OF RAW MATERIAL TO AN I NDEPENDENT MANUFACTURER WOULD BE LOWER AS THE SUPPLIER DOES NOT HAVE TO FACTOR THE L EAD TIME FOR THE SALE OF FINISHED GOODS BY THE MANUFACTURER' AND THAT 'THE SUPPLIER I S ENTITLED TO RECEIPT OF PAYMENT IMMEDIATELY ON DELIVERY IRRESPECTIVE OF WHETHER THE FINISHED GOODS IS SOLD IN THE MARKET, GET SPOILED IN MANUFACTURING OR IS DAMAGED' . HE FURTHER SUBMITS THAT 'IT IS BY NOW ACKNOWLEDGED THAT GRANTING OF EXCESS CREDIT PERIOD IS A SERVICE RENDERED TO THE AE AND NEEDS TO BE BENCHMARKED'. A REFERENCE IS THEN MADE TO SPECIAL BENCH DECISION IN THE CASE OF AZTEC SOFTWARE & TECHNOLOGY SERVICES (P.) LTD. V. ASSTT. CIT [2007] 107 ITD 141/162 TAXMAN 119 (SB) (BANG.), IN SUPPORT OF THE PROPOSITION THAT MERELY BY FINDING FAULT IN THE WORK DONE BY TH E TPO, THE ADJUSTMENTS CANNOT BE DELETED AND THAT UNLESS THE ALP SUBMITTED BY THE TA XPAYER IS SPECIFICALLY ACCEPTED, THE APPELLATE AUTHORITIES, ON THE BASIS OF MATERIAL AVAILABLE ON RECORD HAVE TO DETERMINE ALP THEMSELVES. 7. WE FIND THAT, AS EVIDENT FROM AUDIT REPORT ON FO RM 3CEB (PAGES 39 TO 52 OF THE PAPER-BOOK), THE ARM'S LENGTH PRICE OF EXPORTS TO T HE AES, INCLUDING MICRO USA, HAS BEEN DETERMINED ON THE BASIS OF THE TRANSACTIONAL N ET MARGIN METHOD (TNMM). BY WAY OF A NOTE AT PAGE 51, IT IS SPECIFICALLY STATED THAT 'FURTHER, THE SAID AMOUNT OF RS 2428.26 MILLIONS HAS ALSO BEEN DETERMINED/ COMPUTED BY THE ASSESSEE HAVING REGARD TO THE ARM'S LENGTH PRICE ON APPLICATION OF TRANSACTIONAL NET MARGIN METHOD (TNMM), ON AGGREGATION OF TRANSACTIONS, AS PRESCRIB ED UNDER SECTION 92C OF THE INCOME-TAX ACT, 1961'. IN THIS BACKDROP, WE CAN USE FULLY REFER TO THE DECISION OF HON'BLE DELHI HIGH COURT, IN THE CASE OF SONY ERICS SON MOBILE CORPN. (P.) LTD. V. CIT [2015] 374 ITR 118/231 TAXMAN 113/55 TA XMANN.COM 240 (DELHI), WHEREIN THEIR LORDSHIPS HAD, INTER ALIA, OBSERVED A S FOLLOWS: 'WHERE THE ASSESSING OFFICER/TPO ACCEPTS THE COMPAR ABLES ADOPTED BY THE ASSESSED, WITH OR WITHOUT MAKING ADJUSTMENTS, AS A BUNDLED TRANSACTION, IT WOULD BE ILLOGICAL AND IMPROPER TO TREAT AMP EXPENS ES AS A SEPARATE INTERNATIONAL TRANSACTION, FOR THE SIMPLE REASON TH AT IF THE FUNCTIONS PERFORMED BY THE TESTED PARTIES AND THE COMPARABLES MATCH, WI TH OR WITHOUT ADJUSTMENTS, AMP EXPENSES ARE DULY ACCOUNTED FOR. IT WOULD BE IN CONGRUOUS TO ACCEPT THE ITA NO. 1565/AHD/2017 SOPHOS TECHNOLOGIES PVT LTD VS. DCIT ASSESSMENT YEAR: 2012-13 PAGE 5 OF 9 COMPARABLES AND DETERMINE OR ACCEPT THE TRANSFER PR ICE AND STILL SEGREGATE AMP EXPENSES AS AN INTERNATIONAL TRANSACTION,' 8. BY WAY OF AN EXAMPLE, THIS ASPECT OF THE MATTER WAS THEN EXPLAINED BY HON'BLE DELHI HIGH COURT AS FOLLOWS: 'AN EXAMPLE GIVEN BELOW WOULD MAKE IT CLEAR: PARTICULARS CASE 1 CASE 2 SALES 1000 1,000 PURCHASE PRICE 600 500 GROSS MARGIN 400 (40%) 500 MARKETING SALE PROMOTION 50 150 OVERHEAD EXPENSE 300 300 NET PROFIT 50 (5%) 50 (5%) THE ABOVE ILLUSTRATIONS DRAW A DISTINCTION BETWEEN TWO DISTRIBUTORS HAVING DIFFERENT MARKETING FUNCTIONS. IN CASE 2, A DISTRIB UTOR HAVING SIGNIFICANT MARKETING FUNCTIONS INCURS SUBSTANTIAL EXPENDITURE ON AMP, THREE TIMES MORE THAN IN CASE 1, BUT THE PURCHASE PRICE BEING LOWER, THE INDIAN AE GETS ADEQUATELY COMPENSATED AND, THEREFORE, NO TRANSFER PRICING ADJUSTMENT IS REQUIRED. IN CASE WE TREAT THE AMP EXPENSES IN CASE 2 AS RS.501-, I.E. IDENTICAL AS CASE 1 AND AMP OF RS. 100 AS A SEPARATE TRANSACT ION, THE POSITION IN CASE 2 WOULD BE: PARTICULARS CASE 2 SALES 1,000 PURCHASE PRICE 500 GROSS MARGIN 500 (50%) OVERHEAD EXPENSES 300 MARKETING EXPENSES 50 NET PROFIT 150 (15%) IT IS OBVIOUS THAT THIS WOULD NOT BE THE CORRECT WA Y AND METHOD TO COMPUTE THE ARM'S LENGTH PRICE. THE PURCHASE PRICE ADJUSTMENTS/ SET OFF WOULD BE MANDATED TO ARRIVE AT THE ARM'S LENGTH PRICE, IF THE AMP EXP ENSES ARE SEGREGATED AS AN INDEPENDENT INTERNATIONAL TRANSACTION.....' 9. BY THE SAME LOGIC, EVEN MAKING AN ADJUSTMENT FOR INTEREST ON EXCESS CREDIT ALLOWED ON SALES TO AES WILL VITIATE THE PICTURE, I NASMUCH AS WHAT HAS ALREADY BEEN FACTORED IN THE TNMM ANALYSIS, BY TAKING OPERATING PROFIT FIGURE WHICH INCORPORATE ITA NO. 1565/AHD/2017 SOPHOS TECHNOLOGIES PVT LTD VS. DCIT ASSESSMENT YEAR: 2012-13 PAGE 6 OF 9 FINANCIAL IMPACT OF THE EXCESS CREDIT PERIOD ALLOWE D, WILL BE ADJUSTED AGAIN SEPARATELY AS WELL. OF COURSE, IN THE EXAMPLE USED BY HON'BLE DELHI HIGH COURT, THE AMP EXPENSES ARE DEDUCTIBLES IN COMPUTATION OF OPER ATING PROFIT BUT THAT DOES NOT MAKE ANY MATERIAL DIFFERENCE BECAUSE THE INTEREST L EVY FOR LATE REALIZATION OF DEBTORS, BEING INEXTRICABLY CONNECTED WITH THE SALE S, IS ALSO PART OF OPERATING INCOME. IN THE CASE OF NIRMA INDUSTRIES LTD. V. DY. CIT [2006] 283 ITR 402/155 TAXMAN 330 (GUJ.), HON'BLE HIGH COURT HAS DEALING W ITH THE NATURE OF INTEREST ON DEBTORS, HELD IT TO BE INTEGRAL TO BUSINESS INCOME. THE SAME IS THE PRINCIPLE FOR THE TRANSFER PRICING CASES TO THAT EXTENT INTEREST IS T O BE TAKEN AS INTEGRAL TO SALE PROCEEDS, AND, AS SUCH, INCLUDIBLE IN OPERATING INC OME. WHEN SUCH AN INTEREST IS INCLUDIBLE IN OPERATING INCOME AND THE OPERATING IN COME ITSELF HAS BEEN ACCEPTED AS REASONABLE UNDER THE TNMM, THERE CANNOT BE AN OC CASION TO MAKE ADJUSTMENT FOR NOTIONAL INTEREST ON DELAYED REALIZATION OF DEB TORS. ONE CAN UNDERSTAND SEPARATE ADJUSTMENT FOR EXCESS CREDIT PERIOD WHEN THE ARM'S LENGTH PRICE FOR EXPORTS HAS BEEN BENCHMARKED ON THE CUP BASIS BUT NOT IN A CASE WHEN THE ARM'S LENGTH PRICE OF THE EXPORTS HAS BEEN BENCHMARKED ON THE BASIS OF TNMM. THE VERY CONCEPTUAL FOUNDATION, FOR SEPARATE ADJUSTMENT FOR DELAYED REA LIZATION OF DEBTORS AND ON THE FACTS OF THIS CASE, IS THUS DEVOID OF LEGALLY SUSTA INABLE MERITS. 7. IN ANY CASE, AS POINTED OUT BY THE LEARNED COUNS EL, THE UNDISPUTED POSITION IS THAT THE ASSESSEE HAD ALLOWED CREDIT PERIOD BEYOND 90 DAYS IN THE CASE OF NON- ASSOCIATED ENTERPRISES, I.E. INDEPENDENT ENTERPRISE S AS WELL. ONCE THIS FACT IS NOT DISPUTED, THE TRANSACTIONS WITH THE NON-AE CONSTITU TE VALID INTERNAL CUP INPUTS AND ALP ADJUSTMENT ON ACCOUNT OF REALISATION OF BILLS BEYON D 90 DAYS FROM THE ASSOCIATED ENTERPRISE CANNOT BE JUSTIFIED. 8. IN VIEW OF ABOVE DISCUSSIONS, AND RESPECTFULLY F OLLOWING THE BINDING JUDICIAL PRECEDENTS AS REFERRED TO ABOVE, WE UPHOLD THE PLEA OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO DELETE THE IMPUGNED ALP ADJUST MENT OF RS.2,04,090/-. 9. GROUND NO. 1 IS THUS ALLOWED. 10. IN GROUND NO.2, THE ASSESSEE HAS RAISED FOLLOWI NG GRIEVANCES:- 2. GROUND NO. 2 - DISALLOWANCE OF PROVISION FOR ROYALTY EXPENSES OF RS 2.1. ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LEARNED CIT (A) HAS ERRED IN CONFIRMING THE ACTION OF THE LEARN ED AO BY UPHOLDING DISALLOWANCE OF GROSS PROVISION OF ROYALTY EXPENSES OF RS 91,97, 594 UNDER SECTION 40(A)(I) OF THE ACT. 2.2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) HAS ERRED IN CONFIRMING THE ACTION OF THE LEARN ED AO IN NOT APPRECIATING THE FACT THAT THE VENDORS OF ANTI-VIRUS AND ANTI-SPAM SOFTWA RE HAVE NOT GOT THE VESTED RIGHT TO RECEIVE THE AMOUNT OF ROYALTY AND HENCE, THE AMO UNT CREDITED BY THE APPELLANT IS ITA NO. 1565/AHD/2017 SOPHOS TECHNOLOGIES PVT LTD VS. DCIT ASSESSMENT YEAR: 2012-13 PAGE 7 OF 9 TOWARDS A PROVISION ACCOUNT AND NOT TO THE RESPECTI VE PARTIES' ACCOUNT. ACCORDINGLY, NO TAX IS REQUIRED TO BE DEDUCTED BY THE APPELLANT ON SUCH PROVISION. 2.3. WITHOUT PREJUDICE TO ABOVE, THE APPELLANT SUBM ITS THAT TAX HAS BEEN APPROPRIATELY DEDUCTED IN THE SUBSEQUENT YEARS WHEN THE ACTUAL LIABILITY OF MAKING THE PAYMENT OF ROYALTY HAS OCCURRED. HENCE IT IS PR AYED THAT THE APPROPRIATE DEDUCTION BE GRANTED TO THE APPELLANT IN THE SUBSEQ UENT YEAR WHEN TAXES HAVE BEEN DEDUCTED. 11. SO FAR AS THIS DISALLOWANCE IS CONCERNED, THE R ELEVANT MATERIAL FACTS ARE LIKE THIS. THE ASSESSEE PROCURES ANTI-VIRUS (SOURED FROM KASPE RKEY, RUSSIA) AND ANTI-SPAM SOFTWARE (SOURED FROM COMMTOUH SOFTWARE LTD, ISRAEL ) AND BUNDLES THESE SOFTWARES WITH ASSESSEES OWN UNIFIED THREAT MANAGEMENT SOFTW ARE WHICH IS ULTIMATELY SOLD TO THE END CUSTOMERS AS A BUNDLED PRODUCT. THE ROYALTY IN RESPECT OF ANTI-VIRUS AND ANTI- SPAM SOFTWARE, REFERRED TO ABOVE, IS PAID ONLY WHEN THE END CUSTOMER, I.E. THE ULTIMATE USER OF THE BUNDLED SOFTWARE, ACTIVATES THE LICENSE KEY. HOWEVER, THE ASSESSEE RECOGNIZES THE REVENUE FROM THE SALE OF ITS SOFTWAR E AND AT THE POINT OF TIME WHEN THE BUNDLED SOFTWARE IS SOLD TO THE DISTRIBUTOR, AND TH E ASSESSEE ALSO MAKES A PROVISION FOR THE ROYALTY THAT IT MAY HAVE TO PAY UPON ACTIVATION OF KEY IN RESPECT OF THE OUTSOURCED COMPONENT WHICH IS PART OF THE BUNDLED PRODUCT. IN OTHER WORDS, WHILE THE ASSESSEE MAKES THE PROVISION IN RESPECT OF THE POSSIBLE LIAB ILITY FOR THE ANTI-VIRUS AND ANTI-SPAM SOFTWARE WHICH ARE BUNDLED ALONG WITH THIS PRODUCT AT THE TIME OF SALE OF PRODUCT TO THE DISTRIBUTOR, THE ACTUAL LIABILITY TO PAY FOR THIS P RODUCT CRYSTALLIZES AT A MUCH LATER TIME WHEN THE PRODUCT IS EVENTUALLY ACTIVATED BY THE END CUSTOMERS AND THAT IS ALSO THE POINT OF TIME WHEN TAX WITHHOLDING OBLIGATIONS ARE DISCHA RGED. ON THESE FACTS, THE ASSESSING OFFICER WAS OF THE VIEW THAT THE PROVISION FOR THE LIABILITY IN RESPECT OF ROYALTY PAYABLE FOR THE BUNDLED PRODUCT IS NOT ADMISSIBLE AS A DEDUCTIO N BECAUSE THE ASSESSEE HAS FAILED TO DEDUCT THE TAX AT SOURCE. THE PLEA OF THE ASSESS EE IS THAT THE LIABILITY TO PAY TAX ARISES ONLY AT THE POINT OF TIME WHEN THE END PRODUCT ACTI VATED BY THE END CUSTOMER WAS REJECTED. THE ASSESSING OFFICER WAS OF THE VIEW THA T THE PROVISION FOR ROYALTY IS NOT A PROVISION PER SE BUT AN EXPENSE PAYABLE WHICH HAD OCCURRED BUT WAS NOT ACTUALLY PAID AS ON THE YEAR END DATE. THE ASSESSING OFFICER ACC ORDINGLY HELD THAT THE ASSESSEE IS LIABLE TO DEDUCT TAX AT SOURCE UNDER SECTION 195 AN D, ON ACCOUNT OF ASSESSEES INABILITY TO DO SO, THE EXPENSE IS DISALLOWABLE UNDER SECTION 40(A)(I). 12. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN A PPEAL BEFORE THE LEARNED CIT(A) BUT WITHOUT ANY SUCCESS. LEARNED CIT(A), RELYING U PON THE DECISION OF TRIBUNAL IN THE ITA NO. 1565/AHD/2017 SOPHOS TECHNOLOGIES PVT LTD VS. DCIT ASSESSMENT YEAR: 2012-13 PAGE 8 OF 9 CASE OF IBM INDIA (P.) LTD. VS. ITO, [2015] 154 ITD 497 (BANGALORE - TRIB.), UPHELD THE STAND OF THE ASSESSING OFFICER. THE ASSESSEE IS AG GRIEVED AND IS IN FURTHER APPEAL BEFORE US. 13. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE AP PLICABLE LEGAL POSITION. 14. WE FIND THAT THE TAXABILITY OF ROYALTY INCOME I N TERMS OF THE PROVISION IN RESPECT OF TREATIES I.E. INDIA RUSSIA DOUBLE TAXATION AVOIDANC E AGREEMENT [(1998) 233 ITR (STAT) 90] (INDO-RUSSIAN TAX TREATY IN SHORT) AND INDIA ISRAEL DOUBLE TAXATION AVOIDANCE AGREEMENT [(1996) 222 ITR (STAT) 10] (INDO-ISRAEL TAX TREATY IN SHORT) ARISES ONLY AT THE POINT OF TIME WHEN THE ROYALTIES ARE PAID TO TH E RESIDENT OF THE OTHER CONTRACTING STATE. AS A MATTER FOR FACT, ARTICLE 12(1) OF BOTH OF THESE TREATIES, WHICH IS IDENTICALLY WORDED, PROVIDES THAT R OYALTY ARISES IN A CONTRACTING STATE AND PAID TO A RESIDENT OF THE OTHER CONTRACTING STATE MAY BE TAXED IN THAT OTHER STATE. CLEARLY, THEREFORE, THE TRIGGER FOR TAX LIABILITY UNDER THE TREATY IS THE POINT OF TIME WHEN THE ROYALTY INCOME IS PAID TO THE RESIDENT OF THE OTHER CONTRACTING STATE. INCIDENTAL LY, WHILE DEALING WITH AN IDENTICALLY WORDED ARTICLE 13(1) OF THE INDO-ITALIAN TAX TREATY , A CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF SAIRA ASIA INTERIORS (P.) LTD. VS. I TO, [2017]164 ITD 687 (AHMEDABAD- TRIB.), HAS, INTER ALIA, OBSERVED AS FOLLOWS:- 8. AS FOR THE POINT OF TIME OF CREDITING THE AMOUN T PAYABLE TO NON-RESIDENT, I.E. 'AT THE TIME OF CREDIT OF SUCH INCOME TO THE ACCOUNT OF PAYEE', THE ROYALTY SO PAID BY THE ASSESSEE WAS NOT TAXABLE IN THE HANDS OF THE RE SIDENT, FOR THE SIMPLE REASON THAT, IN TERMS OF ARTICLE 13 OF INDO ITALIAN DTAA- WHICH IS REPRODUCED ABOVE FOR THE READY REFERENCE, TAXABILITY OF ROYALTY IS DEPEN DENT ON THE PAYMENT BY THE RESIDENT OF A CONTRACTING STATE AND RECEIPT OF THE SAME BY THE RESIDENT OF THE OTHER CONTRACTING STATE. UNLESS, THEREFORE, THE ACT UAL PAYMENT TAKES PLACE, THE TAXABILITY UNDER ARTICLE 13 OF INDO ITALIAN DTAA DO ES NOT ARISE. IN OTHER WORDS, THE MERE FACT THAT AN INDIAN RESIDENT CREDITS THE AMOUN T OF ROYALTY PAYABLE TO AN ITALIAN RESIDENT DOES NOT TRIGGER TAXABILITY UNDER ARTICLE 13 OF THE INDO ITALIAN DTAA. SUCH IS ALSO THE VIEW TAKEN BY A SERIES OF DE CISIONS BY THE COORDINATE BENCHES, INCLUDING THE DECISION IN THE CASE NATIONA L ORGANIC CHEMICAL INDUSTRIES LTD. V. DY. CIT [2006] 5 SOT 317 (MUM.), WITH WHICH WE ARE IN RESPECTFUL AGREEMENT. WHEN THE ROYALTY SO CREDITED BY THE ASSE SSEE IS NOT TAXABLE AT THE TIME OF CREDIT OF SUCH AMOUNT TO THE ACCOUNT OF PAY EE, IN THE LIGHT OF LAW LAID DOWN BY HON'BLE SUPREME COURT IN THE CASE OF GE INF ORMATION TECHNOLOGY CENTRE (P.) LTD. (SUPRA), IT DOES NOT GIVE RISE TO ANY TAX WITHHOLDING OBLIGATIONS UNDER SECTION 195 (1) EITHER. 15. THE LIABILITY TO DEDUCT TAX AT SOURCE ARISES ON LY WHEN THE INCOME EMBEDDED IN THE RELEVANT PAYMENT IS EXIGIBLE TO TAX. CLEARLY, THE SALE OF BUNDLES SOFTWARE TO THE ITA NO. 1565/AHD/2017 SOPHOS TECHNOLOGIES PVT LTD VS. DCIT ASSESSMENT YEAR: 2012-13 PAGE 9 OF 9 DISTRIBUTOR IS NOT A POINT OF TIME WHEN THE ROYALTY IN RESPECT OF THE BUNDLED PRODUCT BECOMES PAYABLE. THAT POINT OF TIME IS WHEN THE END PRODUCT IS ACTIVATED. IN THESE CIRCUMSTANCES, THE ASSESSING OFFICERS APPROACH OF TREATING THE ENTIRE PROVISION AS INCOME EXIGIBLE TO TAX IN THE HANDS OF THE SUPPLIER OF THE ANTI-VIRUS/ANTI-SPAM PRODUCT IS FALLACIOUS. 16. IN ANY EVENT, AS EVIDENT FROM THE UNDISPUTED FA CTS ON RECORDS, THE TAX WITHHOLDING LIABILITY HAS BEEN DISCHARGED BY THE ASSESSEE AS AN D WHEN THE ACTIVATION OF KEY HAS TAKEN PLACE. THIS APPROACH IS LEGALLY CORRECT BECA USE ACTIVATION OF THE END PRODUCT IS THE TRIGGER TO ROYALTY ACCRUING TO THE VENDORS AND AS SUCH TO THE INCOME IN THE HANDS, IF TAXABLE, BEING BROUGHT TO TAX IN INDIA. THE APPROAC H OF THE ASSESSEE THUS CANNOT BE FAULTED WITH. IN VIEW OF THE ABOVE DISCUSSIONS AND BEARING IN MIND ENTIRETY OF THE CASE, WE SEE MERITS IN THE PLEA OF THE ASSESSEE. THE IMP UGNED DISALLOWANCE OF UNDER SECTION 40(A)(I), AS RIGHTLY CONTENDED BY THE LEARNED COUNS EL, IS DEVOID OF LEGALLY SUSTAINABLE MERITS AND MUST BE, THEREFORE, DELETED. ACCORDINGL Y, WE DIRECT THE ASSESSING OFFICER TO DELETE THE IMPUGNED DISALLOWANCE MADE UNDER SECTION 40(A)(I) OF THE ACT. 17. GROUND NO. 2 IS ALSO THUS ALLOWED. 18. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. PRONOUNCED IN THE OPEN COURT TODAY ON THE 16 TH NOVEMBER, 2018 SD/- SD/- JUSTICE P P BHATT PRAMOD KUMAR (PRESIDENT) (VICE PRESIDENT) AHMEDABAD, THE 16 TH DAY OF NOVEMBER, 2018 **BT COPIES TO: (1) THE APPELLANT (2) THE RESPONDENT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER TRUE COPY ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCHES, AHMEDABAD