TATA CONSULTANCY SERVICES LTD, MUMBAI V. ACIT LARGE TAX PAYER UNIT-1, MUMBAI

ITA 1769/MUM/2018

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 4741 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-04-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: I
• Assessment Year: 2013-2014
• Appeal Filed On: 18-03-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: Not Found
• Assessee Lawyers: PORUS F KAKA
• Keywords: Related party transaction; Depreciation; Transfer pricing; Double taxation relief; International transaction; Earning of tax free income; Retrospective amendment; Additional evidence; Permanent establishment; Non-deduction of tax; Commercial expediency; capital expenditure; TDS; Rule 8D; Liquidation
• Section: 37; 6; 10; 90; 2; 92B; 10AA; 40(a)(ia); 37(1); 195; 201; 80HH; 207; 44AB; 43; 40a(ia)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, ‘I‘ BENCH MUMBAI BEFORE: SHRI VIKAS AWASTHY, JUDICIAL MEMBER & SHRI M.BALAGANESH, ACCOUNTANT MEMBER ITA No.1769/Mum/2018 (Assessment Year : 2013-14) & ITA No.797/Mum/2018 (Assessment Year : 2012-13) M/s. Tata Consultancy Services Limited 9 th Floor, Nirmal Building Nariman Point, Mumbai – 400 021 Vs. Assistant Commissioner of Income Tax LTU-1 29 th Floor, Centre One World Trade Centre Cuffe Parade, Mumbai – 400 005 PAN/GIR No. AAACR4849R (Appellant) .. (Respondent) ITA No.2431/Mum/2018 (Assessment Year : 2013-14) & ITA No.1887/Mum/2018 (Assessment Year : 2012-13) Assistant Commissioner of Income Tax LTU-1 29 th Floor, Centre One World Trade Centre Cuffe Parade, Mumbai – 400 005 Vs. M/s. Tata Consultancy Services Limited 9 th Floor, Nirmal Building Nariman Point, Mumbai – 400 021 PAN/GIR No. AAACR4849R (Appellant) .. (Respondent) Assessee by Shri Porus F Kaka & Shri Manish Kanth Revenue by Ms. Surabhi Sharma Date of Hearing 11/01/2022 Date of Pronouncement 11/04/2022 ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 2 आदेश / O R D E R PER BENCH: ITA No.1769/Mum/2018 (A.Y. 2013-14)- Assessee Appeal & ITA No.2431/Mum/2018 (Assessment Year : 2013-14)- Revenue Appeal These cross appeals in ITA Nos.1769/Mum/2018 & 2431/Mum/2018 for A.Y.2013-14 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-58, Mumbai in appeal No.CIT(A)-58, Mumbai 10132/2016-17 dated 31/01/2018 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) r.w.s. 144C(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 16/02/2017 by the ld. Asst. Commissioner of Income Tax, LTU-(1), Mumbai (hereinafter referred to as ld. AO). ITA No.797/Mum/2018 (A.Y. 2012-13)- Assessee Appeal & ITA No.1887/Mum/2018 (Assessment Year : 2012-13)- Revenue Appeal These cross appeals in ITA Nos.797/Mum/2018 & 1887/Mum/2018 for A.Y.2012-13 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-58, Mumbai in appeal No.CIT(A)-58, Mumbai 10041/2016-17 dated 22/12/2017 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) r.w.s. 144C(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 28/04/2016 by the ld. Asst. Commissioner of Income Tax, LTU-(1), Mumbai (hereinafter referred to as ld. AO). Since certain issues are identical all the appeals are taken up together and disposed of by this common order for the sake of convenience. ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 3 2. The ground No.1 raised by the assessee for A.Y.2012-13 is challenging the disallowance made u/s. 40 (a)(ii) in respect of state taxes paid in overseas countries. 3. We have heard rival submissions and perused the materials available on record. At the outset both the parties before us agreed that this issue is already covered by the Co-ordinate Bench decision of this Tribunal in assessee‟s own case for A.Y.2009-10 in ITA No.5713/Mum/2016 dated 30/10/2019 wherein it was held as under:- “6. We have considered the rival submissions and perused the material on record. From the stage of the assessment proceeding itself, it is the claim of the assessee that the term "tax", as defined under section 2(43) of the Act would only include taxes chargeable under the Indian Income Tax Act. It is the further case of the assessee that since in respect of the State taxes paid overseas, the assessee is not eligible to claim relief under section 90 or 91 of the Act, it will not be covered under section 40(a)(ii) of the Act. On a perusal of provisions of sub-section (43) of section 2 of the Act, it becomes clear that the term "tax" has been defined to mean any tax paid under the provisions of the Act. Section 40(a)(ii) of the Act says that any rate or taxes levied on the profits or gain in any business or profession would not be allowable as deduction. Explanation-1 to section 40(a)(ii) of the Act inserted by the Finance Act, 2006, w.e.f. 1st April 2006, further clarifies that any sum eligible for relief of tax either under section 90 or 91 of the Act would not be allowable as deduction under section 40(a)(ii) of the Act. It is the say of the assessee that the tax eligible for relief under section 90 of the Act are only those taxes which are levied by Federal / Central Government and not by any local authority of State, City or County. Thus, it is ineligible for any relief under section 90 of the Act. The aforesaid submissions of leaned Sr. Counsel for the assessee, prima facie, is acceptable if one has to strictly go by the meaning of "tax", defined under section 2(43) of the Act, as it only refers to tax paid under the provisions of the Act. It is also worth mentioning, the State taxes paid by the assessee in DTAA countries are not eligible for relief under section 90 of the Act. Therefore, the issue which arises is, whether it can be allowed as deduction under section 37 of the Act. No doubt, in assessee's own case in assessment year 2005-06, the Tribunal in the order referred to above following its own decision in DCIT v/s Tata Sons Ltd., [2011] 43 SOT 27 (Mum.), has held that the State taxes paid overseas cannot be allowed as deduction in view of the provisions of section 40(a)(ii) of the Act. However, the aforesaid legal position has substantially changed after the decision of the Hon'ble Jurisdictional High Court in Reliance Infrastructure Ltd. (supra). While interpreting the provisions of section 2(43) of the Act, vis- ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 4 a- vis section 40(a)(ii) of the Act, the Hon'ble Court held that the tax which has been paid abroad would not be covered within the meaning of section 40(a)(ii) of the Act, since, the meaning of the word "tax" as defined under section 2(43) of the Act would mean only the tax chargeable under the Act. Thus, as per the aforesaid decision of the Hon'ble Jurisdictional High Court, taxes levied overseas which are not eligible for relief either under section 90 or 91 of the Act, would not come within the purview of section 40(a)(ii) of the Act. It is the specific plea of the assessee that the State tax is not covered either under Indo-US or Indo-Canada tax treaty, hence, not eligible for any relief under section 90 of the Act. Pertinently, unlike section 91 read with Explanation-(iv), section 90 does not provide for inclusion of tax levied by any State/ local authority of that country within the expression 'income tax'. In view of the aforesaid, we direct the Assessing Officer to verify whether the State taxes paid by the assessee overseas are eligible for any relief under section 90 of the Act and if it is not found to be so, assessee's claim of deduction should be allowed. In view of our decision above, no separate adjudication of grounds no.1.2 is required.” 3.1. Respectfully following the same, the ground No.1 raised by the assessee for A.Y.2012-13 is disposed of in the above mentioned terms. 4. The ground No.2 raised by the assessee is challenging the disallowance made on account of advertisement expenses. The Revenue is also aggrieved on this ground vide ground No.4 raised for A.Y.2012-13 in respect of relief granted partially by the ld. CIT(A). 4.1. We have heard rival submissions and perused the materials available on record. At the outset both the parties before us agreed that this issue is already covered by the Co-ordinate Bench decision of this Tribunal in assessee‟s own case for A.Y.2009-10 in ITA No.5713/Mum/2016 dated 30/10/2019 wherein it was held as under:- “23. We have considered rival submissions and perused the material on record. We have also carefully examined the case laws cited before us. On a detailed analysis of facts on record, we have noted that the reasoning of the Assessing Officer that the expenditure was incurred for brand building is without any basis. It is to be noted, before the Departmental Authorities the assessee had demonstrated that in no way it is connected with development of Tata brand. The details of expenditure incurred clearly demonstrate that they were basically for the purpose of advertising assessee's products in print media or through seminar, conferences, etc. As rightly observed by learned Commissioner (Appeals), the Assessing Officer has brought no material on ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 5 record to establish that the expenditure is for brand building. As observed earlier, the expenditure relates to advertisement in newspaper, magazine, events, seminars, conferences, exhibitions, etc. Thus, the nature of expenditure incurred by the assessee clearly indicates that it was for promoting its own business. Further, considering the turnover of the assessee, the expenditure incurred on advertisement does not appear to be unusually high. That being the case, the expenditure incurred on advertisement cannot be treated to be in the nature of capital expenditure and amortized over a period of five years. To that extent, we agree with the decision of learned Commissioner (Appeals) on the issue. However, as regards experience certainty expenditure amounting to ₹ 5.28 crore, it appears that learned Commissioner (Appeals) has held it to be of capital nature on the basis that the assessee itself admitted so. However, before us, leaned Sr. Counsel for the assessee has vehemently argued that no such admission was made by the assessee before learned Commissioner (Appeals) and under a misconception, learned Commissioner (Appeals) has come to such conclusion. The leaned Sr. Counsel submitted, the experience certainty campaign was also for the purpose of advertisement only and in this context, he has furnished before us the details of such expenditure through additional evidences. Since, the additional evidences furnished by the assessee will have a crucial bearing in determining the nature of expenditure, we are inclined to admit the additional evidences. However, considering the fact that these evidences were not furnished before the Departmental Authorities, to afford a fair opportunity to the Department to verify the authenticity of assessee's claim vis-a-vis the additional evidences furnished before us, we restore the issue to the Assessing Officer for de novo adjudication after providing reasonable opportunity of being heard to the assessee. We make it clear, our aforesaid direction is only with regard to the experience certainty expenditure of ₹ 5.28 crore. The decision of learned Commissioner (Appeals) on this issue is modified to this extent only.” 4.2. We find that assessee had furnished the additional evidences for the A.Y.2012-13 in respect of the aforesaid issue vide letter dated 30/12/2019 before us. Respectfully following the aforesaid decision in assessee‟s own case, the ground No.2 raised by the assessee and ground No.4 raised by the Revenue for A.Y.2012-13 are disposed of in the above mentioned terms. 5. The ground No.3 raised by the assessee is in respect of seeking foreign tax credit in respect of income pertaining to Section 10A/10AA eligible units in India. The ground No.8 raised by the Revenue for A.Y.2012-13 is also on the same issue. Hence, both these grounds are taken up together and disposed of herein. ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 6 5.1. We have heard rival submissions and perused the materials available on record. We have heard rival submissions and perused the materials available on record. At the outset both the parties before us agreed that this issue is already covered by the Co-ordinate Bench decision of this Tribunal in assessee‟s own case for A.Y.2009-10 in ITA No.5713/Mum/2016 dated 30/10/2019 wherein it was held as under:- “26. In ground no.6, corresponding to ground no.7 of Revenue's appeal, the assessee has claimed foreign tax credit in respect of income pertaining to section 10A/10AA of the Act eligible units in India. 27. Brief facts are, in the course of assessment proceedings the assessee furnished countrywise statement of tax paid in support of its claim of tax credit under section 90 and 91 of the Act amounting to ₹ 93,48,94,709. It was contended by the assessee that the tax paid on income charged to tax outside India and in India would be eligible for deduction in terms of the applicable tax treaties as well as under section 91 of the Act. The Assessing Officer after examining the claim of the assessee and verifying the details allowed tax credit in respect of tax paid overseas on the income which was not only offered to tax abroad but was also subjected to tax in India to the extent not exceeding the rate of tax payable in India. However, in respect of income subjected to tax abroad but exempt from payment of tax in India, he did not grant relief either under section 90 or 91 of the Act. The assessee challenged the aforesaid decision of the Assessing Officer before the first appellate authority. 28. Learned Commissioner (Appeals), after considering the submissions of the assessee and taking note of the decision of the Hon'ble Karnataka High Court in Wipro Ltd. v/s DCIT, [2015] 62 taxmann.com 26 (Kar.) bifurcated the foreign tax credit into three parts i.e., tax paid in USA, tax paid in other DTAA countries and tax paid in non-DTAA countries. Thereafter, he directed the Assessing Officer to allow tax credit in respect of tax paid in USA even on the income which is exempt from tax in India under section 10A / 10AA of the Act. However, in respect of tax paid in other DTAA and non- DTAA countries, learned Commissioner (Appeals) held that no tax credit will be available in respect of income which is exempt from tax in India under section 10A / 10AA of the Act. While the assessee has challenged the decision of learned Commissioner (Appeals) on non-grant of tax credit in respect of taxes paid in other DTAA countries and non-DTAA countries, the Department is aggrieved with the decision of learned Commissioner (Appeals) in granting tax credit in respect of taxes paid in USA. Since, the grounds raised by the assessee and Revenue, as noted above, are on a common issue, we dispose of both the grounds together. 29. The leaned Sr. Counsel for the assessee submitted, as per section 90(1)(a)(ii) of the Act, the Central Government may enter into an agreement with any country outside India for granting relief in respect of Income Tax chargeable under the Act and under the corresponding law in force in that ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 7 country, as the case may be, to promote mutual economic relationship, trade and investment. Thus, he submitted, section 90 of the Act empowers the Central Government to enter into DTAA with the Government of any other country for granting relief in respect of cases where income tax is chargeable. He submitted, section 10A/10AA grants deduction from eligible income from the total profit. However, such income is chargeable to tax in India as per the provisions of section 4 and 5 of the Act. He submitted, the exemption under section 10A / 10AA of the Act is for a specified period and after expiry of that period such income would otherwise be chargeable to tax. Referring to article 25 of Indo-U.S. DTAA, the leaned Sr. Counsel submitted, the condition mandated in the treaty is that if any income derived and tax paid in USA on such income then tax relief / credit shall be granted in India of such tax paid in USA. He submitted, the aforesaid article does not speak of any income tax being paid by the resident assessee under the Indian Income Tax Act as a condition precedent for claiming the benefit of tax credit under DTAA. He submitted, like article 25(2)(a) of India-USA DTAA, similar clause also appear in various other tax treaties concluded by the Government of India with foreign countries from which the assessee has received income under section 10A / 10AA of the Act till assessment year 2009-10, such as, Denmark, Finland, Hungary, Norway, Oman, South Africa, Saudi Arabia, Taiwan. In this context, he drew our attention to the relevant clauses of the DTAAs with the above noted countries. Thus, he submitted, tax credit has to be provided for taxes paid in overseas jurisdiction in respect of section 10A/10AA eligible income in India as per the provisions of respective DTAAs. He submitted, even under MAT computation, the assessee should be allowed full credit for taxes paid overseas in respect of section 10A/10AA eligible income. In support of his contention, the learned Sr. Counsel put strong reliance upon the decision of the Hon'ble Karnataka High Court in Wipro Ltd. (supra).The learned Sr. Counsel submitted, when no decision of the Hon'ble Jurisdictional High Court is available on the issue and the only decision of a High Court which is available is that of the Hon'ble Karnataka High Court, even though, the decision is of a non-jurisdictional High Court, however, this being the only decision available on the issue, it will be binding when there is no contrary decision of another High Court is available. For such proposition, he relied upon the following decisions:- i) CIT v/s Smt. Nirmalabai K. Davekar, [1990] 186 ITR 242 (Bom.) Tata Consultancy Services Ltd. ii) CIT v/s Highway Construction Co. Pvt. Ltd., [1996] 217 ITR 234 (Gauhati); and iii) CIT v/s Maganlal Mohanlal Panchan (HUF), [1994] 210 ITR 580 (Guj.). 30. The learned Departmental Representative strongly relying upon the observations of the Assessing Officer submitted, since all income of section 10A/10AA eligible units are exempt and not subjected to tax in India, the assessee would not get tax credit for taxes paid on such income in overseas countries, except, USA. 31. We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. As could be seen, while the Assessing Officer has disallowed assessee's claim of foreign tax credit ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 8 in respect of income exempt under section 10A/10AA of the Act on the reasoning that only such income which is subjected to tax in both the countries would qualify for tax credit, learned Commissioner (Appeals) has restricted the relief of foreign tax credit only in respect of tax paid in USA even in respect of income which is exempt under section 10A/10AA of the Act. The learned Commissioner (Appeals) has come to such conclusion by following the decision of the Hon'ble Karnataka High Court in Wipro Ltd. (supra). The reasoning of the learned Commissioner (Appeals) on the issue is, as per the decision of Hon'ble Karnataka High Court in Wipro Ltd. (supra), the foreign tax credit benefit under section 90(1)(a)(ii) of the Act would only be applicable under Indo-US DTAA and would not be applicable to other DTAA countries and non-DTAA countries. On a careful reading of the decision of the Hon'ble Karnataka High Court in Wipro Ltd. (supra), it is noted, while dealing with identical issue the Hon'ble Court held that in the cases covered under section 90(1)(a)(ii) of the Act, it is not the case of income being subjected to tax or the assessee has paid tax on the income. The provision applies to a case where the income of the assessee is eligible to tax under the Act as well as in the corresponding law in force in the other country. The Court observed, though, income tax is chargeable under the Act, it is open to the Parliament to grant exemption under the Act from payment of tax for any specified period, normally, to incentivize the assessee the to carry on manufacturing activities or providing services. The Court thereafter referring to the treaty provisions with USA held that it is not the requirement of law that the assessee before he claims credit under the Indo-US convention or under the provision of the Act must pay tax in India on such income. The Court observed, as per the embargo placed in the DTAA, the assessee is entitled to such tax credit only in respect of that income which is taxed in USA. In similar context, the Court also referred to the tax treaty with Canada where the provisions does not allow credit for tax paid in Canada if the income is not subjected to tax in India. With regard to country's with which India does not have any agreement for avoidance of double taxation, the Court observed that as per section 91 of the Act, the assessee would be eligible to avail tax credit. Thus, on a careful reading of the aforesaid judgment of the Hon'ble Karnataka High Court, it becomes clear that where the respective tax treaty provides for benefit for foreign tax paid even in respect of income on which the assessee has not paid tax in India, still, it would be eligible for tax credit under section 90 of the Act. Like Article 25 of the Indo-USA treaty, treaties with various other countries such as Indo-Denmark, Indo-Hungary, Indo-Norway, Indo-Oman, Indo-US, Indo- Saudi Arabia, Indo-Taiwan also have similar provision providing for benefit of foreign tax credit even in respect of income not subjected to tax in India. However, Indo-Canada and Indo-Finland treaties do not provide for such benefit unless the income is subjected to tax in both the countries. Therefore, the foreign tax credit would be available to the assessee in all cases except the foreign tax paid in Finland and Canada. The Assessing Officer is directed to grant credit accordingly.” ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 9 5.2. In respect of this issue we find that the list of countries involved in for the year under consideration are as under:- i) USA ii) Denmark iii) Finland iv) Hungary v) Norway vi) Oman vii) South Africa viii) Saudi Arabia ix) Taiwan 5.3. In view of the above mentioned decision, credit for foreign tax paid shall be eligible only for nine countries listed above. Respectfully following the aforesaid decision for the A.Y.2009-10 in assessee‟s own case, the ground No.3 raised by the assessee and ground No.8 raised by the Revenue are disposed of in the above mentioned terms. 6. The assessee has raised two additional grounds for A.Y.2012-13 – one is on account of claim for deduction of education cess and two in respect of claiming deduction u/s.10AA of the Act on commercial profit instead of on income from business and profession. 6.1. We have heard rival submissions and perused the materials available on record. Since these issues go to the root of the matter and does not require verification of fresh facts and are purely legal issues, we are inclined to admit these additional grounds and take up the same for adjudication. 6.2. In respect of claim of deduction for education cess, though this issue is covered in favour of the assessee by the decision of the Hon‟ble Jurisdictional High Court in the case of Sesa Goa Limited reported in 107 ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 10 CCH 375, we find that there is an amendment by the Finance Act 2022 in Section 40(a)(ii) wherein it had been categorically stated that no deduction on account of education cess shall be allowed while computing the income from business and profession. Admittedly, this amendment has been brought in statute with retrospective effect and is accordingly, applicable for the year under consideration. Hence, in view of the amendment in the statute, this additional ground raised by the assessee on account of claim for deduction of education cess is dismissed. 6.3. In respect of claim of deduction u/s.10AA of the Act on commercial profit, the ld. AR before us placed reliance on the provisions of Section 80HH of the Act and also argued that the language of Section 80HH and Section 10AA are pari materia in as much as both the sections provide that in computing the total income of the assessee, deduction shall be allowed at certain percentage of profits and gains derived from business. The expression “profits and gains” derived was subject matter of adjudication by the Hon‟ble Supreme Court in the case of Vijay Industries Ltd., reported in 103 taxmann.com 454 wherein the Hon‟ble Apex Court observed that the profits and gains referred to commercial profits without deducting depreciation and investment allowance as per the Act. Since this aspect was not raised by the assessee before the lower authorities, accordingly, the lower authorities did not have an occasion to give their finding on the same. Hence, in the interest of justice and fair play, we deem it fit and appropriate to remand this issue raised in the additional ground to the file of the ld. AO for denovo adjudication in the light of the decision of the Hon‟ble Apex Court in Vijay Industries Ltd., referred to supra and decide the controversy in accordance with law. Accordingly, the additional ground raised by the assessee in respect of claim of deduction u/s.10A of commercial profits is allowed for statistical purposes. ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 11 6.4. The assessee had raised yet another additional ground in respect of rate of dividend distribution tax of dividend paid to overseas shareholders. According to assessee, this rate of dividend distribution tax should be restricted to rate prescribed in the DTAA. This issue was stated to be not pressed by the ld. AR at the time of hearing. Accordingly, the same is hereby dismissed as not pressed. 7. The ground No.1 raised by the Revenue for A.Y. 2012-13 is challenging the action of the ld. CIT(A) in deleting the disallowance made on account of expenditure on imported software u/s.40(a)(i) of the Act on account of non-deduction of tax at source. 7.1. We have heard rival submissions and perused the materials available on record. We find that the very same issue was subject matter of adjudication by this Tribunal in assessee‟s own case for A.Y.2009-10 in ITA No.5713/Mum/2016 dated 30/10/2019. The facts recorded in the order passed by this Tribunal for A.Y.2009-10 and the adjudication of the same by the lower authorities is reproduced below as the same facts are prevailing in this year also except with variance in figures and yet another exception is that agreement copies were duly filed by the assessee during the year under consideration before the lower authorities. “8. Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has claimed expenditure incurred in respect of purchase of software called upon the assessee to furnish the necessary details. On verifying the details furnished by the assessee, he found that the assessee had purchased software for its internal use amounting to ₹ 47,36,54,498, and for trading purpose amounting to ₹ 31,03,03,823. After perusing the details, the Assessing Officer was of the view that the amount paid towards acquiring software brought along with support service is in the nature of royalty as per section 9(i)(vi) of the Act. In this context, he referred to Explanation-3 to section 9(1)(vi) of the Act as well as CBDT Circular no.621 dated 9th December 2019. Having held so, the Assessing Officer observed that since the assessee had not deducted tax at source while making payment for purchases of software both for internal use as well as for trading purpose, the amount paid is ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 12 liable for disallowance under section 40(a)(i) of the Act. Accordingly, he disallowed the entire amount of ₹ 78,39,58,321. The assessee challenged the aforesaid disallowance before the first appellate authority. 9. Learned Commissioner (Appeals) following the order passed by the Tribunal in assessee's own case for the assessment year 2005-06, held that the expenditure incurred on software products acquired for internal use is a capital expenditure, hence, the assessee is entitled to depreciation thereon. However, in respect of payment made towards software products acquired for re-sale / trading purpose, learned Commissioner (Appeals) agreed with the Assessing Officer that it is in the nature of royalty, hence, the assessee was required to deduct tax at source.” 7.2. We find that the ld. AR argued that the amendment brought out by the Finance Act, 2012 will not have any retrospective effect based on the principle of “impossibility of performance”, since assessee cannot be expected to deduct tax at source in respect of transactions effected in earlier years. This argument has to be dismissed as the year under consideration is A.Y.2012-13 where amendment has been brought. 7.3. The ld. AR further argued that even under the applicable DTAA, the payment for purchase of software cannot be regarded as „royalty‟, since the definition of „royalty‟ under DTAA is narrower than the definition in the Act. The ld. AR without prejudice, in respect of purchase of software for trading purpose, argued that assessee does not obtain any license from the seller and only earns margin on trading or re-selling of such software. Accordingly, he submitted that the same cannot be treated as „royalty‟ and no disallowance u/s.40(a)(i) of the Act could be made on the same. He also drew attention of the Bench to certain clauses in the re- setting agreement entered into between assessee and Microsoft Regional Sales Corporation and submitted that assessee is only a re-seller of the software product and assessee was not entitled to make any alterations to the software in order to make copies thereon. Finally, the ld. AR also submitted on without prejudice basis that in any case, provisions of Section 40(a)(i) of the Act would not be made applicable to allowance of ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 13 depreciation on imported software if the same is treated as capital in nature. 7.4. Per contra, the ld. DR vehemently relied on the orders of the lower authorities. 7.5. We find ultimately that this issue has been restored to the file of the ld. AO by this Tribunal in A.Y.2009-10 by making certain observations. We find that while rendering this decision and also for the decision of A.Y.2010-11 in ITA No.974/Mum/2018 dated 18/08/2020, the decision of the Hon‟ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd., vs. CIT reported in 432 ITR 471 was not rendered. Now, we find that the issue in dispute before us has been fully settled by the aforesaid decision of the Hon‟ble Apex Court in favour of the assessee by holding as under:- “By virtue of section 90 of the Income-tax Act, 1961, once a Double Taxation Avoidance Agreement applies, the provisions of the Act can only apply to the extent that they are more beneficial to the assessee and not otherwise. Further, by Explanation 4 to section 90, Parliament has clarified that where any term is defined in a DTAA, the definition contained in the DTAA is to be looke4 at. It is only where there is no such definition that the definition in the Ad can then be applied. UNION OF INDLA V. AZADI BACHAO ANDOLAN [7003] 763 1TR 706 (SC) relied on. The expression "copyright" has not been defined separately in the definitions section of the Copyright Act, 1957, yet, section 14 makes it clear that "copyright means the "exclusive right", subject to the provisions of the Act, to do or authorise the doing of certain acts "in respect of a work". In the case of computer programmes, section 14(b) specifically speaks of two sets of acts: the seven ads enumerated in clause (a) and the eighth act of selling or giving on commercial rental or offering for sale or for commercial rental any copy of the computer programme. All the seven acts set out in clause (a) delineate how the exclusive right with the owner of the copyright may be parted with. In essence, such right is referred to as copyright, and includes the right to reproduce the work in any material form, issue copies of the work to the pub tic, perform the work in public or make translations or adaptations of the work. The definition of an "in fringing copy" contained in section 2(m) of the 1957 Act, in ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 14 relation to a computer programme, i. e., a literary work, means reproduction of the work. Thus, the right to reproduce a computer programme and exploit the reproduction by way of safe, transfer, licence, etc., is at the heart of the exclusive right. Section 14(b)(ii) of the 1957 Act was amended twice, first in 1994 and then again in 1999, with effect from January 15, 2000. What is conspicuous in the provision after the amendment is the absence of the phrase "regardless of whether such copy has been sold or given on hire on earlier occasions". This is a statutory recognition of the doctrine of first sale or principle of exhaustion. Copyright is an exclusive right, which is negative in nature, being a right to restrict others from doing certain acts. Cop right is an intangible, incor - poreal right, in the nature of a privilege, which is quite independent of any material substance. Ownership of copyright in a work is different from the ownership of the physical material in which the copyrighted work may hap- pen to be embodied. Importantly, by virtue of section 16 of the 1957 Act no copyright exists in India outside the provisions of the 1957 Act or any other special law for the time being in force. The making of copies or adaptation of a computer programme in order to utilise the programme for the purpose for which it was supplied, or to make backup copies as a temporary protection against kiss, destruction or damage so as to be able to utilise the computer programme for the purpose for which it was supplied, does not constitute an act of infringement copyright under section 52(1)(aa) of the 1957 Act. Section 52(l)(ad) is independent of section 52(1)(aa) of the 1957 Act, and states that the making of copies of a computer programme from a personally legally obtained copy of non-commercial per - sonal use would not amount to an infringement of copyright. Section 52(1)(ad) of the 1957 Act cannot be read to negate the effect of section 52(1)(aa), since it deals with a subject matter that is separate and distinct from that contained in section 52(1)(aa) of the 1957 Act. There is an important difference between the right to reproduce and the right to use computer software. Whereas the former would amount to parting with a copyright by the owner thereof, the latter would not. When, under a non-exclusive licence, an end -user gets the right to use computer software in the form of a compact disk, the end-user only receives a right to use the soft- ware and nothing mare. The end-user does not get any of the rights that the owner continues to retain under section 14(b) of the 1957 Act read with .cub- clauses (i) to (vii) of clause (a) thereof Thus. the conclusion that when com- puter software is licensed for use under an end-user licence agreement, what is also licensed is the right to use the copyright embedded therein, is wholly incorrect. The licence for the use of a product under an end-user licence agreement cannot be construed as the licence spoken of in section 30 of the 1957 Act, as such end-user licence agreement only imposes restrictive conditions upon the end-user and does not part with any interest relatable to any rights mentioned in section 14(a) and (b) of the 1957 Act. ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 15 The ownership of copyright in a work is different from the ownership of the Physical material in which the copyrighted work may happen to be embedded. Any ruling on the more expansive language contained in the Explanations to section 9(vi) of the Income-tax Act, 1961 would have to be ignored if it is wider and less beneficial to the assessee than the definition cont wined in the DTAA, in terms of section 90(2) of the Act read with Explanation 4 there-to.. and article 3(2) of the DTAA Further, the expression copyright" has to be understood in the context of the statute which deals with it, it being acc4Tted that municipal laws which apply in the contracting States must be applie4 unless there is any repugnancy to the terms of the DTAA. By no stretch of imagination, can the payment for such computer software amount to royalty within the meaning of article 12 of the DTA A or section 9(i)(vi) of the Act. DASSAULT SYSTEMS K. K., In re [70101 32 ITR 175 (AAR), GEOQUEST SSTEMS B. V., In re 120101 327 ITR 1 (AAR), DIT v. ERICSSON A. B. 120121 343 ITR 470 (Delhi), DIT v. Nokia NETWORKS OY [2013] 358 ITR 259 (Delhi), D1T V. INFRASOFT LTD. [2014] 3 ITR-OL 333 (Delhi) and CIT v. Z'I'E CORPORATION [2017] 392 ITR 80 (Delhi) approved. STATE BANK OF INDIA V. COLLECTOR OF CUSTOMS (2000) 1 SCC 727 relied on. Royalty, under section 90)(vi) of the Act, means the transfer of all or any rights, including the g-ranting of a licence, in respect of any copyright in a literary work. Under article 3(2) of the Double Taxation Avoidance Agreement between India and Singapore, the definition of the term "royalties" , shall have the meaning assigned to it by the DTAA, meaning thereby that the expression "royalty, when occurring in section 9 of the Act, has to be construed with reference to article 12 of the DTAA. This position is also clarified by CBDT Circular No. 333 dated April 2, 1982 2 . Thus, by virtue of article 12(3) of the DTAA, royalties are payments of any kind received as consideration for "the use of; or the right to use, any copyright" of a literary work, which includes a computer programme or software. When article 12 of the DTAA defines the term "royalties" in paragraph (3) thereof, it does so stating that such definition is exhaustive : it uses the expression "means". Secondly, the term "royalties" refer to payments of any kind that are received as a considerate ion for the use of or the right to use any copyright in a literary work. The definition contained in Explanation 2 to section 90(1)(vi) of the Act, is wider in at least three respects it speaks of "consideration", but also includes a lump-sum consideration which would not amount to income of the recipient chargeable under the head "capital gains"; when it speaks of the transfer of "all or any rights", it expressly includes the granting of a licence in respect thereof; and it states that such transfer must be "in respect of" any copyright of any literary work. However, even where such transfer is 'in respect of" copyright, the transfer of all or any rights in relation to copyright is a sine qua non under Explanation2 to section 9(1)(vi) of the Act. in short, there must be transfer by way of licence or otherwise, of all or any of the rights mentioned in section 14(b) read with section 14(a) of the 1957 Act. ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 16 Indian tax laws use the expression "in respect of" as synonymous with the expression "on" the expression "in respect of”, when used in a taxation statute, is only synonymous with the words "on" or "attributable to". This accords with the meaning to be given to the expression "in respect of" contained in Explanation 2(v) to section 9(1)(vi) of the income-tax Act, 1961 and would not in any manner make the expression otiose. STATE OF MADRAS V. SWASTIX TOBACCO FACTORY [1966] AIR 1966 SC 1000; [1966] 3 SCR 79 relied on. While Explanation 2(v) to section 90Xvi) of the Ad, when it speaks of "all of any rights...in respect of copyright" is more expansive than the DTAA provision, which speaks of the "use of or the right to use" any copyright, when it comes Jo the expression "use of, or the right to use", the same position would obtain under Explanation 2(v) to section 9(1)(vi)of the Ad, inasmuch as, there must, under the licence granted or sale made; be a transfer of any of the rights contained in section 14(a) or (b) of the 1957 Act, for Explanation 2(v) to apply. To this extent, there will be no difference in the position between the definition of royalties" in the DTAAs and the definition of "royalty in Explanation 2(v) to section 90(vi) of the Act. Even f the ambit of " royalty " were considered only under the Act, the definition of royalty in Explanation 2(v) to section 9 (1)(vi) of the Act would make it clear that there has to be a transfer of "all or any rights" which includes the grant of a licence in respect of any copyright in a literary work. The expression 'including the granting of' a licence" in clause (v) of Explanation 2(v) to section 9(i)(vi) of the Act, would necessarily mean a licence in which transfer is made of an interest in rights "in respect of' copyright, namely, that there is a parting with an interest in any of the rights mentioned in section 14(b) read with section 14(a) of the 1957 Act. To this extent, there will be no difference between the position, under the DTAA and Explanation 2 to section 9(i)(vi)of the Act. Explanation 4 to section 9(1)(vi) of the Act was inserted retrospectively to expand the scope of Explanation 2(v). In any case, Explanation 2(v) contains the expression, "the transfer of all or any rights" which is an expression that would subsume "any right, property or information" and is wider than the expression "any right, property or information". CBDT Circular No. 152 dated November 27, 1974 1 cannot apply to explain a position that existed even before section 9(1)(vi) was actually inserted in the Act by the Finance Act, 1976. In so far as section 9(1)(vi) of the Act relates to computer software Explanation 3 thereto refers to computer software for the first time with effect from April 1, 1991, when it was introduced, which was then amended by the Finance Act, 2000. Quite clearly, Explanation 4 cannot apply to any right for the use of or the right to use computer software before the term "computer software" was inserted in the statute. Likewise, even qua section 2(o) of the 1957 Act, the term "computer software' was introduced for the first time in the definition literary work, and defined under section 2(ffc) only in 1994. It is equally Ludicrous for the ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 17 amendment which also inserted Explanation 6 to section 9(i)(vi) of the Act, to apply with effect from June 1, 1976, when technology relating to transmission by a satellite, optic fibre or other similar technology was only regulated by Parliament for the first time through the Cable Television Networks (Regulation) Act, 1995, much after 1976. For all these reasons, it is clear that Explanation 4 to section 9(1)(vi) of the Act is no clarificatory of the position as of June 1, 1976, but in fact, expands that posit ion to include what is stated therein, by the Finance Act, 2012. Notification No, 21 of 2C'12 dated June 13, 2012 being issued after Explanation 4 was inserted could not be invoked to assert that Explanation 4 clarifies the legal position as it always stood. It is only when the non-resident is liable to pay income-tax in India on income deemed to arise in India and no deduction of tax at Source is made under section 195(1) of the Income-tax Act, 1961 or such person has, after applying section 195(2) of the Act, not deducted such proportion of tax as is required, that the consequences of a failure to deduct and pay, reflected in section 201 of the Act, follow by virtue of which the resident-payee is deemed an "assessee in default", and thus, is made liable to pay tax, interest and penalty thereon. Section 194E of the Act belongs to a set of various provisions which deal with tax deduction at source, without any reference to chargeability to tax under the Act of the non-resident assessee. This section is similar to sections 193 and 194 of the Act by which deductions have to be made without any reference to the chargeability of a sum received by a non-resident assessee under the Act. On the other hand, at the heart of section 195 of the Act is the fact that deductions can only be made if the non-resident assessee is liable to pay tax under the provisions of the Act in the first place. GE INDIA TECHNOLOGY CENTRE (P.) LTD. V. CIT 120101 327 ITR 456 (SC) explained. PILOM v. CIT 120201425 ITR 312 (SC) explained and distinguished. The "person" spoken Of in section 195(1) of the Art is liable to make the necessary deductions only if the non-resident is liable to pay tax as an asses-see under the Act, and not otherwise. The tax deductor must take into consideration the effect of the DTAA provisions. Thus the charging and machinery provisions contained in sections 9 and 195 of the Act are interlinked. The per- son liable to deduct tax is only liable to deduct tax first and foremost if the non- resident person is liable to pay tax, and second, if he is so liable, he is liable to deduct tax depending on the rate mentioned in the DTAA. GE INDIA TECHNOLOGY CENTRE (R) LTD. v. CIT [20101 327 ITR 456 (SC) and VODAFONE INTERNATIONAL HOLDINGS B. V. V. UNION OF LNDJA [20121 341 ITR 1 (SC) relied on. The argument based on article 30 of the Double Taxation Avoidance Agreement between India and the United States of America that the DTAA's provisions in these cases would not apply at all, inasmuch as the provisions relatable to deduction of tax at source under section 195 of the Act do not refer to tax at all, but are deductions that are to be made before assessments to tax are made, would Lead to absurd consequences. Article 30 cannot be read out of context. The logic behind article 30 of the DTA.4 is for reasons connected ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 18 with the municipal taxation laws of the United States of America and has nothing to do with Indian municipal law governing the liability of persons to deduct tax at source under section 195 of the Income-tax Act. This is reinforced by the fact that the OECD Commentary on articles 30 and 31 acknowledges the fact that the "entry into force" provisions, unlike the rest of the provisions in the OECD Mode! Tax Convention on Income and on Capital, depend on the domestic laws of contracting States. Persons are not obligated to do the impossible, i.e., to apply a provision of a statute when it was not actually and factually on the statute book. Thus the "person" mentioned in section. 195 of the Act cannot be expected to do the impossible, namely, to apply the expanded definition of "royalty" inserted by Explanation 4 to section 9(1 Xvi) of the Act, Or the assessment years. at a time when such Explanation was not actually and factually in the statute. CIT v. NGC NETWORKS (INDIA) Pvt Ltd, 120211432 ITR 326 (Born) approved. After the 1999 amendment of section 141))(ii) of the 1957 Act, what is con- spicuous by its absence is the phrase "regardless of whether such copy has been sold or given on hint on earlier occasions ". This is a statutory recogni- tion of the doctrine of first sale or principle of exhaustion. The doctrine of first sale or principle of exhaustion is dependent, in the first place, upon legislation which either recognises or refuses to recognise the doctrine (thereby continuing to vest distribution rights in the copyright owner, even beyond the first sale of the copyrighted work). The language of section 14(b) of the 1957 Act makes it clear that it is the exclusive right of the owner to sell or to give on commercial rental or offer for sale or for commercial rental any copy of the computer programme". Thus, a distributor who purchases computer software in material form and resells it to an end-user cannot be said to be within the scope of the provision. The safe or commercial rental spoken of in section 14(b)(ii) of the 1957 Act is of "any copy of a computer programme", making it clear that the section would only apply to the making of copies of the computer programme and then selling them, i.e., reproduction thereof for sale or commercial rental, The object of section 14(b)(ii) in. the context of a computer programme, is to interdict reproduction of the computer programme and consequent transfer of the reproduced computer programme to subsequent acquirers or end-users. Thus, any sale by the author of a computer software to a distributor for onward sale to an end-user, cannot possibly be hit by the provision. Further, the distributor cannot use the computer software at all and has to pass on the software, as shrink-wrapped by the owner, to the end-user for a consideration., the distributor's profit margin being that of an intermediary, who merely resells the same product to the end-user. WARNER BROS. ENTERTAINMENT INC. V. SANTOSH V. G. [20091 SCC OnLine Del 835 approved. ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 19 Double Taxation Avoidance Agreements entered into by India with other contracting States have to be interpreted liberally with a view to implement the true intention of the parties. The Agreements have, as their starting point, either the OECD Model Tax Convention on Income and Capital or the United Nations Model Double Taxation Convention between Developed and Developing Countries in so far as the taxation of royalty for parting with copyright is concerned. The OECD Model Tax Convention speaks of the importance of the OECD Commentary. The term "royalties" is defined in all the DTAAS in a manner either identical with or similar to the definition con tamed in article 12 of the OECD Model Tax Convention. The OECD Commentary on royalty payments under article 12 states that in a transaction where a distributor makes payments to acquire and distribute software copies (without the right to reproduce the software), the rights in relation to these acts of distribution should be disregarded in analysing the character of the transact ion for tax purposes. Payments in these types of transactions would be dealt with as business profits. From the positions taken by India (in the capacity of an OECD non-member) with regard to article 12 of the OECD Model Tax Convention and the OECD Commentary, which use the language "reserves the right to" and "is of the view that some of the payments referred to may constitute royalties", it is not at all clear what exactly the nature of these positions is. This is in contrast with the categorical language used by India in its positions taken with respect to other aspects ("India does not agree to"). Mere positions taken with respect to the OECD Commentary do not alter the DTAA 's provisions, unless the latter are actually amended by way of bilateral re- negotiation. The OECD Commentary on article 12 of the OECD Model Tax Convention incorporated in the DTAM will continue to have persuasive value as to the interpretation of the term "royalties" contained therein, DIT v. NEW SKIES SATELLITE BV 120161382 ITR 114 (Delhi) approved. Persons who deduct tax at source and assessees in the nations governed by a DTAA have a right to know exactly where they stand in respect of the provisions that govern them. Such persons and asses - sees can place reliance upon the OECD Commentary for provisions of the OECD Model Tax Convention, which are used without any substantial change by bilateral DTAAs, in the absence of judgments of municipal courts clarifyiing them, or in the event of conflicting municipal decisions. From this point of view also, the OECD Commentary is significant, as the contracting States to which the persons deducting tax and the assessees belong, can conclude business transactions on the basis that they are to be taxed either on income by way of royalties for parting with copyright, or income derived from licence agreements which is then taxed as business profits depending on the existence of a permanent establishment in the contracting State. The HPC Report 2003 and the E-Commerce Report 2016 submitted to the Government of India are recommendatory reports expressing the views of the committee members, ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 20 which the Government of India may accept or reject. When it comes to DTAA provisions, even if the position put forth in these reports were to be accepted, a DTAA would have to be bilaterally amended before any such recommendation can become law in force for the purposes of the Act. On appeals arising in four categories of cases (a) cases in which computer software was purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer; (b) cases where resident Indian companies were distributors or resellers, purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling it to resident Indian end- users (c) cases where the distributor was a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resold it to resident Indian distributors or end-users; and d) cases where the computer software was affixed onto hard ware and sold as an integrated unit or equipment by foreign, non- resident suppliers to resident Indian distributors or end-users, on the question. whether amounts paid in/ the persons resident in India to non- resident, foreign-n software suppliers, amounted to royalty, and whether it constituted taxable income deemed to accrue in India under section 9(I)(vi) of the Income-tax Act, 1961 thereby making it incumbent upon all such persons to deduct tax at source and pay such tax deductible at source under section. 195 of the Act; Held, (i) that in all these cases, the licence" that was granted under the end- user licence agreement, was not a licence in terms of section 30 of the 1957 Act, which transferred an interest in all or an of the rights contained in sections 14(a) and 14(b) of the 1957 Act, but a licence" which imposed restrictions or conditions for the use of computer software. Thus, none of the end user licence agreements was referable to section 30 of the 1957 Act, inasmuch as section 30 'that Act spoke of granting an interest in any of the rights mentioned in sections 14(a) and 14(b) of that Act. The end-user licence agreements did not grant any such right or interest, least of all a right or interest to reproduce the computer software , In fact, such reproduction was expressly interdicted, and it was also expressly stated that no vestige of copyright was at all transferred, either to the distributor or to the end-user. What was "licensed" by the foreign, non-resident supplier to the distributor and resold to the resident end-user, or directly supplied to the resident end- user, was in fact the sale of a physical object which contained an embedded computer programme, and was therefore, a sale of goods The distributors resold shrink-wrapped copies of the computer programmes already put in circulation &y foreign, non-resident suppliers and manufacturers, since they had been sold and imported into India via distribution agreements and they were thus not hit by section 14(a)(ii) of the 1957 Act, The end-user licence agreements conveyed title to the material object embedded with a copy of the computer software to the distributors or end-users. The distribution of copy- righted computer software, on the facts, would not constitute the grant of an interest in cop, right under section 14(b)(i0 of the 1957 Act, thus necessitat- ing the deduction of tax at source under section 195 of the Income-tax Act, ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 21 1961. TATA CONSULTANCY SERVICES V. STATE OF ANDHRA PRADESH [2004] 271 ITR 401 (SC); [2004] 137 SIC 620 (SC) relied on. (ii) That given the definition of "royalties' contained in article 12 of the DTAAs there was no obligation on the persons mentioned in section 195 of the Act to deduct tax at source, as the distribution agreements and end-user licence agreements did not create any interest or right in such distributors or end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Act which deal with royalty, not being more beneficial to the assessees, had no application in the facts of these cases. The amounts paid by resident Indian end-users or distributors to non-resident computer software manufacturers or suppliers, as consideration for the resale or use of the computer software through end-user licence agreements or distribution agreements, was not royalty for the use of copyright in the computer software, and did not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Act were not liable to' deduct any tax at source under section 195 of the Act. Decision of the Delhi High Court in CIT v. ALCATEL LUCENT CANADA [2015] 372 ITR 476 (1.)(Delhi) affirmed. Decisions of the Karnataka High Court in CIT v. SAMSUNG ELECTRONICS Co. Ltd. 12012J 345 ITR 494 (Karn) and CIT v. SUNRAY COMPUTERS P. LTD. [2012] 348 ITR 196 (Karn) and ruling of the Authority for Advance Rulings in CITRIX SYSTEMS ASIA PACIFIC Pry. LTD., In re (2012] 343 ITR 1 (AAR) reversed. The real nature of the transaction must be looked at upon reading the agreement as a whole. 7.6. In view of the above, the ground No.1 raised by the Revenue is hereby dismissed. 8. The ground Nos. 2 & 3 raised by the Revenue are challenging the deletion of disallowance u/s.14A of the Act for the A.Y.2012-13. 8.1. We find that assessee had claimed an amount of Rs.53,70,92,090/- as dividend income exempt u/s.10(34) of the Act. The assessee made ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 22 voluntary disallowance of expenses of Rs.51,58,068/- in the return of income. The ld. AO merely observed that he was not satisfied with regard to the correctness of the claim of expenditure made by the assessee and directly applied the computation mechanism provided in Rule 8D(2) of the Income Tax Rules and made disallowance as under:- i) Under Rule 8D(2)(i) - Rs.51,58,068/- ii) Under Rule 8D(2)(ii) - Rs.85,38,991/- iii) Under Rule 8D(2)(iii) - Rs.14,58,97,513/- Total Rs.15,95,94,572/- Less voluntary disallowance - Rs. 51,58,068/- made by the assessee ============= Amount disallowed u/s.14A Rs.15,44,36,504/- ============= 8.2. We find that assessee had duly given the basis of its voluntary disallowance of Rs.51,58,068/- before the ld. AO together with explanation thereon. The assessee had also submitted before the ld. AO that it has sufficient interest free funds in its kitty for making investments and accordingly, in view of the decision of the Hon‟ble Jurisdictional High Court in the case of Reliance Utilities and Power Limited reported in 313 ITR 340, no disallowance of interest need to be made for the purpose of earning exempt income. The assessee also gave an explanation with regard to the details of various interest paid by it together with the purpose of borrowing and its utilization for the purpose of business and categorically stated that the same were not related for investment activity of the assessee. None of these submissions were even addressed by the ld. AO and the ld. AO without recording any satisfaction as to how the disallowance made by the assessee voluntarily in the return of income u/s.14A of the Act amounting to Rs.51,58,068/- was incorrect, erred in directly proceeding to make ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 23 disallowance under Rule 8D(2) of the Rules. We find that it is the duty of the ld. AO to record objective satisfaction with cogent reasons as to why the voluntary disallowance made by the assessee is incorrect having regard to the accounts of the assessee. Without recording such objective satisfaction with cogent reasons, the ld. AO cannot proceed directly to apply the computation mechanism provided in Rule 8D(2) of the Income Tax Rules and make disallowance u/s.14A of the Act. This issue is also addressed by the decision of the Hon‟ble Apex Court in the case of Maxopp Investments reported in 402 ITR 640. Hence, the disallowance made by the ld. AO u/s.14A of the Act has been rightly deleted by the ld. CIT(A) for want of recording of objective satisfaction with cogent reasons. Accordingly, the ground Nos. 2 & 3 raised by the Revenue for the A.Y.2012-13 are hereby dismissed. 9. The ground No.5 raised by the Revenue for the A.Y.2012-13 is challenging the deletion of disallowance of payment made towards Tata Brand equity subscription which was treated as capital expenditure. 9.1. We have heard rival submissions and perused the materials available on record. We find that assessee had incurred an expenditure in respect of payment towards Tata brand equity and claimed the same as „business expenditure‟ u/s37(1) of the Act. The assessee had made payment towards subscription fee for carrying out normal business activities of the company. The assessee submitted that the Tata brand always belong to Tata Sons and accordingly, the assessee has made payment to Tata Sons after due deduction of tax at source u/s.194J of the Act. The assessee also submitted that this payment is required to be made annually by all the subscribee‟s to Tata Sons towards subscription on the basis of their profitability. There is no question of capitalizing this expenditure as it is a recurring payment by the ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 24 assessee. The ld. DR vehemently relied on the order of the ld. AO. 9.2. We find that this Tribunal in assessee‟s group concern‟s case of Tata Autocomp Systems Ltd., vs. ACIT in IT (TP)A No.7596/Mum/2012 for A.Y.2008-09 dated 12/06/2013 had addressed very same issue. The decision rendered thereon shall apply mutatis mutandis to this appeal except with variance in figures. The relevant operative portion of the Tribunal order dated 12/06/2013 referred to supra is reproduced hereunder:- 2. The issue raised in ground No. 1 relates to the disallowance of ₹ 32,42,666/- made by the A.O. on account of payment made by the assessee to M/s Tata Sons Ltd. on account of subscription towards “TATA” brand equity and business promotion scheme. 3. The assessee in the present case is a company which is engaged in the business of providing services to the global automotive industries. The return of income for the year under consideration was filed by it on 30-9-2008 declaring total income of ₹ 51,05,63,935/- which was subsequently revised to ₹ 52,34,36,910/-. In the profit and loss filed along with the said return, an amount of ₹ 32,42,666/- was debited by the assessee on account of subscription paid to Tata Sons Ltd. towards TATA brand equity and promotion scheme. While justifying its claim for the said payment, the following submissions were mainly made on behalf of the assessee before the A.O:-  “By entering into the agreement, the assessee became entitle to use and associated itself with TATA name, marks and marketing Indica for the company’s products and services.  The Tata Sons Ltd., protects and enforces the collective image and goodwill of the Tata Group, organize corporate identity, coordinate major campaign involving promotion and development of Tata name, engage the service of specialist and professional consultants for energizing and enhancing the overall Tata brand etc.  By entering into the agreement, Tata Sons Ltd. had granted non exclusive and on assignable subscription to use TATA name and marketing Indica.  The assessee justified the payment stating that the main goal to formulate the scheme was to justify a diverse and diffuse enterprise and make it capable of facing the challenge from international brand names, post liberalization. ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 25  The assessee company has derived huge benefits in the form of increase sales and also other operational efficiencies.  In the past assessment years the similar payment has been allowed as deduction. The Assessee relied on the decision in the case of Radhasoami Satsang Vs. CIT (1992)193 ITR 321(SC)”. 4. The A.O. did not find merit in the above submissions made by the assessee on this issue for the following reasons given in the assessment order:-  “The assessee company was incorporated on 17.10.1995 with the name Tata Autocomp Systems Ltd. Therefore, the assessee company had been using the name TATA since then. It is not a case where prior permission was required to use the “TATA” name at the time of incorporation.  The aforesaid arrangement of payment of subscription towards brand equity was entered only on 04.06.2001 i.e. more than five years after the incorporation. By using TATA word in its name since then itself gives the assessee right to use TATA brand.  Further, it is seen that the major holding (74%) of the assessee company is with Tata Industries Ltd. Tata Motors Ltd, and Tata Sons Ltd. All these three  companies have been using the name TATA since long.  As regards assessee’s submission that the similar claim had been allowed in past, it may be noted that this particular issue was never examined in past. Further, perpetuity of a mistake cannot be allowed to continue. Since, this issue had never been examined in past and had been allowed without any verification, with due respect to the ratio of the decision in the case of Radhasoami Satsang Vs. CIT (1992) 193 ITR 321 (SC), it is submitted that the same is not applicable to the present case.  The similar issue is involved in the case of Tata Chemical Ltd. a group company of the Tata Group wherein, DRP have confirmed the proposed addition on the ground of disallowance of brand equity subscription. For the reasons given above, the A.O. proposed disallowance of ₹ 32,42,666/- on account of subscription paid by the assessee to Tata Sons Ltd. in the draft assessment order against which objection was filed by the assessee before the DRP. The DRP found the objection of the assessee to be unsustainable keeping in view that a similar issue was being agitated by the Department at various appellate forums. Consequently, final disallowance of ₹ 32,42,666/- was made by the A.O. on this issue. ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 26 5. We have heard the arguments of both the sides and also perused the relevant material available on record. The ld. counsel for the assessee, at the outset, has invited our attention to the copy of relevant agreement entered into by the assessee company with Tata Sons Ltd. on 4th June, 2001 placed at assessee’s paper book page No. 207 to 225 in order to point out the obligation of Tata Sons to look after the entire brand of TATA group. The said obligation being relevant in the present context are extracted below from page No. 210 and 212 of the assessee’s paper book:- “a) To protect and promote the interests generally of the Subscriber both in India and abroad. To this end, the Subscriber hereby authorizes the Proprietor to act on its behalf in protecting and enforcing the collective image and goodwill of the Group and preventing any newly developed mark or symbol from being usurped and/or diluted in any way. b) To organize periodically as may be deemed necessary corporate identity and brand promotional activities and campaigns through various media including electronic /telecommunication/satellite communication media (e.g. TATA Website) etc. printing and publishing of promotional material and such other activities as in the opinion of the Board of Directors of the Proprietor Company, will enhance the TATA Brand Equity and correspondingly benefit the business of the Subscriber. c) To co-ordinate major campaigns involving the promotion and development of the Business Name Marks and Marketing Indica. d) to engage the services of specialist agencies both National and International as the need may be to energise and enhance the Overall TATA Brand Equity which eventually could result in a greater market share for the products and services of the Subscriber and help in the preservation and vindication of the trust and confidence reposed by customers, business associates, stockholders and the society in general. e) To engage profession consultants for conducting industry/organizational studies/research for the formulation of Group business strategies and policies that would assist the subscribing companies to emerge as business leaders in the evolving markets. f) For the attainment of the overall objectives of the TATA Brand Equity & Business Promotion Scheme and interacting closely with the participating TATA Companies in a certainly coordinated manner, engage and set up a team of senior personnel and/or advisors/consultants and/or specialists firms as well as provide them with the necessary supporting staff and facilities to perform their functions. g) To take steps to make available a pool of sharable resources of the TATA Group including managerial talent trained in TATA values to the Subscriber. h) To provide necessary guidance to the Subscriber in order to ensure appraise the performance of the Subscriber in various areas of its activity and to guide and assist the Subscriber in the attainment of higher standards of quality of its products, services and management. i) To adopt the JRD Quality Value and/or other such process as a means of appraise the performance of the Subscriber in various areas of its activity and ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 27 to guide and assist the Subscriber in the attainment of higher standards of quality of its products. Services and management. j) To provide such support and assistance to the Subscriber as the Board of Directors of the Proprietor Company may consider necessary in certain circumstances including securing the support of Group companies to the extent and in a manner permissible under the prevalent laws. k) to encourage support to the Subscriber’s business from Group companies subject to the availability of products and services of a desirable quality at competitive rates. l) to undertake activities which in the opinion of the Board of Directors of the Proprietor Company are essential for the purpose of promoting, developing, maintaining, managing and legally protecting the Business Name, the Marks and Marketing Indica in India and abroad and thereby endeavor to promote the business of the Subscriber to achieve greater profitability and enhancement of stakeholder value. m) To undertake measures to preserve the stability of the management of the Subscriber in order to protect the larger interests of its stakeholders. n) To provide resources for availing services in the areas of 1. Financial and Strategic Management. 2. Legal and Economic matters. 3. Management Develop0ment and Human Resources. 4. Corporate Communications. 5. Community Services. o) For the purposes of promoting the business of the Subscriber to provide assistance in accessing the network of domestic and international business contacts and availing the services of the domestic and overseas offices of the Proprietor and the Group Companies. p) To institutionalise mechanisms to share and propagate best management practices amongst the Subscribing companies. q) To manage and supervise the implementation of the Scheme and ensure compliance with the terms of this Agreement and the Code”. The ld. counsel for the assessee has also invited our attention to the relevant portion of the agreement dtd 4th June, 2001 at page 218 containing subscription clause whereby the assessee was obliged to pay the subscription at the stipulated rate to Tata Sons Ltd. for the services rendered in connection with maintaining and promoting the entire brand and image of TATA group. 6. As further submitted by the ld. counsel for the assessee, M/s Rallis India Ltd., another company belonging to TATA group had also entered into a similar agreement with M/s Tata Sons and the subscription paid as per the said agreement towards TATA brand equity and business promotion scheme was disallowed by the A.O. The ld. CIT(A), however, allowed the same and the Tribunal vide its order dtd. 30-8-2011 passed in ITA No. 5701/Mum/2008 for ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 28 A.Y. 2004-05 upheld the order of the ld. CIT(A) on this issue. The copy of the said order is placed on record at page 1 to 21 of the compilation of the judgments filed by the ld. counsel for the assessee and a perusal of the same shows that a similar issue was decided by the Tribunal in favour of the assessee by agreeing with the view of the ld. CIT(A) that the payment in question not only permitted the use of TATA name but also gave an opportunity to the assessee to inform the business world that it was having the back up of excellence, with a code of conduct and a promise of quality. It was held that the fact that the TATA group was already having an infrastructure and brand equity was well established and by making such a contribution, the assessee company was benefited in its day-to-day business. The Tribunal also found that a similar issue was decided in favour of the assessee in case of Harrisons Malayalam reported in 19 SOT 363 wherein the payment made for acquiring non-exclusive licence to use the logo for the purpose of business was held to be allowable u/s 37(1) of the Act being the expenditure wholly and exclusively incurred for the purpose of business. It is pertinent to note that in the case of Tata Steel, another company belonging to TATA group, a similar subscription paid by the assessee company to Tata Sons Ltd. was proposed to be disallowed by the A.O. in the draft assessment order for A.Y. 2008-09 and when the assessee objected to the said disallowance before the DRP by relying on the decision of the Tribunal in the case of Rallis India Ltd. (supra), the DRP directed the A.O. to allow the said expenditure after verifying as to whether the department has accepted the said decision of the Tribunal. On verification, the A.O. found that no appeal was filed by the department against the order of the Tribunal passed in the case of Rallis India Ltd. giving relief to the assessee on the issue of brand equity subscription and accordingly he allowed similar subscription paid by Tata Steel Ltd. in the final assessment completed u/s 143(3) r.w.s. 144-C of the Act vide order dtd. 27-11-2010. It is thus clear that this issue is squarely covered in favour of the assessee by the decision of the co-ordinate Bench of this Tribunal in the case of Rallis India Ltd. which has also been accepted by the department. Respectfully following the said decision of the Tribunal, we delete the disallowance made by the A.O. on account of subscription paid by the assessee to Tata Sons Ltd. towards brand equity and promotion scheme and allow ground No. 1 of assessee’s appeal. 9.3. Respectfully following the same, we find no infirmity in the order of the ld. CIT(A) allowing the said expenditure as a Revenue expenditure. Accordingly, the ground No.5 raised by the Revenue for the A.Y.2012-13 is dismissed. 10. The ground No.6 raised by the Revenue is challenging the deletion of disallowance of expenditure on commission paid to non-residents which was disallowed for non-deduction of tax at source u/s.40(a)(i) of the Act. ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 29 10.1. We have heard rival submissions and perused the materials available on record. We find that assessee always submitted that it had made payment of commission to non-resident agents who are operating outside India. It was specifically submitted that no part of the agents‟ income arises in India. The payments are remitted directly abroad. The payments are not covered by any of the deeming provisions u/s.9 of the Act and the same is not in the nature of interest, royalty, fees for technical services etc., Accordingly, it was pleaded that the payment of commission to non-resident agents are not chargeable to tax in India u/s.5 r.w.s. 9 of the Act in the hands of the non-residents and hence, there is no obligation on the part of the assessee to deduct tax at source in terms of Section 195(1) of the Act. 10.2. We find that this issue was the subject matter of adjudication in assessee‟s own case for A.Y.2009-10 in IT(TP)A No.5823/Mum/2016 dated 30/10/2019 wherein it was held as under:- 5. We have considered rival submissions and perused the material on record. The facts on record clearly reveal that commission has been paid to non-resident agents located in their respective countries towards services rendered by them in those countries in relation to obtaining export contracts for the assessee. No material has been brought on record by the Assessing Officer to demonstrate that the non-resident agents either have any business connection in India or have PE in India so as to bring the commission payment within the tax net. The factual finding recorded by learned Commissioner (Appeals) that the non- resident agents have rendered the services in their respective countries and do not have either any business connection in India or any PE in India has not been controverted by the Revenue. Further, the nature of payment viz. commission has also not been disputed by the Revenue. That being the case, since the commission paid to the non-resident agents is not chargeable to tax in India at their hands, there is no necessity for the assessee to withhold tax under section 195(1) of the Act on such payment. Accordingly, we uphold the decision of learned Commissioner (Appeals) on this issue. 10.3. Respectfully following the same, the ground No.6 raised by the Revenue for A.Y.2012-13 is dismissed. ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 30 11. The ground No.7 raised by the Revenue is challenging the method of computation of deduction u/s.10AA of the Act. 11.1. We have heard rival submissions and perused the materials available on record. The short issue to be decided in this ground is as to whether the list of items that are subject matter of reduction from export turnover would be liable for reduction from „total turnover‟ also, while computing deduction u/s.10AA of the Act. 11.2. We find that this issue is no longer res integra in view of the decision of the Hon‟ble Jurisdictional High Court in the case of CIT vs. TCS Limited (assessee‟s own case) in Income Tax Appeal No.1778 of 2016 dated 18/03/2019 for A.Y.2005-06, wherein it was held as under:- 10] Coming to the revenue's contention in relation to the computation of benefit of section 10A of the Act, this issue is squarely covered by the judgement of Supreme Court in the case of Commissioner of Income Tax Vs. HCL Technologies, reported in 404 ITR 719. in which the Court held that the total turnover for the purpose of section 10 of the Act cannot be understood as defined for the purpose of section 80 HHE. It was further held that thus the expenses which are to be excluded from the export turnover, would also have to be excluded for the purpose of computing total turnover. 11.3. Respectfully following the same, the ground No.7 raised by the Revenue for A.Y.2012-13 is dismissed. 12. The ground No.5 raised by the assessee is with regard to transfer pricing adjustment made in respect of provision of software consultancy services. The ground No.9 raised by the Revenue for the A.Y.2012-13 is also challenging the transfer pricing adjustment made in respect of provision of software consultancy services in respect of partial relief ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 31 granted by the ld. CIT(A). Hence, both the grounds are taken up together as identical issue is involved. 12.1. We have heard rival submissions and perused the materials available on record. We find that assessee is a leading global information technology consulting services and outsourcing company having worldwide persons for more than 20 years providing consultancy services, developing and maintaining products for customers covering on all matters pertaining to implementation of computer software and hardware system, management of data processing and information systems and data communication systems. Assessee carries out its overseas operations through a web of foreign subsidiaries which act as marketing and sales support companies of assessee. The subsidiaries served as a hub in the realization of the international projects. Client service is carried out by the assessee in India. 12.2. In respect of provision of software, technical and consultancy services, the assessee in its Transfer Pricing Study Report (TPSR) had benchmarked the said transaction by selecting itself as a tested party by adopting Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) with Operating Profit / Operating Cost (OP/OC) as the Profit Level Indicator (PLI) for benchmarking the receipts from the said services. The assessee submitted that it had rendered software development, technical and consultancy services to its Associated Enterprises (AEs) on the basis of specific requests received from them by it. The assessee also submitted that the charges for the services rendered were determined on the basis of mutual negotiation between the parties. The assessee gave a complete description of functions performed, assets employed and risks assumed (FAR analysis) ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 32 while rendering this provision of software, technical and consultancy services. These facts are brought out in detail by the assessee in its TPSR as well as in the order of the ld. TPO vide pages 5-8 of the order. The assessee selected comparable companies wherein the arithmetic mean margin was arrived at 11.28%. The assessee‟s margin for provision of IT services was 34.99%. The assessee in its TP study report mentioned that the margins earned by AE were better than that earned from AEs and non-AEs collectively and accordingly, the transactions were at arm‟s length. 12.3. The assessee also made a comparable analysis in the TP study report to justify that its margin are better than the peers i.e. Wipro, Infosys, HCL Technologies, Patni Computers etc., to state that its transactions are at arm‟s length. The ld. TPO used the same set of comparables as were used by him in assessee‟s own case for A.Y.2006-07 and considered the AEs as the tested party. The ld. TPO selected companies based in US and considered the same set of US companies as comparable to all other AEs operating in different geographic region. The ld. TPO also computed the margins from the consolidated financials of the said comparable companies instead of looking into stand alone financials. The assessee state that the said comparable companies have got significant related party transactions and there is a huge difference in the scale of operations and hence not comparable with that of the assessee. However, these provisions were not considered and ultimately, the ld. TPO processed to make an adjustment of Rs.946,91,61,694/- and made an upward adjustment thereon. 12.4. The ld. CIT(A) upheld the action of the ld. TPO in taking AE as the tested party. Further the ld. CIT(A) analysed each of the comparable ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 33 companies and provided detailed reasons for either inclusion or exclusion thereon. The ld. TPO was also provided an opportunity to perform the comparable selected by the ld. CIT(A). Both the parties before us agreed that all the aspects of this TP adjustment has been duly considered by this Tribunal in assessee‟s own case for A.Y.2009-10 in ITA No.5713/Mum/2016 and IT(TP)A No.5823/Mum/2016 dated 30/10/2019. “20. We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. From the grounds raised by the Revenue, the following three issues arise for consideration - (i) what should be the appropriate PLI; (ii) whether cost of outsourcing / sub-contracting to the TCS should be considered for computing the margin; and (iii) whether the alternative benchmarking furnished by the assessee by treating the AEs as tested party with comparables in the same geographical locations is acceptable. On a careful perusal of the facts on record as well as submissions of the learned Counsel for the parties in the course of hearing as well as in the written note, we are of the view that the decision of learned Commissioner (Appeals) on the aforesaid issues are unassailable. As regards the issue of appropriate PLI, we are of the view that considering the nature of activity performed by the assessee as well as the AEs, it cannot be said that the A.Es are not bearing any risk. Rather the facts on record reveal that the AEs performed the role of risk bearing distributors. It is well brought out by learned Commissioner (Appeals) in his order that the AEs are bearing credit risk and risk of default by client. In fact, the assessee through proper evidences has demonstrated instances where the credit risk with reference to part cancellation of contract has been borne by the AEs without compensation from the assessee. The documentary evidences in this regard furnished by the assessee were thoroughly examined not only by learned Commissioner (Appeals) but they were also produced before us. Thus, from the aforesaid facts, it becomes clear that significant marketing functions are being performed and distribution and marketing risk are being taken by the AEs. On examination of the financials of the subsidiaries it is revealed that some subsidiaries are still making loss at net level which signifies that some risk is being borne by the AEs. It has further been brought on record that the manpower base of AEs performed various functions relating to marketing as well as client co-ordination. The AEs have developed sufficient competency to handle the marketing work independently. The entire contract related work is performed by the AEs, though, in cooperation with the assessee. Thus, it is quite natural that for being a sufficiently motivated work force, the AEs are compensated at return on sales and not merely on value added costs. Therefore, learned Commissioner (Appeals) was justified in directing the Transfer Pricing Officer to adopt the PLI of gross margin on sales. As regards consideration by the Transfer Pricing Officer, the outsourcing / sub- contracting cost to assessee as a pass through cost, learned Commissioner (Appeals) was absolutely correct in observing that the decision of the Transfer Pricing Officer to exclude such costs while computing the margin of the AEs is ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 34 incorrect. When similar cost incurred by the comparables were not excluded while computing their margin, a different treatment cannot be given to such costs in case of the AEs. Certainly, the aforesaid approach of the Transfer Pricing Officer has resulted in distorting the correct PLI of the AEs. In the aforesaid context, the observations of learned Commissioner (Appeals) are appreciable, wherein, he has observed that the PLI of the AEs and PLI of comparables have not been computed on similar lines by the Transfer Pricing Officer, hence, comparability condition fails. It is further relevant to observe, the alternative benchmarking furnished by the assessee before the Transfer Pricing Officer by considering the AEs in different geographic locations as tested parties with the comparables selected on the basis of the respective geographic locations furnished before the Transfer Pricing Officer were not properly considered. However, in course of appeal proceedings, the learned Commissioner (Appeals) examined them in detail and after a detailed analysis approved some comparables selected by the assessee and also added some new comparables. Whereas, the comparable selected by the Transfer Pricing Officer were not on the basis of any detailed search process. At least, no such analysis is either forthcoming from the order of the Transfer Pricing Officer or could be brought to our notice by learned Departmental Representative. On the contrary, on a thorough and careful reading of the impugned order of learned Commissioner (Appeals), we are of the view that learned Commissioner (Appeals) has taken pains to examine in detail the alternative benchmarking done by the assessee with foreign comparables and after detailed analysis has shortlisted the final comparables to be considered for comparability analysis. No convincing argument or evidence has been brought on record by the learned Departmental Representative to persuade us to disturb the finding of learned Commissioner (Appeals) on these issues. In view of the aforesaid, we do not find any merit in the grounds raised by the Revenue on the issues. Accordingly, grounds are dismissed. 12.5. Hence, the ground No.5 raised by the assessee and ground No.9 raised by the Revenue are disposed off in the above mentioned terms. 13. The ground No.6 raised by the assessee is challenging the transfer pricing adjustment made in respect of provision of loans to Associated Enterprises (AEs). 13.1. We have heard rival submissions and perused the materials available on record. We find that assessee had provided loans to its Associated Enterprises as under:- ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 35 S. No. Name of the Associated Enterprise (AE') Currency Denomination extended prior to subject AY Loan given during the year Loan repaired/ converted to equity during the year Amount outstanding as on 31 March 2012 1 TCS Iberoamerica USD 59,140,000 Nil 49,740,000* 9.400,400 2 FNS Australia AUD 46,500,000 Nil Nil 46,500,000 3 TCS Morocco USD 1,163,835 Nil Nil 1,163,835 * USD 49,740,000 converted to equity during the year. 13.2. The ld. TPO disregarded the commercial rationale for the loans and the fact that the said loans were provided, to enable the AEs to pay the consideration for acquisition of downstream subsidiaries or as quasi equity and further infusion of capital by the AEs into other companies as well as entering into joint ventures with overseas parties. The TPO disregarded the fact that the said loans were to achieve an optimal funding structure to facilitate acquisitions, the strategic decision of which was taken by the assessee, being the parent company of the group. 13.3. The assessee gave explanation that purpose of extending loans to the aforesaid parties are as under:- I. TCS Morocco SARL AU ("TCS Morocco") a. Loan outstanding as on 1st April, 2011 to TCS Morocco USD 1,163,835. During the year under consideration, there is no further amounts advanced to the TCS Morocco.: Particulars Date Amount in USD Opening Balance l-Apr-09 1,163,835 Loan Given Nil Closing Balance 31-Mar-10 1,163,835 b. The appellant had provided this loan as a part of the working capital requirements of the AE and with a vision to generate more revenues from this entity / region. We would further ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 36 like to submit that during FY 2009-10, a part of the loan, amounting to USD. 1,799,500 were converted equity. c. However, given difficult business conditions prevailing in the AE's jurisdiction for growth, TCS Morocco was in the process of being voluntarily liquidated from FY 2011 -12 onwards and was finally liquidated on 30 th May 2014. An amount of USD 253,350 was received by TCS India from TCS Morocco in January 2014 and the balance amount of the loan of USD 9! 0,485 was written off in September 2014. Copy of board resolution and certificate of liquidation are attached as Annexure 25.1 and 25.2. II. TCS Iberoamerica SA ("TCS Iberoamerica") • a. TCS Iberoamerica is a wholly owned subsidiary of the Appellant which acts as the regional holding company i. e. the operating entities in the South America region are held by TCS Iberoamerica. Loan outstanding as on l sl April, 2011 to TCS Iberoamerica USD 59,140,000. During the year under consideration, there is no further amounts advanced to the TCS Iberoamerica. Particulars Date Amount in USD Opening Balance 1-Apr-ll 59,140,000 Conversion into Equity 1-Oct-ll 49,740,000 Closing Balance 31-Mar-12 9,400,000 b. The appellant had provided this loan as a part of the working capital requirements of the AE and with a vision to generate more revenues from this entity / region. Further we would like to submit that out of the amount outstanding as on 1 April, 2011. loan amounting to USD -I9. 7 40,000 were converted into equity during the year and balance amounting to USD 9.-^00,000 were converted in loan during FY 2012-13. Copies of board resolution for conversion are attached as Annexure 26.1 and 26.2. This substantiates our contention that the said loan is quasi equity in nature. (Explained in greater detail below). III. TCS FNS Pty Limited ("FNS Australia") a. The appellant has given this loan to support its AB, FNS Australia to acquire and run the business of a downstream subsidiary i.e. in the nature of infusion to equity/ quasi equity. Loan outstanding as on 1 s1 April, 2011 to FNS Australia AUD 46,500,000. During the year under consideration, there is no further amounts advanced to the FNS Australia. Particulars Date Amount in USD Opening Balance 1-Apr-11 46,500,000 Loan given Nil Closing Balance 3 1 -Mar- 12 46,500,000 The assessee has given this loan to support its AE, FNS Australia to acquire and run the business of a downstream subsidiary i.e. in the nature of infusion to equity / quasi equity. Further, we would like to submit that out of the amount outstanding as on 31 March, 2010, ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 37 during FY 2012-13, a loan amounting to AUD 36,258,815/-, which consist major portion of loan was converted into equity capital. Copy of board resolution for conversion is attached as Annexure 27. Which is further substantiating the quasi-equity contention of the Appellant. Further, part of the loan amounting to AUD 1,200,000 was repaid during the FY 2013-14 on different dates. 13.4.The assessee further submitted that it had a strategic plan to expand its presence in the various parts of the globe and accordingly, it had become necessary for it to support its subsidiaries for their growth in addition to growth of the assessee. The assessee also submitted that financial and operational flexibility became necessary to meet the demands of investing and operating in alien countries. Hence, it was prudent on the part of the assessee to invest a portion of its funds in the form of equity and balance in the form of loan. The assessee also submitted that in some countries substantial time is taken to obtain statutory and exchange control approvals to invest by way of equity, wherein the funds are initially infused as loans and later converted into equity. Having regard to overseas investment regulations, existence of barriers to repatriation of equity etc., investment made by way of share holders deposit provided flexibility to assessee to bring back the money in case it is so desired. The assessee specifically pointed out that had such monies not been provided, the assessee could not have acquired these downstream subsidiaries across the world which would have hampered its growth and expansion and long term profitability and sustainability. The assessee also relied on various case laws to drive home the point that it had passed the test of commercial expediency. 13.5. The assessee had charged interest on its loan to its AEs as under:- ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 38 Sr. No. Name of the Associated Enterprise Interest rate Amount (in INR) 1. TCS Iberoamerica 4.00% 105,050,427 2. TCS FNS Australia 5.00% 128,226,042 3. TCS Morocco 4.00% 2,022,136 13.6. The ld. TPO completely disregarded by the submissions of the assessee and proceeded to substitute the interest rate and made transfer pricing adjustment of Rs.8,97,50,607/-. 13.7. We find that this issue has already been addressed by this Tribunal in assessee‟s own case in ITA No.5713/Mum/2016 and IT(TP)A No.5823/Mum/2016 for A.Y.2009-10 dated 30/10/2019 wherein this issue was restored to the file of the ld. AO for denovo adjudication by observing as under:- “37. We have considered rival submissions and perused the material on record. We have also carefully gone through the case law cited before us. Notably, right from the stage of transfer pricing proceeding itself the assessee has taken a stand that loans and advances to the AEs are in the nature of quasi equity, hence, cannot be treated as loan simpliciter. It is relevant to observe, the transfer pricing adjustment made on account of interest is in respect of loans advanced to four overseas AEs. From the details available on record, it is noticed that major portion of loans advanced to TCS Ibero America, is for acquisition of downstream subsidiary and about 20% of the advance was for working capital. Money advanced to TCS FNS Pty. Ltd., Australia, was purely for acquisition of downstream subsidiary. Similarly, advance to TCS Asia Pacific Pty. Ltd., is for acquisition of downstream subsidiary. Only the advance made to TCS Morocco is for working capital requirement. It is further noted, major part of advances made to TCS Ibero America, TCS FNS Pty. Ltd. and TCS Morocco have been converted to equity subsequently. It is also a fact on record that before learned Commissioner (Appeals), the assessee has filed a detailed written submission on 27th March 2014, elaborately discussing the nature of advance made to the AEs and the purpose for which such advances were made. It was submitted by the assessee that the advances made to the AEs were as a part of business strategy and not simply to help ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 39 the AEs with capital infusion. The assessee has advanced detailed argument stating that advances made to the AEs is a shareholder activity and not advancement of loan. In this context, the assessee has referred to OECD Transfer Pricing Guidelines as well as UK and Australian Regulations. It is evident from the impugned order of the learned Commissioner (Appeals), though, he sketchily referred to some of the submissions made by the assessee, however, he has not at all dealt with them in an effective manner. The learned Commissioner (Appeals), though, has observed that the loans advanced were not merely for downstream acquisition but for a variety of purpose including working capital requirement and other business uses, however, he has not elaborated as to for what other purpose loans were advanced. Without properly dealing with the factual aspect of the issue, learned Commissioner (Appeals) has jumped to the legal aspect and has held that the amount advanced by the assessee is in the nature of loan and has to be benchmarked as such. After considering the submissions of the parties and examining the material on record, we are convinced that various submissions made by the assessee before learned Commissioner (Appeals) have not at all been dealt with. The primary contention of the assessee that the advance made to the AEs is in the nature of quasi equity and falls within shareholder's activity has not been properly addressed by the Departmental Authorities keeping in view the ratio laid down in the relevant case laws. It also requires deliberation whether it can be considered as an international transaction under section 92B r/w Explanation-1(c). Since, the aforesaid legal and factual aspects have not been considered properly, we are inclined to restore the issue to the file of the Assessing Officer for de novo adjudication after due opportunity of being heard to the assessee. The Assessing Officer must examine all relevant facts to find out the exact nature of the advances made to the AEs. He should also examine the applicability of the ratio laid down in the case of DLF Hotel Holdings Ltd. (supra) and any other case laws which may be cited before him. The assessee must be afforded reasonable opportunity of being heard. Ground is allowed for statistical purposes.” 13.8. Respectfully following the same, the ground No.6 raised by the assessee is allowed for statistical purposes. 14. The ground No.7 raised by the assessee is challenging the transfer pricing adjustment made in respect of provision of guarantee. The ground Nos. 10-12 raised by the Revenue for A.Y.2012-13 are also in respect of transfer pricing adjustment made in respect of provision of guarantees in respect of partial relief given by the ld. CIT(A). ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 40 14.1.We have heard rival submissions and perused the materials available on record. We find that assessee during the year under consideration had provided guarantees in the nature of performance, financials and lease for or on behalf of its various AEs. 14.2. The assessee submitted that with respect to performance guarantee, part of the activity was performed by the assessee itself while the remaining services were rendered by the AEs. Accordingly, the ld. CIT(A) appreciated this fact and by following its own order for A.Y.2009-10 held that charges should be levied only on the component of services performed by the AE. 14.3. With respect to lease guarantee which is similar to performance guarantee, the ld. CIT(A) by following its order for A.Y.2012-13 in assessee‟s own case held that charges should be levied only on the portion of lease premises, occupied by the AE. The details of guarantees given i.e performance, financial and others are tabulated in page 32 of the order of the ld. TPO. The ld. TPO made transfer pricing adjustment in respect of guarantee services amounting to Rs.28,74,94,665/- in his order. We find that the entire gamut of this issue has already been addressed by this Tribunal in assessee‟s own case in A.Y.2009-10 in ITA No.5713/Mum/2016 and IT(TP)A No.5823/Mum/2016 dated 30/10/2019 wherein it was held as under:- “43. We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. Insofar as the contention of learned Sr. Counsel for the assessee that provision of guarantee is not an international transaction as per section 92B of the Act, we are unable to accept such contention. In our considered opinion, after introduction of Explanation-(i)(c) to section 92B of the Act, with retrospective effect from 1st April 2002, provision of guarantee to AEs has to be considered as an international transaction. Different Benches of the Tribunal have also expressed similar view on the issue. Therefore, we hold that the provision of guarantee to the AEs is an international transaction. In ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 41 fact, the aforesaid view has been expressed by the Co-ordinate Bench in WNS Global Services Pvt. Ltd. (supra). Therefore, following the aforesaid decision of the Co- ordinate Bench and the decision of the Hon'ble Jurisdictional High Court in Everest Canto Cylinders Ltd. (supra), we direct the Assessing Officer to charge guarantee commission @ 0.5% per annum both on performance / lease guarantee as well as financial guarantee.” 14.4. Respectfully following the same, ground No.7 raised by the assessee and ground Nos.10-12 raised by the Revenue for A.Y.2012- 13 are partly allowed. 15. The ld. AR specifically submitted before us that the legal ground raised by the assessee vide ground Nos. 4.1.1 to 4.1.5. in respect of procedure adopted by the lower authorities are not pressed. Accordingly, the same is reckoned as a statement made from the Bar and the ground Nos. 4.1.1. to 4.1.5. raised by the assessee for A.Y.2012-13 in respect of transfer pricing adjustment are dismissed as not pressed. ITA No.1769/Mum/2018 (A.Y.2013-14) – Assessee Appeal & ITA No.2431/Mum/2018 (A.Y.2013-14) – Revenue Appeal 16. All the grounds and additional grounds raised by the assessee for A.Y.2013-14 are identical with those raised by it in A.Y.2012-13. Hence, the decision rendered hereinabove for A.Y.2012-13 shall apply mutatis mutandis to this assessment year also except with variance in figures. 17. All the grounds raised by the Revenue for the A.Y.2013-14 except ground No.8 in respect of year end provision are identical with those raised by it in A.Y.2012-13. Hence, the decision rendered hereinabove ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 42 for A.Y.2012-13 except ground No.8 shall apply mutatis mutandis to this assessment year also except with variance in figures. 18. Now, we proceed to adjudicate the ground No.8 raised by the Revenue for A.Y.2013-14, wherein the Revenue has challenged the deletion of disallowance of expenditure of Rs.265.56 Crores made u/s.40(a)(ia) of the Act in respect of year end provision both under normal provisions as well as in the computation of book profits u/s.115JB of the Act. 18.1. We have heard rival submissions and perused the materials available on record. We find that assessee had made certain provisions for expenses at the end of the year for which deduction of tax at source has not been made. The ld. AO disallowed the same for non- deduction of tax at source invoking the provisions of Section 40(a)(ia) of the Act both under normal provisions of the Act as well as under the computation of book profits u/s.115JB of the Act. We find that the ld. CIT(A) had deleted the said disallowance by observing as under:- “This is a matter arising for the first time in the case of assessee and has three parts, I, II and III. The Assessing Officer deals with the same in para 14 of assessment order. The genesis of the disallowance under section 40(a)(ia) 1 is remark in Audit Report under section 44AB which is as under: In the opinion of the company , year-end provisions of expenses which are reversed in the subsequent year are not liable for deduction of tax at source as such provisions are made only for the purpose of preparation of annual financial statements in accordance with applicable accounting principles/standards 16. I first take up the part I on the matter of disallowance u/s 40(a)(ia). The Assessing Officer called for explanation of the assessee who stated inter alia that a. Entry concerned is made as per accounting standards and policy b. The person concerned to whom sum is payable is not identifiable from the entry ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 43 c. Tax deduction at source is effected when the person to whom sum payable is identified and thereafter Form 16A is issued. d. Certain case decision is cited The Assessing Officer overruled the assessee and reasons recorded by him included the following: A. Even when sum is credited to suspense account tax deduction at source is to be made B. Bangalore ITAT in case of IBM India Pvt Ltd [TS-305-ITAT-2015(Bang] has stated that even when sum is credited to suspense account tax deduction at source is to be effected and this included provision 17. The matter is examined. The primary requirement to effect disallowance under section 40(a)(ia) is by identifying a default in complying with provision relating to TDS. The explanation before Assessing officer is that provision is created in books in accordance with accounting principle and reversed next year. This is a consistent method of accounting followed by the assessee. Here a provision created by book entry is disallowed by invoking section 40(a)(ia). If at all Assessing Officer had to make a disallowance under section 40(a)(ia) the entry(ies) must be split up by identifying (a) to whom payable (b) whether the sum credited is one where tax is deductible at source (c) under which section tax is deductible at source and (d) whether same exceeds threshold limits specified In section. Identification of violation in respect of specific entry or a set of entries in tax deduction at source was a fundamental exercise keeping in view provisions of XVll-B was the first step before invoking section 40(a)(ia). This exercise is not carried out. As no default in deduction of tax at source is recorded, the question of disallowance does not arise. Hence on this count assessee succeeds on part I of the ground. 18. Part II is the disallowance of whole of the sum created as provisions. The Assessing Officer disallowed the same after recording reasons that",... Even then assessee cannot be a/lowed the deduction of provisions u/s 37 as in such situation provision is nothing but an ac/hoc provision, liability for which has ether not accured or cannot be ascertained ant thus the provision cannot be said to have been laid out or expended wholly and exclusively for the purposes of business". The written submission does not contain a specific comment on this part. In course of hearing, the appellant stated that this is a consistent method where income and expenses are accounted for following the principle of accrual and that this consistent method is disturbed without adequate recording of reasons or analysing facts. 19. I find from the assessment order that the views of appellant is not considered. The decision is taken without examining relevant facts. Verification of annual reports of the company reveal no significant change in accounting policy. The Assessing Officer has made a disallowance merely because provision is created. The disallowance without examining the nature of provision by itself renders it wrong. There are admissible and inadmissible provisions. The disallowance made sans valid reasons has no locus stand/. The heading of the disallowance and the computation statement mentions the ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 44 same as disallowance under section 40(a)(i) 2 which leaves doubt as to whether there is an unambiguous finding regarding eligibility under section 37. As an emphatic finding which is reason based is not; present in the assessment order, the alternate disallowance under section 37 is also held not in order, 20. Part III of the ground is against adding the same in computation of Book Profit under section 115JB. I had deleted the substantive addition on both counts. Keeping in view this decision, the Assessing Officer is directed to recompute book profit under section 115JB. 21. In view of discussion above, he Assessing Officer is directed to delete the addition of Rs 2,655 1 677,983.Parts I, II and III of the ground is disposed of accordingly.” 18.2. We find that provision has been made in the books by the assessee as per the standard accounting practices followed by it and that since the accounts of the company are closed within short period after the end of the year, before which the data or invoice from the concerned vendor was not available with the assessee whereas the services had already been provided by the vendor to the assessee. In respect of these items, the assessee had made provision for expenses in its books as per the applicable accounting standard and as per the generally accepted accounting principles on accrual basis. Since the concerned vendor account is not credited by the assessee they are not identifiable for want of bills, the assessee has credited provision for expenses and had not deducted tax at source for the same, as according to the assessee, only when the party name is identifiable, the provisions of 40(a)(ia) of the Act would come into operation. Accordingly, it pleaded that no liability of TDS could be fastened on the assessee when the payee is not identifiable. We further find that the very same issue has been the subject matter of adjudication of this Tribunal in the case of Mahindra and Mahindra Ltd., vs DCIT in ITA No.8597/Mum/2010 for A.Y.2006-07 dated 2006-07 dated 06/06/2012 wherein this ground has been adjudicated as under:- ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 45 “19.Next ground of appeal is about addition made under section 40a(ia) in respect of year-end provision of Rs.4,25,52,623/-.AO on pages 104 (para23) has discussed the issue as under- "It has been stated by auditors in note for clause 17(f) and auntie 7 (b) of form 3 CD audit report, that company is not detecting the TDS on year end provision as they are of the view that the liability of deducting TDS arises in subsequent year when Bill of the party is booked." 19.1.After considering the submissions made by the appellant AO held that same was not acceptable because expenses under consideration was liable to TDS and were squarely covered by the provisions of chapter XVIIB of the Act. He was of the view that once the assessee was debating the P&L account, it automatically was crediting the party account based on matching principle. 19.2.Before us ,AR submitted that amount in question was year-end accounting provision to book, expenditure incurred, but in respect of which there was no obligation to either pay or to deduct tax at source is because no income had accrued to the payee, that no order had been passed under section 201 of the act holding, the appellant to be an assessee in default. Therefore, no disallowance could be made under section 40a(ia). He referred to page number 265 of the paper-book that gives details of provision on which TDS was not paid. As per the AR bills for the said expenditure were not received during the year under consideration. As per the AR, the appellant company would make year-end provisions based on services rendered by various lenders/professionals. These provisions represented cost of various activities carried out by the company during the relevant financial period. Since, the company was following the Mercantile system of accounting it was required to account for such expenses, even though the concerned parties had not submitted their bills or such bills were pending for approval based on the internal system. At that point of time, since bills from the contractors had not been raised though that was owed by the company in favour of any specific party. Such a debt would be owed only on receipt of the bills and after it had been passed following the procedure. Only at that point of time relationship of debtor and creditor was established and was also an obligation to pay that would amount within the agreed period of time. The obligation, to deduct tax at source from the account of a specific party arose only at the time the bill was passed not before that. Citing the example of audit fees the AR submitted that obligation to pay the fees to the statutory auditors arises only after they complete the statutory audit.He relied upon the decisions of GE India Technology Centre Private Ltd.(327 ITR 456) and Industrial Development Bank of India(107 ITD45) in this regard. DR submitted that work was already carried out for the assessee, that appellant should have deducted tax source. He further submitted that once the amount was debited to profit and loss account provisions of section 40(a)(ia) were applicable. 19.3.We find that the AO has not examined the issue about year-end payments.There is a difference between the payments that are made during the year and the payments made at the fag-end of the year.In our humble opinion in 2nd category of payments tax has been detected in the subsequent year when Bills are booked. In this regard we have also considered the amendment made to Sec.40(a)(ia) by the finance act,2008, with retrospective effect from 1.4.2005.We have also perused the case laws relied upon by the AR.Principles discussed in the said judgement is also support our view that provisions of tax deducted at source were not applicable in case consideration. ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 46 Ground number 19 is decided in favour of the assessee.” 18.3. Respectfully following the same, we find no infirmity in the order of the ld. CIT(A) granting relief to the assessee. Accordingly, the ground No.8 raised by the Revenue is dismissed. 19. To Sum-Up ITA No. A.Y. Appeal By Result 797/Mum/2018 2012-13 Assessee Partly Allowed for statistical purposes 1887/Mum/2018 2012-13 Revenue Partly Allowed 1769/Mum/2018 2013-14 Assessee Partly Allowed for statistical purposes 2431/Mum/2018 2013-14 Revenue Partly Allowed Order pronounced on 11/04/2022 by way of proper mentioning in the notice board. Sd/- (VIKAS AWASTHY) Sd/- (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 11/04/2022 KARUNA, sr.ps ITA No.1769/Mum/2018 and other appeals M/s. Tata Consultancy Services Ltd., 47 Copy of the Order forwarded to : BY ORDER, (Asstt. Registrar) ITAT, Mumbai 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy//