Giesecke & Devrient India Pvt. Ltd., Gurgaon V. DCIT, New Delhi

ITA 3865/DEL/2015

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 1185 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 10 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-05-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Assessment Year: 2010-2011
• Appeal Filed On: 12-06-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Keywords: Capital asset; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Deemed to accrue or arise in india; Retrospective amendment; Non-deduction of tax; Bad and doubtful debts; Capital expenditure; TDS; Set aside
• Section: 271(1)(c); 143(3); 5(2); 234B; 10B; 195; 144C; 208; 9(1); 9(1); 9(1); 73; 13; 22; 92CA; 27

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-1 NEW DELHI BEFORE SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER ITA NO.3865/DEL./2015 ASSESSMENT YEAR: 2010-11 M/S. GIESECKE & DEVRIENT INDIA PVT. LTD., CORPORATE OFFICER-PLOT #57, SECTOR-44, GURGAON VS. DCIT, CIRCLE-10(1), NEW DELHI PAN : AABCG4223D (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI HARPREET SINGH AJMANI, ADV. & SHRI ROHAN KHARE, ADV. DEPARTMENT BY SHRI SURENDER PAL, CIT(DR) DATE OF HEARING 03.02.2020 DATE OF PRONOUNCEMENT 01.05.2020 ORDER PER O.P. KANT, A.M.: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST FIN AL ASSESSMENT ORDER DATED 26/11/2014 PASSED BY THE DEP UTY COMMISSIONER OF INCOME-TAX, CIRCLE-10(1), NEW DELHI [IN SHORT THE ASSESSING OFFICER] PURSUANT TO THE DIRECTION OF THE LEARNED DISPUTE RESOLUTION PANEL (IN SHORT THE DRP) FOR A SSESSMENT YEAR 2010-11. FOLLOWING GROUNDS HAVE BEEN RAISED IN THE APPEAL: A. SOFTWARE DEVELOPMENT SEGMENT [RS.1,94,67,549] 1. ON THE FACTS AND IN LAW, THE LD. TPO/AO AND HON BLE DRP ERRED IN DETERMINING THE ADJUSTMENT OF RS.1,94,67,549/- TO T HE VALUE OF 2 ITA NO. 3865/DEL./2015 INTERNATIONAL TRANSACTIONS PERTAINING TO SOFTWARE D EVELOPMENT SERVICES SEGMENT. 2. THAT ON FACTS AND IN LAW, THE HONBLE DRP AND LD . TPO/AO FAILED TO APPRECIATE THE BUSINESS MODEL AND BUSINESS REALITIE S OF THE APPELLANT AND ITS ASSOCIATED ENTERPRISES (AE) WHI LE CONDUCTING THE TRANSFER PRICING ANALYSIS AND ADOPTED AN ENTIRELY F LAWED APPROACH TO REACH A CONCLUSION THAT THE APPELLANT IS NOT COM PENSATED AT ARMS LENGTH FOR ITS SOFTWARE DEVELOPMENT SERVICES SEGMEN T. 3. ON THE FACTS AND IN LAW, THE LD. TPO ERRED IN NO T DISCHARGING HIS STATUTORY ONUS TO ESTABLISH THAT ANY OF THE CONDITI ONS SPECIFIED IN CLAUSE (A) TO (B) OF SECTION 92C(3) OF THE ACT HAVE BEEN SATISFIED BEFORE DISREGARDING THE ARMS LENGTH PRICE DETERMIN ED BY THE APPELLANT AND PROCEEDING TO DETERMINE THE ARMS LEN GTH PRICE HIMSELF. 4. ON THE FACTS AND IN LAW, THE HONBLE DRP AND LD. TPO/AO HAVE ERRED IN REJECTING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT WITHOUT PROPER JUSTIFICATION AND CONDUCTING A FRESH SEARCH USING ARBITRARY FILTERS FOR IDENTIFYING COMPANIES COMPARA BLE TO THE APPELLANT. 5. ON THE FACTS AND IN LAW, THE LD. TPO/AO AND HON BLE DRP GROSSLY ERRED IN NOT ACCEPTING THE COMPARABLE COMPANIES PRO POSED BY THE APPELLANT, AS THE SAID COMPARABLE COMPANIES MET THE FAR (FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISK ASSUMED) TEST S TATED UNDER RULE 10B(2) OF THE INCOME TAX RULES, 1962 (THE RUL ES) 6. ON FACTS AND INLAW, THE LD. AO/TPO ERRED IN VIOL ATING THE PROVISIONS OF RULE 10B92) OF THE RULES BY INTRODUCING NEW COMP ARABLES WITHOUT CONSIDERING THE DIFFERENCES IN THE FUNCTIONS PERFOR MED, ASSETS EMPLOYED AND RISKS ASSUMED BY SUCH COMPANIES VIS-- VIS THE APPELLANT, THEREBY RESORTING TO CHERRY PICKING OF C OMPARABLES. 7. ON THE FACTS AND IN LAW, THE LD.AO/TPO ERRED IN INCORRECTLY COMPUTING THE OPERATING MARGINS OF THE COMPARABLES COMPANIES BY TREATING CERTAIN ITEMS AS OPERATING/NON-OPERATING. 8. ON THE FACTS AND IN LAW, THE LD. AO/TPO AND HON BLE DRP ERRED IN NOT PROVIDING THE BENEFIT ENVISAGED UNDER SECTION 9 2C(2) OF THE ACT. 9. ON THE FACTS AND IN LW, THE LD. TPO AND LD. AO E RRED IN NOT ALLOWING A RISK ADJUSTMENT TO THE APPELLANT THEREBY CONTRAVE NING THE PROVISIONS OF RULE 10B(1)(E)(III) AND RULE 10B(3) O F THE RULES. 10. ON THE FACTS AND IN LAW THE LD. TPO, LD. AO AND THE HONBLE DRP ERRED IN USING THE DATA FOR THE CURRENT YEAR (I.E. FINANCIAL YEAR 2008- 09) WHICH WAS NOT CONTEMPORANEOUS AND WHICH WAS NOT AVAILABLE IN THE PUBLIC DOMAIN AT THE TIME OF PREPARING THE TP D OCUMENTATION BY THE APPELLANT, THEREBY GROSSLY MISINTERPRETING THE REQUIREMENT OF CONTEMPORANEOUS DATA IN THE RULES TO NECESSARILY IMPLY CURRENT YEAR DATA, THEREBY BREACHING THE PRINCIPLES OF NATU RAL JUSTICE AND IMPOSSIBILITY OF PERFORMANCE. B. SIM CARD ASSEMBLY SEGMENT [RS.3.90,60,721] 11. ON FACTS AND IN LAW, THE HONBLE DRP AND LD. AO /TPO GROSSLY ERRED IN PASSING ANON-SPEAKING ORDER WITHOUT APPRECIATING THE CORRECT 3 ITA NO. 3865/DEL./2015 FACTS AND LEGAL POSITION IN UTTER DISREGARD OF THE PRINCIPLES OF NATURAL JUSTICE. 12. ON THE FACTS AND IN LAW, THE HONBLE DRP AND LD . AO/TPO ERRED IN MAKING AN ADJUSTMENT OF RS.3,90,60,721/- TO THE TOT AL INCOME OF THE APPELLANT ON ACCOUNT OF THE DIFFERENCE IN ARMS LEN GTH PRICE OF THE INTERNATIONAL TRANSACTIONS PERTAINING TO SIM CARD A SSEMBLY SEGMENT. 13. WITHOUT PREJUDICE, ON FACTS AND IN LAW, THE ORD ER OF THE LD. AO/TPO IS ERRONEOUS TO THE EXTENT OF NOT INCORPORATING THE BINDING DIRECTIONS OF THE HONBLE DRP THAT THE TREATMENT OF FOREIGN EX CHANGE GAIN/LOSS SHOULD BE CONSIDERED AS A NON-OPERATING ITEM, WHILE FINALIZING THE ORDER SECTION 143(3) READ WITH SECTION 144C OF THE ACT. 14. WITHOUT PREJUDICE, ON FACTS AND IN LAW, THE LD. AO/TPO AND HONBLE DRP ERRED IN NOT APPRECIATING THAT ADJUSTMENT, IF A NY, IN COMPUTING THE PROFIT MARGIN OF SIM CARD ASSEMBLY SEGMENT OUGH T TO HAVE BEEN RESTRICTED TO INTERNATIONAL TRANSACTION WITH AES A ND NOT THE WHOLE SEGMENT. 15. ON FACTS AND IN LAW, THE HONBLE DRP AND LD. TP O/AO ERED IN APPLYING THE PROFIT MARGIN OF COMPARABLE COMPANIES TO THAT OF THE APPELLANT WITHOUT TAKING INTO ACCOUNT ECONOMIC & CO MMERCIAL REASONS AND FACTUAL DATA TO SUPPORT THE LOSSES INCU RRED IN THE SIM CARD ASSEMBLY SEGMENT. 16. ON FACTS AND IN LAW, THE HONBLE DRP AND THE LD . TPO/AO HAVE FAILED TO MAKE APPROPRIATE ADJUSTMENTS TO ACCOUNT F OR VARYING RISK PROFILES OF THE APPELLANT VIS--VIS THE COMPARABLES AND IN THE PROCESS ALSO NEGLECTED THE INDIAN TRANSFER PRINCING REGULAT IONS, OECD GUIDELINES ON TRANSFER PRICING AND JUDICIAL PROCEDU RE. 17. ON THE FACTS AND IN LAW, THE HONBLE DRP AND TH E LD. TPO/AO GROSSLY ERRED IN TAKING THE MARGIN ON SIM CARD ASSE MBLY SEGMENT AND COMPARING THE MARGIN OF COMPARABLES, WITHOUT GI VING ANY BENEFIT ON ACCOUNT OF HIGH COMPETITION IN MARKET, C APACITY UNDER UTILIZATION, LOW SALES, REALIZATION DUE TO FALLING PRICES ETC, 18. WITHOUT PREJUDICE TO OUR OTHER GROUNDS OF APPEA L, THE LD. TPO OUGHT TO HAVE CONSIDERED THAT IN VIEW OF THE PECULIAR FAC TS OF THE MATTER. AE SHOULD HAVE BEEN TAKEN AS TESTED PARTY FOR THE PU RPOSE OF BENCHMARKING INTERNATIONAL TRANSACTION IN RESPECT T O SIM CARD ASSEMBLY SEGMENT. 19. WITHOUT PREJUDICE TO OUR OTHER GROUNDS OF APPEA L, THE LD. TPO OUGHT TO HAVE CONSIDERED THAT PURSUANT TO RULE 10B OF INC OME-TAX RULES, 1962 AND OECD GUIDELINES THE TESTED PARTY IS ONE WITH LESS COMPLEX FUNCTION ANALYSIS WHERE PROFITABILITY CAN B E RELIABLY ASCERTAINED WITH LEASE ADJUSTMENTS. CORPORATE TAX GROUNDS A. DISALLOWANCE OF EXPORT COMMISSION [RS.39,47,160/- ] 20. ON THE FACTS AND IN LAW, THE LD. AO ERRED IN DE TERMINING AND THE HONBLE DRP ERRED IN CONFIRMING THE ADJUSTMENT OF R S.39,47,160/- TO THE TOTAL INCOME OF THE APPELLANT ON ACCOUNT OF DIS ALLOWANCE OF PAYMENT OF EXPORT COMMISSION UNDER SECTION 40(A)(IA ) OF THE ACT. 4 ITA NO. 3865/DEL./2015 21. ON THE FACTS AND IN LAW, THE LD. AO AND THE HON BLE DRP GROSSLY ERRED IN NOT APPRECIATING THAT THE MARKETING SUPPOR T SERVICE WERE RENDERED OUTSIDE INDIA AND AS SUCH THE INCOME OF TH E PAYEE NEITHER ACCRUED NOR AROSE IN INDIA AND HENCE, WAS NOT TAXAB LE IN INDIA. 22. ON THE FACTS AND IN LAW, THE LD. AO AND THE HON BLE DRP ERRED IN CONCLUDING THAT THE PAYMENT OF EXPORT COMMISSION BY THE APPELLANT PARTAKES THE CHARACTER OF FEES FOR TECHNICAL SERVI CES AND IS COVERED BY THE PROVISIONS OF THE SECTION 9(1)(VII)(B) OF TH E ACT. 23. ON THE FACTS AND IN LAW, THE LD. AO AND THE HON BLE DRP GROSSLY ERRED IN CONCLUDING THAT THE PAYMENT OF EXPORT COMM ISSION BY THE APPELLANT TO A NON-RESIDENT IS COVERED BY THE PROVI SIONS OF SECTION 195 OF THE ACT, WHICH REQUIRES FOR DEDUCTION OF TDS ON PAYMENT TO A NON-RESIDENT. B. ADDITION ON ACCOUNT OF BAD DEBTS [RS.29,73,346] 24. ON THE FACTS AND IN LAW, THE LD. AO AND THE HON BEL DRP ERRED IN CONCLUDING THAT THE APPELLANT HAD FAILED TO PROVE THAT THE BAD DEBTS HAD BEEN ACTUALLY WRITTEN OFF AND ALSO INCOME CORRE SPONDING TO SUCH BAD DEBTS HAD ALSO BEEN OFFERED TO TAX IN THE EARL IER YEAR AND HENCE HAD TO BE DISALLOWED UNDER SECTION 36(1)(VII) OF TH E ACT. 25. ON FACTS AND IN LAW, THE LD. AO AND THE HONBLE DRP GROSSLY ERRED IN NOT APPRECIATING THAT THE APPELLANT HAD ACTUALLY WRITTEN OFF DEBTORS AGGREGATING TO RS.29,73,346/- AS BAD DEBTS WHICH REPRESENTS INCOME RELATING TO EARLIER YEARS WHICH REMAINED UNPAID AND COULD NOT BE REALIZED AND HENCE WRITTEN OFF. C. OTHER GROUNDS 26. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. AO ERRED IN LEVYING INTEREST UNDER SECTION 234B AND 234D OF THE ACT. 27. ON THE FACTS AND IN LAW, THE LD. AO AND THE HON BLE DRP ERRED ON FACTS AND IN LAW IN INITIATING PENALTY UNDER SECTIO N 271(1)(C) OF THE ACT. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE AS SESSEE COMPANY IS ENGAGED IN THE BUSINESS OF TRADING OF CURRENCIE S VERIFICATION AND CURRENCY PROCESSING MACHINES, ITS AFTER SALES WARRANTY SERVICES AND SOFTWARE SERVICES ETC. FOR THE YEAR UN DER CONSIDERATION, THE ASSESSEE FILED RETURN OF INCOME ON 07/10/2010 DECLARING TOTAL INCOME OF RS.17,77,56,570/-. THE RE TURN OF INCOME FILED BY THE ASSESSEE WAS SELECTED FOR SCRUTINY ASS ESSMENT AND STATUTORY NOTICES UNDER THE INCOME-TAX ACT, 1961 (I N SHORT THE 5 ITA NO. 3865/DEL./2015 ACT) WERE ISSUED AND COMPLIED WITH. IN VIEW OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE WITH ITS AS SOCIATED ENTERPRISES (AES), THE LEARNED ASSESSING OFFICER RE FERRED THE MATTER OF DETERMINATION OF THE ARMS-LENGTH PRICE O F THOSE INTERNATIONAL TRANSACTIONS TO THE LEARNED TRANSFER PRICING OFFICER (TPO). THE TPO AFTER GOING THROUGH THE TRANSFER PRI CING STUDY OF THE ASSESSEE AND AFTER PROVIDING AN OPPORTUNITY OF BEING HEARD IN HIS ORDER DATED 16/01/2014 UNDER SECTION 92CA OF TH E ACT, PROPOSED TRANSFER PRICING ADJUSTMENT OF RS.1,94,67, 549/- TO THE TRANSACTION OF THE SOFTWARE DEVELOPMENT SERVICE AND OF RS.3,90,60,721/-TO THE SIM CARD ASSEMBLY SEGMENT , TOTALING TO RS.5,85,28,270/-. THE ASSESSING OFFICER IN THE DRAF T ASSESSMENT ORDER DATED 21/03/2014, IN ADDITION TO THE TRANSFER PRICING ADJUSTMENT PROPOSED OF RS.5,85,28,270/-, ALSO PROPO SED DISALLOWANCE OF EXPORT COMMISSION OF RS.39,47,160/- ON ACCOUNT OF NON-DEDUCTION OF TDS AND ADDITION ON ACCOUNT OF THE BAD DEBT OF RS.29,73,346/-. AGAINST THE DRAFT ASSESSMENT ORD ER, THE ASSESSEE FILED OBJECTION BEFORE THE LEARNED DRP. TH E LEARNED DRP, REJECTED VARIOUS OBJECTION OF THE ASSESSEE AGA INST THE FILTERS APPLIED BY HIM FOR SHORT-LISTING THE COMPARABLES BU T ISSUED DIRECTION FOR EXCLUDING CERTAIN COMPARABLES. ON THE DIRECTION OF THE LEARNED DRP, THE LEARNED TPO COMPUTED TRANSFER PRICING ADJUSTMENT TO RS.4,81,38,645/-. THE DISALLOWANCE OF EXPORT COMMISSION OF RS.39,47,160/- AND ADDITION OF BAD DE BT OF RS.29,73,346/- WAS CONFIRMED BY THE LEARNED DRP. PU RSUANT TO THE DIRECTION OF THE LEARNED DRP, THE ASSESSING OFF ICER PASSED THE IMPUGNED FINAL ASSESSMENT ORDER. AGGRIEVED WITH THE ADDITIONS/DISALLOWANCE MADE IN THE IMPUGNED FINAL A SSESSMENT 6 ITA NO. 3865/DEL./2015 ORDER, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNA L RAISING THE GROUNDS AS REPRODUCED ABOVE. 3. THE GROUND NO.1 TO 10 OF THE APPEAL RELATES TO T RANSFER PRICING ADJUSTMENT TO THE TRANSACTION OF SOFTWARE DEVELOPME NT SERVICES. 3.1 BEFORE US, THE LD. COUNSEL OF ASSESSEE FILED A PAPER-BOOK CONTAINING PAGES 1 TO 783IN TWO VOLUMES AND SUBMITT ED THAT IN RELATION TO TRANSFER PRICING ADJUSTMENT OF SOFTWARE DEVELOPMENT SERVICES, THE ASSESSEE REFERRED ONLY TO EXCLUSION O F COMPARABLE NAMELY M/S INFOSYS LTD. 3.2 THE FUNCTIONS, ASSETS AND RISK (FAR) PROFILE OF THE ASSESSEE REPORTED BY THE ASSESSEE IN TRANSFER PRICING STUDY IN RELATION TO INTERNATIONAL TRANSACTION OF PROVISION OF THE SOFTW ARE DEVELOPMENT SERVICES OF RS.15,94,04,791/-, AVAILABLE ON PAGE 92 TO 100 OF THE PAPER BOOK IS REPRODUCED AS UNDER: 5.3.1 FUNCTIONS G&D INDIA RENDERS SOFTWARE DEVELOPMENT SERVICES TO G&D GMBH WHEREIN IT DEVELOPS APPLICATION SOFTWARE(S) FO R G&D GMBH. IN THIS REGARD, G&D INDIA HAS ENTERED INTO A SOFTWARE DEVELOPMENT AGREEMENT EFFECTIVE FROM DEC EMBER 12, 2005. G&D INDIA IS PRIMARILY ENGAGED IN THE FOLLOWING SOFTWARE BUSINESS: DEVELOPMENT OF SOFTWARE FOR THE SMARTCARD MODULE, WHICH IS SOLD TO G&D GMBH. THE CHIP SET MODULE SOFTWARE IS DEVELOPED AS PER THE GENERAL REQUIREMENTS OF THE MARKETS AND IS PRIMARILY DEVELOPED FOR G&D GMBH. ABOUT 90% OF THE TOTAL DEVELOPMENT ACTIVITY RELATES TO THE DEVELOPMENT SOFTWARE USED AS A PART OF THE SMARTCARD MODULE AND IS SOLD AS A PART OF THE SMARTCARD. THE SOFTWAR E DEVELOPMENT PROCESS FOR THE DEVELOPMENT OF THE CHIP SET MODULE IS FURTHER EXPLAINED IN THE FOLLOWING PARTS. DEVELOPMENT OF APPLICATION SOFTWARE AS PER THE SPECIFIC REQUIREMENTS OF THE CLIENTS OF G&D GROUP. THE SERVICES ARE OFFERED TO G&D GMBH AND GIESECKE & DEVRIENT ASIA PTE LTD. FURTHER, THESE SERVICES AR E PROVIDED TO THE SIM CARD DISTRIBUTION DIVISION OF G & D INDIA. THIS ACCOUNTS FOR ABOUT 10 PER CENT OF THE TOTAL REVENUE. 7 ITA NO. 3865/DEL./2015 THE FINANCIAL ROLES WITH RESPECT TO THE SOFTWARE DEVELOPMENT PROCESS ARE MENTIONED BELOW: 5.3.1.1 ROLE G&D INDIA G&D INDIA IS ENGAGED IN THE BUSINESS OF DEVELOPM ENT OF SMART CARD RELATED SOFTWARE. THE SOFTWARE IS BUILT OF ASSEMBLER C AND JAVA USING EMBEDDED SOFTWARE TECHNOLOGY. THE SOFTWARE DEVELOPED IS PRIMARILY USED IN THE TELECOM SEGMENT (ABOUT 80%). THE OTHER VERTICLES IN WHICH T HE COMPANY OPERATES ARE BANKING AND GOVERNMENT SOLUTIO NS. THE SOFTWARE DEVELOPED BY G&D INDIA DOES NOT FIND A NY STANDALONE APPLICATION WITHOUT THE SMARTCARDS. THE TRANSFER OF SOFTWARE HAPPEN THROUGH MULTI-SITE DATE TRANSFER SYSTEMS. 5.3.1.2 ROLE OF G&D GMBH G&D GMBH CONCEPTUALIZES THE NEED FOR A PARTICULA RS SOFTWARE APPLICATION TO BE USED IN PROVIDING SERVIC ES TO ITS END CUSTOMERS. G&D GMBH THEN DEFINES THE BASIC DESI GN OF SOFTWARE, PROJECT CONTENT, DELIVERY TIME, ETC. F OR DEVELOPING THE PARTICULAR SOFTWARE. THE SOFTWARE SO DEVELOPED BY G&D INDIA IS FINALLY INSERTED BY G&D G MBH IN THE SMARTCARDS. G&D GMBH IS ALSO RESPONSIBLE FOR THE OVERALL SUPERVISION OF THE SOFTWARE DEVELOPED. G&D GMBH HAS DEFINED THE WHOLE PRODUCT LIFE CYCL E (PLC) PROCEDURE. THE PLC PROCEDURE COVERS THE ENT IRE DEVELOPMENT PROCESS FROM CRADLE TO GRAVE, IT DEFI NES THE MAJOR MILESTONES WHICH LINK MULTIPLE DEPARTMENTS AT G&D GMBH THROUGH REVIEWS, HAND OFF ETC. THIS PROCEDURE APPLIES NOT ONLY TO NEW PRODUCTS, BUT ALSO TO PRODU CTS THAT REQUIRED MODIFICATIONS, FEATURE ENHANCEMENTS AND NE W PACKAGE OPTIONS. THE PRODUCT LIFE CYCLE IS BROKEN DOWN INTO A TRA DITIONAL PHASED APPROACH. EACH PHASE IS MADE UP OF MAJOR DELIVERABLES AND OR MILESTONES AND THESE MILESTONES ARE DEFINED BY G&D GMBH. THE ACTIVITY DIAGRAM IN RELATION TO THE SOFTWARE DEVELOPMENT SERVICE RENDERED BY G&D INDIA IS SHOWN BELOW: 8 ITA NO. 3865/DEL./2015 9 ITA NO. 3865/DEL./2015 5.3.1.3 SOFTWARE DEVELOPMENT LIFE-CYCLE 5.3.1.3.1 MARKETING G&D GMBH DETERMINES THE OPPORTUNITIES FOR NEW TE LECOM PRODUCTS AND THE SOFTWARE FOR THE SAME ON THE BASIS OF RESEARCH CONDUCTED BY THE MARKETING TEAM. 5.3.1.3.2 PRODUCT DEFINITION G&D GMBH UNDERTAKES THE PRODUCT DEFINITION, WHER EIN IT DEFINES DESCRIPTION OF THE PRODUCT (SOFTWARE) TO BE DEVELOPED. THE RESEARCH & DEVELOPMENT (R&D) TEAM AT G&D GMBH IS APPROACHED TO TAKE THE PRODUCE DEVELOPMENT FORWARD. R&D TEAM DRAWS THE PRODUCT FUNCTIONS/FEATURES, TARGET APPLICATIONS, HIGH LEVEL ARCHITECTURES, COST ESTIMATES AND PRODUCT DEFINITIO N PLAN (PDP) WHICH DEFINES RESOURCES AND DELIVERABLES RE QUIRED TO COMPLETE THE PRODUCT. INITIAL PRODUCT IDEA IS PRESENTED ALONG WITH THE BUSINESS CASE, REQUIREMENTS, ARCHITECTURE AND PROJECT PLAN B EFORE THE MANAGEMENT OF G&D GMBH. THIS PROCESS ALLOWS MANAGEMENT TO CONTROL THE ALLOCATION OF RESOURCES T O A PROJECT STARTING FROM ITS APPROVAL AND TILL IT IS R EADY TO BE LAUNCHED INTO DEVELOPMENT. THE TIME SCHEDULE AS TO WHEN TO COMPLETE EACH PHASE OF THE MODULE IS ALSO DECIDE D ALONG WITH THE MANAGEMENT APPROVAL. 5.3.1.3.3 SOFTWARE SPECIFICATION AND REQUIREMENT ANALYSIS G&D GMBH DEFINES THE EXACT SPECIFICATIONS/REQUIR EMENT OF THE PROJECT, METHODOLOGIES AND TOOLS TO BE USED IN THE PROJECT, TIME LINES FOR THE COMPLETION OF THE PROJE CT AND STANDARDS THEREOF. THE FUNCTION PERTAINING TO THE CONCEPTUALIZATION OF SERVICES IS A KEY ASPECT AND IS UNDERTAKEN BY G&D GMBH. G&D INDIAN PROVIDES ITS INPUTS IN THE REQUIREMENT ANALY SIS PHASE OF THE SOFTWARE DEVELOPMENT PROCESS, BUT THIS IS RESTRICTED TO THE INFORMATION REQUIRED BY G&D GMBH. THUS, G&D GMBH IS WHOLLY RESPONSIBLE FOR DEFINING THE SPECIFICATIONS AND REQUIREMENTS OF THE SOFTWARE DEV ELOPED BY G&D INDIA. 5.3.1.3.4 PRODUCT VALIDATION AND DATA FLOW TEST AFTER RECEIVING PRODUCT SPECIFICATIONS, CHARTS A ND DIAGRAMS FROM G&D GMBH, G&D INDIA PERFORMS CODING FUNCTION WHICH INVOLVES TRANSLATION OF THE SOLUTIONS PROVIDE D BY SYSTEMS DESIGNERS INTO DETAILED PROGRAM SPECIFICATI ONS. G&D INDIA ALSO UNDERTAKES PROGRAM DESIGN ACTIVITIES INCLUDING DATA AND MODULE DEFINITION, SPECIFICATION OF INPUT AND OUTPUT BETWEEN SYSTEMS, AND ERROR MESSAGE ARRANGEMENTS. 10 ITA NO. 3865/DEL./2015 G&D INDIA PERFORMS TESTS MANDATED PRIOR TO RELEA SE OF THE PRODUCT/SOFTWARE TO THE CUSTOMERS. ONCE DEMO PRODUC T IS DEVELOPED AND IS SHOWN TO THE CUSTOMER/PROSPECTIVE CUSTOMER (ACTIVITY CO-ORDINATED BY G&D GMBH TEAM), DEMO CHIP UNDERGOES A REGRESSIVE TESTING IN INDIA BASED ON CUSTOMERS FEEDBACK. G&D INDIA IS RESPONSIBLE FOR TESTING ALL MAINTEN ANCE PROCESSES (EXISTING SOFTWARE APPLICATIONS) AS WELL AS NEW DEVELOPMENT ACTIVITY TO ENSURE THAT IT MEETS THE SPECIFICATIONS/REQUIREMENTS OF G&D GMBH. 5.3.1.3.5 DEVELOPMENT AND DOCUMENTATION G&D INDIA UNDERTAKES THE DEVELOPMENT OF SOFTWARE MODULE AND DOCUMENTATION FUNCTION WITH RESPECT TO T HE SOFTWARE MODULES THAT IT DEVELOPS. HOWEVER, G&D GMB H PLANS, SUPERVISES AND MANAGES THE PRODUCTION AND DOCUMENTATION FUNCTION PERFORMED BY G&D INDIA. 5.3.1.3.6 TESTING POST-DEVELOPMENT OF MODULE, QUALITY ASSURANCE TE AM TESTS AND VERIFIES AND DEVELOPED SOFTWARE. 5.3.1.3.7 INTEGRATION G&D GMBH WITH ASSISTANCE FROM G&D INDIA INTEGRAT ES THE INDIVIDUAL MODULES, IF REQUIRED, AND PERFORMS THE INTEGRATION AND TESTING. THE FINAL SOFTWARE DEVELOP ED, POST VALIDATION AND TESTING IN INDIA, IS SUPPLIED TO G&D GMBH OR TO THE CHIP MANUFACTURER. THIS SOFTWARE IS EMBED DED INTO THE CHIPS. THESE CHIPS ARE THEN PACKED AND TES TED FOR QUALITY CHECK AND FINALLY SOLD TO CUSTOMERS BY G&D GMBH. 5.3.1.4 RESEARCH & DEVELOPMENT G&D GMBH UNDERTAKES RESEARCH ACTIVITIES REQUIRED IN RESPECT OF THE SOFTWARE DEVELOPMENT SERVICES RENDER ED BY G&D INDIA. G&D INDIA DOES NOT PERFORM ANY FUNCTION WHICH MAY LEAD TO THE CREATION OF SIGNIFICANT INTAN GIBLES. 5.3.1.5 PROJECT MANAGEMENT G&D GMBH PERFORMS FEASIBILITY STUDIES ON EACH PR ODUCT AND DEVELOPS WRITTEN REQUIREMENTS TO PROVIDE DIRECT ION FOR PRODUCT DEVELOPMENT AND HIGHLIGHTING THE PRODUCT FUNCTIONS, PRODUCT PERSPECTIVE, AND UNIQUE POSITION THE PRODUCT INTENDS TO FILL IN THE MARKET PLACE. AT THE TIME OF FINALIZATION OF WORK TO BE DONE B Y G&D INDIA, G&D GMBH IDENTIFIES THE RESOURCES REQUIRED T O UNDERTAKE THE PROJECT AND ALSO IDENTIFIES THE AREAS WHERE G&D INDIAS ASSISTANCE WOULD BE REQUIRED. G&D GMBH DEPLOYS A SENIOR R&D AND MARKETING MANAGEMENT TEAM TO ANALYZE THE SOFTWARE REQUIREMENT AND DESIGN AN ARCHITECTURE BASED ON THE ANALYSIS. 11 ITA NO. 3865/DEL./2015 THE PROJECT TEAM AT G&D INDIA WORKS IN CLOSE CO- ORDINATION WITH THE PROJECT TEAM AT G&D GMBH. THE RESOURCES AR E MOBILIZED DEPENDING UPON THE REQUIREMENTS OF THE PR OJECT. THUS, THE OVERALL PROJECT RESPONSIBILITY REMAINS WITH G&D GMBH WHICH IS ALSO RESPONSIBLE FOR MONITORING AND MANAGING THE ENTIRE PROJECT. 5.3.1.6 SUPPORT SERVICES AS PER THE SERVICES AGREEMENT ENTERED INTO BETWE EN G&D GMBH AND G&D INDIA, G&D GMBH MAY SPECIFY POST- DELIVERY SUPPORT OBLIGATIONS. WITH REGARD TO THE SU PPORT SERVICES, BASED ON FOLLOW-UP WITH CUSTOMERS, IF THE RE IS ANY BUT IN THE SOFTWARE, THE CUSTOMERS WOULD REACH OUT TO SALES & MARKETING TEAM OF G&D GMBH ARE SUBSEQUENTLY THE ENGINEERING TEAM IS INFORMED OF THE PROBLEM IN THE SOFTWARE. G&D GMBH THEN TAKES A CALL ON WHICH TEAM SHALL BE APPOINTED TO RESOLVE THE SOFTWARE BUNGS. 5.3.2 ASSETS G&D INDIA MAINTAINS AND DEPLOYS NECESSARY HUMAN RESOURCES AND INFRASTRUCTURE FOR DEVELOPMENT OF SOF TWARE. HOWEVER, G&D INDIA DOES NOT OWN ANY VALUATION NON- ROUTINE INTANGIBLES. FURTHER, ALL INTANGIBLES INCLU DING PATENTS, TRADEMARKS AND TRADE SECRETS ETC. ARE THE SOLE AND EXCLUSIVE PROPERTY OF G&D GMBH. G&D INDIAS ASS ETS INCLUDES COMPUTERS, OFFICE EQUIPMENT, ETC. FOR ITS BUSINESS OPERATIONS. THE COMPANY CARRIES OUT ITS ACTIVITIES FROM ITS CENTRE AT PUNE, WHICH IS DESIGNATED STPI UNIT. 5.3.2.1 HUMAN RESOURCE IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES, HUM AN RESOURCE IS THE MOST CRITICAL ASSET. DURING 2009-10 , THE COMPANY HAD EMPLOYED AROUND 73 SOFTWARE DEVELOPERS WITH A STAFF OF 9 PERSONS LOOKING AFTER THE MANAGER IAL FUNCTIONS AND A SUPPORT STAFF OF 5 PERSONS. THE QUALIFICATION REQUIREMENTS FOR DEVELOPERS EM PLOYED BY G&D INDIA ARE PERSON WITH BE, B.TECH AND MCA. 5.3.2.2 OTHER ASSETS G&D INDIA ALSO EMPLOYS OTHER HARDWARE/SOFTWARE F OR PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO G&D G MBH 5.3.3 RISK ANALYSIS THE VARIOUS RISKS ASSOCIATED WITH THIS INTERNATI ONAL TRANSACTION ARE AS UNDER: 5.3.3.1 MARKET RISK G&D GMBH IS RESPONSIBLE FOR MARKETING ITS SERVIC ES WORLDWIDE. IT INTERACTS WITH CUSTOMERS, FACES COMPE TITION AND IS RESPONSIBLE FOR PENETRATING NEWER MARKETS AN D 12 ITA NO. 3865/DEL./2015 INTRODUCING NEW PRODUCTS/SERVICES TO WIDEN ITS CUST OMERS BASE. AS G&D INDIA PROVIDES SERVICES ONLY TO G&D GM BH AND GIESECKE&DEVRIENT ASIA PTE LTD., IT DOES NOT HA VE TO MARKET ITS SERVICES. THEREFORE, AES BEAR THE FULL M ARKET RISK IN RELATION TO SOFTWARE DEVELOPMENT SERVICES. 5.3.3.2 CONTRACT RISK G&D GMBH ENTERS INTO CONTRACTS WITH ITS CUSTOMER S IN ITS OWN NAME FOR THE FINAL PRODUCT SOLD, WHICH INCLUDES THE SOFTWARE DEVELOPED BY G&D INDIA. THEREFORE, THE CON TRACT RISK IS BORNE BY G&D GMBH. 5.3.3.3 CAPACITY UTILIZATION RISK G&D INDIA HAS HIRED EMPLOYEES/INVESTED IN INFRAS TRUCTURE BASED ON SPECIFIED R&D BUDGET/WORK ALLOCATED TO G&D INDIA. AS THE DECISION REGARDING THE WORK TO BE PER FORMED BY G&D INDIA IS DRIVEN FROM G&D GMBH (WITH INPUTS F ROM G&D INDIA) AND AS G&D INDIA WORKS ON A COST PLUS MO DEL, THE CAPACITY UTILIZATION RISK VESTS WITH G&D GMBH. 5.3.3.4. TECHNOLOGY RISK THIS RISK ARISES IF THE MARKET IN WHICH THE COMP ANY OPERATES IS SENSITIVE TO INTRODUCTION OF NEW PRODUC TS TECHNOLOGIES. HENCE, IN THAT CASE, BUSINESS UNITS M AY FACE LOSS OF POTENTIAL REVENUES DUE TO INEFFICIENCIES AR ISING FROM OBSOLETE PRODUCTS. G&D GMBH BEARS THE TECHNOLOGY RISK AS IT IS THE OWNER OF THE FINAL SOFTWARE PRODUCT DEVELOPED. AS THE TECHNO LOGY IS EVER-EVOLVING, G& D GMBH IS CONSTANTLY UPGRADING TH E SOFTWARE. 5.3.3.5 MANPOWER RISK G&D INDIA HAS SKILLED WORKFORCE TO PERFORM VARIO US FUNCTIONS RELATING TO DEVELOPMENT OF SOFTWARE. THER E IS A RISK OF TRAINED MANPOWER LEAVING THE COMPANY. SOFTW ARE INDUSTRY IS PLAGUED WITH HIGH RISK OF ATTRITION. TH US, G&D INDIA BEARS THE MANPOWER RISK. HOWEVER, SINCE G&D I NDIA FUNCTIONS AS A CAPTIVE UNIT, G&D GMBH IN TURN ALSO FACES MANPOWER RISK. 5.3.3.6 SERVICE LIABILITY RISK SERVICE LIABILITY RISK REFERS TO THE RISK ASSOCI ATED WITH THE POSSIBILITY OF FACING LEGAL ACTION FORM CUSTOMERS, DUE TO DEFECTS IN THE PRODUCTS PROVIDED. G&D INDIA PROVIDES SOFTWARE SERVICES ONLY TO ITS AES. THE RISK OF SERVICE LIABILITY TO CUSTOMERS OF G&D GMBH RESTS WITH G&D GMBH. HOWEVER, IN CASE OF ANY DEFAULT, G&D INDIA IS LIABLE TO REWORK. 5.3.3.7 CREDIT RISK 13 ITA NO. 3865/DEL./2015 SINCE G&D GMBH SELLS THE PRODUCTS TO THIRD PARTY CUSTOMERS ON CREDIT TERMS, ANY RISK SUCH AS BAD DEB TS ARISING OUT OF CREDIT TRANSACTIONS ARE BORNE BY G&D GMBH. G&D INDIA DOES NOT BEAR ANY CREDIT RISK AS IT PROVI DES SERVICES ONLY TO ITS AES. 5.3.3.8 FOREIGN EXCHANGE RISK G&D INDIA INVOICES G&D GMBH FOR ITS SERVICES IN EUROS, WHICH IS DIFFERENT FROM ITS FUNCTIONAL CURRENCY (I. E. INR). THUS, THE FOREIGN EXCHANGE RISK IS BORNE BY G&D IND IA. TYPE OF RISK G&D INDIA G&D GMBH MARKET RISK INDIRECTLY EXPOSED TO THIS RISK YES CONTRACT RISK NO YES CAPACITY UTILIZATION RISK NO YES TECHNOLOGY RISK NO YES MANPOWER RISK YES YES SERVICE LIABILITY RISK NO YES CREDIT RISK NO YES FOREIGN EXCHANGE FLUCTUATION RISK YES NON 5.3.4 DECISION MAKING MATRIX 5.3.4.1 ORGANIZATIONAL DECISION MATRIX THE DECISIONS REGARDING THE ORGANIZATION AND THE REPORTING STRUCTURE OF THE SOFTWARE DEVELOPMENT CENTRE AT G&D INDIA, IS LOOKED AFTER BY G&D GMBH. THE SOFTWARE DEVELOPMENT HEAD AT G&D INDIA HAS REPORTING TO G&D GMBH, IN ADDITION TO DIRECT REPORTING TO THE MANAGEMENT OF G&D INDIA. 5.3.4.2 CAPACITY DECISION THE DECISION REGARDING UTILIZATION OF RESOURCES A ND THE PLANNING OF RESOURCES IS A FUNCTION OF G&D GMBH; G&D INDIA O NLY ACTS AS A SERVICE PROVIDER GIVEN THE REQUIREMENTS AND NE EDS BY G&D GMBH. G&D INDIA PARTICIPATES IN THE DECISION-MAKING PROCESS WITH THE FINAL DECISION VESTING WITH G&D GMBH. 5.3.4.3 BUDGED PROCESS G&D INDIA IS ALLOCATED A BUDGET BY G&D GMBH, WHIC H FORMS A PART OF THE GLOBAL R&D BUDGET OF THE G&D GROUP. 5.3.4.4 CAPEX DECISION THE DECISION TO SET-UP THE SOFTWARE DEVELOPMENT C ENTRE IN G&D INDIA WAS TAKEN BY G&D GMBH. 5.3.4.5 KEY RESULT AREAS (KRA) OF THE SOFTWARE DEVELOPMENT T EAM. 14 ITA NO. 3865/DEL./2015 THE KRA OF THE SOFTWARE DEVELOPMENT HEAD AT G&D I NDIA IS DELIVERY OF SOFTWARE AS PER THE REQUIREMENTS OF G&D GMBH AND COST CONTROL. THE WORK TO BE OUTSOURCED TO INDIA IS DECIDED BY G&D GMBH. 5.3.5 CHARACTERISTICS OF G&D INDIAS RISK-N-REWARD MATRIX . ON DETAILED EXAMINATION OF THE FUNCTIONAL MATRIX OF SOFTWARE DEVELOPMENT SERVICES RENDERED BY G&D INDIA, AS OUTL INED IN SECTION 5.3.1 ABOVE, WE UNDERSTAND THAT G&D INDIA I S A LOW RISK SERVICE PROVIDER WHICH IS NOT VESTED WITH THE CAPACITY UTILIZATION DECISION/RISK. THE KEY CHARACTERISTICS OF THE RISK-N- REWARD MATRIX OF SOFTWARE DEVELOPMENT SERVICES REND ERED BY G&D INDIA ARE: G&D INDIA EXECUTES DEFINED TASKS; THE KRA OF THE SOFTWARE HEAD OF G&D INDIA IS LINKED TO THE QUALITY OF SERVICE DELIVERY AND HE IS NOT RESPO NSIBLE TO SOURCE WORK FROM GROUP ENTITIES; THE SOFTWARE DEVELOPED BY G&D INDIA IS NOT SOLD AS A STANDALONE PRODUCT AND IS USED BY G&D GMBH AS A PAR T OF THE FINAL DELIVERABLE; G&D INDIA ONLY PARTICIPATES IN THE DECISION-MAKING PROCESS REGARDING CAPACITY UTILIZATION WITH THE FIN AL DECISION VESTING WITH G&D GMBH; G&D INDIA IS ALLOCATED A SPECIFIC BUDGED IN THE GRO UPS GLOBAL R&D SCHEME; G&D INDIA DETERMINES THE NUMBER OF EMPLOYEES TO BE EMPLOYED IN ITS SOFTWARE DEVELOPMENT CENTRE BASED A S DEDUCTIVE ANALYSIS OF THE WORK OUTSOURCED BY G&D GMBH; AND THE CAPEX DECISION IN RELATION TO THE SOFTWARE DEVELOPMENT CENTRE AT G&D INDIA WAS TAKEN BY G&D GMBH. 3.3 THE ASSESSEE USED TRANSACTIONAL NET MARGIN METH OD (TNMM) AND NET OPERATING PROFIT MARGIN BASED ON COST AS PR OFIT LEVEL INDICATOR (PLI). THE ASSESSEE SELECTED EIGHT COMPAR ABLES WITH AN AVERAGE PLI OF 10.60% USING MULTIPLE YEAR DATA. THE ASSESSEE COMPUTED ITS OWN MARGIN (PLI) AT 12.00% FOR THE SOF TWARE DEVELOPMENT SERVICES AND CONCLUDED THAT IN VIEW OF ITS MARGIN (PLI) BEING HIGHER THAN THE AVERAGE MARGIN OF THE C OMPARABLES, THE INTERNATIONAL TRANSACTION OF THE SOFTWARE DEVEL OPER SERVICES WAS AT ARMS LENGTH. THE LEARNED TPO REJECTED FEW C OMPARABLES 15 ITA NO. 3865/DEL./2015 CHOSEN BY THE ASSESSEE AND SELECTED FEW COMPARABLES FROM HIS SIDE. IN THE FINAL ACCEPT /REJECT MATRIX, THE LEA RNED TPO SELECTED 15 COMPARABLES WITH AVERAGE MARGIN(PLI) OF 24.38% U SING CURRENT YEAR DATA AND ACCORDINGLY MADE ADJUSTMENT OF RS.1,8 5,27,602/-. PURSUANT TO THE DIRECTIONS OF THE LEARNED DRP OF ACCEPTING/REJECTING THE COMPARABLES, THE ADJUSTMENT WAS REDUCED TO RS.4,81,38,645/-. BEFORE US, THE ASSESSEE HAS SO UGHT ONLY TO EXCLUDE THE COMPARABLE M/S INFOSYS TECHNOLOGIES LTD . 3.4 BEFORE THE LEARNED TPO, THE ASSESSEE OBJECTED INCLUSION OF THE M/S INFOSYS TECHNOLOGIES LTD ON THE GROUND OF FUNCTIONAL DISSIMILARITY, BRAND PROFIT, ON-SITE REVENUE, EMPLO YEE COST TO COST RATIO, RESEARCH AND DEVELOPMENT EXPENSES AND SIGNIF ICANTLY HIGHER TURNOVER. THE LEARNED TPO REJECTED THE OBJECTION OF THE ASSESSEE AND OBSERVED THAT 90% OF REVENUE OF THE INFOSYS COM ES FROM MAINTENANCE OR ENHANCEMENT OF THE SOFTWARE AND NOT FROM THE END-TO-END SOLUTIONS. HE OBSERVED THAT OPERATIONAL SIZE HAS NO IMPACT ON THE PROFIT MARGINS. ACCORDING TO HIM IN S OFTWARE DEVELOPMENT SERVICE SECTOR TEAMS OF SOFTWARE EMPLO YEES ARE FORMED TO WORK UPON THE SOFTWARE DEVELOPMENT SERVIC ES CONTRACTS RECEIVED AND ACCORDINGLY, MORE THE CONTRACTS MORE T EAM ARE FORMED, THEREFORE BASIC WORKING REMAINS THE TEAM IN ALL THE COMPANIES IN THE SOFTWARE SECTOR. IN VIEW OF THE BA SIC UNIT OF BUSINESS BEING THE SAME I.E .THE TEAM, HE REJECTE D THE CONTENTION OF THE ASSESSEE THAT THE DIFFERENCE BETWEEN TAXPAYE R AND THE INFOSYS DUE TO INFOSYS MIGHT BE HAVING MORE TEAMS THAN THE TAXPAYER TO RENDER SOFTWARE DEVELOPMENT SERVICES. T HE CONTENTION OF THE FUNCTIONAL DIFFERENCE ON ACCOUNT OF THE ON-S ITE REVENUE WAS ALSO REJECTED BY THE LEARNED TPO. ACCORDING TO LD T PO, THIS FILTER WAS NOT APPLIED WHILE SELECTING/REJECTING THE COMPA RABLES. HE 16 ITA NO. 3865/DEL./2015 ALSO SUBMITTED THAT MAJORITY OF THE REVENUE OF THE INFOSYS WAS FROM OFF-SITE ACTIVITIES. 3.5 THE OBJECTION OF THE ASSESSEE OF THE SIGNIFICAN T BRAND VALUE OF INFOSYS ALSO REJECTED BY THE LEARNED TPO. THE LEARN ED TPO HELD THAT BRAND BUILDING EXPENSES (RS. 57 CRORES) AND MA RKETING EXPENSES (RS. 15 CRORES) CONSTITUTE ONLY 0.34% OF T HE TOTAL REVENUE. HE ALSO HELD THAT BRAND MAY HAVE HELPED IN FOSYS IN INCREASING ITS NO. OF CLIENTS AND RETENTION OF THE EXISTING CLIENT AND THUS INCREASING ITS MARKET, BUT IT HAS NOT NECE SSARY RESULTED IN BETTER PROFIT MARGINS AND THERE ARE SEVERAL OTHE R FACTORS WHICH GO INTO THE PROFITABILITY OF A CONCERN. REGARDING T HE ARGUMENT OF THE ASSESSEE THAT INFOSYS HAS INCURRED SUBSTANTIAL R&D EXPENDITURE AND IS DEVELOPING INTELLECTUAL PROPERTY AND THEREFORE IT IS DIFFERENT FROM THE TAXPAYER, THE LEARNED TPO HELD THAT R&D EXPENSES (RS. 438 CRORES) CONSTITUTE ONLY 2.07% OF THE REVENUE, WHICH CANNOT BE SAID TO BE SUBSTANTIAL BY ANY STAND ARD. IN VIEW OF THE OBSERVATIONS, THE LEARNED TPO INCLUDED THE C OMPANY AS COMPARABLE. 3.6 BEFORE THE LEARNED DRP, THE ASSESSEE CONTESTED THAT INFOSYS SELLS SOFTWARE PRODUCT FOR BANKING INDUSTRY IN THE NAME OF THE FINNACLE, AND THUS BEING MIXED PRODUCT AND SOFTWA RE DEVELOPMENT SEGMENT, THE COMPANY CANNOT BE TREATED AS COMPARABLE AT THE ENTITY LEVEL. THE LEARNED DRP, HO WEVER REJECTED THIS CONTENTION OF THE ASSESSEE HOLDING THAT REVENU E FROM SOFTWARE PRODUCT WAS OF RS. 925 CRORES OUT OF ITS O PERATING REVENUE OF RS 21,140 CRORES, WHICH CONSTITUTE ONLY 4.3% OF THE OPERATING REVENUE. THE CONTENTION OF HIGH TURNOVER OF THE INFOSYS AND RENDERS END TO END SOLUTIONS WAS ALSO REJECTED BY THE LEARNED 17 ITA NO. 3865/DEL./2015 DRP. THE OBJECTION ON THE GROUND OF EXPENDITURE ON R&D WAS ALSO REJECTED BY THE LEARNED DRP. 3.7 BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE SUBMITTED THAT THE COMPANY M/S INFOSYS TECHNOLOGIES LTD HAS BEEN R EJECTED BY THE TRIBUNAL IN THE CASE OF THE ASSESSEE ITSELF FOR ASSESSMENT YEAR 2008-09 AND ASSESSMENT YEAR 2011-12. THE LEARNED CO UNSEL ALSO REFERRED TO THE ANNUAL REPORT OF THE COMPANY AVAILA BLE ON PAGE 366 TO 462 TO SUPPORT THAT IN THE YEAR UNDER CONSID ERATION THERE IS NO CHANGE IN THE FUNCTION OF THE COMPANY AND THE REFORE RELYING ON THE ORDER OF THE COORDINATE BENCH OF THE TRIBUNA L IN ASSESSMENT YEAR 2008-09 AND 2011-12, THE COMPANY MI GHT BE EXCLUDED FROM THE SET OF THE COMPARABLES. 3.8 THE LEARNED DR, ON THE OTHER HAND, RELIED ON TH E FINDING OF THE LOWER AUTHORITIES. 4. WE HAVE HEARD RIVAL SUBMISSIONS OF THE PARTIES O N THE ISSUE IN DISPUTE AND PERUSED THE RELEVANT MATERIAL ON REC ORD. WE FIND THAT THERE IS NO SIGNIFICANT CHANGE IN THE ACTIVITI ES OF THE COMPANY AS COMPARED TO EARLIER YEARS. IN ASSESSMENT YEAR 20 08-09, THE COORDINATE BENCH OF TRIBUNAL IN ITA NO. 5924/DEL/20 12, FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF NOKIA S IEMENS NETWORK INDIA PRIVATE LIMITED (SUPRA) EXCLUDED M/S INFOSYS TECHNOLOGIES LTD FROM THE SET OF THE COMPARABLES OBSERVING AS UN DER: 3.2.25 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD. WE NOTICE THAT ON SIMI LAR SET OF FACTS COORDINATE BENCH OF TRIBUNAL IN THE CASE OF NOKIA S IEMENS NETWORKS INDIA PVT. LTD. VS. ACIT IN ITA NO. 333/DEL/2013, H AS EXCLUDED THIS COMPARABLE BY OBSERVING AS FOLLOWS: '78. THIS COMPANY IS UNDOUBTEDLY A CORPORATE GIANT WITH ITS LARGE SCALE OF OPERATIONS VIS--VIS THE ASSESSEE CO MPANY; THAT IT HAD A BRAND IMPACT TO DETERMINE THE PREMIUM PRICING ; THAT IT HAS A DIFFERENT MODEL OF REVENUE RECOGNITION. IT IS SUBMITTED ON 18 ITA NO. 3865/DEL./2015 BEHALF OF THE ASSESSEE THAT THIS COMPARABLE HAS BEE N REJECTED IN ASSESSEES OWN CASE IN IMMEDIATELY PRECEDING YEA R, I.E. AY 2007- 08 BY THE TRIBUNAL ON ACCOUNT OF DIFFERENT RI SK PROFILE, SCALE, NATURE OF SERVICES, REVENUE OWNERSHIP OF BRA NDED/ PROPRIETARY PRODUCTS, ONSITE AND OFFSHORE SERVICES ETC. THIS FACT IS NOT CONTRADICTED BY THE REVENUE. 79. FURTHER, TH E ASSESSEE HAS PLACED RELIANCE ON AIRCOM (SUPRA), IN ORDER TO EXCLUDE THIS COMPARABLE COMPANY ON THE BASIS OF ITS MAGNITUDE. T HE COORDINATE BENCH HAS REJECTED THIS COMPARABLE BY MA KING FOLLOWING OBSERVATIONS:- 17.2. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT CAN BE SEEN THAT THE TPO HAS INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES BY REJECTING THE ASSESSEES CONTENTIONS . THE ASSESSEE IS PROVIDING AND ASSIGNING SOFTWARE SERVIC ES TO ITS AE ALONE WITHOUT ACQUIRING ANY INTELLECTUAL PRO PERTY RIGHTS IN THE WORK DONE BY IT IN THE DEVELOPMENT OF SOFTWARE. THE HONBLE DELHI 31 ITA NO. 5924/DEL/201 2 (GIESECKE&DEVRIENT INDIA PVT. LTD.) HIGH COURT IN C IT VS. AGNITY INDIA TECHNOLOGIES (P) LTD. (2013) 219 TAXMA NN 26 (DEL) CONSIDERED THE GIANTNESS OF INFOSYS LTD., IN TERMS OF RISK PROFILE, NATURE OF SERVICES, NUMBER OF EMPLOYE ES, OWNERSHIP OF BRANDED PRODUCTS AND BRAND RELATED PRO FITS, ETC. IN COMPARISON WITH SUCH FACTORS PREVAILING IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD., BEING, A CA PTIVE UNIT PROVIDING SOFTWARE DEVELOPMENT SERVICES WITHOUT HAV ING ANY IP RIGHTS IN THE WORK DONE BY IT. AFTER MAKING COMPARISON OF VARIOUS FACTORS AS ENUMERATED ABOVE, THE HONBLE DELHI HIGH COURT HELD INFOSYS LTD. TO BE NO N- COMPARABLE WITH AGNITY INDIA TECHNOLOGIES PVT. LTD. THE FACTS OF THE INSTANT CASE ARE SIMILAR TO THE EXTENT THAT THE EXTANT ASSESSEE IS ALSO NOT OWNING ANY BRANDED PROD UCTS AND HAVING NO EXPENDITURE ON R&D ETC. WHEN WE CONSI DER ALL THE ABOVE FACTORS IN A HOLISTIC MANNER, THERE R EMAINS ABSOLUTELY NO DOUBT THAT INFOSYS TECHNOLOGIES LTD. IS NOT COMPARABLE WITH THE ASSESSE COMPANY. RESPECTFULLY FOLLOWING THE JUDGMENT OF THE HONBLE JURISDICTIONA L HIGH COURT IN AGNITY INDIA (SUPRA), WE HOLD THAT INFOSYS TECHNOLOGIES LTD., CANNOT BE TREATED AS COMPARABLE WITH THE ASSESSEE COMPANY. THIS COMPANY IS, THEREFORE, DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLE S. 80. THE DIVERSIFIED ACTIVITIES OF BUSINESS, ITS DEP LOYMENT OF CAPITAL, RESOURCES AND THE BRAND NAME MAKE THIS COM PANY NOT COMPARABLE WITH THE ASSESSEE AND, THEREFORE, THIS C OMPANY HAS TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLE COM PANIES FOR BENCHMARKING INTERNATIONAL TRANSACTION RELATED TO S OFTWARE SEGMENT.' 19 ITA NO. 3865/DEL./2015 3.2.26 RESPECTFULLY FOLLOWING THE VIEW TAKEN BY THE COORDINATE BENCH, WHILST, FOLLOWING THE JUDGMENT OF THE HON'BL E DELHI HIGH COURT, AS AFORE MENTIONED, WE DIRECT THE AO/ TPO TO EXCLUDE INFOSYS FROM THE FINAL LIST OF COMPARABLES. 4.1 RESPECTFULLY, FOLLOWING THE VIEW TAKEN BY THE C OORDINATE BENCH IN ASSESSMENT YEAR 2008-09, WE DIRECT THE LD AO/TPO TO EXCLUDE M/S INFOSYS TECHNOLOGIES LTD. FROM THE FIN AL SET OF THE COMPARABLES. THE GROUND NO. 1 TO 10 OF THE APPEAL O F THE ASSESSEE ARE ACCORDINGLY ALLOWED. 5. THE GROUND NOS. 11 TO 19 OF THE APPEAL ARE RELA TED TO ADJUSTMENT MADE TO SIM CARD ASSEMBLY SEGMENT. THE L EARNED COUNSEL BEFORE US SUBMITTED THAT SAID ADJUSTMENT HA S ALREADY BEEN DELETED BY THE LD. AO WIDE ITS RECTIFICATION O RDER DATED 22/06/2015 (COPY OF WHICH IS AVAILABLE ON PAGE 357 TO 360 OF THE PB). IN VIEW OF THE DELETION OF THE ADDITION BY THE LEARNED AO, THE LEARNED COUNSEL OF THE ASSESSEE DID NOT PRESS THE G ROUND NO. 11 - 19 OF THE APPEAL, ACCORDINGLY SAME ARE DISMISSED AS INFRUCTUOUS. 6. THE GROUND NOS. 20-23 OF THE APPEAL RELATES TO D ISALLOWANCE OF THE EXPORT COMMISSION ON ACCOUNT OF NON-DEDUCTIO N OF THE TAX AT SOURCE. 6.1 THE ASSESSEE SUBMITTED BEFORE THE ASSESSING OF FICER THAT IT PAID COMMISSION AMOUNTING TO RS.39,47,160/- TO M/S G & D LLC, EGYPT, FOR FORWARDING THE SALES ORDER TO THE A SSESSEE FOR SALES IN THE REGION OF MIDDLE EAST AND NORTH AFRIC A. IT SUBMITTED THAT THE SERVICES ARE CARRIED OUT BY THE G & D EGYP T OUTSIDE INDIA AND NOT QUALIFY AS FEE FOR TECHNICAL SERVICES OR ROYALTY AS DEFINED UNDER SECTION 9(1) OF THE ACT. IT FURTHER S UBMITTED THAT PAYMENT FOR SUCH SERVICES WAS ALSO RECEIVED BY THE G & D EGYPT OUTSIDE INDIA. THEREFORE, IT WAS SUBMITTED THAT AS A NON-RESIDENT OPERATES OUT OF INDIA, NO PART OF ITS INCOME ACCRUE S ARISES IN INDIA 20 ITA NO. 3865/DEL./2015 AND ACCORDINGLY SUCH SUM WOULD NOT BE LIABLE FOR WI THHOLDING TAX UNDER THE PROVISIONS OF THE SECTION 195 OF THE ACT. FURTHER THE ASSESSEE RELIED ON THE CIRCULAR NO. 23 OF 1969 ISSU ED BY THE CENTRAL BOARD OF THE DIRECT TAXES (CBDT) AND SUBSEQ UENTLY REITERATED BY THE CBDT IN CIRCULAR NO. 786 OF 2000. 6.2 THE LEARNED ASSESSING OFFICER REJECTED THE CON TENTION OF THE ASSESSEE. ACCORDING TO HIM IN VIEW OF SECTION 9(1)( VII)(B) OF THE ACT THE INCOME BY WAY OF FEES FOR TECHNICAL SERVICES PA YABLE BY A RESIDENT, EXCEPT WHERE SERVICES ARE UTILIZED OUTSID E INDIA OR FOR THE PURPOSE OF MAKING OF EARNING AN INCOME FROM ANY SOURCE OUTSIDE INDIA, THEN SUCH INCOME SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA. THE LEARNED ASSESSING OFFICER HELD THAT PAYMENT BY THE RESIDENT ASSESSEE IN CONNECTION WITH HIS BUSINE SS IN INDIA TO A PERSON OUTSIDE INDIA MAKING USE OF HIS EXPERTISE IN SALE OF GOODS IN A PARTICULAR COUNTRY IS NOTHING BUT A FEE WHICH HAS BEEN PAID BY THE RESIDENT ASSESSEE TO THE NON-RESIDENT F OR SERVICES RENDERED BY HIM, WHICH IS CONSTRUED AS FEE FOR TECH NICAL SERVICES. ACCORDING TO THE ASSESSING OFFICER THERE IS ELEMENT OF CONSULTANCY, TECHNICAL AND MANAGERIAL SERVICES FOR WHICH SAID COMMISSION WAS PAID AND THEREFORE IT WAS SQUARELY C OVERED BY SECTION 9 OF THE ACT, AND THUS AS PER SECTION 195 O F THE ACT, THE ASSESSEE WAS REQUIRED TO DEDUCT TAX AT SOURCE. THE ASSESSING OFFICER HELD THAT IN VIEW OF NON-DEDUCTION OF TAX A T SOURCE ON THE COMMISSION PAYABLE/PAID TO NON-RESIDENT OF RS.39,47 ,160/-IS DISALLOWED UNDER SECTION 40(A)(I) OF THE ACT. 6.3 THE LEARNED DRP EXAMINED THE ISSUE IN DETAIL. THE LEARNED DRP EXAMINED VARIOUS TERMS OF THE AGREEMENT BETWEEN THE ASSESSEE AND M/S G & D EGYPT AND CONCLUDED THAT THE RE EXISTED 21 ITA NO. 3865/DEL./2015 A BUSINESS CONNECTION BETWEEN G&D EGYPT AND G & D I NDIA. THE RELEVANT FINDING OF THE LEARNED DRP IS REPRODUCED A S UNDER: FROM THE ABOVE, IT IS EVIDENT THAT THE SAID AGREEM ENT IS PART OF THE OVERALL DESIGN BY THE MNC GROUP NAMELY GIESECKE & D EVRIENT (G&D) BY WHICH GD EGYPT IS RESPONSIBLE FOR THE REASON OF MIDDLE EAST AND NORTH AFRICA AS SUBSIDIARY OF G&D GMBH AND SOLELY E NTITLED TO COVER MARKETING AND SALES IN THAT REGION. THIS PREAMBLE T HEREFORE, INDICATES THAT AN ARTIFICIAL RESTRAINT AND CONDITIO NS HAVE BEEN PUT ON GD INDIA TO PAY COMMISSION TO GD EGYPT AND GD EGYPT HAS BEEN GRANTED EXCLUSIVE RIGHTS BY THE PRINCIPAL G&D GMBH TO MARKET THE PRODUCTS OF GD INDIA IN THAT REGION. ARTICLE 3.4 CL ARIFIES THE POSITION THAT GD INDIA CANNOT SELL ANY PRODUCTS IN THAT REGI ON WITHOUT INVOLVING GD EGYPT. FROM THE ABOVE, IT IS EVIDENT T HAT THE CONSIDERATION PAID TO GD EGYPT IS AGAINST THE RIGHT WHICH IT IS EXERCISING TO SELL THE PRODUCTS IN THAT REGION. 11.4.3IN THIS BACKDROP, IT IS TO BE EXAMINED IF THE CONSIDERATION PAID BY GD INDIA TO GD EGYPT AGAINST A RIGHT VESTED IN I T, THE VALUE BEING COMPUTED WITH REFERENCE TO THE VALUE OF THE ORDERS, IS CHARGEABLE TO TAX IN TERMS OF SECTION 5 READ WITH SECTION 9 OR NO T. 11.4.4CONSIDERING THE FACTS OF THE CASE, IT CAN BE SAID THAT THERE IS A STRONG BUSINESS CONNECTION BETWEEN GD INDIA AND GD EGYPT. THE SALE ORDER RECEIVED BY GD INDIA IS NOT POSSIBLE WIT HOUT HONORING THE AGREEMENT WITH GD EGYPT. GD EGYPT IS ALLEGEDLY OBT AINING AND FORWARDING THE ORDERS FOR GD INDIA FOR THE REGION. GD EGYPT, IN TERMS OF THE AGREEMENT CARRIES OUT NECESSARY TASKS IN THA T REGION BY DEPUTING ITS REPRESENTATIVES ETC. TO THE PROSPECTIV E CUSTOMERS. THUS, THE PRINCIPLES LAID DOWN BY VARIOUS COURTS ON THE ISSUE OF BUSINESS CONNECTION WHEN APPLIES TO THE TAXPAYERS CASE DO LEAD TO A LOGICAL CONCLUSION THAT THERE IS A STRONG AND VIBRANT BUSIN ESS CONNECTION BETWEEN THE TAXPAYER AND THE GD EGYPT. IN THIS CONT EXT, THE DECISION IN ADIT VS. STAR CRUISE INDIA TRAVEL SERVICES, WHER EIN ITAT MUMBAI HELD THAT: THE EXPRESSION BUSINESS CONNECTION DOES NOT COVE R MERE CANVASSING FOR BUSINESS BY AN AGENT IN INDIA. IT PO STULATES A REAL AND INTIMATE RELATION BETWEEN BUSINESS ACTIVIT Y CARRIED ON OUTSIDE INDIA AND BUSINESS ACTIVITY WITHIN INDIA, T HE RELATION BETWEEN THE TWO CONTRIBUTING TO THE EARNING OF INCO ME BY THE NON-RESIDENT IN HIS BUSINESS ACTIVITY. THE BUSINESS OPERATIONS CARRIED OUT OUTSIDE INDIA AND INSIDE INDIA MUST HAV E SUCH A RELATIONSHIP AS TO CONTRIBUTE TO BUSINESS OPERATION S AS A WHOLE. IT IS ALSO A FACT THAT A TRANSACTION CANNOT BE FINA LIZED UNTIL AND UNLESS GD EGYPT IS INVOLVED AND THEREFORE, THE RELA TIONSHIP BETWEEN THE TWO IS SUCH THAT THE ACTION CANNOT BE COMPLETED WITHOUT THE PAYMENT OF THE SAID PAYMENT OF THE SAID COMMISSION TO GD EGYPT. 22 ITA NO. 3865/DEL./2015 UNDER THESE FACTS, THE PANEL HOLDS THAT THERE IS A BUSINESS CONNECTION BETWEEN GD EGYPT WITH GD INDIA. 6.4 FURTHER, THE LEARNED DRP HELD THAT SERVICES RE NDERED BY GD EGYPT ARE IN THE NATURE OF MANAGERIAL, CONSULTANCY AND TECHNICAL OBSERVING AS UNDER: 11.4.5 THAT TAXPAYER HAS OBJECTED TO THE FACT THA T THE AMOUNTS, REMITTED BY THE TAXPAYER TO THE GD EGYPT IS NOT FTS U/S 9(1)(VII) OF THE ACT, AS HELD BY THE AO. THE AMOUNT PAID BY THE TAXPAYER TO THE GD EGYPT IS FTS BECAUSE FTS MEANS ANY CONSIDERATION FOR RENDERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTAN CY SERVICES. THESE TERMS HAVE NOT BEEN DEFINED IN THE ACT. HOWEV ER, THE MEANING OF THESE TERMS HAS TO BE UNDERSTOOD IN THE LIGHT OF THE PURPOSE WHICH THESE ARE GOING TO SERVE, PARTICULARLY IN THE LIGHT OF THE PRESENT TIMES WHEN THE LAW IS BEING APPLIED. SUPREME COURT IN TH E CASE OF CIT VS. PODAR CEMENT PRIVATE LIMITED WHILE INTERPRETING THE LAW, ADOPTED THE AMBULATORY APPROACH FOR INTERPRETING THE TERM O WNER. THE AMBULATORY APPROACH GIVES DUE IMPORTANT TO THE ADVA NCEMENT IN TECHNOLOGY. IN THE BACKDROP, THERE HAS BEEN CONSIDE RABLE OVERLAP BETWEEN THE THREE TERMS NAMELY MANAGERIAL, CONSULTA NCY AND TECHNICAL SERVICE. THE AAR IN THE CASE OF INTERTEK TESTING SERVICES INDIA PVT. LIMITED 307 ITR 418 HAS OBSERVED THAT C ONSULTANCY SERVICES COULD ALSO BE TECHNICAL IN NATURE AND THES E TWO EXPRESSIONS ARE NOT TO BE TREATED AS WATER TIGHT COMPARTMENTS. THE AAR IN THE CASE OF P. NO. 28 OF 1999 242 ITR 208 OBSERVED AS F OLLOWS: BY TECHNICAL SERVICES, WE MEAN IN THIS CONTEXT SER VICES REQUIRING EXPERTISE IN TECHNOLOGY. BY CONSULTANCY S ERVICES, WE MEAN IN THIS CONTEXT ADVISORY SERVICES. THE CATEGOR Y OF TECHNICAL AND CONSULTANCY SERVICES ARE TO SOME EXTE NT OVERLAPPING BECAUSE A CONSULTANCY SERVICES COULD AL SO BE TECHNICAL SERVICE. HOWEVER, THE CATEGORY OF CONSULT ANCY SERVICES ALSO INCLUDES AN ADVISORY SERVICE, WHETHER OR NOT E XPERTISE IN TECHNOLOGY IS REQUIRED TO PERFORM IT. THE ITAT HYDERABAD IN CASE OF TECUMSEH PRODUCTS (I) LTD. VS. DCIT, 86 ITD 791 HAS OBSERVED THAT TECHNICAL SERVICES D OES NOT INCLUDE PROVIDING SOME TECHNICAL KNOWLEDGE FOR MANUFACTURIN G ALONE. TECHNICAL KNOWLEDGE INCLUDES MANAGEMENT OR CONSULTA NCY SERVICES. IN VIEW OF THE ABOVE, AND CONSIDERING THE NATURE O F SERVICES RENDERED BY GD EGYPT, IT CAN BE SAID THAT THE SERVI CES RENDERED ARE SUCH WHICH REQUIRE EXPERTISE AND KNOWLEDGE IN THE S PECIFIC AREA OF WORK, SUCH EXPERTISE CANNOT BE DEVELOPED OVERNIGHT BUT IS THE RESULT OF LONG PERIOD OF WORK IN THIS LINE OF ACTIVITIES C OUPLED WITH ACCUMULATED EXPERIENCE OF OPERATIONS. THE PANEL THE REFORE, BELIEVES THAT THE PAYMENTS MADE BY THE TAXPAYER TO GD EGYPT PARTAKES THE CHARACTER OF FTS UNDER THE DOMESTIC LAW. 23 ITA NO. 3865/DEL./2015 6.5 FURTHER, THE LEARNED DRP HELD THAT IN VIEW OF THE EXPLANATION BELOW SECTION 9(2), WHICH HAS BEEN INSERTED BY THE FINANCE ACT 2010 WITH RETROSPECTIVE EFFECT FROM 01/06/1976, EVE N THE INCOME OF NON-RESIDENT DEEMED TO ACCRUE OR ARISE IN INDIA IRRESPECTIVE OF WHETHER OR NOT BUSINESS CONNECTION IN INDIA OR THE NON-RESIDENT HAS RENDERED SERVICES OUTSIDE INDIA. ACCORDING TO T HE LEARNED DRP IN VIEW OF THE EXPLANATORY MEMORANDUM TO THE FINANC E BILL 2010, THE SITUS OF RENDERING SERVICES IS NOT RELEVANT AND IT IS THE SITUS OF THE PAYER AND THE SITUS OF UTILIZATION OF THE SERVI CES WHICH WILL DETERMINE THE TAXABILITY OF SUCH SERVICES IN INDIA. 6.6 THE LEARNED DRP HELD THAT THE PROVISION OF SEC TION 9(1)(VII) ARE APPLICABLE IN THE CASE OF THE ASSESSEE OBSERVIN G AS UNDER: 11.4.7 THUS, IT IS ESTABLISHED THAT AMOUNTS REMITT ED ARE CHARGEABLE TO TAX IN INDIA. THE NEXT STEP TO ASCERTAIN IS IF T HE CASE OF THE TAXPAYER IS COVERED UNDER CLAUSE (B) OF SECTION 9(1 )(VII) OF THE ACT OR NOT? ACCORDING TO THE SAID SECTION, FTS PAYABLE BY A RESIDENT ARE DEEMED TO ACCRUE OR ARISE IN INDIA WHERE THE ROYALT Y/FEE IS PAYABLE TO A NON-RESIDENT EXCEPT WHERE THESE ARE PAYABLE IN RESPECT OF ANY RIGHT, PROPERTY OR INFORMATION USED OR SERVICES UTI LIZED: FOR THE PURPOSES OF A BUSINESS OR PROFESSION CARRIE D ON BY SUCH PERSON OUTSIDE INDIA. OR FOR THE PURPOSE OF MAKING OR EARNING ANY INCOME FRO M ANY SOURCE OUTSIDE INDIA. BOTH THESE EVENTUALITIES ARE NOT CUMULATIVE BUT AR E IN THE ALTERNATIVE TO EACH OTHER AND THEREFORE ON NON-SATI SFACTION OF ANY ONE, THE DEEMING FICTION SHALL COME INTO PLAY IN TH E CASE. THE ISSUE FOR CONSIDERATION IS THE MEANING OF THE EXPRESSION SUCH PERSON APPEARING IN SECTION 9(1)(VII)(B) OF THE ACT. IN THIS CONTEXT REFERENCE IS MADE TO THE DECISION OF DELHI HIGH COURT IN THE CASE OF CIT VS. HAVELS INDIA LTD. 352 ITR 376 WHEREIN HONBLE HIGH COURT HELD THAT IN ORDER TO FALL WITHI N THE EXCEPTION PROVIDED IN SECTION 9(1)(VII)(V) OF THE ACT, THE SO URCE OF INCOME, AND NOT THE RECEIPT, SHOULD BE SITUATED OUTSIDE INDIA. REGARDING THE EXCEPTION OF SECTION 9(1)(VII)(B), THE COURT HELD T HAT IN ORDER TO GET THE BENEFIT OF FIRST EXCEPTION IT IS NECESSARY FOR THE TAXPAYER (RESIDENT) TO SHOW THAT THE TECHNICAL SERVICES WERE UTILIZED IN A BUSINESS CARRIED 24 ITA NO. 3865/DEL./2015 OUTSIDE INDIA. INDIRECTLY, THE RATIO DECIDENDI HAS BEEN THAT SUCH PERSON APPEARING IN SECTION 9(1)(VI)/(VII)(B) OF T HE ACT REFERS TO THE RESIDENT PAYER OF THE SAID FEE AND NOT THE NON-RESI DENT RECIPIENT. IN THE CONTEXT, REFERENCE IS MADE TO THE CBDT CIRC ULAR NO. 202 DT. 5.7.1976, WHICH READS AS UNDER: SOURCE RULE FOR FEES FOR TECHNICAL SERVICES- SEC TION 9(1)(VII) 16.1 AS IN THE CASE OF ROYALTY, THE FINANCE ACT, 19 76 HAS AMENDED THE INCOME-TAX ACT CLEARLY SPECIFYING THE CIRCUMSTANCES IN WHICH INCOME BY WAY OF FEES FOR T ECHNICAL SERVICES WILL BE DEEMED TO ACCRUE OR ARISE IN INDI A AND ALSO DEFINING THE EXPRESSION FEES FOR TECHNICAL SERVICE S. FOR THIS PURPOSE, A NEW CLAUSE (VII) HAS BEEN INSERTED IN SE CTION 9(1). 16.2 UNDER THE NEW PROVISION, INCOME BY WAY OF FEE S FOR TECHNICAL SERVICES OF THE FOLLOWING TYPES WILL DEE MED TO ACCRUE OR ARISE IN INDIA: (A) FEES FOR TECHNICAL SERVICES PAYABLE BY THE CENT RAL GOVERNMENT OR ANY STATE GOVERNMENT; (B) FEES FOR TECHNICAL SERVICES PAYABLE BY A RESIDE NT, EXCEPT WHERE THE PAYMENT IS RELATABLE TO A BUSINESS OR PROFESSION CARRIED ON BY HIM OUTSIDE INDIA OR TO AN Y OTHER SOURCE OF HIS INCOME OUTSIDE INDIA; AND (C) FEES FOR TECHNICAL SERVICES PAYABLE BY A NON-RE SIDENT IF THE PAYMENT IS RELATABLE TO A BUSINESS OR PROFESSIO N CARRIED ON BY HIM IN INDIA OR TO ANY OTHER SOURCE O F HIS INCOME IN INDIA. 16.3 THE EXPRESSION FEES FOR TECHNICAL SERVICES H AS BEEN DEFINED TO MEAN; 16.4 THE AFORESAID AMENDMENT HAS COME INTO FORCE WI TH EFFECT FORM 1-6-1976, AND WILL APPLY IN RELATION TO THE ASSESSMENT YEAR 1977-76 AND SUBSEQUENT YEARS. IN VIEW OF THE ABOVE, IT IS EVIDENT THAT THE INTEN TION OF THE LEGISLATURE CLARIFIED BY THE EXPLANATORY CIRCULAR O N THE INTRODUCTION OF THE AMENDMENT IN THE ACT HAS BEEN TO CONSIDER SUCH PERSON APPEARING IN SECTION 9(1)(VII)9B) WITH REFERENCE TO THE RESIDENT PAYER FOR THE SAID AMOUNT BECAUSE THE EXPRESSION IF THE PAYMENT IS RELATABLE TO A BUSINESS OR PROFESSION CARRIED ON BY HIM OUTSIDE INDIA REFERS TO THE BUSINESS OR PROFESSION CARRIED OUT BY HIM VIS. RESIDENT PAYER IN THIS CONTEXT AND NOT THE NON-RESI DENT PAYEE. IN VIEW OF THE CLEAR DISPOSITION OF THE RELEVANT P ROVISIONS OF THE ACT AND THAT THE PAYMENTS ARE BEING MADE BY THE RES IDENT TAXPAYER IS NOT FOR ANY BUSINESS CARRIED OUT BY IT OUTSIDE I NDIA BUT FROM INDIA, THE PANEL HOLDS THAT THE TAXPAYERS CLAIM ON THIS A CCOUNT IS NOT ON SOUND FOOTING AND CANNOT BE ACCEPTED. THUS, THE PAN EL HOLDS THAT 25 ITA NO. 3865/DEL./2015 THE PROVISION OF SECTION 9(1)(VII)(B) OF THE ACT AR E ALSO SATISFIED AND THE CASE OF THE TAXPAYER IS NOT COVERED BY EITHER O F THE EXCEPTIONS. 6.7 IN VIEW OF THE ABOVE DISCUSSION, THE LEARNED D RP UPHELD THE DISALLOWANCE OF COMMISSION IN TERMS OF SECTION 40(A )(I) OF THE ACT. 6.8 BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE SUBMITTED THAT IDENTICAL ISSUE OF DISALLOWANCE OF COMMISSION ON PROCURING EXPORT ORDERS HAS BEEN ALLOWED IN FAVOUR OF THE ASS ESSEE BY THE TRIBUNAL IN ASSESSMENT YEAR 2009-10 HOLDING THAT PA YMENT MADE TO FOREIGN AGENTS PRIOR TO THE APPLICABILITY OF CIR CULAR NO. 7 OF 2009, COULD NOT BE BROUGHT TO TAX IN INDIA. 6.9 THE LEARNED COUNSEL SUBMITTED THAT IN FOLLOWIN G DECISIONS, COMMISSION RECEIVED FOR THE SERVICES OF PROCURING E XPORT ORDER BY NON-RESIDENT FROM OUTSIDE INDIA HAS BEEN HELD NOT TO BE IN THE NATURE OF FEE FOR TECHNICAL SERVICE: (I) ACIT VS PAHILAJRAI JAIKISHIN (2016) 66 TAXMANN.COM 30 (II) ACIT VS EVERGREEN INTERNATIONAL LTD (2018) 91 TAXMANN.COM 111(DELHI-TRIB) (III) DCIT VS WELSPUN CORPORATION(2017)77 TAXMANN.COM 165 (AHMEDABAD-TRIB) 6.10 ON THE OTHER HAND, THE LEARNED DR RELIED ON T HE FINDING OF THE LOWER AUTHORITIES AND SUBMITTED THAT FOR PAYMEN T TO BE IN THE NATURE OF THE COMMISSION, THE RELATIONSHIP BETWEEN THE PARTIES SHOULD BE OF PRINCIPAL AND AGENT, WHEREAS IN THE CA SE IT IS EVIDENT FROM THE TERMS OF THE AGREEMENT THAT THE AGREEMENT FOR RENDERING SERVICES IS BETWEEN TWO PRINCIPAL PARTIES. HE SUPPO RTED THE FINDING OF THE LEARNED DRP REGARDING EXISTENCE OF T HE BUSINESS CONNECTION AND ACCORDING TO HIM THE SERVICES ARE IN THE NATURE OF THE CONSULTANCY. 26 ITA NO. 3865/DEL./2015 6.11 THE LEARNED COUNSEL IN THE REJOINDER SUBMITTE D THAT NATURE OF THE EXPORT COMMISSION HAS NEVER BEEN DOUBTED BY THE AUTHORITIES AND ONLY ISSUE IN DISPUTE IS WHETHER TH E SAID COMMISSION PAYMENT FOR THE SERVICES ARE IN THE NATU RE OF THE FEE FOR TECHNICAL SERVICES (FTS). ACCORDING TO THE ASS ESSEE, THE PAYMENT WAS FOR ONLY SECURING ORDERS AND NOT FOR RE NDERING ANY MANAGERIAL TECHNICAL CONSULTANCY SERVICES AND THUS NOT LIABLE FOR FEE FOR TECHNICAL SERVICES. 6.12 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES ON THE ISSUE IN DISPUTE. IN THE CASE, THE ASSESSEE HAS MADE PAYM ENT TO NON- RESIDENT COMPANY M/S GD EGYPT FOR PROCURING EXPORT ORDER FOR THE ASSESSEE. THE CLAIM OF THE ASSESSEE THAT M/S GD EGYPT HAS RENDERED SERVICES OUT OF THE INDIA AND PAYMENT HAS BEEN ALSO MADE TO THE SAID COMPANY OUTSIDE INDIA. THE CLAIM O F THE ASSESSEE THAT PAYMENT IN THE HANDS OF M/S GD EGYPT IS NOT TAXABLE IN INDIA AND THEREFORE NO TAX WAS DEDUCTED AT SOURCE ON SAID PAYMENT. THE CONTENTION OF THE REVENUE IS THAT SAID PAYMENT IS INCOME TAXABLE IN INDIA IN THE HANDS OF M/S GD EGYPT DUE TO FOLLOWING REASONS: (I) THE PAYMENT IS INCOME DEEMED TO ACCRUED U/S 9(1) OF THE ACTIN VIEW OF THE BUSINESS CONNECTION IN INDIA (II) THE PAYMENT IS IN THE NATURE OF FEE FOR TECHNICAL SERVICES FTS) IN TERMS OF SECTION 9(1)(VII)(B) AS DEEMED INCOME 6.13 ACCORDING TO THE REVENUE , THEREFORE SUM PAID TO M/S GD EGYPT IS CHARGEABLE UNDER THE PROVISIONS OF THE ACT AND TAX WAS TO BE DEDUCTED ON SAID PAYMENT IN TERMS OF SECTION 195 OF THE ACT AND DEDUCTION OF THE TAX HAS ATTRACTED APPLICABILIT Y OF SECTION 27 ITA NO. 3865/DEL./2015 40(A)(I) OF THE ACT FOR DISALLOWANCE OF SAID EXPEND ITURE ON COMMISSION. 6.14 THOUGH, THE IDENTICAL ISSUE WAS THERE IN ASSE SSMENT YEAR 2009-10, BUT IN THE SAID ASSESSMENT YEAR, THE TRIBU NAL HELD THAT IN VIEW OF THE CIRCULAR NO. 23 OF 1969 AND 786 OF 2 000, ISSUED BY THE CENTRAL BOARD OF THE DIRECT TAXES (CBDT) , THE COMMISSION PAID BY THE INDIAN EXPORTERS TO A FOREIGN AGENT WAS NOT TAXABLE IN INDIA. HOWEVER THE SAID CIRCULARS HAVE BEEN WITHDRA WN BY WAY OF CIRCULAR NO. 7/2009 DATED 22/10/2009. SINCE IN THE YEAR UNDER CONSIDERATION THOSE CIRCULARS ARE NOT APPLICABLE, T HE ISSUE IN DISPUTE HAS TO BE DECIDED IN THE LIGHT OF THE PROVI SIONS OF THE ACT AND JUDICIAL DECISIONS ON THE ISSUE IN DISPUTE. 6.15 ACCORDING TO THE SECTION 9(1)(I) OF THE ACT , ALL INCOME ACCRUING OR ARISING WHETHER DIRECTLY OR INDIRECTLY, THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA. FURTHER EXPLANATION-1 BELOW SECTION 9(1)(I) OF THE ACT HAS EXPLAINED THE TERM BUSINESS CONNECTION FOR THE PURPOSE OF THE SECTION. THE EXPLANATION (A) IS RELEVANT IN THE FACTS OF THE PRESENT CASE. THE SAID EXPLANATION IS REPRODUCED AS UNDER: INCOME DEEMED TO ACCRUE OR ARISE IN INDIA. 9. (1) THE FOLLOWING INCOMES SHALL BE DEEMED TO ACCRU E OR ARISE IN INDIA : (I) ALL INCOME ACCRUING OR ARISING, WHETHER DIRECT LY OR INDIRECTLY, THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA, OR THROUGH O R FROM ANY PROPERTY IN INDIA, OR THROUGH OR FROM ANY ASSET OR SOURCE OF IN COME IN INDIA, OR THROUGH THE TRANSFER OF A CAPITAL ASSET SITUATE IN INDIA. EXPLANATION 1.FOR THE PURPOSES OF THIS CLAUSE (A) IN THE CASE OF A BUSINESS OF WHICH ALL THE OPE RATIONS ARE NOT CARRIED OUT IN INDIA, THE INCOME OF THE BUSINESS DEEMED UND ER THIS CLAUSE TO ACCRUE OR ARISE IN INDIA SHALL BE ONLY SUCH PART OF THE INCOME AS IS REASONABLY ATTRIBUTABLE TO THE OPERATIONS CARRIE D OUT IN INDIA ; 28 ITA NO. 3865/DEL./2015 6.16 FURTHER, ACCORDING TO THE EXPLANATION -2 BELOW THE SECTION 9(1)(I) ALSO BUSINESS ACTIVITY NEED TO CARRIED OUT IN INDIA BY ANY OTHER PERSON ON BEHALF OF THE NON-RESIDENT. IN THE CASE, THERE ARE NO SUCH ALLEGATION THAT BUSINESS ACTIVITY HAS BEEN CARRIED OUT IN INDIA BY ANY OTHER PERSON ON BEHALF OF GD EGYPT. 6.17 THUS, ACCORDING TO THE EXPLANATION IF PART OF THE BUSINESS OPERATION ARE CARRIED OUT IN INDIA THEN SUCH PART O F THE INCOME WHICH IS ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT IN INDIA , SHALL ACCRUE OR ARISE IN INDIA. 6.18 THE COORDINATE BENCH OF TRIBUNAL IN THE CASE OF EVERGREEN INTERNATIONAL LTD (SUPRA) HAS REFERRED TO DECISIONS IN THE CASE OF GVK INDUSTRIES LTD VS. ITO 228 ITR 564 WHEREIN THE TE RM BUSINESS CONNECTION HAS BEEN ANALYSED AS UNDER: 4.8.3 FURTHER, HONBLE ANDHRA PRADESH HIGH COURT I N THE CASE OF GVK INDUSTRIES LTD. VERSUS INCOME TAX OFFICER, (199 7) 228 ITR 564 ANALYSED VARIOUS DECISIONS OF THE COURTS AND LAID C ERTAIN PRINCIPLES TO DECIDE EXISTENCE OF BUSINESS CONNECTION, AS UN DER: 12. CLAUSE (I) OF SUB-S. (1) OF S. 9, EXTRACTED AB OVE, BRINGS WITHIN THE FOLD OF THE SAID EXPRESSION ALL INCOME A CCRUING OR ARISING, WHETHER DIRECTLY OR INDIRECTLY, THROUGH OR FROM ANY BUSINESS 'CONNECTION IN INDIA,' OR THROUGH OR FROM ANY PROPERTY IN INDIA, OR THROUGH OR FROM ANY ASSET OR SOURCE OF INCOME IN INDIA, OR THROUGH THE TRANSFER OF A CAPITAL ASSET S ITUATE IN INDIA. HERE THE CONTENTION OF MR. DHANUKA THAT THE NRC HAD NO BUSINESS CONNECTION REQUIRES EXAMINATION. 13. 'THE EXPRESSION BUSINESS CONNECTION' IS ALSO US ED IN S. 163(1)(B) WHICH REGARDS EVERY PERSON IN INDIA, WHO HAS ANY BUSINESS CONNECTION WITH THE NONRESIDENT, AS AN AGE NT OF THAT NON-RESIDENT. 14. THE IMPORT OF THAT EXPRESSION HAS BEEN EXPLAINE D IN VARIOUS JUDICIAL PRONOUNCEMENTS. 15. IN CIT VS. R. D. AGGARWAL AND CO. (1965) 56 ITR 20 (SC), THE EXPRESSION 'BUSINESS CONNECTION,' AS USED IN S. 42 OF THE INDIAN IT ACT, 1922, FELL FOR CONSIDERATION OF THE SUPREME COURT. IT IS OBSERVED THAT THE QUESTION WHETHER THERE IS 'BUSINE SS 29 ITA NO. 3865/DEL./2015 CONNECTION' FROM OR THROUGH WHICH THE INCOME, PROFI TS OR GAINS ARISE OR ACCRUE TO A NON-RESIDENT MUST BE DETERMINE D UPON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IT IS POINT ED OUT THAT THE EXPRESSION BUSINESS CONNECTION POSTULATES A REA L AND INTIMATE RELATION BETWEEN THE TRADING ACTIVITY CARR IED ON OUTSIDE THE TAXABLE TERRITORIES AND THE TRADING ACTIVITY WI THIN THE TERRITORIES, THE RELATION BETWEEN THE TWO CONTRIBUT ING TO THE EARNING OF INCOME BY THE NON-RESIDENT IN HIS TRADIN G ACTIVITY. 'BUSINESS CONNECTION CONTEMPLATED BY S. 42 OF THE 1 922 ACT, IT IS EXPLAINED,' INVOLVES A RELATION BETWEEN A BUSINE SS 14 CARRIED ON BY A NON-RESIDENT WHICH YIELDS PROFITS OR GAINS AND SOME ACTIVITY IN THE TAXABLE TERRITORIES WHICH CONTRIBUT ES DIRECTLY OR INDIRECTLY TO THE EARNING OF THOSE PROFITS OR GAINS ; THERE MUST BE AN ELEMENT OF CONTINUITY BETWEEN THE BUSINESS OF A NON-RESIDENT AND THE ACTIVITY IN THE TAXABLE TERRITORIES AND A S TRAY OR ISOLATED TRANSACTION IS NOT TO BE REGARDED AS BUSINESS CONNE CTION.' IN CARBORANDUM CO. VS. CIT 1977 CTR (SC) 209 :(1977 ) 108 ITR 335 (SC), A FOREIGN COMPANY ENTERED INTO AN AGREEME NT WITH AN INDIAN COMPANY FOR RENDERING TECHNICAL AND KNOW-HOW SERVICES TO THE INDIAN COMPANY. IN LIEU OF THOSE SERVICES, T HE FOREIGN COMPANY WAS TO RECEIVE FROM THE INDIAN COMPANY AN A NNUAL FEE EQUAL TO THREE PER CENT. OF THE NET SALE PROCEE DS OF THE PRODUCTS MANUFACTURED BY THE INDIAN COMPANY EVERY Y EAR. THE QUESTION WAS HOW MUCH OF THE MONEY RECEIVED BY THE FOREIGN COMPANY WOULD BE TAXABLE UNDER THE PROVISIONS OF TH E ACT. THE INDIAN COMPANY EMPLOYED PERSONNEL MADE AVAILABLE BY THE FOREIGN COMPANY, WHO WORKED UNDER THE DIRECT CONTRO L OF THE INDIAN COMPANY. THE SUPREME COURT HELD THAT THE SER VICES OF THE FOREIGN COMPANY IN MAKING THE EMPLOYEES AVAILAB LE WERE RENDERED WHOLLY OUTSIDE INDIA AND THAT THE ACTIVITI ES OF THE FOREIGN PERSONNEL LENT OR DEPUTED BY THE FOREIGN CO MPANY DID NOT AMOUNT TO A BUSINESS ACTIVITY CARRIED ON BY THE FOREIGN COMPANY IN INDIA. IT WAS FURTHER HELD THAT THE FEE DID NOT ACCRUE OR ARISE IN INDIA NOR COULD IT BE DEEMED TO HAVE AC CRUED OR ARISEN IN INDIA AND THAT TO ROPE IN THE INCOME OF A NON-RESIDENT UNDER THE DEEMING PROVISION OF S. 42(1) OF THE 1922 ACT IT MUST BE SHOWN BY THE DEPARTMENT THAT SOME OF THE OPERATI ONS WERE CARRIED OUT IN INDIA IN RESPECT OF WHICH THE INCOME IS SOUGHT TO BE ASSESSED. IN CIT VS. HINDUSTAN SHIPYARD LTD. 1975 CTR (AP) 97 : (1977) 109 ITR 158 (AP), THE RESPONDENT-COMPANY ENTERED IN TO AN AGREEMENT WITH A POLISH COMPANY FOR THE PURCHASE OF DIESEL ENGINES WITH ACCESSORIES. THE AGREEMENT PROVIDED TH AT THE POLISH COMPANY WOULD RENDER SERVICES FOR THE EFFECT IVE FULFILLMENT OF THE CONTRACT OF SALE, WHICH INCLUDED ORGANIZING OF A TRAINING COURSE IN POLAND FOR TECHNICAL EMPLOYEES O F HINDUSTAN SHIPYARD AT THE EXPENSE OF THE POLISH COMPANY. IN T HE CONTEXT OF THE QUESTION REFERRED TO THIS COURT UNDER S. 256(1) OF THE ACT, THE 30 ITA NO. 3865/DEL./2015 DIVISION BENCH WHICH DEALT WITH THE CASE, CONSIDERE D THE SCOPE OF THE EXPRESSION BUSINESS CONNECTION WITHIN THE ME ANING OF SS. 9(1)(I) AND 163(1)(B) OF THE ACT AND HELD THAT TO C ONFORM TO THE REQUIREMENTS OF THAT EXPRESSION IT IS NECESSARY THA T THE COMMON THREAD OF MUTUAL INTEREST MUST RUN THROUGH THE FABR IC OF THE TRADING ACTIVITIES CARRIED ON OUTSIDE AND INSIDE TH E TAXABLE TERRITORY WHICH HAS BEEN DESCRIBED AS A REAL AND IN TIMATE CONNECTION AND THAT THERE MUST BE SOMETHING MORE TH AN A MERE TRANSACTION OF PURCHASE AND SALE BETWEEN PRINCIPAL AND PRINCIPAL IN ORDER TO BRING THE TRANSACTION WITHIN THE PURVIEW OF THE EXPRESSION. 18. IN BARENDRA PRASAD RAY VS. ITO (1981) 22 CTR (S C) 157 : (1981) 129 ITR 295 (SC), A FIRM OF SOLICITORS AT CA LCUTTA WAS INSTRUCTED BY CERTAIN SOLICITORS IN LONDON WHO WERE ACTING FOR A GERMAN CORPORATION. ON THEIR INSTRUCTIONS THE SOLIC ITORS IN INDIA RETAINED A BARRISTER OF LONDON IN THE SUIT PENDING BEFORE THE CALCUTTA HIGH COURT. THE BARRISTER ARGUED THE CASE FOR 15 DAYS AND WENT BACK TO LONDON WITHOUT MAKING ANY ARRANGEM ENT FOR PAYMENT OF INDIAN INCOME-TAX ON THE FEES EARNED BY HIM. ON THE ITO INITIATING PROCEEDINGS TO TREAT THE FIRM OF 15 SOLICITORS AS THE AGENT OF THE SAID BARRISTER, THE FIRM OF SOLICI TORS FILED A WRIT PETITION CHALLENGING THE SAID PROCEEDINGS WHICH WAS DISMISSED BY A LEARNED SINGLE JUDGE. AN APPEAL AGAINST THE JU DGMENT OF THE LEARNED SINGLE JUDGE, WAS ALSO DISMISSED TAKING THE VIEW THAT THERE WAS A 'BUSINESS CONNECTION' BETWEEN THE FIRM OF SOLICITORS AND THE BARRISTER. ON FURTHER APPEAL TO THE SUPREME COURT IT WAS HELD THAT THERE WAS CONNECTION BETWEEN THE INDIAN SOLICITOR AND THE BARRISTER WHICH WAS REAL AND INTI MATE AND NOT A CASUAL ONE AND THAT THE BARRISTER EARNED THE FEE ARGUING THE CASE IN INDIA ONLY DUE TO THAT CONNECTION. E. S. VE NKATARAMIAH J. (AS HE THEN WAS) SPEAKING FOR THE SUPREME COURT, OBSERVED THAT, IN THAT CASE THE TEST LAID DOWN BY THE SUPREM E COURT IN AGGARWALS CASE (SUPRA), WAS SATISFIED AND IN THE 'P ROFESSIONAL CONNECTION THERE WAS A BUSINESS CONNECTION.' 19. IN ADDL. CIT VS. NEW CONSOLIDT. GOLD FIELDS LTD . (1983) 143 ITR 599 (PATNA), THE ASSESSEE-COMPANY AND THE FOREI GN COMPANY ENTERED INTO AN AGREEMENT UNDER WHICH THE F OREIGN COMPANY WAS TO BE TECHNICAL ADVISER OF THE ASSESSEE -COMPANY IN THE MATTER OF EXPLORATION, MINING AND MINERAL DR ESSING OPERATIONS. THE FOREIGN COMPANY WAS TO BE PAID A RE TAINERS FEE AT THE RATE OF 7,000 PER ANNUM IN LONDON. THE ITO TREATED THE ASSESSEE-COMPANY AS THE AGENT OF THE FOREIGN-COMPAN Y WITHIN THE MEANING OF S. 163 OF THE IT ACT AND TREATED 7 ,000 PAYABLE BY THE ASSESSEE-COMPANY TO THE FOREIGN COMPANY AS I TS INCOME ACCRUING IN THE HANDS OF THE ASSESSEE-COMPANY. ON A PPEAL, THE AAC HELD THAT EVEN IF THE ASSESSEE-COMPANY WAS TO B E TREATED AS AN AGENT WITHIN THE MEANING OF S. 163(1), THERE WAS NO BUSINESS CONNECTION WITHIN THE MEANING OF S. 9(1) O F THE ACT SO 31 ITA NO. 3865/DEL./2015 THE INCOME ACCRUING TO THE NON-RESIDENT FOREIGN COM PANY COULD NOT BE ASSESSED THROUGH ITS AGENT. THAT ORDER WAS A FFIRMED BY THE TRIBUNAL. ON A REFERENCE TO THE HIGH COURT OF P ATNA, IT WAS HELD THAT THE SUM OF 7,000 WAS NOT THE INCOME WHI CH THE FOREIGN-COMPANY HAD RECEIVED IN INDIA OR AN INCOME WHICH HAD ACCRUED TO THE FOREIGN COMPANY WITHIN THE MEANING O F S. 5(2) OF THE ACT AND THAT THE SUM PAID TO THE FOREIGN COMPAN Y AT LONDON FOR TECHNICAL ADVICE GIVEN FROM LONDON COULD NOT BE ATTRIBUTED TO THE OPERATION CARRIED ON IN INDIA. IT WAS FURTHER H ELD THAT THERE WAS NO CONTINUITY BETWEEN THE BUSINESS OF THE NON-R ESIDENT AND THE ACTIVITY IN THE TAXABLE TERRITORIES IN RESP ECT OF THE INCOME AND, THEREFORE, THERE WAS NO BUSINESS CONNEC TION BETWEEN THE FOREIGN COMPANY AND THE ASSESSEE- COMPA NY AND THE INCOME COULD NOT BE DEEMED TO ACCRUE OR ARISE T O THE FOREIGN COMPANY IN INDIA WITHIN THE MEANING OF S. 9(1) AS S UCH, THE SAID SUM PAID TO THE FOREIGN COMPANY AT LONDON WAS NOT ASSESSABLE IN THE HANDS OF THE ASSESSEE-COMPANY EVE N AS AGENT OF THE FOREIGN COMPANY. 20. FROM THE ABOVE DISCUSSION THE FOLLOWING PRINCIP LES EMERGED: (I) WHETHER THERE IS A BUSINESS CONNECTION BETWEEN AN INDIAN COMPANY AND A NON-RESIDENT (COMPANY) IS A MI XED QUESTION OF FACT AND LAW WHICH HAS TO BE DETERMINED ON THE FACTS AND CIRCUMSTANCES OF EACH CASE ; (II) THE EXPRESSION BUSINESS CONNECTION IS TOO WIDE TO A DMIT OF ANY PRECISE DEFINITION ; HOWEVER IT HAS SOME WEL L KNOWN ATTRIBUTES ; (III) THE ESSENCE OF 16 BUSINESS CONNECTION IS THE EXISTE NCE OF CLOSE, REAL, INTIMATE RELATIONSHIP AND COMMONNESS O F INTEREST BETWEEN THE NRC AND THE INDIAN PERSON ; (IV) WHERE THERE IS CONTROL OF MANAGEMENT OR FINANCES OR SUBSTANTIAL HOLDING OF EQUITY SHARES OR SHARING OF PROFITS BY THE NRC OF THE INDIAN PERSON, THE REQUIREMENT OF PRINCIPLE (III) IS FULFILLED ; (V) TO CONSTITUTE BUSINESS CONNECTION THERE MUST BE CON TINUITY OF ACTIVITY OR OPERATION OF THE NRC WITH THE INDIAN PARTY AND A STRAY OR ISOLATED TRANSACTION IS NOT ENOUGH T O ESTABLISH A BUSINESS CONNECTION. 6.19 FURTHER, THE LEARNED DRP HAS RELIED ON THE DEC ISION OF THE TRIBUNAL IN THE CASE OF ADIT VS STAR CRUISE INDIA TR AVEL SERVICES (SUPRA)WHEREIN THE TERM BUSINESS CONNECTION HAS BEEN EXPLAINED AS UNDER: 32 ITA NO. 3865/DEL./2015 THE EXPRESSION BUSINESS CONNECTION DOES NOT COVE R MERE CANVASSING FOR BUSINESS BY AN AGENT IN INDIA. IT PO STULATES A REAL AND INTIMATE RELATION BETWEEN BUSINESS ACTIVITY CAR RIED ON OUTSIDE INDIA AND BUSINESS ACTIVITY WITHIN INDIA, THE RELAT ION BETWEEN THE TWO CONTRIBUTING TO THE EARNING OF INCOME BY THE NO N-RESIDENT IN HIS BUSINESS ACTIVITY. THE BUSINESS OPERATIONS CARRIED OUT OUTSIDE INDIA AND INSIDE INDIA MUST HAVE SUCH A RELATIONSHIP AS T O CONTRIBUTE TO BUSINESS OPERATIONS AS A WHOLE. 6.20 THUS FOR HAVING ANY BUSINESS CONNECTION IN IN DIA , WHAT WE ARE REQUIRED TO EXAMINE AS TO OUT OF THE ENTIRE BUS INESS ACTIVITY WHETHER ANY PART HAS BEEN CARRIED OUT BY THE NON-RE SIDENT ENTITY IN INDIA. WE FIND THAT FOR HAVING BUSINESS CONNECTI ON IN INDIA THE BUSINESS OPERATIONS CARRIED OUT SIDE INDIA AND INSI DE INDIA MUST HAVE RELATIONSHIP AS TO CONTRIBUTE THE BUSINESS OPE RATIONS AS A WHOLE. 6.21 BUT IN THE INSTANT CASE, M/S GD EGYPT IS RESP ONSIBLE FOR MARKETING AND SALES FOR ASSESSEE IN THE REGION OF M IDDLE EAST AND NORTH AFRICA AND HAS PROCURED SALES FOR THE ASSESSE E. THE BUSINESS OPERATION OF THE M/S GD EGYPT OF PROCURING SALES ORDER FOR THE ASSESSEE AND ITS ENTIRE ACTIVITY HAS BEEN C ARRIED OUT FROM OUTSIDE INDIA AND NO PART OF THE BUSINESS ACTIVITY HAS BEEN CARRIED OUT IN THE INDIA BY M/S GD EGYPT. THE BUSIN ESS CONNECTION HAS TO BE LOOKED INTO THE BUSINESS OPERA TIONS OF M/S GD EGYPT IN INDIA AND NOT BUSINESS CONNECTION BETWE EN THE OPERATION OF THE GD EGPYT AND BUSINESS OF THE ASSES SEE IN INDIA, BECAUSE ANY WORKFOR WHICH THE ASSESSEE IS MAKING PA YMENT WILL ALWAYS BE ASSOCIATED AND PART OF THE BUSINESS OF TH E ASSESSEE. OBVIOUSLY, IN THE INSTANT CASE NO BUSINESS CONNECTI ON EXIST AND THUS THE FINDING OF THE LEARNED DRP ON THE ISSUE IS SET ASIDE. 6.22 FURTHER, THE LEARNED DRP HAS HELD THAT THE SE RVICES RENDERED BY M/S GD EGYPT REQUIRE EXPERTISE AND KNOW LEDGE IN 33 ITA NO. 3865/DEL./2015 THE SPECIFIC AREA OF WORK AND SUCH EXPERTISE CANNO T BE DEVELOPED OVERNIGHT, BUT IT IS THE RESULT OF LONG PERIOD OF T HE WORK IN THIS LINE OF ACTIVITIES COUPLED WITH ACCUMULATED EXPERIENCE O F OPERATIONS AND THEREFORE THE PAYMENT MADE BY THE ASSESSEE TO G D EGYPT PARTAKES THE CHARACTER OF THE FTS UNDER DOMESTIC LA W. 6.23 IN THE INSTANT CASE, THE ASSESSEE HAS NOT INV OKED ANY DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) AND THER EFORE WE ARE EXAMINING ONLY THE FTS UNDER DOMESTIC LAW. 6.24 THIS ISSUE HAS BEEN EXAMINED BY THE TRIBUNAL IN THE CASE OF EVERGREEN INTERNATIONAL LTD.(SUPRA) AS UNDER: 4.8.6 THUS, IN THE INSTANT CASE, THE FIRST ISSUE A RISES, WHETHER THE SERVICES OF PROCURING EXPORT ORDER BY THE NON-RESID ENT OUTSIDE INDIA FALLS UNDER THE DEFINITION OF FEE FOR TECHNICAL SER VICES. EVIDENTLY, THE SERVICES OF PROCURING EXPORT ORDER DOES NOT FALL EI THER IN THE TECHNICAL OR CONSULTANCY SERVICES. THE CONTENTION OF THE ASSE SSING OFFICER IS THAT SAID SERVICES ARE MANAGERIAL SERVICES AND THUS FALLS UNDER FEE FOR TECHNICAL SERVICES. THE ASSESSING OFFICER HAS N OT MADE ANY ATTEMPT AS HOW THE SAID SERVICES OF PROCURING ORDER ARE MANAGERIAL SERVICES. THE ASSESSING OFFICER HAS FAILED TO DISCH ARGE HIS ONUS IN THIS REGARD. 4.8.7 ACCORDING TO THE ASSESSEE, THE MANAGERIAL SER VICES THOUGH NOT DEFINED IN THE ACT, BUT AS PER NORMAL ORDINARY BUSI NESS MEANING, IT COVERS SERVICES RENDERED IN PERFORMING MANAGEMENT F UNCTIONS WHICH RELATES TO RUNNING A BUSINESS OR HANDLING OF MANPOW ER AND RELATED AFFAIRS 18 ETC. BUT IT CANNOT COVER THE SERVICES OF FOREIGN AGENT OF PROCURING EXPORT ORDERS, IN THE INSTANT CASE. 4.8.8 ON PERUSAL OF THE SUBMISSION OF THE ASSESSEE AND ORDER OF THE LOWER AUTHORITIES, WE FIND THAT THE NON-RESIDENT HA S RENDERED SERVICES OF BOOKING EXPORT ORDER FROM FOREIGN BUYER S. IN THE PROCESS OF PROCURING EXPORT ORDERS, THE NON-RESIDENT DISPLA YS OR DEMONSTRATES THE GOODS OF THE ASSESSEE TO THE FOREI GN BUYERS. IF THE FOREIGN BUYER PLACE ANY ORDER FOR PURCHASE OF THOSE GOODS, THE NON- RESIDENT AGENT FORWARD THOSE PURCHASE ORDERS TO THE ASSESSEE. FOR RENDERING THE SERVICES OF PROCURING ORDERS, THE ASS ESSEE PAYS CERTAIN COMMISSION AT THE RATE OF PERCENTAGE AGREED BY THE NON-RESIDENT AGENT. IN OUR OPINION, THIS ENTIRE PROCESS OF PROCU RING ORDERS BY THE NON-RESIDENT CANNOT BE TERMED AS MANAGERIAL SERVICE , WHICH COULD FALL UNDER FEE FOR TECHNICAL SERVICES AS DEFINED IN EXPLANATION -2 BELOW THE SECTION 9(1)(VII) OF THE ACT. 34 ITA NO. 3865/DEL./2015 4.8.9 FURTHER, WE FIND THAT THE ASSESSEE HAS CLAIME D THAT NO PART OF SERVICES WAS RENDERED IN INDIA. THE CONTENTION OF T HE LD. DR IS THAT IN VIEW OF THE EXPLANATION INSERTED BELOW THE SECTI ON 9(2), NOW EVEN IF SERVICES ARE RENDERED OUTSIDE INDIA, SAME MAY FA LL UNDER FEE FOR TECHNICAL SERVICES. THE RELEVANT EXPLANATION IS REP RODUCED AS UNDER: EXPLANATION.FOR THE REMOVAL OF DOUBTS, IT IS HERE BY DECLARED THAT FOR THE PURPOSES OF THIS SECTION, INCOME OF A NON-RESIDENT SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA UNDER C LAUSE (V) OR CLAUSE (VI) OR CLAUSE (VII) OF SUB-SECTION (1) AND SHALL BE INCLUDED IN THE TOTAL INCOME OF THE NON-RESIDENT, WHETHER OR NOT, (I) THE NON-RESIDENT HAS A RESIDENCE OR PLACE OF BUSINE SS OR BUSINESS CONNECTION IN INDIA; OR (II) THE NON-RESIDENT HAS RENDERED SERVICES IN INDIA. 6.25 IN VIEW OF THE ABOVE DECISION, THE PAYMENT MA DE FOR PROCURING OF EXPORT SALE ORDER FOR INDIAN TAXPAYER BY ANY FOREIGN ENTITIES FROM OUTSIDE INDIA CANNOT BE HELD AS FEE F OR TECHNICAL SERVICES. 6.26 IN VIEW OF HOLDING THAT PAYMENT FOR SERVICES OF GD EGYPT ARE NOT IN THE NATURE OF FEE FOR TECHNICAL SERVICES (FT S) , THE OTHER FINDING OF THE LEARNED DRP OF THE APPLICABILITY OF EXPLANATION BELOW SECTION 9(2) I.E. THERE IS NO REQUIREMENT OF RENDERING SERVICES IN INDIA FOR INCOME DEEMED TO ACCRUE OR AR ISE IN INDIA AS PER SECTION 9(1)(VII) OF THE ACT, ARE RENDERED MERE LY ACADEMIC, AND WE ARE NOT REQUIRED TO EXAMINE APPLICABILITY OF THE SAME IN THE YEAR UNDER CONSIDERATION. 6.27 IN VIEW OF THE ABOVE, THE PAYMENT MADE BY THE ASSESSEE IS NOT CHARGEABLE UNDER THE PROVISIONS OF THE ACT IN T HE HANDS OF GD EGYPT, NO TAX IS REQUIRED TO BE DEDUCTED IN TERMS O F SECTION 195OF THE ACT AND CONSEQUENTLY NO DISALLOWANCE COULD BE M ADE UNDER SECTION 40(A)(I) OF THE ACT FOR NON-DEDUCTION OF TH E TAX AT SOURCE. 6.28 THE GROUNDS NO. 20 TO 23 OF THE APPEAL ARE AC CORDINGLY ALLOWED. 35 ITA NO. 3865/DEL./2015 7. THE GROUND NO. 24 AND 25 ARE IN RELATION TO BAD DEBT OF RS.29,73,346/-. 7.1 BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE HAS SUBMITTED THAT BAD DEBT WRITTEN OFF IN BOOKS OF ACCOUNTS ARE TO BE ALLOWED IN TERMS OF DECISION OF THE HONBLE SUPREME COURT IN T HE CASE OF TRF LTD, IF FOLLOWING TWO CONDITIONS ARE SATISFIED: (I) THE DEBT IS WRITTEN OFF IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE (II) THE DEBT WAS CONSIDERED AS INCOME AND OFFERED TO TA X IN ANY PREVIOUS/ EARLIER ASSESSMENT YEAR. 7.2 THE LEARNED COUNSEL SUBMITTED THAT IN RESPECT OF THE BAD DEBT CLAIMS BOTH THE CONDITIONS ARE SATISFIED, HOWE VER THE ASSESSING OFFICER HAS NOT ALLOWED THE CLAIM OF THE BED DEBT. HE FURTHER SUBMITTED THAT THE LEARNED DRP IS NOT CORRE CT IN HOLDING THAT THE ASSESSEE WAS REQUIRED TO PROVE THAT THE DE BT FROM RESERVE BANK OF INDIA AND OTHER BANKS BECOMES BAD. 7.3 THE LEARNED DR, ON THE OTHER HAND, SUBMITTED T HAT THE ASSESSEE HAS NOT PROVIDED BEFORE THE ASSESSING OFFI CER THE SUPPORTING DOCUMENTS TO EXPLAIN WHETHER THE AMOUNT CORRESPONDING TO THE BAD DEBTS WERE TAKEN INTO ACCO UNT AS INCOME IN EARLIER YEARS FOR THE PURPOSE OF THE TAX, AND THEREFORE ISSUE MAY BE RESTORED BACK TO THE FILE OF THE ASSES SING OFFICER FOR VERIFICATION. 7.4 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES ON THE ISSUE IN DISPUTE. THE FINDING OF THE ASSESSING OFFICER IN DR AFT ASSESSMENT ORDER, WHICH IS REPRODUCED IN PARA 5.2 IS EXTRACTE D AS UNDER: 36 ITA NO. 3865/DEL./2015 5.2 THE REPLY OF THE ASSESSEE COMPANY HAS BEEN CON SIDERED. IT HAS BEEN OBSERVED A SPECIFIC QUERY WITH REGARD TO T HE WRITE OFF OF THE BAD DEBTS HAS BEEN ASKED VIDE QUESTION NUMBER 17 OF THE QUESTIONNAIRE DATED 23 JANUARY 2014. HERE IT IS IMP ORTANT TO MENTION THAT THE ASSESSEE HAD FAILED TO PROVIDE RES PONSE ON THE FOLLOWING POINTS: DETAILS ASKED FROM THE ASSESSEE RESPONSE OF ASSESSEE DETAI LS OF BAD DEBTS ASSESSEE HAD ONLY PROVIDED A LIST OF BAD DEBTS AMOUNTING TO RS.29,73,346 WHEREIN PARTY- WISE AMOUNTS HAVE BEEN MENTIONED WITHOUT ANY DOCUMENTS. SUPPORTING DOCUMENTS TO SUBSTANTIATE WHETHER INCOME PERTAINING TO SUCH WRITE OFF HAD BEEN OFFERED TO TAX IN ANY PREVIOUS/EARLIER ASSESSMENT YEAR ASSESSEE HAD NOT PROVIDED ANY DOCUMENTARY EVIDENCE.- 7.5 IT IS EVIDENT THAT NO DOCUMENTARY EVIDENCE IN SUPPORT OF THE CLAIM THAT INCOME PERTAINING TO SUCH WRITE OFF HAD BEEN OFFERED TO TAX AS REQUIRED UNDER THE PROVISIONS OF THE ACT. IN VIEW OF THE ABOVE CIRCUMSTANCES, WE FEEL IT APPROPRIATE TO REST ORE THIS ISSUE BACK TO THE FILE OF THE LEARNED ASSESSING OFFICER W ITH THE DIRECTION TO THE ASSESSEE TO PRODUCE ALL NECESSARY DOCUMENTS IN SUPPORT OF ITS CLAIM BEFORE THE ASSESSING OFFICER, WHO THEN WI LL DECIDE THE ISSUE IN ACCORDANCE WITH LAW. IT IS NEEDLESS TO ME NTION THAT THE ASSESSEE SHALL BE AFFORDED ADEQUATE OPPORTUNITY OF BEING HEARD. THE GROUND NOS. 24 AND 25 OF THE APPEAL ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 8. THE GROUND NO. 26 IS CONSEQUENTIAL NATURE AND G ROUND NO. 27 IS PREMATURE AT THIS STAGE, THUS, BOTH THESE GROUND S ARE DISMISSED AS INFRUCTUOUS. 37 ITA NO. 3865/DEL./2015 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED PARTLY FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 1 ST MAY, 2020. SD/- SD/- (SUDHANSHU SRIVASTAVA) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 1 ST MAY, 2020. RK/- (D.T.D.S) COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI