Infineon Technologies India Private Limited, Bangalore V. DCIT, Bangalore

ITA 474/BANG/2015

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 8113 (ITAT-BANGALORE)
• Duration Of Justice: 5 year(s) 4 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-08-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 27-03-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MUZAFFAR HUSSAIN BENGALURU
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Retrospective amendment; Permanent establishment; TDS; Set aside
• Section: 92C; 143(3); 40(a)(ia); 133(6); 195; 144C; 43; 72; 13; 92CA; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N V VASUDEVAN, VICE PRESIDENT AND SHRI G MANJUNATHA, ACCOUNTANT MEMBER IT(TP)A NO.405/BANG/2015 ASSESSMENT YEAR: 2010 - 11 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 3(1)(1), BANGALORE. VS. INFINEON TECHNOLOGIES INDIA PVT. LTD., 9 TH FLOOR, PRESTIGE THIRULAKSHMI, NO.11, MAHATMA GANDHI ROAD, BANGALORE 560 001. PAN: AABCS 6967N APPELLANT RESPONDENT IT(TP)A NO.474/BANG/2015 ASSESSMENT YEAR: 2010-11 INFINEON TECHNOLOGIES INDIA PVT. LTD., BANGALORE 560 001. PAN: AABCS 6967N VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 3(1)(1), BANGALORE. APPELLANT RESPONDENT REVENUE BY : SHRI MUZAFFAR HUSSAIN, CIT(DR)(ITAT), BENGALURU. ASSESSEE BY : SHRI K R VASUDEVAN, ADVOCATE DATE OF HEARING : 17.08.2020 DATE OF PRONOUNCEMENT : 21.08.2020 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT THESE APPEALS IN IT(TP)A NO.474/BANG/2015 BY THE A SSESSEE AND IT(TP)A NO.405/BANG/2015 BY THE REVENUE ARE DIRECTE D AGAINST THE FINAL ORDER OF ASSESSMENT DATED 19.1.2015 OF THE DCIT, CI RCLE 3(1)(1), IT(TP)A NOS.405 & 474/BANG/2015 PAGE 2 OF 19 BANGALORE PASSED U/S. 143(3) R.W.S. 144C OF THE INC OME-TAX ACT, 1961 [THE ACT] IN RELATION TO ASSESSMENT YEAR 2010-11. 2. THE FIRST ISSUE THAT NEEDS ADJUDICATION IN THES E APPEALS IS THE CORRECTNESS OF DETERMINATION OF ALP IN RESPECT OF A N INTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND ITS AE OF REND ERING SOFTWARE DEVELOPMENT SERVICES [SWD SERVICES] U/S. 92 OF THE ACT. THE GROUNDS OF APPEAL RAISED BY THE REVENUE IN THIS REGARD ARE AS FOLLOWS:- 1. THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL ARE OPPOSED TO LAW AND FACTS OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, AS PER THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL, WHE THER WORKING CAPITAL ADJUSTMENT CAN BE MADE ON THE BASIS OF ADVA NCE RECEIVED FROM AES IN ABSENCE OF DEBTORS AND INVENTORY IN THE CASE OF ASSESSEE FOR CALCULATING THE COST OF WORKING CAPITA L BUILT IN THE PROFIT MARGIN. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE DISPUTE RESOLUTION PANEL IS NOT JUSTIFIED IN DIRECT ING THE TPO TO ADJUST THE PROFIT MARGIN OF THE ASSESSEE FOR THE EN TIRE AMOUNT OF ADVANCES RECEIVED FROM AE ON THE GROUND THAT THERE IS TIME VALUE FOR MONEY. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE DISPUTE RESOLUTION PANEL ERRED IN DIRECTING THE TPO /A0 TO EXCLUDE THE COMPARABLE M/S INFOSYS LTD., M/S PERSIS TENT SYSTEM LTD., M/S KALS INFORMATION SYSTEMS LTD. & M/5 SASKE N COMMUNICATION TECHNOLOGIES LTD. WITHOUT CONSIDERING THE FACTS DISCUSSED BY THE TPO FOR SELECTION OF THE COMPARABL ES IN THE CASE OF ASSESSE AND WITHOUT APPRECIATING THE FACT THAT T HESE ARE QUALIFYING ALL THE QUALITATIVE AND QUANTITATIVE FIL TERS APPLIED BY THE TPO. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE DISPUTE RESOLUTION PANEL ERRED IN DIRECTING THE TPO /A0 TO EXCLUDE THE COMPARABLE M/S TATA ELXSI LTD., WITHOUT APPRECIATING THE FACT THAT THE SELECTION OF COMPARABLES IN A CAS E DEPENDS ON IT(TP)A NOS.405 & 474/BANG/2015 PAGE 3 OF 19 ASSESSEE SPECIFIC FAR ANALYSIS AND THIS IS FUNCTION ALLY COMPARABLE COMPANY WHICH QUALIFIES ALL THE QUALITAT IVE AND QUANTITATIVE FILTERS APPLIED BY THE TPO 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE DISPUTE RESOLUTION PANEL ERRED IN DIRECTING THE TPO /A0 TO EXCLUDE THE COMPARABLE M/S RS SOFTWARE INDIA LTD., BY APPLYING NEW FILTER I.E ONSITE FILTER IN SWD SEGMENT, WITHOU T APPRECIATING THE FACT THAT THE DIRECTION ACTUALLY AMOUNTS TO SET TING ASIDE OF THE DRAFT ORDER, WHICH IS BEYOND THE MANDATE GIVEN TO D RP VIDE PROVISIONS BY SECTION 144C(8). 7. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL IN SO FAR AS IT RELATES TO THE ABO VE GROUNDS MAY BE REVERSED. 8. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND / OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. 3. AS FAR AS ASSESSEES APPEAL WITH REGARD TO TP IS SUE IS CONCERNED, GROUNDS 1 & 2 ARE GENERAL IN NATURE AND CALLS FOR N O SPECIFIC ADJUDICATION. THE GROUNDS WHICH THE ASSESSEE SEEKS ADJUDICATION B Y THE TRIBUNAL ARE GROUNDS 3(B), (C), 7, 9, 10 & 13, WHICH READS AS FO LLOWS:- 3. THE LEARNED AO / LEARNED TPO ERRED IN REJECTING THE TP DOCUMENTATION MAINTAINED BY THE APPELLANT BY INVOKI NG PROVISIONS OF SUB-SECTION (3) OF 92C OF THE ACT CON TENDING THAT THE INFORMATION OR DATA USED IN THE COMPUTATION OF THE ALP IS NOT RELIABLE OR CORRECT. THE LEARNED AO/ LEARNED TPO HA S GROSSLY ERRED THEREFORE IN : A. . B. INCLUDING COMPANIES THAT DO NOT SATISFY THE TEST OF COMPARABILITY. SPECIFICALLY, THE FOLLOWING COMPANIE S SELECTED AS FUNCTIONALLY COMPARABLE BY THE LEARNED AO / LEARNED TPO OUGHT TO HAVE BEEN REJECTED: LARSEN AND TOUBRO INFOTECH LIMITED IT(TP)A NOS.405 & 474/BANG/2015 PAGE 4 OF 19 C. REJECTING COMPANIES THAT ARE FUNCTIONALLY COMPAR ABLE TO THE APPELLANT WHILE PERFORMING THE COMPARABILITY ANALYS IS. SPECIFICALLY, THE FOLLOWING COMPANIES OUGHT TO HAVE BEEN INCLUDED AS COMPARABLE: AKSHAY SOFTWARE TECHNOLOGIES LIMITED QUINTEGRA SOLUTIONS LIMITED 4. .. 7. THE LEARNED AO / LEARNED TPO ERRED IN APPLICATIO N OF DIFFERENT FINANCIAL YEAR ENDING FILTER. . 9. THE LEARNED AO/ LEARNED TPO/LEARNED DRP ERRED IN APPLYING ONSITE FILTER TO REJECT THE COMPANIES THAT ARE COMPARABLE TO THE APPELLANT. 10. THE LEARNED AO / LEARNED TPO ERRED IN COMPUTATI ON OF WORKING CAPITAL ADJUSTMENT. .. 13. THE LEARNED AO / LEARNED TPO ERRED IN COMPUTATI ON OF THE MARK-UP OF THE APPELLANT. THE LEARNED TPO HAS ERRED IN CONSIDERED 'RETIREMENT PROVISION WRITTEN BACK' AS N ON-OPERATING IN NATURE. THE OTHER GROUNDS OF ASSESSEES APPEAL IN ASSESSEE S APPEAL WERE NOT PRESSED. 4. THE ASSESSEE IS A COMPANY. IT IS A SUBSIDIARY O F INFINEON TECHNOLOGIES ASIA PACIFIC P. LTD. THE ASSESSEE REN DERED SOFTWARE DEVELOPMENT SERVICES (SWD SERVICES) AND MARKETING S UPPORT SERVICES. DURING THE PREVIOUS YEAR RELEVANT TO AY 2010-11, TH E ASSESSEE RENDERED SWD SERVICES TO ITS ASSOCIATED ENTERPRISE [AE]. AS REQUIRED UNDER THE IT(TP)A NOS.405 & 474/BANG/2015 PAGE 5 OF 19 PROVISIONS OF SECTION 92 OF THE ACT, THE ASSESSEE H AS TO ESTABLISH THAT THE PRICE RECEIVED IN THE INTERNATIONAL TRANSACTION FRO M THE AE WAS AT ARMS LENGTH. THE ASSESSEE IN SUPPORT OF ITS CLAIM THAT THE PRICE RECEIVED WAS AT ARMS LENGTH FILED A TP ANALYSIS IN WHICH THE ASSES SEE ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD FOR DETERMINATION OF ALP. THE PROFIT LEVEL INDICAT OR (PLI) CHOSEN FOR THE PURPOSE OF COMPARING THE ASSESSEES PROFIT MARGIN W ITH THAT OF THE COMPARABLE COMPANIES WAS OPERATING PROFIT TO OPERAT ING COST (OP/OC). THE AO REFERRED THE QUESTION OF DETERMINATION OF AL P TO THE TRANSFER PRICING OFFICER (TPO) AS IS REQUIRED UNDER THE PROV ISIONS OF SEC.92C OF THE ACT. THERE IS A DISPUTE WITH REGARD TO OP/OC AS CO MPUTED BY THE ASSESSEE AND THAT OF THE TPO. THE COMPUTATION BY THE ASSESSEE AND THE TPO IS AS FOLLOWS:- PARTICULARS COMPUTATION OF NET MARGIN AS PER THE ASSESSEE (INR) COMPUTATION OF NET MARGIN AS PER THE TPO (INR) IN COME : OPERATING INCOME 1,575,133,244 1,575,133,44 TOTAL OPERATING REVENUE 1,575,133,244 1,575,133,244 TOTAL COSTS 1,534,682,488 1,534,682,488 LESS: EXCHANGE LOSS 26,725,537 26,725,537 RETIREMENT PROVISION WRITTEN BACK 22,463,388 TOTAL OPERATING COSTS 1,485,493,563 150,79,56,951 OPERATING PROFIT 89,639,680 67,176,293 OPERATING PROFIT/ OPERATING COST 6.03% 4.45% IT(TP)A NOS.405 & 474/BANG/2015 PAGE 6 OF 19 5. IT IS THE PLEA OF THE ASSESSEE THAT A SUM OF RS. 2,24,63,388 WAS A RETIREMENT PROVISION WRITTEN BACK WHICH WAS CONSIDE RED BY THE TPO AS NON- OPERATING IN NATURE; WHEREAS THE ASSESSEE HAS CONS IDERED THE SAME AS OPERATING IN NATURE AND THAT IS THE REASON FOR THE DIFFERENCE IN THE COMPUTATION OF PLI BETWEEN THE ASSESSEE AND THE DEP ARTMENT. 6. THE ASSESSEE IN SUPPORT OF ITS CLAIM THAT THE PR ICE RECEIVED IN THE INTERNATIONAL TRANSACTION WAS AT ARMS LENGTH CHOSE 12 COMPARABLE COMPANIES AND COMPARED THE AVERAGE ARITHMETIC MEAN PROFITS OF THOSE 12 COMPANIES WITH THE ASSESSEE TO JUSTIFY THE PRICE RE CEIVED AS AT ARMS LENGTH. THE TPO ACCEPTED 4 OUT OF 12 COMPARABLES C HOSEN BY THE ASSESSEE. THE TPO ON HIS SELECTED 7 OTHER COMPARAB LE COMPANIES AND ARRIVED AT A SET OF 11 COMPARABLES. THE AVERAGE AR ITHMETIC PROFIT MEAN OF 11 COMPARABLE COMPANIES CHOSEN BY THE TPO WAS AS FO LLOWS:- S L. NO. NAME PLI 1 LGS GLOBAL LTD 11.45% 2 INFOSYS LTD 45.01% 3 KALS INFORMATION SYSTEMS LTD.(SEG) 38.27% 4 LARSEN & TOUBRO INFOTECH LTD. 19.23% 5 MINDTREE LTD.(SEG) 14.83% 6 PERSISTENT SYSTEMS & SOLUTIONS LTD. 15.38% 7 PERSISTENT SYSTEMS LTD. 30.35% 8 R S SOFTWARE (INDIA) LTD. 10.29% 9 SASKEN COMMUNICATION TECHNOLOGIES 17.36% 10 TATA ELXSI (SEG) 21.88% 11 THINKSOFT GLOBAL SERVICES LTD. 17.65% AVERAGE MARGIN 21.98% 7. THE TPO COMPUTED THE ALP AND THE SUGGESTED ADDIT ION TO THE TOTAL INCOME AS FOLLOWS:- IT(TP)A NOS.405 & 474/BANG/2015 PAGE 7 OF 19 3.9.4 COMPUTATION OF ARMS LENGTH PRICE THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. PLEASE SEE ANNEXURE B FOR DETA ILS OF COMPUTATION OF PLI OF THE COMPARABLES. BASED ON TH IS, THE ARMS LENGTH PRICE OF THE SERVICES RENDERED BY THE TAXPAY ER TO ITS AE(S) IS COMPUTED AS UNDER: SOFTWARE DEVELOPMENT SERVICES A RM'S LENGTH MEAN MARGIN ON COST 21.98% LESS: WORKING CAPITAL ADJUSTMENT (ANNEX. C) 0.30% ADJUSTED MARGIN 21.68% OPERATING COST 150,79,56,951 ARMS LENGTH PRICE (ALP) @ 121.68% OF OPERATING COST 183,48,82,018 PRICE RECEIVED 157,51,33,244 SHORTFALL BEING ADJUSTMENT U/S 92CA: 25,97,48,774 THE ABOVE SHORTFALL OF RS. 25,97,48,774/- IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA IN RESPECT OF SOFTWARE DEVELOPMENT SEGMENT OF THE TAXPAYER'S INTERNATIONAL TRANSACTION S. 8. THE ADDITION SUGGESTED BY THE TPO ON A REFERENCE BY THE AO U/S. 92CA OF THE ACT WAS INCORPORATED BY THE AO IN THE D RAFT ORDER OF ASSESSMENT. AGAINST THE DRAFT ORDER OF ASSESSMENT, THE ASSESSEE FILED AN APPEAL BEFORE THE DRP. THE DRP EXCLUDED SOME OF TH E COMPARABLE COMPANIES CHOSEN BY THE TPO AND ALSO DID NOT AGREE WITH THE PRAYER OF THE ASSESSEE FOR INCLUSION OF CERTAIN COMPARABLE CO MPANIES. 9. BESIDES THE ABOVE, THE DRP ALSO GAVE A DIRECTION TO THE TPO TO COMPUTE THE WORKING CAPITAL ADJUSTMENT AS PER THE A CTUAL COMPUTATION AND NOT TO RESTRICT THE GRANT OF WORKING CAPITAL ADJUST MENT TO THE AVERAGE ARITHMETIC WORKING ADJUSTMENT MEAN OF THE COMPARABL E COMPANIES. ONE OF THE GRIEVANCE OF THE ASSESSEE BEFORE THE DRP WAS WI TH REGARD TO COMPUTATION OF WORKING CAPITAL ADJUSTMENT, APART FR OM THE GRIEVANCE WITH REGARD TO TPO ADOPTING THE WORKING CAPITAL ADJUSTME NT BY RESTRICTING IT TO IT(TP)A NOS.405 & 474/BANG/2015 PAGE 8 OF 19 AVERAGE ARITHMETIC MEAN WORKING CAPITAL ADJUSTMENT OF THE COMPARABLE COMPANIES. THAT DISPUTE WAS WITH REGARD TO THE QUE STION WHETHER ADVANCES RECEIVED FROM AE SHOULD BE IGNORED WHILE C OMPUTING THE AVERAGE TRADE PAYABLES, WHICH WAS SPECIFICALLY RAIS ED AS OBJECTION NO.16 BEFORE THE DRP, BUT WAS NOT DECIDED BY THE DRP. TH E ASSESSEE AND THE REVENUE ARE AGGRIEVED BY THE DIRECTIONS OF THE DRP AND HAVE PREFERRED THE PRESENT APPEALS BEFORE THE TRIBUNAL. 10. AS FAR AS GROUND NO.4 RAISED BY THE REVENUE IS CONCERNED, THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO A DE CISION OF THIS TRIBUNAL RENDERED IN THE CASE OF CSG SYSTEMS INTERNATIONAL ( I) P. LTD. V. DCIT, ITA NO.2026/BANG/2017, ORDER DATED 31.7.2016 (THE ASSES SEE IN THAT CASE WAS ALSO A SWD SERVICE PROVIDER SUCH AS THE ASSESSEE AN D THE SAME COMPARABLES CHOSEN IN THE CASE OF THE ASSESSEE IN T HIS APPEAL WAS ALSO CHOSEN AS COMPARABLE COMPANY BY THE TPO IN THAT CAS E) WHEREIN THE COMPARABILITY OF THE AFORESAID 4 COMPANIES WITH THE SWD SERVICES COMPANY SUCH AS THE ASSESSEE CAME UP FOR CONSIDERAT ION. THE TRIBUNAL EXCLUDED INFOSYS LTD. FROM THE LIST OF COMPARABLES VIDE PARA 19 OF ITS O RDER ON THE GROUND THAT INFOSYS LTD. WAS HAVING A HUGE B RAND VALUE AND INTANGIBLES AS WELL AS BARGAINING POWER AND THE SAM E CANNOT BE COMPARED WITH ASSESSEE WHO IS PROVIDING ONLY SWD SERVICES TO ITS AE. VIDE PARA 20 OF THE VERY SAME AFORESAID ORDER OF THE TRIBUNAL, P ERSISTENT SYSTEMS LTD. & SASKEN COMMUNICATION TECHNOLOGIES LTD. WAS EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES ON THE GROUND THAT THESE COMPA NIES WERE ENGAGED IN DIVERSIFIED ACTIVITIES AND EARNING REVENUE FROM VARIOUS ACTIVITIES INCLUDING LICENSING OF PRODUCTS AND INCOME FROM MAINTENANCE C ONTRACTS. SASKEN COMMUNICATION TECHNOLOGIES LTD. WAS HAVING INCOME F ROM 3 SEGMENTS AND THERE WAS NO SEGMENTAL REPORTING SO THAT THE OP ERATING MARGINS OF SWD SERVICES OF THIS COMPANY CAN BE COMPARED WITH T HE ASSESSEE. AS FAR IT(TP)A NOS.405 & 474/BANG/2015 PAGE 9 OF 19 AS KALS INFORMATION SYSTEMS LTD. IS CONCERNED, THE TRIBUNAL IN THE VERY SAME AFORESAID ORDER AT PARA 15 HELD THAT THIS COMPANY W AS INTO SOFTWARE PRODUCTS AND THE SEGMENTAL RESULTS OF THE SWD SERVICES WERE NOT AVAILABLE, HENCE NOT COMPARABLE. IN THE LIGHT OF THE AFORESAID DECISION OF THE TRIBUNAL, WE DO NOT FIND ANY MERIT IN GROUND NO.4 RAISED BY THE REVENUE. 11. AS FOR GROUND NO.5 OF THE REVENUE IS CONCERNED, IN THE AFORESAID ORDER OF TRIBUNAL I.E., CSG SYSTEMS INTERNATIONAL (I) P. LTD. (SUPRA) , VIDE PARA 9, THE TRIBUNAL HELD THAT TATA ELXSI CANNOT BE REGARDED AS A COMPARABLE COMPANY ON THE GROUND THAT THIS COMPANY WAS ENGAGED IN DIVERSE ACTIVITIES IN THE SOFTWARE DEVELOPMENT SEGM ENT. THIS COMPANY WAS HELD TO BE DEALING IN SOFTWARE PRODUCTS ALSO AND SE GMENTAL DETAILS OF REVENUE WERE NOT AVAILABLE. FOLLOWING THE AFORESA ID DECISION, WE FIND NO MERIT IN GROUND NO.5 RAISED BY THE REVENUE. 12. AS FAR AS GRD.NO.6 REGARDING INCLUSION OF R S S OFTWARE (INDIA) LTD. IS CONCERNED, IT WAS BROUGHT TO OUR NOTICE THAT THIS C OMPANY WAS DIRECTED TO BE INCLUDED IN THE LIST OF COMPARABLE COMPANIES BY THIS TRIBUNAL IN THE CASE OF INTEVA PRODUCTS INDIA AUTOMATIVE P. LTD. V. DCIT, [2016] 72 TAXMANN.COM 163 [BANG TRIB.] VIDE PARA 24. THE ASSE SSEE IN THAT CASE WAS ALSO A SWD SERVICE PROVIDER SUCH AS THE ASSESSE E AND THE SAME COMPARABLES CHOSEN IN THE CASE OF THE ASSESSEE IN T HIS APPEAL WAS ALSO CHOSEN AS COMPARABLE COMPANY BY THE TPO IN THAT CAS E. THE LD. COUNSEL FOR THE ASSESSEE HAS NO OBJECTION TO INCLUSION OF T HIS COMPANY IN THE LIST OF COMPARABLES. ACCORDINGLY, GROUND NO.6 OF THE REVEN UE IS ALLOWED. 13. THE ONLY GROUND THAT REMAINS FOR ADJUDICATION I N THE REVENUES APPEAL IS GROUND NOS. 2 & 3. THESE GROUNDS DO NOT EMANATE FROM THE ORDER OF THE DRP AND WAS NOT PART OF THE EITHER GRO UNDS RAISED BY THE IT(TP)A NOS.405 & 474/BANG/2015 PAGE 10 OF 19 ASSESSEE BEFORE DRP OR TPO. HENCE THESE GROUNDS AR E DISMISSED AS NOT ARISING OUT OF THE ORDER OF THE DRP. 14. IN THE RESULT, THE APPEAL BY THE REVENUE IS TRE ATED AS PARTLY ALLOWED. 15. AS FAR AS THE APPEAL OF THE ASSESSEE IS CONCERN ED, IN GROUND NO.3(B) THE ASSESSEE HAS SOUGHT EXCLUSION OF LARSEN & TOUBRO INFOTECH LTD. FROM THE LIST OF COMPARABLE COMPANIES. THE TR IBUNAL IN THE AFORESAID DECISION IN THE CASE OF CSG SYSTEMS INTERNATIONAL (I) P. LTD. (SUPRA) VIDE PARA 21 DEALT WITH COMPARABILITY OF LARSEN & TOUBRO INFOTECH LTD. WITH THE SOFTWARE SERVICE PROVIDER SUCH AS THE ASSESSEE AND HOLD THAT THIS COMPANY HAS REVENUE FROM SOFTWARE SERVICES AND PRODUCTS AND SEGMENTAL INFORMATION WAS NOT AVAILABLE. IN PARA 23 THE TRIB UNAL DIRECTED EXCLUSION OF LARSEN & TOUBRO INFOTECH LTD. FROM THE LIST OF COMPARABLE COMPANIES. 16. IN GROUND NO.3(C), THE ASSESSEE SEEKS INCLUSION OF 2 COMPANIES, BUT AT THE TIME OF HEARING THE LD. COUNSEL FOR THE ASSE SSEE PRESSED FOR EXCLUSION OF AKSHAY SOFTWARE TECHNOLOGIES LTD. ALON E. THIS TRIBUNAL IN THE CASE OF INTEVA PRODUCTS INDIA AUTOMATIVE P. LTD. (SUPRA) VIDE PARAS 25 TO 28 REMANDED THE ISSUE WITH REGARD TO EXCLUSION OF T HIS COMPANY FROM LIST OF COMPARABLE COMPANIES. FOLLOWING ARE THE RELEVANT O BSERVATIONS:- 25. THE ASSESSEE IS SEEKING INCLUSION OF ANOTHER C OMPANY VIZ. AKSHAY SOFTWARE TECHNOLOGY LTD. WHICH WAS REJECTED BY THE TPO. 26. THE LEARNED AUTHORISED REPRESENTATIVE OF THE AS SESSEE HAS SUBMITTED THAT THE TPO HAS REJECTED THIS COMPANY ON THE GROUND THAT THIS COMPANY HAS 90% OF THE REVENUE EARNED FRO M DUBAI OFFICE WHEREAS THE ASSESSEE HAS EARNED 100% REVENUE FROM INDIA OPERATIONS. THE LEARNED AUTHORISED REPRESENTATIVE H AS POINTED OUT THAT THIS FACT HAS BEEN INAPPROPRIATELY INTERPR ETED BY THE TPO AS THE ANNUAL REPORT OF THE COMPANY CLEARLY STATED THAT THE COMPANY HAS ITS OFFICES ONLY IN MUMBAI AND USA AND NO OFFICE IT(TP)A NOS.405 & 474/BANG/2015 PAGE 11 OF 19 AT DUBAI. HE HAS REFERRED THE OBJECTIONS RAISED BEF ORE THE DRP AT PAGES 156 & 157 OF THE PAPER BOOK AND SUBMITTED THA T THE ASSESSEE HAS REPRODUCED THE DIRECTOR'S REPORT WHERE IN IT IS STATED THAT THE COMPANY'S OUTSOURCING BUSINESS FROM CLIENT S IN DUBAI FACING STEEP PRICING PRESSURE DUE TO WHICH THE INCO ME FOR THE YEAR WAS LOWER IN COMPARISON TO THE EARLIER YEAR. THE AS SESSEE HAS SPECIFICALLY MENTIONED THAT THE EXPORT INCOME FROM DUBAI ACCOUNTED FOR 90% OF TOTAL INCOME. THE LEARNED AUTH ORISED REPRESENTATIVE HAS SUBMITTED THAT THE EXPORT INCOME FROM DUBAI IS STATED AS INCOME FROM OPERATIONS OF DUBAI OFFICE . THUS THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THA T THIS COMPANY IS FUNCTIONALLY COMPARABLE WITH THE ASSESSE E AND SHALL BE INCLUDED IN THE SET OF COMPARABLES. 27. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REP RESENTATIVE HAS SUBMITTED THAT THESE FACTS WERE NOT SPECIFICALL Y POINTED OUT BEFORE THE DRP AND THEREFORE THE DRP HAS NOT GIVEN FINDING ON THESE FACTS. 28. HAVING CONSIDERED THE RIVAL SUBMISSIONS AND CAR EFUL PERUSAL OF THE RECORD, WE NOTE THAT THE TPO HAS REJECTED TH IS COMPANY ON THE GROUND THAT IT HAS 90% OF ITS INCOME FROM DUBAI OPERATIONS IN COMPARISON TO THE ASSESSEE'S 100% INCOME FROM THE I NDIAN OPERATIONS. IT APPEARS THAT THE TPO HAS CONSIDERED THE EXPORT INCOME FROM DUBAI CLIENTS OF THE COMPANY AS INCOME FROM DUBAI OPERATIONS. ACCORDINGLY, WE SET ASIDE THE ISSUE OF COMPARABILITY OF THIS COMPANY TO THE RECORD OF THE A.O./TPO FOR R EADJUDICATION OF THE SAME AFTER CONSIDERING THE CORRECT AND PROPE R FACTS AND DETAILS OF THE COMPANY. 17. FOLLOWING THE AFORESAID DECISION, WE REMAND THE QUESTION OF COMPARABILITY OF AKSHAY SOFTWARE TECHNOLOGIES LTD. TO TPO/AO FOR FRESH CONSIDERATION. 18. IN GROUND NO.7, THE ASSESSEE HAS SOUGHT FOR INC LUSION OF R SYSTEMS LTD. THIS COMPANY WAS EXCLUDED ON THE REASON THAT THIS COMPANY HAD A DIFFERENT FINANCIAL YEAR ENDING. THE LAW BY NOW IS SETTLED THAT IF FROM THE AVAILABLE DATA IN THE PUBLIC DOMAIN IT IS POSSIBLE TO COMPUTE OP/OC OF THIS IT(TP)A NOS.405 & 474/BANG/2015 PAGE 12 OF 19 COMPANY BY CULLING OUT THE DATA OF THE PREVIOUS YEA R OF THE ASSESSEE; THEN THE COMPANY SHOULD BE REGARDED AS A COMPARABLE. TH E AO/TPO CAN EXERCISE POWERS U/S. 133(6) OF THE ACT TO GET THE R EQUIRED DETAILS. THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT HE WILL MAKE THE NECESSARY DETAILS AVAILABLE TO THE AO. HENCE THE COMPARABILIT Y OF THIS COMPANY IS SET ASIDE TO THE AO/TPO FOR FRESH CONSIDERATION ON THE BASIS OF THE AVAILABLE DATA OF THE COMPANY COMPARABLE WITH THE PREVIOUS YE AR OF THE ASSESSEE. 19. REGARDING GROUND NO.10 RAISED BY THE REVENUE RE LATING ERRONEOUS WORKING CAPITAL ADJUSTMENT BY NOT CONSIDERING THE A DVANCES RECEIVED FROM AES WHILE COMPUTING THE AVERAGE TRADE PAYABLES. IN VIEW OF THE DECISION OF THE TRIBUNAL RENDERED IN THE CASE OF CGI INFORMA TION SYSTEMS & MANAGEMENT CONSULTANTS (P) LTD. IT(TP)A.NO.346/BANG /2015 ORDER DATED 26.10.2016 THE TPO IS DIRECTED TO CONSIDER THE ADVA NCE RECEIVED FROM AE AS TRADE PAYABLE AND CONSIDERED FOR WORKING CAPITAL ADJUSTMENT. IT WAS HELD IN THE SAID DECISION THAT ADVANCES RECEIVED FR OM AE PAR TAKE THE CHARACTER OF TRADE PAYABLES WHICH IS TO BE ADJUSTED AGAINST FUTURE INVOICE. THE ADVANCE RECEIVED FROM THE AE DISPENSES WITH THE NECESSITY TO BORROW FOR WORKING CAPITAL AND HAS DIRECT BEARING ON THE P ROFITABILITY OF THE CONCERNED. THE GRIEVANCE OF THE ASSESSEE IS ACCORD INGLY ALLOWED. THE AO IS DIRECTED TO COMPUTE THE WORKING CAPITAL ADJUSTME NT BY CONSIDERING THE ADVANCES RECEIVED FROM AE AS PART OF THE AVERAGE TR ADE PAYABLE. 20. THE NEXT ASPECT TO BE CONSIDERED IS GROUND NO.1 3 WITH REGARD TO COMPUTATION OF OP/OC OF THE ASSESSEE. THE PLEA OF THE ASSESSEE IS THAT OP/OC SHOULD BE COMPUTED AS DONE BY THE ASSESSEE BY CONSIDERING THE RETIREMENT PROVISION WRITTEN BACK AS PART OF OPERAT ING EXPENDITURE. THE ASSESSEES CLAIM THAT FOR EARLIER AY ITS OPERATING PROFIT WAS CONSIDERED AFTER TREATING THE PROVISION FOR RETIREMENT BENEFIT NO LO NGER REQUIRED AS PART OF OPERATING EXPENSES. THIS ASPECT WAS NOT VERIFIED E ITHER BY THE IT(TP)A NOS.405 & 474/BANG/2015 PAGE 13 OF 19 DRP/AO/TPO. HENCE WE DEEM IT FIT AND APPROPRIATE TO SET ASIDE THE ISSUE TO TPO/AO FOR CONSIDERATION OF THE CLAIM OF ASSESSE E WITH REGARD TO PAST TREATMENT OF SIMILAR WRITE BACK FOR COMPUTING ITS O PERATING PROFIT. THE AO/TPO WILL AFFORD OPPORTUNITY OF BEING HEARD TO TH E ASSESSEE, BEFORE DECIDING THE ISSUE OF DETERMINATION OF ALP IN ACCOR DANCE WITH THE DIRECTIONS CONTAINED IN THIS ORDER. 21. THE OTHER CORPORATE GROUND BY THE ASSESSEE WHIC H REQUIRES ADJUDICATION VIDE GROUND NO.14 READS AS FOLLOWS:- 14. DISALLOWANCE OF PROJECT SPECIFIC COSTS AMOUNTI NG TO INR 76,139.4591-UNDER SECTION 40(A)(I) OF THE ACT. THE LEARNED AO ERRED IN DISALLOWING THE EXPENDITURE OF INR 76,139,459/- INCURRED BY THE APPELLANT TOWARDS THE USAGE OF EDA (ELECTRONIC DESIGN AUTOMATION) SOFTWARE TOOLS IN SOFTWARE DEVELOPMENT, UNDER SECTION 40(A) OF THE ACT. THE LEARNED AO OUGHT TO HAVE APPRECIATED THAT THE EDA SOFTWARE LICENSES ARE PURCHASED BY INFINEON TECHNOLOGIES AG GERMANY. THE ULTIMATE PARENT COMPANY OF THE APPELLANT, FROM THE VENDORS AS A STANDARD OFF-THE-SHELF PRODUCT AND ARE NOT TRANSFERRED TO THE APPELLANT COMPANY. THE APPELLANT COMPANY ONLY USES THE LICENSES OWNED BY INFINEON TECHNOLOGIES AG, GERMANY. THE LEARNED AO OUGHT TO HAVE APPRECIATED THAT THE PAYMENTS MADE BY THE APPELLANT COMPANY TO INFINEON TECHNOLOGIES AG, GERMANY FOR USAGE OF EDA SOFTWARE TOOLS IS TOWARDS REIMBURSEMENT OF COSTS INCURRED BY INFINEON TECHNOLOGIES AG, GERMANY WITHOUT ANY MARK UP, AND THEREFORE NO TAX IS REQUIRED TO BE DEDUCTED ON THE SAME. FURTHER, THE LEARNED AO HAS ERRED IN NOT PLACING RELIANCE ON THE RULING OF HONORABLE INCOME-TAX IT(TP)A NOS.405 & 474/BANG/2015 PAGE 14 OF 19 APPELLATE TRIBUNAL IN THE COMPANY'S OWN CASE FOR THE ASSESSMENT YEARS 2000-01 AND 2001-02 (ITA NOS. 467 AND 468/BANG/2002) WHEREIN THE TRIBUNAL HAS HELD THAT THE COMPANY IS NOT REQUIRED TO WITHHOLD TAXES AT SOURCE ON PAYMENTS MADE TO THE NON-RESIDENT COMPANY TOWARDS PURCHASE OF SHRINK- WRAPPED / OFF-THE-SHELF SOFTWARE. THE LEARNED AO ERRED IN HOLDING THAT SALE OF SOFTWARE IS TO BE CONSTRUED AS 'ROYALTY' AS PER EXPLANATION (2) OF CLAUSE (VI) OF SECTION 9 OF THE ACT AND AS PER THE PROVISIONS OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT (`DTAA'). 22. THE FACTS ARE THAT THE ASSESSEE IS A COMPANY IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT SERVICES OF ELECTR ONIC INTEGRATED CIRCUITS AND SUPPORT SERVICES TO INFINEON SINGAPORE. FOR THE ASSESSMENT YEAR 2010- 11, THE ASSESSEE FILED THE RETURN OF INCOME ON 8TH OCTOBER, 2010 DECLARING A TOTAL INCOME OF RS. 78,696,350/-. DURING THE COU RSE OF ASSESSMENT PROCEEDINGS, THE AO HAS REQUESTED THE ASSESSEE COMP ANY TO PROVIDE INFORMATION ON WHETHER TAXES HAVE BEEN WITHHELD ON GLM CHARGES (PROJECT SPECIFIC COSTS) OF RS. 78,696,346/- DEBITED TO THE PROFIT & LOSS ACCOUNT. IN RESPONSE, A DETAILED SUBMISSION DATED 26.02.2014 WA S MADE BY THE ASSESSEE. THE ASSESSEE EXPLAINED THAT THE PAYMENT S TOWARDS USAGE CHARGES OF ELECTRONIC DESIGN AUTOMATION (EDA) TOOLS (SOFTWARE) BY THE ASSESSEE WERE INITIALLY PAID BY INFINEON TECHNOLOGI ES AG, GERMANY ('INFINEON GERMANY') AND CROSS-CHARGED TO THE ASSES SEE WITHOUT ANY MARK- UP DEPENDING ON THEIR SOFTWARE TOOLS USAGE. THE ASS ESSEE COMPANY REIMBURSES THESE CHARGES TO INFINEON GERMANY, WITHO UT ANY MARK UP. THE PAYMENT BEING A PURE REIMBURSEMENT DOES NOT RESULT IN INCOME; THEREFORE, THERE IS NO REQUIREMENT FOR TAX TO BE DEDUCTED AT S OURCE. HENCE, THE PROVISIONS OF SECTION 195 OF THE ACT ARE NOT APPLIC ABLE. ALTERNATIVELY IT WAS SUBMITTED THAT THE PAYMENT IS TOWARDS THE USAGE CHA RGES OF COPYRIGHTED IT(TP)A NOS.405 & 474/BANG/2015 PAGE 15 OF 19 SOFTWARE AND NOT TOWARDS A RIGHT IN COPYRIGHT OF TH E SOFTWARE. THE ASSESSEE HAS ONLY THE RIGHT TO USE THE SOFTWARE FOR ITS OWN INTERNAL USE WITHOUT ANY RIGHT TO MAKE ANY TRANSLATION / ADAPTATION OR ISSUE COPIES OF THE SOFTWARE TO PUBLIC OR SELL OR GIVE ON HIRE A COPY OF THE COMPUT ER PROGRAMME. IN THIS REGARD, THE ASSESSEE RELIED ON THE EXTRACT OF THE A GREEMENT ENTERED INTO BY ASSESSEE WITH INFINEON GERMANY IN WHICH RESTRICTION S HAVE BEEN PROVIDED ON USE OF SOFTWARE (PARAGRAPH 4) AS PROVIDED BELOW - `FOR THE STANDARD SOFTWARE APPLICATION AND TOOLS RE FERRED TO IN THIS AGREEMENT, BOTH THE RECIPIENT AND PROVIDER CONFIRM THEY DO NOT HAVE THE FOLLOWING RIGHTS ARISING OUT OF THE SOFTWA RE LICENSES PROCURED BY PROVIDER: RIGHT TO EXPLOIT THE COPYRIGHT OF THE SOFTWARE; RIGHT TO DUPLICATE COPIES OF THE SOFTWARES; RIGHT TO MODEM, REVERSE ENGINEER OR DECOMPILE THE S OFTWARES; RIGHT TO SELL ON-THE SOFTWARE.' FROM THE ABOVE RESTRICTIONS IT CAN BE OBSERVED THAT INFINEON INDIA CAN ONLY USE THE COPYRIGHTED ARTICLE BUT CANNOT USE ANY OF THE RIGHTS MENTIONED ABOVE. THEREFORE, THE SAME WOULD N OT AMOUNT TO 'ROYALTY'. THE ASSESSEE RELIED ON ARTICLE 12(4) OF THE INDIA GERMANY TAX TREATY WHICH DEFINES 'ROYALTY' AS UNDER 'THE TERM 'ROYALTIES' AS USED IN THIS ARTICLE MEANS PAYMENTS OF ANY KIND RECEIVED AS A CONSIDERATION FOR THE USE OF OR THE RIGHT TO USE, ANY COPYRIGHT OF LITERARY, ARTISTIC O R SCIENTIFIC WORK, INCLUDING CINEMATOGRAPH FILMS OR FILMS OR TAP ES USED FOR RADIO OR TELEVISION BROADCASTING, ANY PATENT, TRADE MARK, DESIGN OR MODEL, PLAN, SECRET FORMULA OR PROCESS, OR FOR T HE USE OF OR THE RIGHT TO USE, INDUSTRIAL, COMMERCIAL OR SCIENTI FIC EQUIPMENT, OR FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIA L OR SCIENTIFIC EXPERIENCE.' IT WAS THE PLEA OF THE ASSESSEE THAT IN VIEW OF THE ABOVE DEFINITION, THE CONSIDERATION PAID BY THE ASSESSEE TO INFINEON GERM ANY IS NOT IN THE NATURE OF 'ROYALTY' AS THE ASSESSEE DOES NOT RECEIV E THE RIGHT TO USE THE COPYRIGHT. HENCE, THE PAYMENT TOWARDS GLM CHARGES I S NOT LIABLE FOR DEDUCTION OF TAX AT SOURCE. IT(TP)A NOS.405 & 474/BANG/2015 PAGE 16 OF 19 23. THE AO HELD THAT THE ASSESSEE IS LIABLE TO DEDU CT TAX AT SOURCE AS THERE ARE PLETHORA OF JUDICIAL PRECEDENTS SUPPORTIN G THE FACT THAT TDS COMPLIANCE IS MANDATORY EVEN IF THE EXPENDITURE IS INCURRED BY THE WAY OF REIMBURSEMENTS AND THAT THE PAYMENT MADE FOR RIGHT TO USE COMPUTER SOFTWARE WAS IN THE NATURE OF ROYALTY AND HENCE CHA RGEABLE TO TAX IN INDIA IN THE HANDS OF THE RECIPIENT NON-RESIDENT. THE A O PLACED RELIANCE ON DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT (IT) V. SAMSUNG ELECTRONICS INDIA (P.) LTD. 345 ITR 494 (KA RNATAKA) WHEREIN IT WAS HELD THAT PAYMENT FOR PURCHASE OF OF F THE SHELF SOFTWARE WAS AKIN TO A PAYMENT FOR RIGHT TO USE SOFTWARE AND WAS IN THE NATURE OF ROYALTY AND THE PERSON MAKING PAYMENT TO A NON-RESIDENT HAS TO DEDUCT TAX AT SOURCE ON SUCH PAYMENT. 24. THE DRP CONFIRMED THE ORDER OF AO. IN APPEAL B EFORE THE TRIBUNAL, THE SUBMISSION MADE WAS THAT EVEN ASSUMING THAT THE PAYMENT IN QUESTION IS NOT IN THE NATURE OF REIMBURSEMENT, BUT WAS A CO NSIDERATION FOR PURCHASE OF STANDARD OFF-THE-SHELF PRODUCT AND IN THE NATURE OF ROYALTY, THE ASSESSEE DID NOT DEDUCT TAX AT SOURCE ON THE GROUND THAT AS ON 31.3.2010, THE LAST DATE OF THE PREVIOUS YEAR, THE LAW IN THIS REGARD W AS THAT PAYMENT FOR PURCHASE OF OFF-THE-SHELF SOFTWARE WAS NOT IN THE N ATURE OF ROYALTY AND THEREFORE THERE WAS NO OBLIGATION TO DEDUCT TAX AT SOURCE FROM PAYMENTS MADE TO NON-RESIDENTS. IN THIS REGARD, THE LD. COU NSEL FOR THE ASSESSEE PLACED RELIANCE ON THE DECISION OF ITAT BANGALORE B ENCH IN THE CASE OF INGERSOLL RAND (I) P. LTD. [2019] 112 TAXMANN.COM 7 43 [BANG TRIB.] WHEREIN IT WAS HELD THAT AS ON THE DATE OF PAYMENT TO THE N ON-RESIDENT THERE WAS NO OBLIGATION TO DEDUCT TAX AT SOURCE BUT ON A SUBSEQU ENT DATE DUE TO RETROSPECTIVE APPLICATION OF A LAW OR ON THE BASIS OF DECISION RENDERED SUBSEQUENT TO THE DATE OF PAYMENT AN OBLIGATION IS IMPOSED ON THE PAYER, IT(TP)A NOS.405 & 474/BANG/2015 PAGE 17 OF 19 THEN THERE CAN BE NO DISALLOWANCE U/S.40(A)(IA) OF THE ACT. THE LEARNED DR RELIED ON THE ORDER OF THE CIT(A). 25. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS. THE PAYMENT IN QUESTION WAS MADE TO THE NON-RESIDENT IN THE PRE VIOUS YEAR RELEVANT TO AY. 10-11. THEREFORE THE LAW AS ON 31.3.2010 THE L AST DATE OF THE PREVIOUS YEAR WAS THAT PAYMENT FOR PURCHASE OF OFF SHELF SOF TWARE WAS NOT IN THE NATURE OF ROYALTY. IN SONATA INFORMATION TECHNOLOGY LTD. V. ACIT (103 ITD 324 ) DECISION RENDERED ON 31.1.2006, IT WAS HELD THAT PAYMENTS FOR SOFTWARE LICENSES DO NOT CONSTITUTE ROYALTY UNDER T HE PROVISIONS OF THE ACT AND HENCE DISALLOWANCE UNDER SECTION40(A) (IA) OF T HE ACT WOULD NOT BE APPLICABLE. THE CHANGE IN THE LEGAL POSITION ON TAX ATION OF COMPUTER SOFTWARE WAS ON ACCOUNT OF THE RULING OF THE KARNAT AKA HIGH COURT IN CIT V. SAMSUNG ELECTRONICS CO. LTD. (320 ITR 209 ), WHICH WAS PRONOUNCED ON 15.10.11 THAT IS MUCH LATER THAN THE CLOSURE OF THE FY 2010- 11. SUBSEQUENTLY, THE FINANCE ACT 2012 ALSO INTRODU CED, RETROSPECTIVELY, EXPLANATION 4 TO SECTION 9(1 (VI) OF THE ACT TO CLA RIFY THAT PAYMENTS FOR, INTER ALIA . LICENSE TO USE COMPUTER SOFTWARE WOULD QUALIFY AS ROYALTY. DURING THE FY 10-11, THE ASSESSEE DID NOT HAVE THE BENEFIT OF CLARIFICATION BROUGHT BY THE RESPECTIVE AMENDMENT. AS SUCH, FOR THE FY 2010- 11, IN LIGHT OF THE PROVISIONS OF SECTION 9(1)(VI) OF THE ACT READ WITH JUDICIAL GUIDANCE ON THE TAXATION OF COMPUTER SOFTWARE PAYMENTS, TAX WAS NOT REQUIRED TO BE DEDUCTED AT SOURCE. GIVEN THE PRACTICE IN PRIOR ASS ESSMENT YEARS, THE ASSESSEE WAS OF THE BONA FIDE VIEW THAT THE PAYMENT OF SOFTWARE LICENSE FEE WAS NOT SUBJECT TO TAX DEDUCTION AT SOURCE UNDE R SECTION1941/195 OF THE ACT. LIABILITY TO DEDUCT TAX AT SOURCE CANNOT B E FASTENED ON THE ASSESSEE ON THE BASIS OF RETROSPECTIVE AMENDMENT TO THE ACT (FINANCE ACT 2012 AMENDMENT THE DEFINITION OF ROYALTY WITH RETRO SPECTIVE EFFECT FROM 01.04.1976) OR A SUBSEQUENT RULING OF A COURT (THE KARNATAKA HC IT(TP)A NOS.405 & 474/BANG/2015 PAGE 18 OF 19 IN CIT V SAMSUNG ELECTRONICS CO. LTD . (16 TAXMANN.COM 141) WAS PASSED ON OCTOBER 15,2011). COURTS HAVE CONSISTENTLY UPHEL D THIS PRINCIPLE AS SEEN IN: ITO V. CLEAR WATER TECHNOLOGY SERVICES (P.) LTD. (52 TAXMANN.COM 115) KERALA VISION LTD. V. ACIT (46 TAXMANN.COM 50) SONIC BIOCHEM EXTRACTIONS (P.) LTD. V. ITO (35 TAXMANN.COM 463) CHANNEL GUIDE INDIA LTD. V. ACIT (25 TAXMANN.COM 25) DCI V. VIROLA INTERNATIONAL (20 14(2) TMI 653) CIT V. KOTAK SECURITIES LTD. (20 TAXMANN.COM 846) . 26. THE ABOVE DECISIONS HAVE BEEN CONSIDERED AND DI SCUSSED IN THE CASE OF INGERSOLL RAND (INDIA) LTD. (SUPRA) BY THE BANGALORE BENCH OF THE ITAT AND IT WAS HELD THEREIN THAT PRIOR TO T HE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. SAMSUNG ELECTRONICS CO. LTD. ( SUPRA ) WHICH WAS PASSED ON 15.10.2011 TRANSACTIONS CARRI ED OUT ON PURCHASE OF OFF THE SHELF SOFTWARE ARE NOT LIABLE T O TDS AND HENCE THERE CAN BE NO DISALLOWANCE U/S.40(A)(IA) OF THE ACT BAS ED ON SUBSEQUENT DEVELOPMENT OF LAW AFTER THE DATE ON WHICH PAYMENTS ARE MADE. 27. WE ARE OF THE VIEW THAT IN THE LIGHT OF LAW AS LAID DOWN BY THIS TRIBUNAL IN THE CASE OF INGERSOLL RAND (I) LTD. (SUPRA) , THERE CANNOT BE A RETROSPECTIVE OBLIGATION TO DEDUCT TAX AT SOURCE AN D THEREFORE AS ON THE DATE WHEN THE ASSESSEE MADE PAYMENTS TO THE NON-RES IDENT FOR ACQUIRING OFF-THE-SHELF SOFTWARE CANNOT BE REGARDED AS IN THE NATURE OF ROYALTY AND THEREFORE THERE WAS NO OBLIGATION ON THE PART OF AS SESSEE TO DEDUCT TAX AT SOURCE. THE PAYMENT WOULD BE IN THE NATURE OF BUSI NESS PROFITS IN THE HANDS OF NON-RESIDENT AND SINCE ADMITTEDLY THE NON- RESIDENT DOES NOT HAVE A PERMANENT ESTABLISHMENT IN INDIA, THE SUM IN QUES TION IS NOT CHARGEABLE TO TAX IN THE HANDS OF NON-RESIDENT. CONSEQUENTLY, THE DISALLOWANCE MADE IT(TP)A NOS.405 & 474/BANG/2015 PAGE 19 OF 19 U/S. 40(A)(IA) OF THE ACT HAS TO BE DELETED. WE DI RECT ACCORDINGLY. GROUND NO.14 BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 28. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS P ARTLY ALLOWED. 29. IN THE COMBINED RESULT, BOTH THE APPEALS BY THE ASSESSEE AND THE REVENUE ARE PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 21 ST DAY OF AUGUST, 2020. SD/- SD/- ( G MANJUNATHA ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER VICE PRE SIDENT BANGALORE, DATED, THE 21 ST AUGUST, 2020. / DESAI S MURTHY / COPY TO: 1. REVENUE 2. ASSESSEE 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.