STERIA (INDIA) LTD., NOIDA V. ADDL. CIT, SPL. RANGE- 8 , NEW DELHI

ITA 6687/DEL/2019

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 1394 (ITAT-DELHI)
• Duration Of Justice: 8 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-05-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Assessment Year: 2015-2016
• Appeal Filed On: 13-08-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: NEERAJ KR. JAIN
• Keywords: Business income; Transfer pricing; Double taxation relief; International transaction; Advance ruling; Non-deduction of tax
• Section: 143(3); 234B; 195; 144C; 274; 13; 153; 22; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I - 2: NEW DELHI BEFORE, SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO.6687/DEL/2019 (ASSESSMENT YEAR-2015-16) M/S. STERIA (INDIA) LTD., SEAVIEW SPECIAL ECONOMIC ZONE, BUILDING NO. 4, PLOT NO.20 & 21, SECTOR-135, GAUTAM BUDH NAGAR, NOIDA (UP) PANAAACX 0385L VS. ADD. COMMISSIONER OF INCOME TAX, NEW DELHI (APPELLANT) (RESPONDENT) APPELLANT BY SH. NEERAJ KR. JAIN, ADV. MS. SHAILY GUPTA, CA RESPONDENT BY SH. H.K.CHOUDHARY, CIT-DR DATE OF HEARING 07.02.2020 DATE OF PRONOUNCEMENT 01.05.2020 ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER: THIS APPEAL IS PREFERRED BY THE ASSESSEE AGAINST TH E FINAL ASSESSMENT ORDER PASSED U/S 144C OF THE INCOME TAX ACT, 1961 (HEREINAFTER CALLED THE ACT), SUBSEQUENT TO THE DIRECTIONS OF THE LD. DISPUTE RESOLUTION PANEL (2), NEW DELHI {DRP} FOR TH E ASSESSMENT YEAR 2015-16. 2.0 AS PER THE RECORDS, THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY IS A SOFTWARE SERVICE COMPANY AND I S A SUBSIDIARY 2 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT OF A COMPANY BASED IN THE UNITED KINGDOM. THE COMPA NY PROVIDES SYSTEMS INTEGRATION, ENTERPRISE SOLUTION AND SOFTWAR E DEVELOPMENT SERVICES TO THE CLIENTS OF ITS ASSOCIATED ENTERPRIS ES (AE) AND ALSO TO INDEPENDENT CUSTOMERS IN THE UNITED KINGDOM, THE UN ITED STATE OF AMERICA AND OTHERS COUNTRIES IN EUROPE AS WELL AS I NDIA. THE COMPANY ALSO PROVIDES INFORMATION TECHNOLOGY ENABLE D SERVICES (ITES) IN THE NATURE OF BACK- OFFICE PROCESS OUTSOU RCING AND INBOUND AND OUTBOUND VOICE-BASED SERVICES. 2.1 THE ASSESSEE COMPANY FILED ITS RETURN OF INC OME DECLARING AN INCOME OF RS.108,61,33,970/-. THE CASE WAS SELECT ED FOR LIMITED SCRUTINY THROUGH CASS. SINCE, DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD UNDERTAKEN INTERNATIONAL TRANSACT IONS WITH ITS AE AND THE TOTAL TRANSACTIONS IN THIS REGARD HAD BEEN SHOWN AT RS.45,44,780,336/-, REFERENCE WAS MADE TO THE LD. TR ANSFER PRICING OFFICER (TPO) IN TERMS OF PROVISIONS OF SEC.92CA OF THE ACT FOR DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE INT ERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH THE A SSOCIATED ENTERPRISES (AE). THE DETAILS OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE COMPANY ARE AS UNDER: 3 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT S. NO. NATURE OF INTERNATIONAL TRANSACTION METHOD ADOPTED BY ASSESSEE PLI AMOUNT IN RS. 1. PROVISION OF IT SERVICES TNMM OP/TC 2,775,946,46 6 2. AVAILING OF TECHNICAL & CONSULTANCY SERVICES TNMM OP/TC 18,178,256 3. RECEIPT OF MARKETING SERVICES TNMM OP/TC 73,530, 916 4. COST OF SHARING IT RESOURCES & INFRASTRUCTURE TNMM OP/TC 14,055,016 5. RECEIPT OF MANAGEMENT SERVICES TNMM OP/TC 95,397 ,056 6. CORPORATE GUARANTEE PAID TNMM OP/TC 1,926,223 7. PROVISION OF ITES SERVICES TNMM OP/TC 1,407,442, 865 8. REIMBURSEMENT OF EXPENSES (RECEIVED) CUP NA 29,924,564 9. REIMBURSEMENT OF EXPENSES (PAID) CUP NA 128,378,977 2.2 THE SEGMENTAL RESULTS, AS PER THE ASSESSEE, BY USING THE METHOD OP/TC WAS COMPUTED AT 13.59% FOR SOFTWARE DEV ELOPMENT SERVICES AND 13.61% FOR IT ENABLED SERVICES. THE AS SESSEE HAD SELECTED 9 COMPARABLES IN ITS TRANSFER PRICING STUD Y (TP STUDY) AND HAD CALCULATED THEIR AVERAGE MARGIN AT 13.67% THERE BY ARRIVING AT A CONCLUSION THAT ARMS LENGTH PRICE IN RESPECT OF IN TERNATIONAL TRANSACTION WAS WITHIN THE PERMITTED RANGE OF (+-) 3% . HOWEVER, THE LD. TPO ACCEPTED ONLY THREE OF THE COMPARABLES SELE CTED BY THE ASSESSEE AND REJECTED THE REMAINING SIX. THEREAFTER , THE LD. TPO INTRODUCED SIX MORE COMPARABLES AND COMPUTED THE AV ERAGE MARGIN AT 24.10% WITH RESPECT TO INFORMATION TECHNOLOGY ENA BLED SERVICES AND PROPOSED AN UPWARD ADJUSTMENT OF RS.17,60,22,94 7/-. 4 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT 2.3 SIMILARLY, WITH RESPECT TO THE TRANSACTIONS REL ATING TO SOFTWARE DEVELOPMENT SERVICES, THE LD. TPO FINALLY S ELECTED 17 COMPARABLES AND COMPUTED AVERAGE MARGIN AT 28.76% A ND PROPOSED AN UPWARD ADJUSTMENT OF RS. 50,29,61,074/-. THUS TH E TOTAL ADJUSTMENT PROPOSED BY THE LD. TPO AMOUNTED TO RS.6 7,89,84,021/-. 2.4 APART FROM THIS, IN THE DRAFT ASSESSMENT ORDE R, THE ASSESSING OFFICER ALSO PROPOSED A DISALLOWANCE OF RS .10,17,89,369/- ON ACCOUNT OF DISALLOWANCE U/S 40(A)(I) OF THE ACT O N THE GROUND THAT NO TAX WAS DEDUCTED AT SOURCE FOR PAYMENT MADE AS RE MUNERATION FOR MANAGEMENT SERVICES TO GROUP SCA (STERIA FRANCE). A PART FROM THIS THE ASSESSING OFFICE ALSO PROPOSED A DISALLOWANCE OF RS.9,28,28,017/- ON ACCOUNT OF NON DEDUCTION OF TAX AT SOURCE ON PAY MENTS MADE FOR PURCHASE OF CERTAIN SOFTWARE LICENSES FROM STERIA FR ANCE BY HOLDING THAT THESE PAYMENTS WERE IN THE NATURE OF ROYALTY. 2.5 AGGRIEVED, THE ASSESSEE FILED OBJECTIONS BEFO RE THE LD. DRP CHALLENGING THE VARIOUS PROPOSED ADJUSTMENTS IN THE DRAFT ASSESSMENT ORDER. THE LD. DRP GIVEN PARTIAL RELIEF TO THE ASSE SSEE AND DIRECTED THE ASSESSING OFFICER TO MAKE CERTAIN ADJUSTMENTS/ALLOW ANCES IN THE FINAL ASSESSMENT ORDER. 5 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT 2.6 HOWEVER, STILL BEING AGGRIEVED, THE ASSESSEE I S NOW BEFORE THIS TRIBUNAL AND HAS CHALLENGED THE FINAL ASSESSME NT ORDER BY RAISING THE FOLLOWING GROUNDS OF APPEAL: 1. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN COMPLETING ASSESSMENT UNDER SECTION 143(3) READ WITH SECTION14 4C OF THE INCOME-TAX ACT, 1961 (THE ACT) AT AN INCOME OF RS .1,82,85,79,390 AS AGAINST THE RETURNED INCOME OF RS.1,08,61,33,970 UNDER NORMAL PROVISIONS OF THE ACT. 1.1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE IMPUGNED ORDER PASSED BY THE ASSESSING OFFICER IS B ARRED BY LIMITATION AND THEREFORE, IS LIABLE TO BE QUASHED. RE: TRANSFER PRICING ADJUSTMENT IN IT ENABLED SERVI CE SEGMENT 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN MAKING AN ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT OF RS.27,05,66,054ON ACCOUNT OF THE ALLEGED DIFFERENCE IN THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF PROVISION OF IT ENABLED SERVICES ON THE BASIS OF THE ORDER PASSED U NDER SECTION 92CA(3) OF THE ACT BY THE TRANSFER PRICING OFFICER (TPO). 2.1. THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN RESOR TING TO CHERRY PICKING AND CONSIDERING FOLLOWING COMPANIES IN THE FINAL SET OF COMPARABLE COMPANIES ALLEGEDLY HOLDING THEM TO BE F UNCTIONALLY COMPARABLE TO THE APPELLANT: (I) INFOSYS BPO LIMITED (II) TECH MAHINDRA BUSINESS SERVICES LIMITED (III) BNR UDYOG LTD 2.2. THAT THE DRP/ TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING 6 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT THAT THE AFORESAID COMPANIES DO NOT SATISFY THE TES T OF COMPARABILITY AS PROVIDED IN RULE 10B(2) OF THE INC OME TAX RULES AND THEREFORE ARE LIABLE TO BE REJECTED FROM THE SE T OF COMPARABLE COMPANIES. 2.3. THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN REJEC TING FOLLOWING COMPARABLE COMPANIES ALLEGEDLY HOLDING THEM TO BE F UNCTIONALLY NOT COMPARABLE TO THE APPELLANT FOR THE PURPOSE OF BENCHMARKING ANALYSIS: (I) ALLSEC TECHNOLOGIES LIMITED (II) HARTON COMMUNICATIONS LIMITED (III) R SYSTEMS INTERNATIONAL LIMITED (IV) INFORMED TECHNOLOGIES INDIA LIMITED 2.4. THAT THE TPO ERRED ON FACTS AND IN LAW IN REJECTING R SYSTEMS INTERNATIONAL LIMITED AS COMPARABLE ALLEGEDLY ON AC COUNT OF NON- AVAILABILITY OF FINANCIAL DATA. 2.5. THAT THE TPO ERRED ON FACTS AND IN LAW IN REJECTING HARTON COMMUNICATIONS LIMITED AS COMPARABLE ALLEGEDLY ON A CCOUNT OF FAILING SERVICE INCOME FILTER OF 75% OF TOTAL INCOM E. 2.6. THAT THE TPO ERRED ON FACTS AND IN LAW IN REJECTING INFORMED TECHNOLOGIES LIMITED AS COMPARABLE ALLEGEDLYON ACCO UNT OF FAILING SERVICE INCOME FILTER OF 75% OF TOTAL INCOME. 2.7. WITHOUT PREJUDICE THAT THE DRP/TPO ERRED ON FACTS A ND IN LAW WHILE IN CONSIDERING FOREIGN EXCHANGE FLUCTUATIONAS NON-OPERATING ITEM OF INCOME/ EXPENDITURE WHILE COMPUTING OPERATI NG MARGINS OF THE COMPARABLE COMPANIES UNDER IT ENABLED SERVICES SEGMENT. 2.8. THAT THE TPO/DRP ERRED ON FACTS AND IN LAW IN CONSI DERING FOREIGN EXCHANGE FLUCTUATION INCOME AS NON-OPERATING ITEM O F INCOME, WHILE COMPUTING OPERATING PROFIT MARGIN OF THE APPE LLANT. 7 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT 2.9. THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT A LLOWING APPROPRIATE RISK ADJUSTMENT TO ESTABLISH COMPARABIL ITY ON ACCOUNT OF THE APPELLANT BEING A LOW-RISK-BEARING CAPTIVE S ERVICE PROVIDER AS OPPOSED TO THE COMPARABLE COMPANIES WHO WERE IND EPENDENT IT ENABLED SERVICE PROVIDER. 2.10. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE DRP/TPO ERRED IN REJECTING THE CONTENTION OF TH E APPELLANT REGARDING RISK ADJUSTMENT, ALLEGEDLY HOLDING THAT I N ABSENCE OF ROBUST AND RELIABLE DATA, NO RISK ADJUSTMENT CAN BE ALLOWED. 2.11. THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT A LLOWING ADJUSTMENTS TO THE APPELLANT TO ACCOUNT FOR THE DIF FERENCES IN THE WORKING CAPITAL POSITION OF THE APPELLANT VIS--VIS THE COMPARABLE COMPANIES. RE: TRANSFER PRICING ADJUSTMENT IN SOFTWARE DEVELOP MENT SERVICE SEGMENT 3. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN MAKING AN ADJUSTMENT OF RS.27,72,61,982 TO THE ARMS LENGTH P RICE OF THE INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWAR E DEVELOPMENT SERVICES ON THE BASIS OF THE ORDER PASSED UNDER SEC TION 92CA(3) OF THE ACT BY THE TRANSFER PRICING OFFICER (TPO). 3.1. THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN RESOR TING TO CHERRY PICKING AND CONSIDERING FOLLOWING COMPANIES IN THE FINAL SET OF COMPARABLE COMPANIES ALLEGEDLY HOLDING THEM TO BE F UNCTIONALLY COMPARABLE TO THE APPELLANT: (I) CYBAGE SOFTWARE PRIVATE LIMITED (II) BHILWARAINFOTECHNOLOGYPVT. LTD (III) CLOGENY TECHNOLOGIES PRIVATE LIMITED (IV) INFOBEANS TECHNOLOGIES LIMITED (V) LARSEN & TOUBRO INFOTECH LIMITED 8 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT (VI) CYBERCOMDATAMATICS INFORMATION SOLUTIONS LIMITED (VII) MINDTREE LIMITED (VIII) INTEQ SOFTWARE PVT LTD 3.2. THAT THE DRP/ TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE AFORESAID COMPANIES DO NOT SATISFY THE TES T OF COMPARABILITY AS PROVIDED IN RULE 10B(2) OF THE INC OME TAX RULES AND THEREFORE ARE LIABLE TO BE REJECTED FROM THE SE T OF COMPARABLE COMPANIES 3.3. WITHOUT PREJUDICE THAT THE TPO ERRED ON FACTS AND I N LAW IN CONSIDERING FOREIGN EXCHANGE FLUCTUATION AS NON-OPE RATING ITEM OF INCOME/ EXPENDITURE WHILE COMPUTING OPERATING MARGI NS OF THE COMPARABLE COMPANIES UNDER SOFTWARE DEVELOPMENT SEG MENT. 3.4. THAT THE TPO/DRP ERRED ON FACTS AND IN LAW IN CONSI DERING FOREIGN EXCHANGE FLUCTUATION INCOME AS NON-OPERATING ITEM O F INCOME, WHILE COMPUTING OPERATING PROFIT MARGIN OF THE APPE LLANT 3.5. THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT A LLOWING APPROPRIATE RISK ADJUSTMENT TO ESTABLISH COMPARABIL ITY ON ACCOUNT OF THE APPELLANT BEING A LOW-RISK-BEARING CAPTIVE S ERVICE PROVIDER AS OPPOSED TO THE COMPARABLE COMPANIES WHO WERE IND EPENDENT SOFTWARE SERVICE PROVIDER. 3.6. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE DRP/TPO ERRED IN REJECTING THE CONTENTION OF TH E APPELLANT REGARDING RISK ADJUSTMENT, ALLEGEDLY HOLDING THAT I N ABSENCE OF ROBUST AND RELIABLE DATA, NO RISK ADJUSTMENT CAN BE ALLOWED. 4. THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN NOT A LLOWING ADJUSTMENTS TO THE APPELLANT TO ACCOUNT FOR THE DIF FERENCES IN THE WORKING CAPITAL POSITION OF THE APPELLANT VIS--VIS THE COMPARABLE COMPANIES. 9 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT CORPORATE TAX ISSUES: RE: DISALLOWANCE OF MANAGEMENT SERVICES FEES 5. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE DRP/ ASSESSING OFFICER ERRED IN DISALLOWING UND ER SECTION 40(A)(I) OF THE ACT, EXPENDITURE OF RS.10,17,89,369 INCURRED ON ACCOUNT OF MANAGEMENT SERVICES FEES, ALLEGEDLY ON T HE GROUND THAT THE APPELLANT FAILED TO DEDUCT TAX AT SOURCE T HEREFROM UNDER SECTION 195 OF THE ACT. 5.1. THAT THE DRP/ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN HOLDING PAYMENT MADE TOGROUPE STERIA SCA (STERIA F RANCE) TOWARDS MANAGEMENT SERVICES FEES TO BE IN NATURE OF FEES FOR TECHNICAL SERVICES (FTS) IN TERMS OF ARTICLE 13 O F INDIA-FRANCE DOUBLE TAX AVOIDANCE AGREEMENT (DTAA) READ WITH P ROTOCOL THERETO. 5.2. THAT THE DRP/ ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN ERRONEOUSLY RELYING UPON THE ORDER OF THE AUTHORITY FOR ADVANCE RULING (AAR) WITHOUT APPRECIATING THAT THE FINDIN GS OF AAR ARE PERVERSE IN LIGHT OF THE FAVORABLE ORDER PASSED BY THE JURISDICTIONAL DELHI HIGH COURT IN APPELLANTS OWN CASE. 5.3. THAT THE DRP/ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN NOT APPRECIATING THAT THE PROTOCOL TO INDIA-FRANCE DTAA IS AN INTEGRAL PART OF THE TREATY AND DOES NOT REQUIRE SEPARATE NO TIFICATION TO BE ISSUED BY GOVERNMENT OF INDIA FOR ITS IMPLEMENTATIO N. 5.4. THAT THE DRP/ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN NOT APPRECIATING THAT THE PAYMENT FOR MANAGERIAL SERVIC ES TO STERIA FRANCE IS NOT COVERED UNDER THE TERM TECHNICAL OR CONSULTANCY SERVICES, IN TERMS OF PARAGRAPH 7 OF THE PROTOCOL R EAD WITH ARTICLE 13 OF THE INDIA-UK DTAA. 10 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT 5.5. THAT THE DRP/ ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE SAID SERVICES PROVIDED BY STE RIA FRANCE DOES NOT MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENC E, OR SKILL TO THE APPELLANT, IN ORDER TO BE TAXED AS FTS IN TERMS OF PARAGRAPH 7 OF THE PROTOCOL READ WITH ARTICLE 13 OF THE INDIA-U K DTAA. 5.6. WITHOUT PREJUDICE, THE DRP/ ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE SAID TRANSACTIO N COULD NOT BE HELD AS FTS IN TERMS OF PERFORMANCE RULE IN TERMS O F PARAGRAPH 7 OF THE PROTOCOL READ WITH ARTICLE 13(5) OF INDIA ISRAEL DTAA AND ARTICLE 12(5) OF THE INDIA FINLAND DTAA. 5.7. THAT THE DRP / ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THERE WAS NO INVOLVEMENT OF USE O F TECHNOLOGY/ TECHNICAL SERVICES AND THE SAID SERVICES WERE PROVI DED THROUGH TELEPHONE, FAX, EMAIL, ETC., WITHOUT ANY VISIT TO I NDIA BY THE PERSONNEL OF STERIA FRANCE. 5.8. THAT THE DRP / ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT SINCE THE PAYMENTS MADE TO STERIA FRANCE WERE NOT IN THE NATURE OF FTS AND ACCORDINGLY, NOT CHARG EABLE TO TAX IN INDIA, THEREFORE, THE APPELLANT WAS NOT LIABLE TO O BTAIN CERTIFICATE UNDER SECTION 195 OF THE ACT FOR LOWER OR NO DEDUCT ION OF TAX AT SOURCE. RE: DISALLOWANCE OF PAYMENT MADE TOWARDS RECHARGE O F IT COST UNDER SECTION 40(A)(I) OF THE ACT 6. THAT THE DRP/ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN MAKING DISALLOWANCE OFPAYMENTS MADE TO STERIA FRANC E FOR PURCHASE OF COMPUTER SOFTWARE LICENSES, AGGREGATING TO A SUM OF RS.9,28,28,017,UNDER SECTION 40(A)(I) OF THE ACT, F OR NON-DEDUCTION OF TAXES AT SOURCE UNDER THE PROVISIONS OF SECTION 195 OF THE ACT. 6.1. THAT THE DRP/ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN FAILING 11 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT TO APPRECIATE THAT PAYMENT FOR PURCHASE OF SOFTWARE MADE OUTSIDE INDIA WAS NOT CHARGEABLE TO TAX UNDER THE PROVISION S OF THE ACT READ WITH THE OVERRIDING PROVISIONS OF THE INDIA-FR ANCE DTAA AND THEREFORE, THERE WAS NO DEFAULT IN NOT DEDUCTING TA X AT SOURCE. 6.2. WITHOUT PREJUDICE TO THE ABOVE, THE DRP/ ASSESSING OFFICER FAILED TO APPRECIATE THAT DISALLOWANCE UNDER SECTION 40(A) (I) OF THE ACT WAS, IN ANY CASE, NOT WARRANTED, SINCE NON-DEDUCTIO N OF TAX WAS ON ACCOUNT OF BONA FIDE VIEW TAKEN BY THE APPELLANT . 7. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN LEVYING INTEREST UNDER SECTION 234BOF THE ACT. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER OR VARY, ANY OF THE AFORESAID GROUNDS OF APPEAL BEFORE OR AT THE TIME O F HEARING OF THE APPEAL. 3.0 AT THE OUTSET, THE LD. AUTHORIZED REPRESENTAT IVE (AR) FOR THE ASSESSEE SUBMITTED THAT GROUND NO.1 WAS GENERAL NOT REQUIRING SPECIFIC ADJUDICATION AND THAT GROUND NO.1.1 ALLEGI NG THAT THE IMPUGNED ORDER PASSED BY THE ASSESSING OFFICER WAS BARRED BY LIMITATION HAD BEEN CONSIDERED BY THE ITAT DELHI BE NCH IN THE CASE OF RELIGARE CAPITAL MARKETS LTD. VS. ACIT IN ITA NOS. 1881/DEL/2014, 1583/DEL/2015, 753/DEL/2016 & 1763/DEL/2017 VIDE O RDER DATED 10.10.2019 WHEREIN THE TRIBUNAL HAD HELD THAT THE PR OVISIONS CONTAINED IN SEC.144C OF THE ACT WERE A SELF-CONTAIN ED CODE AND CANNOT BE SUBJECTED TO THE TIME LIMIT PRESCRIBED U/ S 153 OF THE ACT. 12 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT THUS, THE LD. AR FAIRLY ACCEPTED THAT GROUND NO.1.1 OF THE ASSESSEES APPEAL WAS LIABLE TO BE DISMISSED IN VIEW OF BINDING TO THE JUDICIAL PRECEDENT OF THE CO-ORDINATE BENCH. 3.1 WITH RESPECT TO GROUND NO.2 CHALLENGING THE T RANSFER PRICING ADJUSTMENT WITH RESPECT TO IT ENABLED SERVIC ES SEGMENT, THE LD. AR SUBMITTED THAT THE ASSESSEE HAD CONSIDERED N INE COMPANIES FOR COMPUTING THE ARMS LENGTH PRICE IN THE SEGMENT AND THAT IN THE TP DOCUMENTATION IT HAD COMPUTED THEIR AVERAGE AT 1 3.67% WHEREAS THE ASSESSEES AVERAGE WAS 13.61%. IT WAS FURTHER SU BMITTED THAT SINCE THE ASSESSEE IS A COST-PLUS ENTITY, THE FOREI GN EXCHANGE FLUCTUATION HAD BEEN CONSIDERED AS AN OPERATING ITE M BY THE ASSESSEE BUT THE LD. TPO AND THE LD. DRP HAD TREATED THE FOR EIGN EXCHANGE FLUCTUATION AS NON-OPERATING WHILE CALCULATING THE A VERAGE OF THE COMPARABLES FINALLY SELECTED. THE LD. AUTHORIZED RE PRESENTATIVE SUBMITTED THAT THE FINAL SET OF COMPARABLES POST TH E LD. DRP DIRECTIONS WAS HAVING FIVE COMPARABLES AND THE AVER AGE MARGIN CALCULATED WAS 20.11% BY TAKING FOREIGN EXCHANGE FLU CTUATION AS NON- OPERATING WHEREAS IF THE FOREIGN EXCHANGE FLUCTUATIO N WAS TO BE CONSIDERED AS OPERATING, THE AVERAGE MARGIN WOULD CO ME TO 18.20%. 13 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT 3.2 THE LD. AR SUBMITTED THAT THE FINAL SET OF COMPARABLES SUBSEQUENT TO THE LD. DRPS DIRECTIONS WERE AS UNDER: (I) JINDAL INTELLICOM (II) MICROLAND LTD. (III) TECH MAHINDRA BUSINESS SERVICES LTD. (IV) BNR UDYOG LTD. (V) INFOSYS BPO LTD. 3.3 THE LD. AR SUBMITTED THAT THE ASSESSEE WAS CHA LLENGING THE INCLUSION OF INFOSYS BPO LTD., TECH MAHINDRA BU SINESS SERVICES LTD. AND BNR UDYOG LTD. IT WAS FURTHER SUBMITTED THA T THE ASSESSEE WAS ALSO CONTESTING THE INCORRECT REJECTION OF COMPA RABLES SELECTED BY THE ASSESSEE VIZ. ALLSEC TECHNOLOGIES LTD., HARTRON COMMUNICATION LTD., R SYSTEMS INTERNATIONAL LTD. AND. INFORMED T ECHNOLOGIES INDIA LTD. THE ARGUMENTS ADVANCED BY THE LD. AR WITH RESPE CT TO THE IT ENABLED SERVICES SEGMENT WERE AS UNDER: INFOSYS BPO LTD .: THE LD. AUTHORIZED REPRESENTATIVE SUBMITTED THAT THIS COMPANY HAS BEEN INCORRECTLY HELD TO BE F UNCTIONALLY COMPARABLE TO THE ASSESSEES COMPANY. IT WAS ARGUED THAT INFOSYS BPO LTD. IS FUNCTIONALLY DIFFERENT, HAS THE BENEFIT OF SYNERGIES AND HOLDS INTANGIBLES INCLUDING GOODWILL AMOUNTING TO RS .19 CRORES. IT WAS 14 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT FURTHER SUBMITTED THAT INFOSYS BPO LTD. IS A PART O F THE INFOSYS GROUP, A GIANT IN THE FIELD OF IT SERVICES AND, TH EREFORE, IT ENJOYED BENEFITS SUCH AS THE USE OF BRAND NAME INFOSYS, A VAILABILITY OF SKILLED MANPOWER AND TECHNICAL KNOW-HOW ETC. IT WAS ALSO SUBM ITTED THAT IT INCURS SIGNIFICANT MARKETING EXPENSES BEING 3.22% O F THE GROSS REVENUE WHEREAS IN THE CASE OF ASSESSEE THERE WERE NI L MARKETING EXPENSES. IT WAS SUBMITTED THAT THIS COMPANY IS TO B E EXCLUDED ON THE GROUND OF FUNCTIONAL DISSIMILARITY ITSELF BECAU SE AS COMPARED TO INFOSYS BPO THE ASSESSEE COMPANY WAS A VERY SMALL SE RVICES PROVIDER. IT WAS SUBMITTED THAT THE HONBLE DELHI HIGH COURT I N THE CASE OF NEW RIVER SOFTWARE SERVICES PVT. LTD. IN ITA NO.924/2016 HAD APPROVED THE EXCLUSION OF INFOSYS BPO FROM THE LIST OF COMPA RABLE COMPANIES. RELIANCE WAS ALSO PLACED ON THE JUDGMENT OF THE DELH I HIGH COURT IN THE CASE OF PR. CIT VS. ORACLE (OFSS) BPO SERVICES PVT. LTD. IN ITA NO 124/2018 WHEREIN THE HONBLE DELHI HIGH COURT HAD UP HELD THE EXCLUSION OF THE ENTITY ON THE BASIS OF SIGNIFICANT BRAND PRESENCE AND BRAND VALUE. IT WAS SUBMITTED THAT THIS ORDER OF THE HONBLE DELHI HIGH COURT HAD BEEN UPHELD BY THE HONBLE APEX CO URT IN SLP (CC) NO.32469/2018. RELIANCE WAS ALSO PLACED ON NUMEROUS OTHER JUDICIAL PRECEDENTS FOR THE ARGUMENT THAT BPO INFOSYS LTD. H AD TO BE EXCLUDED 15 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT ON ACCOUNT OF ITS NON COMPARABILITY TO A SMALL SERV ICE PROVIDER, ON ACCOUNT OF THIS COMPANY HAVING A HUGE TURN OVER AND ON ACCOUNT OF BPO INFOSYS LTD. HAVING ECONOMIES OF SCALE. 3.4 THE LD. AR SUBMITTED THAT FOREIGN EXCHANGE FLU CTUATION HAS TO BE CONSIDERED AS AN OPERATING ITEM IN TERMS OF J UDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF BC MANAGEME NT SERVICES PVT. LTD. IN ITA NO.1064/2017 AND ANOTHER JUDGMENT OF PR . CIT VS. AMERIPRISE INDIA PVT. LTD. IN ITA 2065/2016. THE LD . AR FURTHER SUBMITTED THAT IF THE FOREIGN EXCHANGE FLUCTUATION IS CONSIDERED AS AN OPERATING ITEM AND INFOSYS BPO LTD. IS REJECTED AS A COMPARABLE, THE OPERATING MARGIN OF THE REMAINING FOUR COMPANIES I. E., (I) JINDAL INTELLICOM, (II) MICROLAND LTD., (III) TECH MAHINDR A BUSINESS SERVICES LTD. & (IV) BNR UDYOG LTD. WOULD WORK OUT TO 16.15% AND SINCE THE OPERATING MARGIN OF ASSESSEE WAS 13.61%, THE DIFFER ENCE WOULD FALL WITHIN THE (+-) 3% RANGE AND, THEREFORE, NO TRANSFER PRICING ADJUSTMENT WOULD BE WARRANTED IN THE ITES SEGMENT. 3.5 THE LD. AR SUBMITTED BEFORE THE BENCH THAT IN CASE THIS ARGUMENT OF THE ASSESSEE IS NOT ACCEPTED THEN THE ASSESSEE SHOULD BE GRANTED THE LIBERTY TO ARGUE ON OTHER COM PARABLES IN THE ITES SEGMENT. 16 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT 3.6 WITH RESPECT TO GROUND NO.3 RELATING TO TRANSFER PRICING ADJUSTMENT IN THE SOFTWARE DEVELOPMENT SERVICE SEGME NT, THE LD. AR SUBMITTED THAT THE ASSESSEE HAD SELECTED ELEVEN COM PANIES IN ITS LIST OF COMPARABLES WITH THE MEAN OF 17.7% WHEREAS THE FIN AL SET OF COMPARABLES SUBSEQUENT TO THE LD. DRPS DIRECTIONS HAD 13 COMPARABLES WITH AN AVERAGE OF 20.84%. IT WAS SUBMITT ED THAT WHILE CALCULATING THIS AVERAGE THE FOREIGN EXCHANGE FLUCT UATION WAS NOT CONSIDERED AS AN OPERATING ITEM AND THAT FURTHER TH E 35 TH PERCENTILE WAS CALCULATED AT 16.76% AND 65 TH PERCENTILE AT 28.76%. IT WAS SUBMITTED THAT IF THE FOREIGN EXCHANGE FLUCTUATION IS CONSIDERED AS OPERATING ITEM, THE OPERATING MARGIN OF THE ASSESS EE WOULD COME TO 13.59% AND THAT IN THE FINAL SET OF COMPARABLES, TH E 35 TH PERCENTILE WOULD COME TO 11.51% AND 65 TH PERCENTILE WOULD COME TO 25.64%. IT WAS SUBMITTED THAT, THUS, THE MARGIN OF THE ASSESSEE WOULD LIE WITHIN THE 35 TH AND 65 TH PERCENTILES AND NO TRANSFER PRICING ADJUSTMENT WOULD BE WARRANTED IN THE SEGMENT. 3.7 IT WAS FURTHER SUBMITTED THAT IN CASE THIS CO NTENTION OF THE ASSESSEE IS ACCEPTED, THEN GROUND NOS.3.1 TO 3.6 AND GROUND NO.4 WOULD BECOME ACADEMIC. THE LD. AR FURTHER SUBM ITTED THAT IN 17 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT CASE THE BENCH HOLDS A DIFFERENT VIEW THEN THE ASSE SSEE SHOULD BE GIVEN AN OPPORTUNITY TO ARGUE ON THESE GROUNDS AS WE LL. 3.8 WITH RESPECT TO GROUND NO.5 CHALLENGING THE A CTION OF THE LD. DRP/AO IN MAKING THE DISALLOWANCE U/S 40(A)( I) AMOUNTING TO RS.10,17,89,369/- INCURRED ON ACCOUNT OF MANAGEMENT SERVICES FEES FOR FAILURE TO DEDUCT OF TAX AT SOURCE, THE LD. AR SUBMITTED THAT THE ASSESSEE HAD ENTERED INTO A MANAGEMENT SERVICES AGR EEMENT WITH STERIA FRANCE WHEREIN IT WAS AGREED TO PROVIDE VARIOU S MANAGEMENT SERVICES TO THE ASSESSEE WITH A VIEW TO RATIONALIZE A ND STANDARDIZE THE BUSINESS CONDUCTED BY THE ASSESSEE IN INDIA IN ACCO RDANCE WITH THE INTERNATIONAL BEST PRACTICES AND PURSUANT TO THIS A GREEMENT, THE ASSESSEE HAD PAID THE IMPUGNED AMOUNT DURING THE YE AR UNDER CONSIDERATION. IT WAS FURTHER SUBMITTED THAT THE ASS ESSEE HAD FILED AN APPLICATION BEFORE THE AUTHORITY FOR ADVANCE RULING S (AAR) TO PRONOUNCE A RULING ON THE ISSUE AS TO WHETHER THIS P AYMENT MADE BY STERIA INDIA TO STERIA FRANCE WOULD NOT BE TAXABLE IN INDIA IN THE HANDS OF STERIA FRANCE IN VIEW OF THE PROVISIONS OF INDIA-FRANCE DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) AND ON T HE ASPECT AS TO WHETHER IF STERIA FRANCE WAS NOT TAXABLE IN INDIA FOR THE MANAGERIAL SERVICES PROVIDED TO STERIA INDIA, WHETHER STERIA IN DIA WILL NOT BE 18 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT LIABLE TO WITHHOLD TAX AS PER THE PROVISIONS OF SECT ION 195 OF THE ACT. IT WAS FURTHER SUBMITTED THAT THE LD. AAR PRONOUNCE D A RULING AGAINST THE ASSESSEE HOLDING THAT THE PAYMENTS MADE TO STERIA FRANCE WERE IN THE NATURE OF FEE FOR TECHNOLOGY SERVICES (F TS) AGAINST WHICH THE ASSESSEE FILED A WRIT PETITION BEFORE THE HONBL E DELHI HIGH COURT. IT WAS FURTHER SUBMITTED THAT VIDE ORDER DATED 28.0 7. 2016 IN WP (C) NO.4793/2014 AND CM APPEAL 9551/2014 , THE HONBLE DELHI HIGH COURT HELD IN FAVOUR OF THE ASSESSEE COMPANY AND HE LD THAT SERVICE RENDERED BY STERIA FRANCE WERE MANAGERIAL IN NATURE AND WERE, THEREFORE, OUTSIDE THE AMBIT OF DEFINITION OF FTS P ROVIDED IN INDIA- UK DTAA AND, THEREFORE, PAYMENTS MADE TO STERIA FRANCE WERE NOT LIABLE TO WITHHOLDING OF TAX U/S 195 OF THE ACT. IT WAS SUBM ITTED THAT FOLLOWING THIS ORDER OF THE HONBLE DELHI HIGH COURT FOR ASSESSMENT YEARS 2010-11 & 2011-12 IN ITA NOS.762/2017 & 380/2 017 RESPECTIVELY, THE HONBLE DELHI HIGH COURT DECIDED THE ISSUE IN THE ASSESSEES FAVOUR. THE LD. AR SUBMITTED THAT THE LD . DRP UPHELD THE DISALLOWANCE PROPOSED BY THE ASSESSING OFFICER WITHOU T APPRECIATING THAT THE JURISDICTIONAL HIGH COURT IN ASSESSEES OWN CASE HAD DECIDED IN FAVOUR OF THE ASSESSEE AND, THEREFORE, THE IMPUG NED DISALLOWANCE WAS NOT SUSTAINABLE. 19 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT 3.9 GROUND NO.6 CHALLENGES THE ACTION OF THE LD. D RP/ ASSESSING OFFICER IN MAKING DISALLOWANCE OF THE PAYM ENT MADE TO STERIA FRANCE FOR PURCHASE OF COMPUTER SOFTWARE LICE NSES AGGREGATING TO A SUM OF RS.9,28,28,017/- U/S 40(A)(I) OF THE AC T FOR THE REASON OF NON-DEDUCTION OF TAX AT SOURCE. THE LD. AR SUBMITTE D THAT SINCE THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVIDING IN FORMATION TECHNOLOGY SOLUTIONS IN INDIA AND ABROAD, WHICH REQU IRES VARIOUS HARDWARE AND SOFTWARE FROM TIME TO TIME, IN ORDER TO MEET THESE REQUIREMENTS, THE ASSESSEE HAD ENTERED INTO AN INTR A-GROUP SUPPLIERS AGREEMENT WITH STERIA FRANCE WHICH IN TURN NEGOTIATE D WITH THE EXTERNAL SUPPLIERS AND MADE CENTRALIZED PURCHASES I N THE INTEREST OF ALL ITS GROUP AFFILIATES. IT WAS FURTHER SUBMITTED THAT UNDER THE TERMS OF THE AGREEMENT STERIA FRANCE WOULD PURCHASE THE M ATERIAL AND SELL IT TO THE STERIA GROUP ENTITIES WITHOUT ADDING A MAR KUP OR RENDERING ANY ADDITIONAL SERVICES. IT WAS SUBMITTED THAT THESE PAYMENTS WERE NOT CHARGEABLE TO TAX IN TERMS OF SECTION 9(1)(VI) OF THE ACT READ WITH ARTICLE 13 OF THE INDIA-FRANCE DTAA AND, THEREFORE, NO TAX WAS REQUIRED TO BE DEDUCTED AT SOURCE. IT WAS SUBMITTE D THAT UNDER THE PROVISIONS OF SECTION 195 OF THE ACT, TAX IS TO BE DEDUCTED AT SOURCE ON PAYMENTS MADE TO NON-RESIDENTS WHICH IS CHARGEABL E UNDER THE 20 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT PROVISIONS OF THE ACT AND SINCE STERIA FRANCES INC OME IS NOT CHARGEABLE TO TAX IN INDIA, THE PROVISIONS RELATING TO DEDUCTION OF TAX AT SOURCE WOULD NOT GET TRIGGERED. IT WAS SUBMITTED THAT STERIA FRANCE IS RESIDENT OF FRANCE WITH WHICH THERE EXISTS A DTAA ENTERED INTO BY THE GOVERNMENT OF INDIA. IT WAS FURTHER SUBMITTED TH AT SECTION 90(2) OF THE ACT PROVIDED THAT IN CASE WHERE A DTAA EXISTS BETWEEN INDIA AND THE COUNTRY OF RESIDENCE OF THE NON-RESIDENT, T HE PROVISIONS OF THE ACT SHALL BE OVERRIDDEN BY THE PROVISIONS OF THE TR EATY TO THE EXTENT THE LATTER ARE MORE BENEFICIAL TO SUCH NON-RESIDENT . IT WAS SUBMITTED THAT THE ASSESSEE HAD PURCHASED HARDWARE AND SOFTWARE LICENSES UNDER THE IMPUGNED TRANSACTIONS UNDER WHICH THE ASSE SSEE HAD ACQUIRED A NON-EXCLUSIVE NON-TRANSFERABLE RIGHT TO USE THE SOFTWARE AND THAT FURTHER THE ASSESSEE WAS PROHIBITED FOR CO PYING, MODIFYING OR FURTHER DEVELOPING THE SOFTWARE. IT WAS SUBMITTED THA T THIS PURCHASE OF SOFTWARE IN TERMS OF THE AGREEMENT ONLY RESULTED IN THE TRANSFER OF THE COPYRIGHTED ARTICLE AND NOT THE COPY RIGHT AND, THEREFORE, THE SAME WAS NOT IN THE NATURE OF ROYALTY IN THE HANDS OF STE RIA FRANCE FOR THE PURPOSES OF DEDUCTION OF TAX AT SOURCE. RELIANCE WAS PLACED ON THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CAS E OF DCIT VS. INFRA SOFTWARE LTD. REPORTED IN 220 TAXMANN 274 WHERE IN THE HONBLE 21 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT DELHI HIGH COURT HAD UPHELD THAT ORDER OF THE TRIBU NAL WHEREIN IT WAS HELD THAT THE AMOUNT RECEIVED BY THE ASSESSEE UN DER THE LICENSE AGREEMENT FOR ALLOWING THE USE OF SOFTWARE WOULD NOT B E ROYALTY UNDER THE DTAA SINCE WHAT WAS TRANSFERRED WAS NEITHER THE C OPY RIGHT NOR THE USE OF THE COPYRIGHT IN THE SOFTWARE BUT WHAT WAS TRANSFERRED WAS THE RIGHT TO USE THE COPYRIGHTED MATERIAL OR ARTICL E WHICH WAS DISTINGUISHABLE FROM THE RIGHTS IN THE COPYRIGHT. T HE LD. AR ALSO SUBMITTED THAT IN THIS JUDGMENT THE HONBLE DELHI H IGH COURT HAD DISTINGUISHED THE RATIO LAID DOWN OF THE HONBLE KAR NATAKA HIGH COURT IN THE CASE OF CIT VS. SAMSUNG COMPANY LTD. REPORTE D IN 345 ITR 494 ON WHICH RELIANCE HAD BEEN PLACED BY THE ASSESSING O FFICER AND THE LD. DRP WHILE MAKING THE DISALLOWANCE. 3.10 WITH RESPECT GROUND NO.7 CHALLENGING THE LEV Y OF INTEREST U/S 234B OF THE ACT, THE LD. AR FAIRLY ACC EPTED THAT THIS GROUND WAS CONSEQUENTIAL. 4.0 IN RESPONSE TO THE ARGUMENTS ADVANCED BY THE LD. AR, THE LD. CIT-DR SUBMITTED THAT AS FAR AS THE ISSUE O F FOREIGN EXCHANGE FLUCTUATION BEING TREATED AS AN OPERATING ITEM WAS C ONCERNED, THERE SHOULD BE CONSISTENCY IN THE APPROACH AND THE OPTIO N SHOULD NOT BE EXERCISED WITH A VIEW TO SUIT THE TRADING RESULTS. 22 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT 4.1 ON THE ISSUE OF THE EXCLUSION OF THE COMPARABL E INFOSYS BPO LTD, THE LD. CIT-DR SUBMITTED THAT THE ASSESSEE WAS ALSO HAVING A SUBSTANTIAL TURNOVER AND WAS A WELL KNOWN COMPANY AN D, THEREFORE, THE ASSESSEES PRAYER FOR EXCLUSION OF INFOSYS BPO LTD. WAS NOT JUSTIFIED. IT WAS SUBMITTED THAT THE TNMM METHOD SO UGHT BROAD COMPARABILITY AND IT WAS NOT ESSENTIAL THAT THE SEL ECTED COMPARABLE SHOULD BE AN EXACT REPLICA OF THE ASSESSEE COMPANY. 4.2 WITH RESPECT TO THE ASSESSEES CONTENTION WITH RESPECT TO THE COMPARABLES AND THE MEAN FALLING BETWEEN 35 TH AND 65 TH PERCENTILE IN THE SOFTWARE DEVELOPMENT SERVICES SEGM ENT, THE LD. CIT- DR SUBMITTED THAT THE LD. TPO SHOULD BE GIVEN AN OP PORTUNITY TO VERIFY THE COMPUTATION OF THE 35 TH AND 65 TH PERCENTILES AND TAKE A DECISION THEREAFTER. 4.3 IN RESPECT ON GROUND NOS.5 & 6 REGARDING D ISALLOWANCE IN RESPECT OF DEDUCTION OF TAX AT SOURCE WITH RESPEC T TO FEES PAID FOR MANAGEMENT SERVICES AND PURCHASE OF SOFTWARE LICENSE RESPECTIVELY, THE LD. CIT-DR PLACED EXTENSIVE RELIANCE ON THE ORD ERS OF THE LD. TPO AND THE DIRECTIONS OF THE LD. DRP AND SUBMITTED THA T THE OBSERVATIONS AND CONCLUSIONS ARRIVED AT BY THESE TWO AUTHORITIES SHOULD BE DULY CONSIDERED WHILE ARRIVING AT A DECISI ON. 23 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT 5.0 WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE ALSO PERUSED THE MATERIAL ON RECORD AS WELL AS THE ORDER S OF THE LOWER AUTHORITIES. WE NOW TAKE UP THE ISSUES ONE BY ONE FO R ADJUDICATION:- 5.1 GROUND NO.1.1 AGITATES THE IMPUGNED ORDER A S BEING BARRED BY LIMITATION. THE LD. AUTHORIZED REPRESENTA TIVE HAS FAIRLY CONCEDED THAT THIS GROUND IS COVERED AGAINST THE AS SESSEE BY THE ORDER OF THE ITAT, DELHI BENCH IN THE CASE OF RELIG ARE CAPITAL MARKETS LTD. VS. ACIT IN ITA NO.1881/DEL/2014, 1583/DEL/201 5, 753/DEL/2016 & 1763/DEL/2017 VIDE ORDER DATED 10.10 .2019 WHEREIN THE TRIBUNAL HAS HELD THAT THE PROVISIONS CO NTAINED IN SECTION 144C OF THE ACT ARE A SELF CONTAINED CODE A ND THAT THE SAME CANNOT BE SUBJECTED TO THE TIME LIMIT PRESCRIBED U/ S 153 OF THE ACT. ACCORDINGLY, GROUND NO.1.1 IS DISMISSED BY RESPECTF ULLY FOLLOWING THE RATIO OF THE DECISION RENDERED BY CO-ORDINATE BENCH OF THE TRIBUNAL AS AFORESAID. 5.2 WITH RESPECT TO THE TRANSFER PRICING ADJUSTMEN T IN RESPECT OF IT ENABLED SEGMENT, ALTHOUGH THE ASSESSEE HAS CH ALLENGED SELECTION OF COMPARABLES AS WELL AS REJECTION OF CO MPARABLES IN THE GROUNDS OF APPEAL, THE LD. AUTHORIZED REPRESENTATIV E HAS ARGUED AT LENGTH ONLY AGAINST THE INCLUSION OF INFOSYS BPO LT D. IN THE FINAL SET OF 24 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT COMPARABLES ON THE GROUNDS THAT THIS COMPANY IS FUN CTIONALLY DIFFERENT, HAVING OWNERSHIP OF INTANGIBLES AND ENJOY S BENEFIT OF SYNERGIES. THE LD. AUTHORIZED REPRESENTATIVE HAS PL ACED RELIANCE ON NUMEROUS JUDICIAL PRECEDENTS FOR BUTTRESSING THE AR GUMENTS IN THIS REGARD. THE AUTHORIZED REPRESENTATIVE HAS ALSO SUBM ITTED THAT THE ASSESSEE HAS TREATED FOREIGN EXCHANGE FLUCTUATION A S AN OPERATING ITEM WHEREAS THE REVENUE HAS TREATED THE SAME AS NON -OPERATING ITEM. THE LD. AR HAS PLEADED THAT IF INFOSYS BPO LT D. IS EXCLUDED FROM THE FINAL SET OF COMPARABLES AND FOREIGN EXCHA NGE FLUCTUATION IS TREATED AS OPERATING ITEM, THE AVERAGE MARGIN OF TH E REMAINING FOUR COMPARABLE COMPANIES VIZ. (I) JINDAL INTELLICOM, (I I) MICROLAND LTD., (III) TECH MAHINDRA BUSINESS SERVICES LTD. & (IV) BNR UDY OG LTD. WILL WORK OUT TO 16.15% AND SINCE THE OPERATING MARGIN OF THE ASSESSEE IS 13.61%, THE MEAN OF THE COMPARABLES WILL BE WITHIN TH E PERMITTED RANGE AND NO TRANSFER PRICING ADJUSTMENT WOULD BE WAR RANTED IN RESPECT OF ITES SEGMENT. 5.3 HAVING GONE THROUGH THE SUBMISSIONS OF THE AS SESSEE AS WELL AS THE ANNUAL REPORT OF BPO INFOSYS LTD. AN D THE JUDICIAL PRECEDENTS RELIED UPON BY THE LD. AUTHORIZED REPRES ENTATIVE, WE ARE OF THE CONSIDERED OPINION THAT INFOSYS BPO LTD. CAN NOT BE CONSIDERED 25 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT AS A COMPARABLE TO THE ASSESSEE COMPANY FOR THE SIM PLE REASON THAT THE ASSESSEE COMPANY IS ENGAGED IN RENDERING SYSTEM INTEGRATION, ENTERPRISE SOLUTIONS AND SOFTWARE DEVELOPMENT SERVIC ES TO THE CLIENTS OF ITS ASSOCIATED ENTERPRISES (AE) AND ALSO TO INDE PENDENT CUSTOMERS IN THE UNITED KINGDOM, THE UNITED STATE OF AMERICA AND OTHERS COUNTRIES IN EUROPE AS WELL AS INDIA WHILE BEING A S UBSIDIARY OF STERIA (UK). ON THE OTHER HAND INFOSYS BPO LTD. IS A PART OF THE INFOSYS GROUP, A GIANT IN THE FIELD OF INFORMATION TECHNOLO GIES SERVICES AND BEING A PART OF THE INFOSYS GROUP, INFOSYS, IT TH US ENJOYS SIGNIFICANT BRAND PRESENCE AND BRAND VALUE PLAYS A SIGNIFICANT ROLE IN ITS ABILITY TO GENERATE PROFIT. THE HONBLE DELHI HIGH COURT IN THE CASE OF PR. CIT VS. ORACLE (OFSS) BPO SERVICES PVT. LTD. IN ITA NO.124/2018 UPHELD THE EXCLUSION OF ENTITY ON THE BASIS OF SIGNIFICANT BRAND PRESENCE ON ENTITY ON THE BASIS OF SIGNIFICANT BRAND PRESENCE A ND BRAND VALUE OF AN ENTITY. THIS DECISION OF THE HONBLE HIGH COURT OF DELHI WAS LATER UPHELD BY THE HONBLE APEX COURT IN SLP (CC) NO.324 69/2018. ON IDENTICAL LINES, THE HYDERABAD BENCH OF ITAT IN THE CASE OF HYUNDAI MOTORS INDIA ENGINEERING. VS. ITO IN ITA NO.1850/HY D/2012 DIRECTED THE EXCLUSION OF INFOSYS BPO LTD. FROM THE FINAL SE T OF COMPARABLES BY HOLDING THAT, .PRESENCE OF A BRAND COMMANDS PREMIUM PRICE AND 26 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT THE CUSTOMERS WOULD BE WILLING TO PAY, FOR THE SERV ICES/PRODUCED OF THE COMPANY. INFOSYS BPO IS A ESTABLISHED PLAYER WHO IS NOT A ONLY A MARKET LEAD BUT ALSO A COMPANY EMPLOYING SHEET BREA TH IN TERMS OF ECONOMIES OF SCALE AND DIVERSITY AND GEOGRAPHICAL D ISPERSION OF CUSTOMERS. THE PRESENCE OF THE AFORESAID FACTORIES WILL TAKE THIS COMPANY OUT OF THE LIST OF COMPARABLES. WE THEREFOR E ACCEPT THE CONTENTION OF THE ASSESSEE THAT THIS COMPANY CANNOT BE REGARDED AS A COMPARABLE. SIMILAR VIEW WAS ALSO TAKEN IN CASE OF SYMPHONY MARKETING SOLUTION INDIA (PVT.) LTD. (SUPRA) BY THE BANGLORE BENCH. THEREFORE, WE DIRECT THE ASSESSING OFFICER/TPO TO E XCLUDE THE SAME . 5.4 ACCORDINGLY, IN VIEW OF THE JUDICIAL PRECEDENTS CITED ABOVE WE DIRECT THE AO/LD. TPO TO EXCLUDE BPO INFOSYS LTD FROM THE FINAL SET OF COMPARABLES. 5.5 SINCE THE LD. AUTHORIZED REPRESENTATIVE HAS SU BMITTED THAT IF INFOSYS BPO LTD. IS EXCLUDED FROM THE FINAL SET OF COMPARABLES, THE ASSESSEES CHALLENGE TO EXCLUSION OF THE TWO COMPARA BLES OF THE ASSESSEE VIZ. ALLSEC TECHNOLOGIES LTD. AND INFORMED TECHNOLOGIES LTD, WILL BECOME ACADEMIC IN NATURE AND THE SAME WERE ALS O NOT ARGUED BY THE LD. AR, THESE TWO COMPARABLES WILL REMAIN TO BE E XCLUDED AND THE ASSESSEES CHALLENGE TO THEIR EXCLUSION IS DISMISSE D AS NOT PRESSED. 27 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT 5.6 WITH RESPECT TO THE ITES SEGMENT, IT IS THE PLEA OF THE LD. AUTHORIZED REPRESENTATIVE THAT FOREIGN EXCHANGE FLUCTUATION SHOULD BE TREATED IS AN OPERATING ITEM. IN THIS REG ARD RELIANCE HAS BEEN PLACED ON THE JUDGMENTS OF THE HONBLE DELHI H IGH COURT IN THE CASE OF PR. CIT VS. BC MANAGEMENT SERVICES PVT. LTD . IN APPEAL NO.1064/2017 AND PR. CIT VS. AMERIPRISE INDIA PVT. LTD. IN APPEAL NO.206/2016. THE HONBLE DELHI HIGH COURT IN THE CA SE OF PR. CIT VS. AMERIPRISE INDIA PVT. LTD. (SUPRA) HAS HELD THAT IN RESPECT OF FOREIGN EXCHANGE GAINS EARNED BY THE ASSESSEE WHICH IS IN RE LATION TO TRADING ITEMS AND EMANATING FROM INTERNATIONAL TRANSACTIONS , DIRECT VALUE DERIVED FROM IT CANNOT BE TREATED AS NON-OPERATING LOSSES AND GAINS. SIMILAR VIEW WAS TAKEN BY THE HONBLE DELHI HIGH COU RT IN THE CASE OF PR. CIT VS. CASHEDGE INDIA PVT. LTD. IN APPEAL NO.2 79/2016 AS WELL AS IN CASE OF PR. CIT VS. BC MANAGEMENT SERVICES PVT. LTD. (SUPRA). THEREFORE, WE AGREE WITH THE CONTENTIONS OF THE AR T HAT FOREIGN EXCHANGE FLUCTUATIONS GAINS/LOSSES SHOULD BE TREATE D AS OPERATING ITEM IF THE SAME ARE IN RELATION TO THE TRADING ITE MS EMANATING FROM THE INTERNATIONAL TRANSACTIONS. IT ONLY REMAINS TO BE VERIFIED AS TO WHETHER THE FOREIGN EXCHANGE FLUCTUATIONS INCURRED B Y THE ASSESSEE RELATE TO THE TRADING ITEMS EMANATING FROM THE INTE RNATIONAL 28 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT TRANSACTIONS OR NOT. THEREFORE, FOR THE LIMITED PUR POSES OF VERIFYING THAT THE FOREIGN EXCHANGE FLUCTUATIONS OF THE ASSES SEE RELATE TO THE TRADING ACTIVITIES OF THE ASSESSEE, THE ISSUE IS RE STORED TO THE FILE OF THE ASSESSING OFFICER/LD. TPO TO VERIFY THE SAME AND IF IT IS FOUND THAT THE FOREIGN EXCHANGE FLUCTUATION RELATE TO TRADING WITH THE ASSOCIATE ENTERPRISES THE ASSESSING OFFICER/LD. TPO IS DIRECT ED TO TREAT THE SAME AS OPERATING ITEM. THUS, THIS ISSUE STANDS ALL OWED FOR STATISTICAL PURPOSES. 5.7 WITH RESPECT TO THE TRANSFER PRICING ADJUSTM ENT IN THE SOFTWARE DEVELOPMENT SEGMENT, THE ASSESSEE HAS AGITA TED INCLUSION OF FOUR COMPARABLES BY THE LD. TPO. HOWEVER, THE MA IN THRUST OF THE ASSESSEES ARGUMENTS HAS BEEN THAT IF THE FOREIGN E XCHANGE FLUCTUATIONS ARE CONSIDERED AS OPERATING ITEM, THE MARGIN OF THE ASSESSEE SO COMPUTED WILL BE 13.59% AND THE 35 TH PERCENTILE OF THE COMPARABLE COMPANIES WOULD COME TO 11.51% AND THE 6 5 TH PERCENTILE WOULD COME 25.64% AND, THEREFORE, SINCE THE MARGIN O F THE ASSESSEE WOULD LIE BETWEEN THE 35 TH AND 65 TH PERCENTILE, NO TRANSFER PRICING ADJUSTMENT WOULD BE REQUIRED. THE LD. CIT-DR HAS SUB MITTED THAT THE AO/TPO SHOULD VERIFY THE COMPUTATION OF THIS 35 TH AND 65 TH PERCENTILE BEFORE THE TRANSFER PRICING ADJUSTMENT I N THIS SEGMENT IS TO 29 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT BE DELETED. THE LD. AUTHORIZED REPRESENTATIVE HAS N O OBJECTION TO THE SAME. ACCORDINGLY, THE ISSUE OF TRANSFER PRICING AD JUSTMENT IN THE SOFTWARE DEVELOPMENT SEGMENT IS RESTORED TO THE FILE OF THE AO/LD. TPO FOR THE LIMITED PURPOSES OF VERIFYING THE COMPU TATION OF 35 TH AND 65 TH PERCENTILES AND IF THE SAME IS FOUND CORRECT THEN NO TRANSFER PRICING ADJUSTMENT WOULD HAVE TO BE MADE. THE ASSESS ING OFFICER/LD. TPO IS ALSO DIRECTED TO VERIFY AS TO WHETHER THE FOR EIGN EXCHANGE FLUCTUATION IN THIS SEGMENT RELATES TO THE TRADING ACTIVITIES WITH THE AES AND IF IT IS SO FOUND THEN THE SAME IS TO BE TR EATED AS OPERATING ITEM. 5.8 SINCE IT HAS BEEN SUBMITTED BY THE LD. AUTHOR IZED REPRESENTATIVE THAT THE GROUNDS RELATING TO INCLUSI ON OF OTHER COMPANIES AS COMPARABLES BY THE LD. TPO/AO WOULD BE COME ACADEMIC AND NO ARGUMENTS WERE ADVANCED BY THE LD. A UTHORIZED REPRESENTATIVE ON THE INCLUSION OF SUCH COMPARABLE COMPANIES BY THE LD. AUTHORIZED REPRESENTATIVE, THE RELATED GROUNDS ARE DISMISSED AS NOT PRESSED. 5.9 GROUND NO.5 CHALLENGES THE ACTION OF THE ASSE SSING OFFICER IN DISALLOWING AN AMOUNT OF RS.10,17,89,369/ - INCURRED ON ACCOUNT OF MANAGEMENT SERVICES FEES U/S 40(A)(I) OF THE ACT ON THE 30 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT GROUND THAT THE ASSESSEE HAD FAILED TO DEDUCT OF TA X AT SOURCE IN TERMS OF PROVISION OF SEC.195 OF THE ACT. THE BRIEF FACTS SURROUNDING THIS CONTROVERSY ARE THAT THE ASSESSEE HAD ENTERED INTO A MANAGEMENT SERVICES AGREEMENT WITH STERIA FRANCE WHEREIN STERIA FRANCE HAD AGREED TO PROVIDE CERTAIN MANAGEMENT SERVICES TO TH E ASSESSEE AND PURSUANT TO THIS AGREEMENT THE ASSESSEE HAD PAID TH E IMPUGNED AMOUNT TO STERIA FRANCE. THE ASSESSEE HAD APPROACHE D THE AUTHORITY FOR ADVANCE RULINGS AND HAD SOUGHT RULING ON THE IS SUE AS TO WHETHER THE PAYMENT MADE BY THE ASSESSEE FOR MANAGEMENT SER VICES TO STERIA FRANCE WILL NOT BE TAXABLE IN INDIA IN THE HANDS OF STERIA FRANCE AS PER THE PROVISIONS OF INDIA-FRANCE DTAA AND THAT IF STERIA FRANCE WAS NOT TAXABLE IN INDIA, WHETHER THE ASSESSEE WAS LIABLE TO DEDUCT TAX AT SOURCE. THE AAR, HOWEVER, RULED AGAINST THE ASSESSE E AND THE ASSESSEE, BEING AGGRIEVED, APPROACHED THE HONBLE D ELHI HIGH COURT IN A WRIT PETITION WHICH WAS DISPOSED OF IN FAVOUR OF THE ASSESSEE WHEREIN THE HONBLE DELHI HIGH COURT HELD THAT THE P ROTOCOL OF INDIA- FRANCE DTAA WAS IN INTEGRAL PART OF THE TREATY AND IT DID NOT REQUIRE ANY NOTIFICATION BY THE GOVERNMENT OF INDIA FOR ITS IMPLEMENTATION. THE HONBLE DELHI HIGH COURT ALSO HELD THAT THE BEN EFICIAL PROVISION IN THE DTAA BETWEEN INDIA AND UK CAN BE AUTOMATICALLY INCORPORATED IN 31 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT INDIA-FRANCE DTAA BY APPLYING THE MOST FAVOURED NAT ION CLAUSE PRESENT IN THE PROTOCOL TO INDIA-FRANCE (DTAA). IT WAS ALSO HELD THAT THE SERVICES RENDERED BY STERIA FRANCE WERE MANAGER IAL IN NATURE AND WERE, THEREFORE, OUTSIDE THE AMBIT OF DEFINITION OF FEE FOR TECHNICAL SERVICES AND FURTHER THAT THE PAYMENTS MADE TO STER IA FRANCE WERE NOT LIABLE TO WITHHOLDING OF TAX UNDER THE PROVISION S OF SECTION195 OF THE ACT. THEREAFTER, FOR ASSESSMENT YEARS 2010-11 A ND 2011-12, THE HONBLE DELHI HIGH COURT WENT ON TO DECIDE THE ISSU E IN FAVOUR OF THE ASSESSEE IN ITA NO.762/2017 AND 382/2017 RESPECTIVE LY. IN ASSESSMENT YEAR 2011-12, THE QUESTION FRAMED BY THE HONBLE DELHI HIGH COURT WAS: WHETHER ON FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, ITAT WAS CORRECT IN LAW IN HOLDING THAT THE ASSESSEE WAS NOT LIABLE TO WITHHOLD TAX U/S 195 OF THE ACT ON PAYMENTS MADE BY IT TO STERIA FRANCE FOR MANAGEMENT SERVICES FEE AND CONSE QUENTLY DELETING THE DISALLOWANCE MADE BY THE LD. ASSESSING OFFICER U/S 40(A) (I) OF THE ACT ? 5.10 THIS QUESTION WAS ANSWERED AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE. THEREFORE, IN LIGHT OF THE SETTLED JUDICIAL PRECEDENT IN FAVOUR OF THE ASSESSEE ON THE ISSUE BY THE HONBLE DELHI HIGH COURT IN ASSESSEES OWN CASE, THERE IS NO REASO N FOR US TO 32 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT SUSTAIN THIS DISALLOWANCE. ACCORDINGLY, RESPECTFULLY FOLLOWING THE JUDGMENT OF THE HONBLE DELHI HIGH COURT, AS AFOREM ENTIONED, IN ASSESSEES OWN CASE, WE DIRECT THE DELETION OF THIS D ISALLOWANCE. 5.11 GROUND NO.6 CHALLENGES THE ACTION OF THE ASS ESSING OFFICER IN MAKING DISALLOWANCE OF RS.9,28,28,017/- B EING PAYMENTS MADE TO STERIA FRANCE FOR PURCHASE OF COMPUTER SOFT WARE LICENSES FOR THE REASON OF FAILURE TO DEDUCT TAX AT SOURCE. IT I S THE CONTENTION OF THE ASSESSEE THAT THE PAYMENT FOR PURCHASE OF SOFTWARE L ICENSES IS NOT IN THE NATURE OF ROYALTY AND, THEREFORE, NO DEDUCTION OF TAX IS REQUIRED. IN THIS REGARD RELIANCE HAS BEEN PLACED ON THE JUDG MENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF DCIT VS. IN FRASOFT LTD., REPORTED IN 220 TAXAMAN273. IT HAS ALSO BEEN SUBMIT TED THAT ALTHOUGH THE LOWER AUTHORITIES HAVE RELIED ON THE J UDGMENT OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. SAMSUNG COMPANY LTD. REPORTED IN 345 ITR 494 (KARNATAKA), T HE SAME HAS BEEN DISTINGUISHED AND DISSENTED FROM BY THE HONB LE DELHI COURT IN THE CASE OF INFRASOFT LTD. (SUPRA). IT HAS BEEN SUB MITTED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVIDING IN FORMATION TECHNOLOGY SOLUTIONS IN INDIA AND ABROAD. THE ASSES SEE REQUIRES VARIOUS HARDWARE(S) AND SOFTWARE(S), FROM TIME TO TIM E. IN ORDER TO 33 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT MEET SUCH REQUIREMENTS, IN A COST EFFECTIVE MANNER, THE ASSESSEE HAD ENTERED INTO AN INTRA-GROUP SUPPLIER AGREEMENT. STE RIA FRANCE HAD NEGOTIATED WITH EXTERNAL SUPPLIERS AND SUBSCRIBED CE NTRALIZED PURCHASES FROM THEM, IN THE INTEREST OF ALL ITS GRO UP AFFILIATES. THE OBJECTIVE FOR UNDERTAKING CENTRALIZED PURCHASES WAS TO BARGAIN COMPETITIVE PRICES FOR THE STERIA GROUPS PURCHASE REQUIREMENTS. UNDER THE TERMS OF THE AGREEMENT ENTERED BY THE ASS ESSEE, STERIA FRANCE WOULD PURCHASE MATERIAL (HARDWARE OR SOFTWARE) OR SERVICES AND THEREAFTER RESALE WITHIN THE GROUP ENTITIES FOR SUBSIDIARIES LOCAL NEEDS. SUCH RESALE, AS PER THE AGREEMENT, IS DONE WITHOUT RENDERING ADDITIONAL SERVICES AND WITHOUT ADDING ANY MARKUP. I T HAS BEEN FURTHER SUBMITTED THAT APROPOS THE AFORESAID AGREE MENT, THE ASSESSEE HAS PURCHASED CERTAIN SOFTWARE LICENSES FOR A SUM AGGREGATING TO RS.9,28,28,017/- FROM STERIA FRANCE IN THE COURSE OF THE YEAR AND THE LICENSES, AS PER THE INVOICES, ARE AS UNDER: - PAULO ALTO & WILDFIRE -SOFTWARE LICENSE CHARG E -MESSAGING 360 ONE -CALL WINDOWS - ANTIVIRUS + TACTEM -ACTIVE DIRECTORY COSTS 34 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT - MICROSOFT MAINTENANCE - ONE IT CATALOGUE - HERMES -DESKTOP SERVICES SCCM 5.12 IT HAS BEEN SUBMITTED THAT PAYMENTS MADE TO STERIA FRANCE WERE IN RESPECT OF SOFTWARE LICENSES O NLY AND, WERE NOT TOWARDS USE OF COPYRIGHT IN THE SOFTWARE COVERED WITHIN THE MEANING OF ROYALTY UNDER SECTION 9(1 )(VI) OF THE ACT. 5.13 IT IS SEEN THAT UNDER SECTION 195 OF ACT, AN OBLIGATION IS CAST ON A PERSON MAKING PAYMENT TO A NON-RESIDENT OF ANY SUM, WHICH IS CHARGEABLE UNDER THE PROVISIONS OF THE ACT, TO DEDUCT TAX AT THE RATES IN FORCE, AT THE TIME OF PAYMENT OF SUCH SUM OR AT THE TIME OF CREDIT THEREOF TO THE AC COUNT OF THE PAYEE, WHICHEVER IS EARLIER. AS PER THE AFORESAID PR OVISION, TAX IS REQUIRED TO BE WITHHELD IN RESPECT OF PAYMENT MADE T O A NON- RESIDENT. [REFER GE INDIA TECHNOLOGY CENTRE (P) LTD V. CIT: 327 ITR 456]. FURTHER, IF WE CONSIDER THE AMBIT OF DEFIN ITION OF ROYALTY AS DEFINED IN SECTION 9(1)(VI) OF THE ACT , IT IS SEEN THAT CLAUSE (V) OF EXPLANATION TO SECTION 9(L)(VI) PROVI DES THAT CONSIDERATION PAID FOR TRANSFER OF INTER ALIA ALL OR ANY RIGHTS IN 35 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT RESPECT OF ANY COPYRIGHT AS FALLING WITHIN THE MEANI NG OF ROYALTY. IN THE PRESENT CASE, CONSIDERING THAT THE ISSUE UND ER CONSIDERATION IS PAYMENT MADE TOWARDS SOFTWARE, WHICH IS A COPYRIGHTED ARTICLE/ASSET, IT NEEDS TO BE CONSIDERE D WHETHER THE PAYMENT MADE IS FOR OBTAINING RIGHTS IN RESPECT OF COPYRIGHT IN THE SOFTWARE, WHICH IS GOVERNED BY THE PROVISIONS OF COPYRIGHT ACT, 1957. FURTHER, IT WOULD BE PERTINENT TO NOTE THAT THE STERIA FRANCE IS A RESIDENT OF FRANCE (TRC AND NO PE CERTIFICATES ARE PLACED IN THE PAPER BOOK). AS PER SECTION 90(2) OF THE ACT, THE PROVISIONS OF THE ACT SHALL BE OVERRIDDEN BY THE PR OVISIONS OF THE DTAA, TO THE EXTENT THE LATTER ARE MORE BENEFICIAL TO A NON- RESIDENT ASSESSEE. IN THE PRESENT CASE, ARTICLE 13 OF INDIA - FRANCE DTAA DEALS WITH TAXABILITY OF ROYALTY PAID BY AN INDIAN RESIDENT TO FRENCH RESIDENT. THE SAID ARTICLE READS AS UNDER: 'ARTICLE 13 - ROYALTIES AND FEES FOR TECHNICAL SERV ICES AND PAYMENTS FOR THE USE OF EQUIPMENT - 1. ROYALTIES, FEES FOR TECHNICAL SERVICES AND PAYMENTS FOR THE USE OF EQUIPMENT ARISING IN A CONTRACTING STATE AND PAID TO A RESIDENT OF THE OTHER CONTRACTING STATE MAY BE TAXED IN THAT OTHER CONTRACTING STATE. 36 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT 2. HOWEVER, SUCH ROYALTIES, FEES AND PAYMENTS MAY ALSO BE TAXED IN THE CONTRACTING STATE, IN WHICH THEY ARISE AND ACCORDING TO THE LAWS OF THAT CONTRACTING STATE, BU T IF THE RECIPIENT IS THE BENEFICIAL OWNER OF THESE CATEGORI ES OF INCOME, THE TAX SO CHARGED SHALL NOT EXCEED 10 PER CENT OF THE GROSS AMOUNT OF SUCH ROYALTIES, FEES AND PAYMEN TS. 3. THE TERM ROYALTIES AS USED IN THIS ARTICLE MEANS PAYMENTS OF ANY KIND RECEIVED AS A CONSIDERATION FO R THE USE OF OR THE RIGHT TO USE, ANY COPYRIGHT OF LITERA RY, ARTISTIC OR SCIENTIFIC WORK INCLUDING CINEMATOGRAPH FILMS, O R FILMS OR TAPES FOR RADIO OR TELEVISION BROADCASTING, ANY PAT ENT, TRADE MARK, DESIGN OR MODEL, PLAN, SECRET FORMULA O R PROCESS, OR FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE. 5.14 THE DEFINITION OF ROYALTY UNDER THE INDIA-FR ANCE DTAA IS, THUS, MUCH NARROWER IN SCOPE THAN THE DEFI NITION UNDER THE ACT. 5.15 THE COPYRIGHT ACT, 1957 DEFINES COMPUTER PROGRAMME AS A SET OF INSTRUCTIONS EXPRESSED IN WORD S, CODES, SCHEMES, OR ANY OTHER FORM INCLUDING A MACHINE READ ABLE 37 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT MEDIUM CAPABLE OF CAUSING A COMPUTER TO PERFORM A P ARTICULAR TASK OR ACHIEVE A PARTICULAR RESULT. THE COPYRIGHT ACT FURTHER DEFINES THE TERM LITERARY WORK AS INCLUDING COMPU TER PROGRAMMES, TABLE COMPILATION INCLUDING COMPUTER DA TABASES. THE TERM COPYRIGHT IN CASE OF A COMPUTER PROGRAM HAS BEEN DEFINED IN SECTION 14 OF THE COPYRIGHT ACT AS AN EX CLUSIVE RIGHT TO REPRODUCE INCLUDING STORING IN ANY MEDIUM BY ELE CTRONIC MEAN, TO ISSUE COPIES OF THE WORK TO PUBLIC, TO MAK E ANY ADAPTATION, ETC. IN RELATION TO A LITERARY WORK INCL UDING COMPUTER PROGRAMME. IN OTHER WORDS, IN TERMS OF THE AFORESAI D SECTION, IN ORDER FOR A PERSON TO BE CONSIDERED AS HAVING A COP YRIGHT IN A LITERARY WORK, INCLUDING COMPUTER PROGRAMME, SUCH PE RSON MUST HAVE AN EXCLUSIVE RIGHT TO REPRODUCE OR TO ISSUE CO PIES OR TO ADAPT, OR TO SELL OR GIVE ON COMMERCIAL RENTAL THE COMPUTER PROGRAM. IN THE PRESENT CASE, THE SOFTWARE PURCHASED BY THE ASSESSEE ARE STANDARDIZED AND NOT CUSTOMIZED PRODUC TS AND IN TERMS OF THE CONTRACTS WITH THE EXTERNAL SUPPLIERS/ STERIA FRANCE OF SUCH SOFTWARE, THE ASSESSEE ACQUIRES A NON-EXCLUS IVE, NON- TRANSFERABLE RIGHT TO DISTRIBUTE THE SOFTWARE AND IS PROHIBITED FROM COPYING, MODIFYING OR FURTHER DEVELOPMENT OF T HE SOFTWARE. 38 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT THEREFORE, THE PURCHASE OF SOFTWARE BY THE ASSESSEE IN TERMS OF THE AGREEMENT ONLY RESULTS IN THE TRANSFER OF A COP YRIGHTED ARTICLE RATHER THAN A COPYRIGHT RIGHT AND PAYMENT R ECEIVED FOR THE SAME WOULD NOT BE IN THE NATURE OF ROYALTY IN TH E HANDS OF STERIA FRANCE. 5.16 WE ARE GUIDED TO REACH SUCH A FINDING BY REL YING ON THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF DIT V. INFRASOFT LTD.: (220 TAXMAN 274). IN THIS CA SE, THE ASSESSEE, AN INTERNATIONAL SOFTWARE MARKETING AND DE VELOPMENT COMPANY OF AN INTERNATIONAL GROUP, HAD CLAIMED THAT AMOUNT RECEIVED BY IT UNDER LICENSE AGREEMENT FOR ALLOWING USE OF SOFTWARE WAS NOT TAXABLE AS ROYALTY. THE HONBLE DELH I HIGH COURT UPHELD THE ORDER OF THE TRIBUNAL WHEREIN IT WA S HELD THAT AMOUNT RECEIVED BY THE ASSESSEE UNDER THE LICENSE A GREEMENT FOR ALLOWING THE USE OF THE SOFTWARE WOULD NOT BE ROYALTY UNDER THE DTAA SINCE WHAT WAS TRANSFERRED WAS NEITHER THE COPYRI GHT IN THE SOFTWARE NOR THE USE OF THE COPYRIGHT IN THE SOF TWARE, BUT WHAT WAS TRANSFERRED WAS THE RIGHT TO USE THE COPYRIGH TED MATERIAL OR ARTICLE WHICH WAS DISTINGUISHABLE FROM TH E RIGHTS IN A COPYRIGHT. ACCORDINGLY, PAYMENTS RECEIVED BY THE AS SESSEE IN 39 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT THIS REGARD WOULD BE TAXABLE AS BUSINESS INCOME. IT MAY ALSO BE PERTINENT TO NOTE THAT THE HONBLE DELHI HIGH COURT IN THE AFORESAID DECISION HAS DISTINGUISHED THE RATIO DECIDENDI LAID DOWN BY THE KARNATAKA HIGH COURT IN THE CASE OF CIT V. SAMSUNG ELECTRONICS CO. LTD. (SUPRA). ACCORDINGLY, THE RELIANCE PLACED BY THE ASSESSING OFFICER ON THE DECISION OF SAMSUNG ELECTRONICS (SUPRA) IS MISPLACED. 5.17 WE HAVE ALSO PERUSED THE INTRA- GROUP SUPPLI ER AGREEMENT ENTERED INTO BETWEEN STERIA FRANCE AND TH E ASESSEE WE FIND THAT IT IS PROVIDED THAT THE HARDWARE AND SOF TWARE PURCHASES BY STERIA FRANCE IS RE-SOLD TO THE ASSESS EE WITHOUT ADDITIONAL SERVICES AND WITHOUT ANY MARKUP. THUS, TH ERE IS NO TRANSFER OF ANY RIGHT IN RESPECT OF THE COPY OF RIG HT AND IT IS A CASE OF MERE TRANSFER OF A COPY OF RIGHTED ARTICLE. THE PAYMENT IS IN THE PURCHASE OF LICENSE OR A COPY RIGHTED ARTICL E AND IT REPRESENTS ONLY THE PURCHASE PRICE AND THE SAME CAN NOT BE CONSIDERED AS ROYALTY EITHER UNDER THE ACT OR UNDER THE PROVISIONS OF DTAA. IT WILL BE WORTHWHILE TO EXTRACT THE FOLLOWING OBSERVATIONS OF THE HONBLE DELHI HIGH COURT FROM T HE JUDGMENT 40 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT IN THE CASE OF DIT VS. INFRA SOFT LTD. (DEL) (SUPRA ) AT THIS JUNCTURE: 96. THE AMOUNT RECEIVED BY THE ASSESSEE UNDER THE LICENSE AGREEMENT FOR ALLOWING THE USE OF THE SOFTWARE IS NOT ROYALTY UNDER THE DTAA. 97. WHAT IS TRANSFERRED IS NEITHER THE COPYRIGHT I N THE SOFTWARE NOR THE USE OF THE COPYRIGHT IN THE SOFTWARE, BUT WHAT IS TRANSFERRED IS THE RIGHT TO U SE THE COPYRIGHTED MATERIAL OR ARTICLE WHICH IS CLEARL Y DISTINCT FROM THE RIGHTS IN A COPYRIGHT. THE RIGHT THAT IS TRANSFERRED IS NOT A RIGHT TO USE THE COPYRIGHT BUT IS ONLY LIMITED TO THE RIGHT TO USE THE COPYRIGHTED MATERIAL AND THE SAME DOCS NOT GIVE RISE TO ANY ROYALTY INCOME AND WOULD BE BUSINESS INCOME. 98. WE ARE NOT IN AGREEMENT WITH THE DECISION OF THE KARNATAKA HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS CO. LTD (SUPRA) THAT RIGHT TO MAKE A CO PY OF THE SOFTWARE AND STORING THE SAME IN THE HARD DISK OF THE DESIGNATED COMPUTER AND TAKING BACKUP COPY WOULD AMOUNT TO COPYRIGHT WORK UNDER SECTION 14(1) PF THE COPYRIGHT ACT AND THE PAYMENT MADE FOR THE GRANT OF THE LICENCE FOR THE SAID PURPOSE WOULD CONSTITUTE ROYALTY. THE LICENSE GRANTED TO TH E LICENSEE PERMITTING HIM TO DOWNLOAD THE COMPUTER PROGRAMME AND STORING IT IN THE COMPUTER FOR HIS OWN USE WAS ONLY INCIDENTAL TO THE FACILITY EXTENDE D TO THE LICENSEE TO MAKE USE OF THE COPYRIGHTED PRODUCT FOR HIS INTERNAL BUSINESS PURPOSE. THE SAID PROCESS WAS NECESSARY TO MAKE THE PROGRAMME FUNCTIONAL AND TO HAVE ACCESS TO IT AND IS QUALITATIVELY DIFFERENT FROM THE RIGHT CONTEMPLATED BY THE SAID PROVISION BECAUSE IT IS ONLY INTEGRAL T O THE USE OF COPYRIGHTED PRODUCT. THE RIGHT TO MAKE A BACKUP COPY PURELY AS A TEMPORARY PROTECTION 41 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT AGAINST LOSS, DESTRUCTION OR DAMAGE HAS BEEN HELD BY THE DELHI HIGH COURT IN NOKIA NETWORKS OY (SUPRA) AS NOT AMOUNTING TO ACQUIRING A COPYRIGHT I N THE SOFTWARE. 5.18 ACCORDINGLY, RESPECTFULLY FOLLOWING THE RATIO OF THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN DIT VS. INFRA SOFT LTD (SUPRA), WE ARE OF THE CONSIDERED THE OPINION THAT TAX WAS NOT REQUIRED TO BE DEDUCTED AT SOURCE IN RESPECT OF THE PAYMENT MADE TO STERIA FRANCE FOR THE PURCHASE OF COMPUTER SOFTWARE LICENSE/S AND THEREFORE, IN VIEW OF THE ABOVE CITED JUDGMENT WE D IRECT THE AO/TPO TO DELETE THE DISALLOWANCE. 5.19 GROUND NO.7 CHALLENGING THE LEVY OF INTEREST U/S 234B OF THE ACT IS CONSEQUENTIAL AND NEEDS NO SEPARATE A DJUDICATION. 6.0 IN THE FINAL RESULT, THE APPEAL OF THE ASSESS EE STANDS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 01/05/2020. SD/- SD/- (R.K.PANDA) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 01/05/2020 PK/PS COPY FORWARDED TO: 1. APPELLANT 42 ITA NO.6687/DEL/2019 S TERIA (INDIA) LTD. VS. ACIT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI