M/s Subex Technologies Limited, Bangalore V. JCIT, Bangalore

ITA 715/BANG/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0167 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 2 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-07-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 29-06-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 23-05-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY KUMAR CITIIIDR
• Assessee Lawyers: K R PRADEEP
• Keywords: Transfer pricing; Double taxation relief; Non-deduction of tax
• Section: 143(3); 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER IT( IT )A NO.715/BANG/2014 ASSESSMENT YEAR : 2008-09 M/S. SUBEX TECHNOLOGIES LTD., # 999, 9 TH MAIN, HSR LAYOUT, SECTOR-7, BENGALURU 560 102. PAN: AAICS 9433Q VS. THE JOINT COMMISSIONER OF INCOME TAX (OSD), CIRCLE 12(3), BENGALURU. APPELLANT RESPONDENT APPELLANT BY : SHRI K.R. PRADEEP, CA RESPONDENT BY : SHRI SANJAY KUMAR, CIT-III(DR) DATE OF HEARING : 29.06.2016 DATE OF PRONOUNCEMENT : 29.07.2016 O R D E R PER ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE COMPANY IS DIRECTED A GAINST THE ORDER DATED 25.02.2014 OF THE CIT(APPEALS)-III, BANGALORE FOR THE ASSESSMENT YEAR 2008-09. 2. THE ASSESSEE IS ENGAGED IN THE DEVELOPMENT, SAL ES AND SERVICE OF SOFTWARE PRODUCTS. DURING THE YEAR, UNDER A SCHEME OF ARRANGEMENT IT(IT)A NO.715/BANG/2014 PAGE 2 OF 10 APPROVED BY THE HONBLE HIGH COURT OF KARNATAKA, TH E SERVICE BUSINESS OF THE ASSESSEES PARENT COMPANY VIZ., SUBEX LTD. WAS TRANSFERRED TO THE ASSESSEE COMPANY FOR A CONSIDERATION OF RS.31,00,00 ,000. A RETURN HAS BEEN FILED OFFERING INCOME OF RS.1,70,10,894. 3. THE ASSESSING OFFICER DURING THE COURSE OF ASSES SMENT PROCEEDINGS EXAMINED THE NATURE OF EXPENSES DEBITED AS SUB-CONT RACT CHARGES OF RS.62,49,85,438 AND HELD THAT THIS AMOUNT WHICH WAS PAID TO SUBEX TECHNOLOGIES INC. [STI], AN ASSOCIATE ENTERPRISE [AE] BASED AT NEW JERSEY WAS HIT BY THE PROVISIONS OF SECTION 40(A)(I A) OF THE INCOME-TAX ACT, 1961 [THE ACT] AS THE PAYMENT HAS BEEN MADE FOR T ECHNICAL SERVICES AND NO TAX WAS DEDUCTED AT SOURCE U/S. 195 OF THE ACT. ACCORDINGLY, A SUM OF RS.62,49,438 WAS DISALLOWED AND ADDITION MADE. 4. AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(APPEALS) ON THE FOLLOWING GROUNDS:- 1. ASSESSMENT BAD IN LAW AT THE OUTSET, SUBEX TECHNOLOGIES LIMITED (HEREINA FTER REFERRED TO AS 'THE APPELLANT' OR 'STL' OR 'THE COM PANY') PRAYS THAT THE ORDER DATED 29 DECEMBER 20 11, PASSED UNDE R SECTION 143(3) OF THE INCOME-TAX ACT, 1961, ('THE ACT'), BY THE JOINT COMMISSIONER OF INCOME-TAX, ('THE JCIT'), BE STRUCK DOWN AS INVALID, AS THE ORDER IS BASED ON SURMISE AND CONJE CTURES AND HENCE IS BAD IN LAW AND ON FACTS. 2. ERRONEOUS DEMANDS THE JCLT ERRED IN LAW AND ON FACTS IN: IT(IT)A NO.715/BANG/2014 PAGE 3 OF 10 A) DETERMINING ASSESSED INCOME OF STL AT INR 641,996,242; B) LEVYING INTEREST UNDER SECTION 234B OF THE ACT AT INR 95,259,645; C) LEVYING .INTEREST UNDER SECTION 2340 OF THE ACT AT INR 93,865; AND D) RAISING A DEMAND AT INR 307,863,457 UPON THE APPELLANT. 3. DISALLOWANCE UNDER SECTION 40(A)(I) OF THE ACT 3.1 THE LEARNED JCIT HAS ERRED IN DISALLOWING SU B-CONTRACTING CHARGES OF INR 624,985,438 PAYABLE BY THE COMPANY T O ITS ASSOCIATED ENTERPRISE ('AE') I.E. SUBEX TECHNOL OGIES INC. (STI') UNDER THE PROVISIONS OF SECTION 40(A)(I ) OF THE ACT FOR NON-DEDUCTION OF TAX AT SOURCE. 3.2 THE LEARNED JCIT HAS ERRED IN CONCLUDING THAT T HE SUB- CONTRACTING CHARGES ARE LIABLE FOR TAX DEDUCTION AT SOURCE UNDER SECTION 195 OF THE ACT. 3.3 THE JCLT HAS ERRED IN NOT TAKING COGNISANCE OF THE COMPANY'S SUBMISSIONS THAT STI HAD NOT MADE AVAILAB LE ANY SERVICES TO IT AS PER THE INDIA-US DOUBLE TAX AVOIDANCE AGREEMENT ('THE TREATY'). 3.4 THE LEARNED JCIT HAS ERRED IN HOLDING THAT: THE AGREEMENT PRODUCED BY THE APPELLANT DID NOT CLE ARLY MENTION THE NATURE OF SERVICES AND APPEARS VAGUE. FURTHER, THE AGREEMENT COPY FURNISHED BY THE APPELL ANT WOULD HAVE EVIDENTIARY SIGNIFICANCE ONLY IN THE PRESENCE OF CORROBORATIVE DOCUMENTS; THE PROCESS FLOW DOCUMENT DOES NOT THROW LIGHT ON T HE TRANSACTION BETWEEN THE COMPANY AND STI AS IT IS MERELY A GUIDANCE NOTE MEANT FOR INTERNAL USE; IT IS NOT POSSIBLE TO ACCEPT THAT STI DID NOT RENDE R ANY TECHNICAL SERVICES THAT WAS NOT TO BE CALLED AS 'IN CLUDED IT(IT)A NO.715/BANG/2014 PAGE 4 OF 10 SERVICES' IN TERMS OF THE INDIA-US TREATY AS IT IS ENGAGED IN SOFTWARE DEVELOPMENT AND CONSULTANCY SERVICES; A ND STI HAS MADE AVAILABLE SERVICES TO THE COMPANY THAT INVOLVE EXPERTISE OR SPECIAL KNOWLEDGE, AS THERE IS HUMAN ELEMENT INVOLVED. 4. INTEREST UNDER SECTION 234B OF THE ACT THE LEARNED JCIT HAS ERRED IN LEVYING INTEREST UNDE R SECTION 234B OF THE ACT OF INR 95,259,645. 5. INTEREST UNDER SECTION 234D OF THE ACT THE LEARNED JCIT HAS ERRED IN LEVYING INTEREST UNDE R SECTION 234D OF THE ACT OF INR 93,865. 5. BEFORE THE CIT(APPEALS), THE ASSESSEE ALSO RAISE D ADDITIONAL GROUNDS AS UNDER:- 7. THE ASSESSMENT ORDER PASSED BY THE LEARNED ASSE SSING OFFICER UNDER SECTION 143(3) OF THE IT ACT IS INVAL ID AND BAD IN LAW. 8. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED ASS ESSING OFFICER IS NOT JUSTIFIED IN REFERRING THE CASE OF T HE APPELLANT TO THE TPO ONLY TO OVERCOME THE TIME-LIMIT PROVIDED UNDER FIRST PROVISO TO SECTION 153(1). 9. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED ASS ESSING OFFICER HAS FAILED TO APPRECIATE THAT CONSIDERATION PAID BY THE STI TO THE APPELLANT ALSO DOES NOT AMOUNT TO 'FEES FOR TECHNICAL SERVICE' UNDER SECTION 9(1)(VII) OF THE ACT. 10. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED AS SESSING OFFICER HAS FAILED TO APPRECIATE THAT THE CASE OF T HE APPELLANT FALLS UNDER THE EXCEPTION PROVIDED UNDER SECTION 9(L)(VII )(B) OF THE ACT AND HENCE THE RECIPIENT NOT LIABLE TO TAX UNDER THE IT ACT. 11. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED AS SESSING OFFICER HAS FAILED TO APPRECIATE THAT THE CONSIDERA TION PAID BY THE IT(IT)A NO.715/BANG/2014 PAGE 5 OF 10 APPELLANT TO THE STI IS NOT TAXABLE BY VIRTUE OF AR TICLE 7 OF THE INDO-USA DTAA AS STI DOES NOT HAVE PERMANENT ESTABL ISHMENT IN INDIA. 12. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED AS SESSING OFFICER IS NOT JUSTIFIED IN FAILING TO APPRECIATE T HAT IN RESPECT OF APPELLANT'S PARENT COMPANY I,E. SUBEX LTD. FOR THE AY 2007- 2008, DURING THE ASSESSMENT PROCEEDINGS THE LEARNED ACIT HAD RAISED THE OBJECTION FOR THE VERY SAME TRANSACTION. UPON FILING OF THE SUBMISSION BY THE SUBEX LTD, THE LEARNED ACIT A CCEPTED THE CONTENTION OF SUBEX LTD. AND HENCE THE SAME WAS NOT DISALLOWED IN THE ASSESSMENT ORDER. 13. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED AS SESSING OFFICER HAS FAILED TO APPRECIATE THAT EVEN IF THE C ONSIDERATION PAID BY THE APPELLANT TO THE STI IS REGARDED AS FEES FOR INCLUDED SERVICES, DISALLOWANCE UNDER SECTION 40(A)(I) OF TH E ACT APPLIES ONLY TO SO MUCH OF AMOUNT WHICH IS PAYABLE TO THE STI AND NOT WHICH IS ACTUALLY PAID. 6. THE ASSESSEE MADE ELABORATE SUBMISSIONS BEFORE T HE CIT(APPEALS). THE CIT(A) CALLED FOR A REMAND REPOR T FROM THE AO WHICH WAS SUBMITTED BY HIS REPORT DATED 31.12.2013. IN R EJOINDER TO THE REMAND REPORT, THE ASSESSEE MADE THE FOLLOWING SUBMISSIONS :- 1.1 PURSUANT TO THE SCHEME OF ARRANGEMENT APPROV ED BY THE KARNATAKA HIGH COURT ON 27TH MARCH 2008, SERVICE BUSINESS OF SUBEX LIMITED, OUR PARENT COMPANY, WAS TRANSFERRED TO US WITH EFFECT FROM 1ST SEPTEMBER 20 07. 1.2 ACCORDINGLY, ALL THE INCOME & EXPENSES RECOR DED IN THE BOOKS OF SUBEX LIMITED IN THE INTERVENING PERIOD (I . E., BETWEEN 1 ST SEPTEMBER 2007 & 31 ST MARCH 2008) WAS RECORDED IN OUR BOOKS BY WAY OF JOURNAL ENTRY. THE RELEVANT LEDGER ACCOUNT WHICH REFLECTS THE EXPENSE OF RS. 624,985,348/- RECORDED BY VIRTUE OF SUCH JOURNAL EN TRY IS ENCLOSED HEREWITH AS ANNEXURE 2. IT(IT)A NO.715/BANG/2014 PAGE 6 OF 10 2. REQUISITE APPROVALS FOR MAKING PAYMENTS TO STI 2.1 FURTHER, YOUR GOODSELF HAVE ALSO ENQUIRED WH ETHER THE CONSIDERATION PAYABLE BY US TO STI WAS DULY APPROVE D PRIOR TO THE PAYMENT. 2.2 IN THIS REGARD, WE WOULD LIKE TO BRING TO Y OUR KIND ATTENTION THAT THE KARNATAKA HIGH COURT HAS APPROVE D THE TRANSFER OF THE SERVICE BUSINESS ON 27 TH MARCH 2008 BUT WITH EFFECT FROM T' SEPTEMBER 2007. DURING THIS INTERVENING PERIOD, THESE PAYMENTS WERE DULY APPROV ED BY THE OFFICIAL OF THE PARENT COMPANY WHICH IS REFLECT ED IN THE VOUCHERS. SAMPLE COPY OF THE VOUCHER ALONG WITH COP Y OF INVOICES RAISED BY STI ON SUBEX LIMITED DURING THE INTERVENING PERIOD OF 1ST SEPTEMBER 2007 & 31ST MAR CH 2008 ARE ENCLOSED AS ANNEXURE 3. 2.3 FURTHER, THESE AMOUNTS HAVE BEEN DULY ADOPT ED BY THE BOARD OF DIRECTORS & THE SHAREHOLDERS & AUDITED BY AN INDEPENDENT CHARTERED ACCOUNTANT. THIS IS EVIDENT F ROM THE FINANCIAL STATEMENTS ANNEXED WITH THE RETURN OF INC OME. 2.4 IT MAY BE NOTED THAT THERE IS NO DISPUTE AS REGARD THE FACT THAT WE DERIVE REVENUES FROM PROVISION OF SOFTWARE TO CUSTOMERS IN UNITED STATES OF AMERICA. SUCH REVENUE COULD NOT HAVE BEEN EARNED WITHOUT SEEKING SUPPORT FROM STI. STI HELPS IN COLLECTING THE REQUIREMENTS OF T HE CUSTOMERS & ALSO HELPS IN PROVIDING SUPPORT IN THE POST OF IMPLEMENTATION ACTIVITIES OF THE COMPANY. IT WAS FO R THIS SUPPORT PROVIDED BY STI THAT THE PAYMENT OF RS. 624,985,348/- WAS MADE. FURTHER, THE COMPANY ALSO SUBMITS THAT IT HAS EARNED ARMS LENGTH PROFITS WHIC H HAVE BEEN OFFERED TO TAX IN INDIA. 7. THE LD. CIT(APPEALS) WAS OF THE OPINION THAT PER SONNEL OF STI ARE IN POSSESSION OF TECHNICAL KNOWLEDGE AND HENCE WERE PR OVIDING TECHNICAL SERVICES TO THE ASSESSEE. THE CIT(A) HELD THAT THE SUM OF RS.62,49,85,348 IS PAID TOWARDS DEVELOPMENT OF SOFTWARE BY STI. HE OBSERVED THAT THE IT(IT)A NO.715/BANG/2014 PAGE 7 OF 10 ASSESSEE DOES NOT FALL UNDER THE EXCEPTION PROVIDED U/S. 9(1)(VII)(B) OF THE ACT AND EXPLANATION TO SECTION 9(2) SUBSTITUTED BY THE FINANCE ACT, 2010 W.R.E.F. 1.10.1976 APPLIES TO THE ASSESSEES CASE. THE CIT(A) WAS OF THE VIEW THAT THE CONSIDERATION PAID BY ASSESSEE TO STI AMOUNTS TO FEES FOR INCLUDED SERVICES UNDER ARTICLE 12(4) OF INDO-U/S. DTAA BY HOLDING THAT THE INFRASTRUCTURE SUPPORT AND ANCILLARY SERVICES PROVI DED BY STI TO THE ASSESSEE IS TO BE REGARDED AS TECHNICAL SERVICES UNDER ARTICLE 12(4) OF THE INDO-U/S. DTAA. 8. THE CIT(A) ALSO REJECTED THE CONTENTION OF THE A SSESSEE THAT MAKE AVAILABLE CONDITION IN THE DTAA IS NOT BEING SATIS FIED BY THE ASSESSEE AND HENCE THE AMOUNT CANNOT BE REGARDED AS FEES FOR INC LUDED SERVICES AS PER ARTICLE 12(4) OF INDO-US DTAA. THE CIT(A) ALSO DID NOT AGREE WITH THE ARGUMENTS OF THE ASSESSEE THAT THE TECHNICAL SERVIC ES WHICH STI PROVIDES ARE DIRECTLY TO THE END CUSTOMERS AND NOT TO THE AS SESSEE AND HENCE THERE IS NO MAKE AVAILABLE OF THE TECHNICAL KNOWLEDGE T O THE ASSESSEE. THE CONTENTION OF THE ASSESSEE THAT THE IMPUGNED PAYMEN T IS IN THE NATURE OF REIMBURSEMENT WHICH CANNOT BE REGARDED AS INCOME OF STI SO AS TO REQUIRE TAX DEDUCTION AT SOURCE AT THE TIME OF MAKING PAYM ENT WAS REJECTED BY THE CIT(A). THE CIT(A) ALSO DID NOT AGREE WITH THE RUL E OF CONSISTENCY AS CLAIMED BY THE ASSESSEE IN RESPECT OF APPELLANTS P ARENT COMPANY M/S. SUBEX LTD. THAT THERE WAS NO REQUIREMENT OF TDS FOR AY 2007-08 ON THE GROUND THAT THE FACTUAL MATRIX FOR THE AY 2008-09 W AS DIFFERENT. FOLLOWING THE DECISION OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT V. IT(IT)A NO.715/BANG/2014 PAGE 8 OF 10 CRESCENT EXPORT SYNDICATE, 33 TAXMANN.COM 253 , THE CIT(A) HELD THAT DISALLOWANCE U/S. 40(A)(IA) OF THE ACT APPLIES BOTH THE AMOUNTS WHICH IS ACTUALLY PAID AND PAYABLE TO STI DURING THE IMP UGNED FINANCIAL YEAR. THE CIT(APPEALS) UPHELD THE ACTION OF THE AO IN DIS ALLOWING A SUM OF RS.62,49,85,348 PAID TO STI TOWARDS SUB-CONTRACTING CHARGES U/S. 40(A)(IA) OF THE ACT ON THE BASIS THAT THE TRANSACTION BETWEE N THE ASSESSEE AND STI WAS TOWARDS DEVELOPMENT OF SOFTWARE AND THE APPELLA NT HAD NOT DEDUCTED TAX AT SOURCE U/S. 195 OF THE ACT. THE CIT(A) ALSO UPHELD THE LEVY OF INTEREST U/S. 234B AND 234D. 9. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US A ND REITERATED THE SUBMISSIONS MADE BEFORE THE CIT(APPEALS). 10. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE HONBLE HIGH COURT OF KARNATAKA HAD APPROVED THE TRANSFER OF SER VICE BUSINESS ON 27.3.2008, BUT W.E.F. 1.9.2007. DURING THIS INTERV ENING PERIOD BETWEEN 1.9.2007 AND 31.3.2008, THESE PAYMENTS WERE DULY AP PROVED BY THE OFFICIALS OF THE PARENT COMPANY WHICH IS REFLECTED IN THE VOUCHERS. ACCORDINGLY ALL INCOME AND EXPENSES RECORDED IN THE BOOKS OF SUBEX LTD. IN THE INTERVENING PERIOD WERE RECORDED IN THE BOOK S OF THE ASSESSEE BY WAY OF A JOURNAL ENTRY. IN THIS REGARD, OUR ATTENT ION WAS INVITED TO THE RELEVANT LEDGER ACCOUNT AT PAGE 227 OF THE ASSESSEE S PAPERBOOK. IT WAS ALSO POINTED OUT TO THE SAMPLE COPY OF VOUCHER ALON G WITH COPY OF INVOICE RAISED BY STI ON SUBEX LTD. DURING THE INTERVENING PERIOD PLACED ON RECORD. IT(IT)A NO.715/BANG/2014 PAGE 9 OF 10 FURTHER, THESE AMOUNTS HAVE BEEN DULY ADOPTED BY TH E BOARD OF DIRECTORS AND THE SHAREHOLDERS AND AUDITED BY AN INDEPENDENT CHARTERED ACCOUNTANT. 11. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THERE IS NO DISPUTE AS REGARDS THE FACT THAT THE ASSESSEE DERIVES REVEN UE FROM PROVISION OF SOFTWARE TO CUSTOMERS IN USA AND SUCH REVENUE CANNO T BE EARNED WITHOUT SEEKING SUPPORT FROM STI. IT WAS SUBMITTED THAT ST I HELPS IN COLLECTING THE REQUIREMENTS OF THE CUSTOMERS AND ALSO HELPS IN PR OVIDING SUPPORT IN THE POST IMPLEMENTATION ACTIVITIES OF THE COMPANY. IT WAS CONTENDED THAT IT WAS FOR THIS SUPPORT PROVIDED BY STI THAT THE PAYMENT O F RS.624,983,348 WAS MADE. IT WAS SUBMITTED THAT THE ASSESSEE EARNED AR MS LENGTH PROFITS WHICH HAVE BEEN OFFERED TO TAX IN INDIA. 12. ON THE OTHER HAND, THE LD. DR SUPPORTED THE ORD ER OF THE CIT(APPEALS). 13. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT THE INCOME AND EXPENSES RECOR DED IN THE BOOKS OF SUBEX LTD. IN THE INTERVENING PERIOD BETWEEN 1.9.20 07 AND 31.3.2008 WERE RECORDED IN THE ASSESSEES BOOKS BY WAY OF JOURNAL ENTRY. WE HAVE PERUSED THE RELEVANT LEDGER ACCOUNT EXTRACTS OF THE EXPENSES OF RS.624,983,348 BY VIRTUE OF SUCH JOURNAL ENTRY. WE ARE OF THE OPINION THAT THE IMPUGNED PAYMENT OF RS.624,983,348 TO STI IS ME RELY A JOURNAL ENTRY AND HENCE THE NEED FOR TAX DEDUCTION AT SOURCE U/S. 195 OF THE ACT DOES NOT IT(IT)A NO.715/BANG/2014 PAGE 10 OF 10 ARISE AND THE LOWER AUTHORITIES HAVE ERRED IN DISAL LOWING THE IMPUGNED AMOUNT U/S. 40(A)(IA) OF THE ACT. 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. PRONOUNCED IN THE OPEN COURT ON THIS 29 TH DAY OF JULY, 2016. SD/- SD/- ( INTURI RAMA RAO ) (ASHA VIJAYARAGHAVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER BANGALORE, DATED, THE 29 TH JULY, 2016. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.