DCIT, CHENNAI V. Atmel R & D India Pvt. Ltd., CHENNAI

ITA 812/CHNY/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8654 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 4 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-08-2016
• Appeal Filed By: Department
• Bench Allotted: D
• Next Hearing Date: 28-06-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 13-04-2015
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; Double taxation relief; Bad and doubtful debts; Royalty expenses

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI . . . , ! ' , # $% & [ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ] ./ I.T.A.NO.812/MDS./2015 & C.O. NO.59/MDS./2015 / ASSESSMENT YEAR : 2010-11 DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE 1(1), CHENNAI. VS. M/S. ATMEL R&D INDIA PRIVATE LTD., 10 TH FLOOR,CAMPUS 2, RMZ MILLENIA, 143, DR.M.G.R ROAD,PERUNGUDI, CHENNAI 600 096. [PAN AAGCA 2630 K ] ( '( / APPELLANT) ( )*'( /RESPONDENT & CROSS OBJECTOR) ./ I.T.A.NO.812/MDS./2015 / ASSESSMENT YEAR : 2010-11 M/S. ATMEL R&D INDIA PRIVATE LTD., 10 TH FLOOR,CAMPUS 2, RMZ MILLENIA, 143, DR.M.G.R ROAD,PERUNGUDI, CHENNAI 600 096. VS. DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE 1(1), CHENNAI. [PAN AAGCA 2630 K ] ( '( / APPELLANT) ( )*'( /RESPONDENT) ASSESSEE BY : MR.RAGHUNATHAN SAMPATH, ADVOCATE ASSESSEE BY : MR.K.PARA SHIVAIAH,CIT D.R ITA NOS.812,1086/MDS./2015 CO NO.59/MDS./2015 M/S.ATMEL R&D PVT LTD. :- 2 -: / DATE OF HEARING : 28 - 06 - 201 6 / DATE OF PRONOUNCEMENT : 18 - 08 - 2016 / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE ARE CROSS APPEALS AND CROSS OBJECTION FILE D BY THE ASSESSEE. THE ASSESSEES APPEAL IS DIRECTED AGAINS T THE ORDER OF THE ASSESSING OFFICER DATED 08.02.2015 PASSED U/S.143( 3) R.W.S.144C OF THE ACT, WHICH IS EMANATED FROM DIRECTION OF THE DI SPUTE RESOLUTION PANEL (DRP), CHENNAI DATED 23.12.2014 U/S.144C OF T HE ACT PERTAINING TO ASSESSMENT YEAR 2010-11. 1.1 THE REVENUES APPEAL IS DIRECTED AGAINST THE O RDER OF DRP PASSED U/S.144C OF THE ACT DATED 23.12.2014 AND COR RESPONDINGLY, THE ASSESSEE FLED A CROSS OBJECTION IN C.O.NO.59/MDS./2 015 IN SUPPORT OF DIRECTION OF DRP. FIRST WE TAKE UP REVENUES APPEAL IN ITA NO.812/MDS ./15 & C.O BY ASSESSEE IN CO NO.59/ MDS./2015 2. THE MAIN GRIEVANCE OF THE REVENUE IN THIS APPEA L IS THAT THE LD.DRP HAS ERRED IN DIRECTING THE TPO TO CONSIDER B OTH THE BPO AND ERP SEGMENT RELATING TO THE COMPARABLE M/S.JEEVAN S CIENTIFIC TECHNOLOGY LTD., FOR THE PURPOSE OF MARGIN COMPUTAT ION, IGNORING THE FACT THAT THE ERP SEGMENT IS TOTALLY DIFFERENT FROM THE BPO SEGMENT AND ALSO WITHOUT STATING REASONS FOR THE SAME. ITA NOS.812,1086/MDS./2015 CO NO.59/MDS./2015 M/S.ATMEL R&D PVT LTD. :- 3 -: 3. THE FACTS OF THE ISSUE ARE THAT THE TPO CONSIDE RED ITES SEGMENT OF M/S.JEEVAN SCIENTIFIC TECHNOLOGY LTD. IS COMPARABLE WITHOUT INCLUDING ENTERPRISE RESOURCE PLANNING (ERP ) DIVISION, WHICH IS PART OF ITES SEGMENT AS MENTIONED IN THE COMPANYS FINANCIAL STATEMENT. THE DISPUTE RESOLUTION PANEL, (DRP) CHE NNAI, HAS GIVEN A DIRECTION THAT INCOME OF THE M/S.JEEVAN SCIENTIFIC TECHNOLOGY LTD. INCLUDES IN ITES SEGMENT. THE DRP OF THE OPINION TH AT SINCE THE BUSINESS ENTERPRISE ITSELF HAS CLUBBED ITES AND ERP IN ONE SEGMENT, AND ITES ITSELF IS NOT ONE HOMOGENEOUS SECTOR. IT A PPEARS TO BE A GENERIC NAME FOR ALL THOSE ACTIVITIES IN WHICH INFO RMATION TECHNOLOGY PLAYS A DOMINANT ROLE. HENCE, DRP DIRECTED THE TP O TO INCLUDE ERP IN ITES SEGMENT AND COMPUTED THE PROFIT MARGIN OF THE COMPANY ACCORDINGLY. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 4. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. WE HAVE GONE THROUGH THE FINANCIALS OF M/S. JEEVAN SCIENTIFIC TECHNOLOGY LTD. FOR THE YEAR ENDED ON 31.03.2010. T HE INCOME FROM ITES SEGMENT INCLUDED AT ` 17,443,276/- AND BIFURCATION AS PER SCHEDULE-7 IS AS FOLLOWS:- ` BPO OPERATIONS 14,109,784 ENTERPRISE SOLUTION 3,333,492 1,74,43,276 ITA NOS.812,1086/MDS./2015 CO NO.59/MDS./2015 M/S.ATMEL R&D PVT LTD. :- 4 -: IN OUR OPINION, NATURE OF WORK CARRIED ON BY M/S.JE EVAN SCIENTIFIC TECHNOLOGY LTD. IS IT ENABLED SERVICES, THOUGH IT W AS CALLED BY DIFFERENT NAME. THE NATURE OF SERVICE PERFORMED BY M/S.JEEVAN SCIENTIFIC TECHNOLOGY LTD. IS IT ENABLED SERVICES A ND WHEN ASSESSEE ITSELF INCLUDED ERP IN IT SEGMENT, TPO CANNOT BE RE -CHARACTERISED WITHOUT MAKING ANY ENQUIRY U/S.133(6) OF THE ACT. I N OUR OPINION, THE DIRECTION GIVEN BY THE DRP THAT ERP IS NOTHING BUT ITES AND TO INCLUDE THE ERP IN ITES SEGMENT SO AS TO COMPUTE THE PROFIT MARGINS IS JUSTIFIED. THE DIRECTION OF THE DRP IS UPHELD. THI S GROUND OF THE REVENUE IS DISMISSED. THE CROSS OBJECTIONS BY THE ASSESSEE IS SUPPORTIVE OF THE DRP, IS ALSO DISMISSED. ASSESSEES APPEAL IN ITA NO.1086/MDS./15 5. THE FIRST GROUND IN ASSESSEES APPEAL IS THAT T HE LD. ASSESSING OFFICER ERRED IN DISALLOWING SOFTWARE EXPENSES OF I NR 9,362,867 REPRESENTING REIMBURSEMENT OF SOFTWARE COST TO ITS PARENT COMPANY, VIZ. ATMEL CORPORATION, USA(ATMEL, US) FOR NON-DEDU CTION OF TAX AT SOURCE U/S.195 OF THE ACT WITHOUT APPRECIATING THAT MERE REIMBURSEMENT OF EXPENSES ON COST TO COST BASIS WIT HOUT ANY MARK-UP DOES NOT ATTRACT TDS U/S.195 OF THE ACT. 5.1. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE COMPANY HAS CLAIMED ` 93,62,867/- TOWARDS SOFTWARE EXPENSES PAID TO THE P ARENT ITA NOS.812,1086/MDS./2015 CO NO.59/MDS./2015 M/S.ATMEL R&D PVT LTD. :- 5 -: COMPANY, ATMEL CORPORATION, USA. THE TDS DEDUCTION DETAILS WERE CALLED FOR ALONG WITH THE SHOW CAUSE FOR DISALLOWAN CE OF THE EXPENSES, IF TDS NOT DEDUCTED. THE ASSESSEE COMPANY STATED TH AT TDS WAS NOT MADE AS IT IS THE COST OF THE SOFTWARE CADENCE AN D SYNOPSIS PAID TO THE ATMEL CORPORATION USA AT A COST WITHOUT ANY MAR KUP. THE COST REIMBURSEMENT WITHOUT MARKUP WILL NOT ATTRACT TDS W AS THE EXPLANATION OFFERED BY THE ASSESSEE. THE ASSESSEE S EXPLANATION WAS CONSIDERED AND IT WAS FOUND NOT BE CORRECT FOR THE REASON THAT THE SOFTWARE EXPENSES ARE IN THE NATURE OF ROYALTY AS P ROVISIONS OF THE SECTION 9(1)(VI) OF THE ACT. THE CONCEPT OF REIMBUR SEMENT WITHOUT MARK-UP IS THE ARRANGEMENT WITHIN THE ASSOCIATED EN TERPRISES (AE). THAT HAS NO BEARING ON THE APPLICABILITY OF THE PRO VISIONS OF THE SECTION 9(1)(VI) OF THE ACT AND THE SOFTWARE WAS USED IN IN DIA FOR THE PURPOSE OF BUSINESS AND PROFESSION CARRIED ON BY THE ASSESS EE IN INDIA. THEREFORE, THE ROYALTY EXPENSES ARE TAXABLE IN INDI A AND UPON WHICH TDS LIABILITY ATTRACTS AS PER THE PROVISIONS OF THE SECTION 195 OF THE ACT. AS THE ASSESSEE HAS NOT DEDUCTED TDS, THE EXPENSES TOWARDS SOFTWARE REIMBURSEMENT IS DISALLOWED U/S.40(A)(I) A ND ADDED BACK TO TOTAL INCOME OF ASSESSEE UNDER THE HEAD INCOME FRO M BUSINESS OR PROFESSION. 5.2 THE DRP OBSERVED THAT THE REIMBURSEMENT OF SOF TWARE EXPENSES ON A COST TO COST BASIS WITHOUT ANY MARK-U P WOULD NOT ITA NOS.812,1086/MDS./2015 CO NO.59/MDS./2015 M/S.ATMEL R&D PVT LTD. :- 6 -: CONSTITUTE INCOME CHARGEABLE TO TAX IN INDIA IN THE HANDS OF ATMEL US. ACCORDINGLY, ASSESSEE SHALL NOT BE LIABLE TO WITHHO LD ANY TAX UNDER THE PROVISIONS OF THE SECTION 195 OF THE ACT ON SUCH RE IMBURSEMENT. ACCORDINGLY, THE LD. ASSESSING OFFICER MADE ADDITIO N OF ` 93,62,867/-. HENCE, THE ASSESSEE IS IN APPEAL BEFORE US. 6. ACCORDING TO LD.A.R, PROVISIONS OF THE SECTION 1 95 OF THE ACT CANNOT BE APPLIED AS THE PAYMENT MADE TO NON-RESIDE NT IS NOT CHARGEABLE TO TAX UNDER THE ACT AND THERE IS NO QUE STION OF WITHHOLDING ANY TAX. HE RELIED ON THE JUDGEMENT OF SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE PRIVATE LTD. , VS. CIT REPORTED IN 193 TAXMAN 234 WHEREIN HELD THAT TAX IS LIABLE T O BE DEDUCTED ON PAYMENT TO A NON-RESIDENT ONLY IF THE PAYMENT IS LI ABLE TO TAX IN INDIA. HE ALSO RELIED ON THE JUDGEMENT OF SPECIAL BENCH O F CHENNAI IN THE CASE OF ITAT IN THE CASE OF ITO V. M/S.PRASA D PRODUCTION REPORTED IN 129 TTJ 641 HELD THAT ANY PAYMENT MADE TO A NON- RESIDENT WOULD BE SUBJECT TO WITHHOLDING TAX, ONLY IF SUCH PAYMENT CONSTITUTED INCOME CHARGEABLE TO TAX INDIA. FOR TH E SAME PROPOSITION, HE RELIED ON THE JUDGEMEN OF DELHI HIGH COURT IN TH E CASE OF VAN OORD ACZ INDIA PRIVATE LTD. V. CIT REPORTED IN 323 ITR 1 30. ACCORDING TO HIM, THE PAYMENTS MADE BY THE ASSESSEE TO ATMEL US TOWARDS SOFTWARE COST REPRESENTS PURE COST TO COST REIMBURS EMENT WITHOUT ANY MARK-UP AND THEREFORE, SUCH REIMBURSEMENT WOULD NOT ITA NOS.812,1086/MDS./2015 CO NO.59/MDS./2015 M/S.ATMEL R&D PVT LTD. :- 7 -: CONSTITUTE INCOME CHARGEABLE TO TAX IN INDIA IN THE HANDS OF ATMEL US. HE ALSO RELIED ON THE FOLLOWING JUDGEMENTS. I) ASST. DIRECTOR OF INCOME-TAX VS. ANTWERP DIAMO ND BANK NV ENGG. CENTER REPORTED IN 44 TAXMANN.COM 175(MUMBAI ITAT)(2014) II) ADIT VS.BARTRONICS INDIA LTD., REPORTED IN 4 3 TAXMANN.COM 16 (HYD ITAT)(2014) III DCIT VS. INFRASOFT REPORTED IN [2013] 39 TAXMA NN.COM 88(DELHI) IV) MOTOROLA INC. V. DCIT REPORTED IN [2005] 196 T TJ 1(DEL.)(SB) V) LUCENT TECHNOLOGIES INTERNATIONAL INC., VS. DCI T REPORTED IN [2008] 28 SOT 98(DEL.) 7. ON THE OTHER HAND, LD.D.R ARGUED IN SUPPORT OF ORDERS OF LOWER AUTHORITIES. 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE MAIN CONTENTION OF THE ASSESSEES COUNS EL THAT THE PAYMENT WAS MADE TOWARDS COST OF THE SOFTWARE NAMEL Y CADENCE AND SYNOPSIS PAID TO THE ATMEL CORPORATION USA AT A COST WITHOUT ANY MARK-UP AND IT DOES NOT INCLUDE ANY PROFIT ELEMENT. HOWEVER, THE AO IS OF THE OPINION THAT IT IS PAYMENT IN THE NATURE OF ROYALTY AS PER PROVISIONS OF THE SECTION 9(1)(VI) OF THE ACT. SINC E THE SOFTWARE IS USED IN INDIA FOR THE PURPOSE OF BUSINESS OR PROFESSION CARRIED ON BY THE ASSESSEE IN INDIA, HE INVOKED THE PROVISIONS 195 OF THE ACT AND DISALLOWED THE EXPENDITURE SINCE THERE WAS NO DEDUC TION OF TDS ITA NOS.812,1086/MDS./2015 CO NO.59/MDS./2015 M/S.ATMEL R&D PVT LTD. :- 8 -: U/S.40(A)(I) OF THE ACT. NOW THE CONTENTION OF THE LD.A.R IS THAT IT IS ONLY PURCHASE OF SOFTWARE TO USE IN ASSESSEES BUSI NESS AND THE ASSESSEE HAS NOT ACQUIRED THE COPYRIGHT OF THE PROG RAMME. THE LD.D.R IS NOT ABLE TO SHOW THAT THE ASSESSEE HAS GOT ANY R IGHT TO USE THE COPYRIGHT AS SOFTWARE PROGRAMME. IN OTHER WORDS, IF THE ASSESSEE ACQUIRES ONLY RIGHT TO USE SOFTWARE AND NOT COPYRIG HT OF THE SOFTWARE, THEN IN OUR OPINION THE ORDER OF TRIBUNAL IN THE C ASE OF ADIT VS.BARTRONICS INDIA LTD.,(SUPRA) IS SQUARELY APPLIC ABLE TO THE FACTS OF THE CASE WHEREIN HELD AS FOLLOWS:- 39. IN ORDER TO QUALIFY AS ROYALTY PAYMENT, IT IS NECESSARY TO ESTABLISH THAT THERE IS TRANSFER OF ALL OR ANY RIGH TS (INCLUDING THE GRANTING OF ANY LICENCE) IN RESPECT OF COPYRIGH T OF A LITERARY, ARTISTIC OR SCIENTIFIC WORK. IN ORDER TO TREAT THE CONSIDERATION PAID BY THE LICENSEE AS ROYALTY, IT I S TO BE ESTABLISHED THAT THE LICENSEE, BY MAKING SUCH PAYME NT, OBTAINS ALL OR ANY OF THE COPYRIGHT RIGHTS OF SUCH LITERARY WORK. DISTINCTION HAS TO BE MADE BETWEEN THE ACQUISITION OF A COPYRIGHT RIGHT AND A COPYRIGHTED ARTICLE. COPY RIGHT IS DISTINCT FROM THE MATERIAL OBJECT, COPYRIGHTED. COP YRIGHT IS AN INTANGIBLE INCORPOREAL RIGHT IN THE NATURE OF A PRI VILEGE, QUITE INDEPENDENT OF ANY MATERIAL SUBSTANCE, SUCH AS A MA NUSCRIPT. JUST BECAUSE ONE HAS THE COPYRIGHTED ARTICLE, IT DO ES NOT FOLLOW THAT ONE HAS ALSO THE COPYRIGHT IN IT. IT DO ES NOT AMOUNT TO TRANSFER OF ALL OR ANY RIGHT INCLUDING LICENCE I N RESPECT OF COPYRIGHT. COPYRIGHT OR EVEN RIGHT TO USE COPYRIGHT IS DISTINGUISHABLE FROM SALE CONSIDERATION PAID FOR C OPYRIGHTED ITA NOS.812,1086/MDS./2015 CO NO.59/MDS./2015 M/S.ATMEL R&D PVT LTD. :- 9 -: ARTICLE. THIS SALE CONSIDERATION IS FOR PURCHASE OF GOODS AND IS NOT ROYALTY. 40. THE LICENSE GRANTED BY THE ASSESSEE IS LIMITED TO THOSE NECESSARY TO ENABLE THE LICENSEE TO OPERATE THE PRO GRAM. THE RIGHTS TRANSFERRED ARE SPECIFIC TO THE NATURE OF CO MPUTER PROGRAMS. COPYING THE PROGRAM ONTO THE COMPUTERS H ARD DRIVE OR RANDOM ACCESS MEMORY OR MAKING AN ARCHIVAL COPY IS AN ESSENTIAL STEP IN UTILIZING THE PROGRAM. THEREFO RE, RIGHTS IN RELATION TO THESE ACTS OF COPYING, WHERE THEY DO NO MORE THAN ENABLE THE EFFECTIVE OPERATION OF THE PROGRAM BY TH E USER, SHOULD BE DISREGARDED IN ANALYZING THE CHARACTER OF THE TRANSACTION FOR TAX PURPOSES. PAYMENTS IN THESE TYP ES OF TRANSACTIONS WOULD BE DEALT WITH AS BUSINESS INCOME IN ACCORDANCE WITH ARTICLE 7. 41. THERE IS A CLEAR DISTINCTION BETWEEN ROYALTY PA ID ON TRANSFER OF COPYRIGHT RIGHTS AND CONSIDERATION FOR TRANSFER OF COPYRIGHTED ARTICLES. RIGHT TO USE A COPYRIGHTED AR TICLE OR PRODUCT WITH THE OWNER RETAINING HIS COPYRIGHT, IS NOT THE SAME THING AS TRANSFERRING OR ASSIGNING RIGHTS IN R ELATION TO THE COPYRIGHT. THE ENJOYMENT OF SOME OR ALL THE RIGHTS WHICH THE COPYRIGHT OWNER HAS, IS NECESSARY TO INVOKE THE ROY ALTY DEFINITION. VIEWED FROM THIS ANGLE, A NON-EXCLUSIVE AND NON- TRANSFERABLE LICENCE ENABLING THE USE OF A COPYRIGH TED PRODUCT CANNOT BE CONSTRUED AS AN AUTHORITY TO ENJOY ANY OR ALL OF THE ENUMERATED RIGHTS INGRAINED IN ARTICLE 12 OF DTAA. WHERE THE PURPOSE OF THE LICENCE OR THE TRANSACTION IS ONLY T O RESTRICT USE OF THE COPYRIGHTED PRODUCT FOR INTERNAL BUSINESS PU RPOSE, IT WOULD NOT BE LEGALLY CORRECT TO STATE THAT THE COPY RIGHT ITSELF OR RIGHT TO USE COPYRIGHT HAS BEEN TRANSFERRED TO ANY EXTENT. THE PARTING OF INTELLECTUAL PROPERTY RIGHTS INHERENT IN AND ATTACHED TO THE SOFTWARE PRODUCT IN FAVOUR OF THE LICENSEE/C USTOMER IS ITA NOS.812,1086/MDS./2015 CO NO.59/MDS./2015 M/S.ATMEL R&D PVT LTD. :- 10 - : WHAT IS CONTEMPLATED BY THE TREATY. MERELY AUTHORIZ ING OR ENABLING A CUSTOMER TO HAVE THE BENEFIT OF DATA OR INSTRUCTIONS CONTAINED THEREIN WITHOUT ANY FURTHER RIGHT TO DEAL WITH THEM INDEPENDENTLY DOES NOT, AMOUNT TO TRANSFER OF RIGHT S IN RELATION TO COPYRIGHT OR CONFERMENT OF THE RIGHT OF USING THE COPYRIGHT. THE TRANSFER OF RIGHTS IN OR OVER COPYRI GHT OR THE CONFERMENT OF THE RIGHT OF USE OF COPYRIGHT IMPLIES THAT THE TRANSFEREE/LICENSEE SHOULD ACQUIRE RIGHTS EITHER IN ENTIRETY OR PARTIALLY CO-EXTENSIVE WITH THE OWNER/TRANSFEROR WH O DIVESTS HIMSELF OF THE RIGHTS HE POSSESSES IN HIS FAVOUR. 42. THE LICENSE GRANTED TO THE LICENSEE PERMITTING HIM TO USE THE PROGRAMME FOR ITS BUSINESS PURPOSE IS ONLY INCI DENTAL TO THE FACILITY EXTENDED TO THE LICENSEE TO MAKE USE O F THE COPYRIGHTED PRODUCT FOR ITS INTERNAL BUSINESS PURPO SE. THE SAID PROCESS IS NECESSARY TO MAKE THE PROGRAMME FUNCTION AL AND TO HAVE ACCESS TO IT AND IS QUALITATIVELY DIFFERENT FROM THE RIGHT CONTEMPLATED BY THE SAID PARAGRAPH BECAUSE IT IS ON LY INTEGRAL TO THE USE OF COPYRIGHTED PRODUCT. APART FROM SUCH INCIDENTAL FACILITY, THE LICENSEE HAS NO RIGHT TO DEAL WITH TH E PRODUCT JUST AS THE OWNER WOULD BE IN A POSITION TO DO. 43. THERE IS NO TRANSFER OF ANY RIGHT IN RESPECT OF COPYRIGHT BY THE ASSESSEE AND IT IS A CASE OF MERE TRANSFER OF A COPYRIGHTED ARTICLE. THE PAYMENT IS FOR A COPYRIGHTED ARTICLE A ND REPRESENTS THE PURCHASE PRICE OF AN ARTICLE AND CAN NOT BE CONSIDERED AS ROYALTY EITHER UNDER THE INCOME TAX A CT OR UNDER THE OTAA. 44. THE LICENSEES ARE NOT ALLOWED TO EXPLOIT THE CO MPUTER SOFTWARE COMMERCIALLY, THEY HAVE ACQUIRED UNDER LIC ENCE AGREEMENT, ONLY THE COPY RIGHTED SOFTWARE WHICH BY ITSELF IS AN ARTICLE AND THEY HAVE NOT ACQUIRED ANY COPYRIGHT IN THE SOFTWARE. IN THE CASE OF THE ASSESSEE COMPANY, THE LICENSEE ITA NOS.812,1086/MDS./2015 CO NO.59/MDS./2015 M/S.ATMEL R&D PVT LTD. :- 11 - : TO WHOM THE ASSESSEE COMPANY HAS SOLD/LICENSED THE SOFTWARE WERE ALLOWED TO MAKE ONLY ONE COPY OF THE SOFTWARE AND ASSOCIATED SUPPORT INFORMATION FOR BACKUP PURPO SES WITH A CONDITION THAT SUCH COPYRIGHT SHALL INCLUDE INTRA ASIA TRADING (P) LTD. COPYRIGHT AND ALL COPIES OF THE SOFTWARE S HALL BE EXCLUSIVE PROPERTIES OF INTRA ASIA TRADING (P) LTD. LICENSEE WAS ALLOWED TO USE THE SOFTWARE ONLY FOR ITS OWN BU SINESS AS SPECIFICALLY IDENTIFIED AND WAS NOT PERMITTED TO LOAN/RENT/SALE/SUB-LICENCE OR TRANSFER THE COPY OF SOFTWARE TO ANY THIRD PARTY WITHOUT THE CONSENT OF INTRA ASIA T RADING (P) LTD. 45. THE LICENSEE HAS BEEN PROHIBITED FROM COPYING, DE- COMPILING, DE-ASSEMBLING, OR REVERSE ENGINEERING TH E SOFTWARE WITHOUT THE WRITTEN CONSENT OF LNTRA ASIA TRADING ( P) LTD. THE LICENCE AGREEMENT BETWEEN THE ASSESSE COMPANY AND ITS CUSTOMERS STIPULATES THAT ALL COPYRIGHTS AND INTELL ECTUAL PROPERTY RIGHTS IN THE SOFTWARE AND COPIES MADE BY THE LICENSEE WERE OWNED BY INTRA ASIA TRADING (P) LTD. AND ONLY INTRA ASIA TRADING (P) LTD. HAS THE POWER TO GRANT LICENCE RIGHTS FOR USE OF THE SOFTWARE. THE LICENCE AGREEME NT STIPULATES THAT UPON TERMINATION OF THE AGREEMENT F OR ANY REASON, THE LICENCEE SHALL RETURN THE SOFTWARE INCL UDING SUPPORTING INFORMATION AND LICENCE AUTHORIZATION DE VICE TO LNTRA ASIA TRADING (P) LTD.. 46. THE INCORPOREAL RIGHT TO THE SOFTWARE I.E. COPY RIGHT REMAINS WITH THE OWNER AND THE SAME WAS NOT TRANSFE RRED BY THE ASSESSEE. THE RIGHT TO USE A COPYRIGHT IN A PRO GRAMME IS TOTALLY DIFFERENT FROM THE RIGHT TO USE A PROGRAMME EMBEDDED IN A SOFTWARE AND THE PAYMENT MADE FOR THE SAME CAN NOT BE SAID TO BE RECEIVED AS CONSIDERATION FOR THE USE OF OR RIGHT TO USE OF ANY COPYRIGHT TO BRING IT WITHIN THE DEFINIT ION OF ROYALTY ITA NOS.812,1086/MDS./2015 CO NO.59/MDS./2015 M/S.ATMEL R&D PVT LTD. :- 12 - : AS GIVEN IN THE DTAA. WHAT THE LICENSEE HAS ACQUIRE D IS ONLY A COPY OF THE COPYRIGHT ARTICLE WHEREAS THE COPYRIGHT REMAINS WITH THE OWNER AND THE LICENSEES HAVE ACQUIRED A CO MPUTER PROGRAMME FOR BEING USED IN THEIR BUSINESS AND NO R IGHT IS GRANTED TO THEM TO UTILIZE THE COPYRIGHT OF A COMPU TER PROGRAMME AND THUS THE PAYMENT FOR THE SAME IS NOT IN THE NATURE OF ROYALTY. 47. WE HAVE NOT EXAMINED THE EFFECT OF THE SUBSEQUE NT AMENDMENT TO SECTION 9 (1)(VI) OF THE ACT AND ALSO WHETHER THE AMOUNT RECEIVED FOR USE OF SOFTWARE WOULD BE RO YALTY IN TERMS THEREOF FOR THE REASON THAT THE ASSESSEE IS C OVERED BY THE DTAA, THE PROVISIONS OT WHICH ARE MORE BENEFICI AL. THE AMOUNT RECEIVED BY THE ASSESSEE UNDER THE LICENCE A GREEMENT FOR ALLOWING THE USE OF THE SOFTWARE IS NOT ROYALTY UNDER THE DTAA. 48. WHAT IS TRANSFERRED IS NEITHER THE COPYRIGHT IN THE SOFTWARE NOR THE USE OF THE COPYRIGHT IN THE SOFTWARE, BUT W HAT IS TRANSFERRED IS THE RIGHT TO USE THE COPYRIGHTED MAT ERIAL OR ARTICLE WHICH IS CLEARLY DISTINCT FROM THE RIGHTS I N 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 COPYRIG HTED MATERIAL AND THE SAME DOES NOT GIVE RISE TO ANY ROYALTY INCO ME AND WOULD BE BUSINESS INCOME. 49. IN VIEW OF ELABORATE DISCUSSION AND IN THE LIGH T OF THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CAS E OF DIT VS. INFRASOFT LTD. (SUPRA), ON WHICH RELIANCE PLACE D BY THE LEARNED AR, IN THE PRESENT CASE, THE ASSESSEE HAS A CQUIRED A READYMADE OFF THE SHELF COMPUTER PROGRAMME TO BE USED IN THEIR BUSINESS AND NO RIGHT WAS GRANTED TO THE ASSE SSEE TO UTILIZE THE COPY RIGHT OF THE PROGRAMME AND, THEREF ORE, CONSIDERATION CANNOT BE TREATED AS ROYALTY. AS HELD BY THE ITA NOS.812,1086/MDS./2015 CO NO.59/MDS./2015 M/S.ATMEL R&D PVT LTD. :- 13 - : CIT(A), THE PAYMENTS MADE BY THE ASSESSEE COMPANY C ANNOT BE HELD AS ROYALTIES COMING INTO THE AMBIT OF ART ICLE 12 OF DTAA OR FEE FOR TECHNICAL SERVICES U/S 9(1 )(VII) OF THE IT ACT AND ACCORDINGLY NO TAX NEED TO BE DEDUCTED U/S 195 OF THE IT ACT. WE, THEREFORE, UPHOLD THE ORDER OF THE CIT(A) ON THIS COUNT AND DISMISS THE GROUNDS RAISED BY THE REVENUE IN THIS REGARD. IN VIEW OF THE ABOVE, WE ARE INCLINED TO ALLOW THE GROUND TAKEN BY THE ASSESSEE. THIS GROUND IS ALLOWED. 9. THE NEXT GROUND IN ASSESSEES APPEAL IS THAT TH E LD. ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN TREATING P ROVISION FOR BAD AND DOUBTFUL DEBTS AS A NON-OPERATING EXPENSES IN COMPU TATION OF MARGINS OF COMPARABLES AND THE DRP ERRED IN CONFIRMING THE SAME. 9.1 THE FACTS OF THE ISSUE ARE THAT TPO TREATED TH E PROVISION FOR BAD AND DOUBTFUL DEBTS AS A NON-OPERATING EXPENSE IN TH E CASE OF NITTANY OUTSOURCING SERVICES PVT LTD. FOR COMPUTATION OF TH E NET MARGINS. THE DRP ENDORSED THE VIEW OF TPO AND HOLDS THAT BAD AND DOUBTFUL DEBT THOUGH OPERATING IN NATURE, BUT IT DOES NOT PERTAIN TO THE OPERATING REVENUES FOR THE RELEVANT FINANCIAL YEAR. THEREFORE , IF IT IS ALLOWED AS DEDUCTION, IT WILL AMOUNT TO EXPENDITURE OF EARLIER YEARS HAS BEEN DEBITED IN P&L ACCOUNT. HOWEVER, THE DRP CONSIDERS EXCLUSION OF PROVISION FOR BAD AND DOUBTFUL DEBT FROM THE FINANC IAL OF THE ASSESSEE ITA NOS.812,1086/MDS./2015 CO NO.59/MDS./2015 M/S.ATMEL R&D PVT LTD. :- 14 - : AND THE COMPARABLES MORE IMPORTANT THAN ALLOWING DE DUCTION FOR BAD AND DOUBTFUL DEBT. THEREFORE, THE DRP OBSERVED THAT IF BAD AND DOUBTFUL DEBT HAS NOT BEEN ALLOWED AS DEDUCTION IN THE CASE OF NITTANY OUTSOURCING SERVICES PVT LTD., THEN TPO IS DIRECTED TO EXCLUDE IT IN THE CASE OF OTHER COMPARABLES AS WELL IN THE CASE OF AS SESSEE COMPANY. THE AO PASSED ORDER AS PER DIRECTIONS OF THE DRP. A GAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 9.2 BEFORE US, LD.A.R SUBMITTED THAT AO/TPO HAD ER RED IN COMPUTING THE MARGIN OF COMPARABLE COMPANIES BY CONSIDERING P ROVISION FOR BAD AND DOUBTFUL DEBTS AS NON-OPERATING EXPENSES. HE PL ACED RELIANCE ON THE ORDER OF HYDERABAD TRIBUNAL IN THE CASE OF M/S. KENEXA TECHNOLOGIES PVT. LTD., VS. DCIT IN ITA NO.243/HYD. /2014 DATED 14.11.2014 WHEREIN HELD THAT:- 41. WE PLACE RELIANCE ON THE DECISION OF ITAT DEL HI BENCH IN THE CASE OF SONY INDIA PVT. ITD. VS. DCIT, ITA NO 1189 /DEL/2005, 819IDEL/2007 AND 820/DEL/2007. THE RELEVANT PORTION IS EXTRACTED BELOW: 106.2 THUS, CREATION OF UNPAID LIABILITY AND ITS WR ITE BACK IS A NORMAL INCIDENT OF A BUSINESS OPERATION WHICH IS CA RRIED EVERYWHERE IN ACCOUNTS TO HAVE TRUE PICTURE OF PROF ITS OF THE RELEVANT PERIOD HAVING REGARD TO STATUTORY PROVISIONS, IT CANNOT BE SAID THAT PROVISIONS OR WRITING BOTH OF LIABILITY IS NOT PORT OF OPERATING PROFIT OR WOULD NOT BE TAKEN INTO CONSIDERATION FOR COMPUT ING THE SAME. ITA NOS.812,1086/MDS./2015 CO NO.59/MDS./2015 M/S.ATMEL R&D PVT LTD. :- 15 - : WE CAN THEREFORE MAKE A GENERAL OBSERVATION THAT AL L BUSINESS ENTERPRISES ARE MAKING AND WRITING BACK LIABILITIES AS A NORMAL INCIDENT OF OPERATING BUSINESS. THEREFORE ON FACTS DO NOT SEE ANY JUSTIFICATION FOR EXCLUDING PROVISIONS WRITTEN BOTH IN THE PROFIT AND LOSS ACCOUNT AS NOT FORMING PORT OF THE OPERATING P ROFIT OF THE TAXPAYER. ACCORDINGLY CLAIM OF THE TAXPAYER IS ACCE PTED 107. THE NEXT ITEM RELATES TO BALANCES WRITTEN BACK . IN OUR CONSIDERED OPINION, FINDING GIVEN IN RESPECT OF PRO VISIONS WRITTEN BACK IS EQUALLY APPLICABLE TO BALANCES WRITTEN BOTH MORE PARTICULARLY WHEN ID CIT(A) HAS NOT GIVEN ANY SEPAR ATE FINDING AND THE TRANSFER PRICING OFFICER HAS SAID NOTHING S PECIFICALLY, ON THIS ITEM THE BALANCES WRITTEN BOTH SHOULD ALSO BE TREATED AS PART OF OPERATING PROFIT. WE DIRECT ACCORDINGLY. 42. WE ARE OF THE VIEW THAT IN THE INSTANT CASE BAD DEBTS AND PROVISION FOR BAD AND DOUBTFUL DEBTS ARE PART OF THE OPERATIN G EXPENSES AND WE DIRECT THE TPO TO RE-COMPUTE THE MARGINS OF COMPARA BLE COMPANIES BY INCLUDING BAD DEBTS AND PROVISION FOR BAD AND DOUBT FUL DEBTS AS OPERATING EXPENSES FOR THE PURPOSE OF COMPUTING PRO FIT AND LOSS OF COMPARABLE COMPANIES. 9.3 ON THE OTHER HAND, LD.D.R RELIED ON THE ORDERS OF AO AND TPO. 10. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN OUR OPINION, IF THE PROVISION FOR DOUBTF UL DEBTS IS THE CURRENT OPERATING EXPENSES ASSOCIATED WITH THE LOSSES FROM NORMAL CREDIT SALES, IT WILL BE TREATED AS OPERATING EXPENSES AND USUALLY AS A PART OF SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. IF T HE EXPENSE IS ASSOCIATED WITH THE EXTENDING CREDIT OUTSIDE OF A C OMPANYS MAIN SELLING ACTIVITIES, THE LOSS WILL BE NON-OPERATING EXPENSES. WITH ITA NOS.812,1086/MDS./2015 CO NO.59/MDS./2015 M/S.ATMEL R&D PVT LTD. :- 16 - : THIS OBSERVATION, WE REMIT THE ISSUE TO THE FILE OF AO FOR FRESH CONSIDERATION AFTER GIVING OPPORTUNITY OF BEING HEA RD TO THE ASSESSEE. 11. NO OTHER GROUNDS PRESSED BEFORE US BY THE LD.A .R. HENCE, OTHER GROUNDS RAISED BY THE ASSESSEE ARE NOT CONSIDERED F OR ADJUDICATION. THE ASSESSEES APPEAL IN ITA NO.1086/MDS./15 IS PAR TLY ALLOWED FOR STATISTICAL PURPOSES. 12. IN THE RESULT, THE APPEAL OF THE REVENUE IN IT A NO.812/MDS./15 AND CROSS OBJECTIONS RAISED BY THE ASSESSEE ARE DIS MISSED AND THE ASSESSEES APPEAL IN ITA NO.1086/MDS./15 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 18 TH AUGUST, 2016, AT CHENNAI. SD/ - SD/ - ( . . . ) ) (N.R.S. GANESAN) / JUDICIAL MEMBER ( ! ' ) (CHANDRA POOJARI) # / ACCOUNTANT MEMBER / CHENNAI / DATED: 18 TH AUGUST, 2016 K S SUNDARAM ! # $% &% / COPY TO: 1 . '( / APPELLANT 3. ) () / CIT(A) 5. %+, # - / DR 2. #.'( / RESPONDENT 4. ) / CIT 6. ,/ 0 / GF