Direct Tax

Whether the sale of standard software would be considered as Royalty?

M/s. QlikTech International AB Vs. DCIT IT(IT)A No. 173/Bang/2021


The taxpayer is a company incorporated in Sweden and is engaged in the business of sale of software products and rendering information technology services. The taxpayer has entered into an agreement with its subsidiary QlikTech India Private Ltd. for the onward sale of shrink-wrapped software to the end users/customers in India as per the distribution/license agreement. The taxpayer filed its return of income NIL income. The AO made additions considering the entire receipts from the sale of software products taxable as royalty under DTAA and Income Tax Act (ITA)

The taxpayer had also entered into an agreement with QIPL for back-office support operations through the shared services center. The taxpayer did not offer the said income to tax on the basis that, since the services were rendered outside India and payments were received outside India, such amount was not taxable in India. The Assessing Officer (AO) held the services were in the nature of consultancy, and thus, the amounts received would be FTS.


The Bangalore Income Tax Appellate Tribunal (ITAT) considered the facts and held that the right to use granted through licensing of software does not fall within the meaning of ‘Royalty’ as provided for in the domestic law or the Double Taxation Avoidance Agreement (DTAA). Any consideration for the same is not taxable as Royalty under section 9(1)(vi) or the relevant DTAA.

The tribunal relied on the judgment of the Hon'ble Delhi High Court in the case of DCIT vs Infrasoft Ltd. (264 CTR 329) and DIT vs M/s Nokia Networks (358 ITR 259).

With respect to the shared services, the ITAT observed that the concerned services were purely in the nature of back-office services, and nothing can be regarded as having been made available to the recipient of services. Accordingly, the same cannot be considered as FTS under India-Sweden DTAA read with the India-Portugal treaty by virtue of the protocol under India-Sweden DTAA.

Our Comments

The tribunal reconfirmed that the sale of shrink-wrapped software would not constitute royalty. However, whether a software qualifies to be considered as shrink-wrapped software or not would have to be determined basis the agreements.

Whether TDS credit can be claimed in a year different from the year of income accrual?

The DCIT Vs. M/s Sasken Network Engineering Limited. ITA No. 547/bang/2013


The taxpayer is a company incorporated in India in the business of installation and commissioning services. The taxpayer’s case was selected for scrutiny, and during the course of assessment proceedings, the taxpayer filed TDS certificates of INR 11.3 million, which were received after the due date of filing of return. Nokia deducted the tax on placing purchase orders with the taxpayer. Since the income had not accrued to the taxpayer, it was not offered to tax in the return of income. The AO accepted the plea that the income was not accrued.

However, the AO did not give credit for the tax deducted on the ground that credit for TDS shall be given in the year in which such income is assessable. The Commissioner of Income-tax (Appeals) [CIT(A)] allowed the taxpayer to appeal and granted relief on the basis that the refund to the deductor is not possible.


ITAT noted that after the amendment of section 199 by the Finance Act, 2008, the section clearly lays down that credit for TDS will be given in the Assessment Year for which such income is assessable. The tribunal also relies on Chandigarh Bench's ruling in Pradeep Kumar Dhir. ITAT remarks that as per the Central Board of Direct Taxes’ (CBDT) Circular No.2/2011 dated 2 April 2011, there is a procedure for the deductor to claim a refund before the AO. The basis on which the CIT(A) allowed relief to the taxpayer is therefore not sustainable.

Our Comments

The decision clarifies that the TDS refund would be granted only in the year of accrual.

Withdrawal of Retrospective Tax on Indirect Transfer

The Government proposes to withdraw the retrospective amendment in respect of Indirect Transfer, introduced in 2012. The Government had already faced setbacks as it had lost the case against Vodafone and Cairn Plc on the said issue. This amendment would help settle long dragging litigations and send out a positive message to global investors.

Maulik Doshi
Senior Executive Director – Transfer Pricing and Transaction Advisory Services

Transfer Pricing

Whether negative Working Capital Adjustment for captive service providers while computing Arm’s Length Price(ALP) is warranted?

Quest Global Engineering Services Pvt Ltd [TS-277-ITAT-2021(Bang)- TP]


The taxpayer is engaged in the business of providing computeraided engineering services, including software development and IT enabled services (ITeS). During the year under consideration, the taxpayer benchmarked its international transaction for the provision of software development and ITeS using Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM).

The Transfer Pricing Officer (TPO) challenged few comparable companies selected by the taxpayer and selected new comparable companies by way of conducting a fresh search to determine the ALP. The TPO further adopted negative working capital adjustment and proposed an adjustment. Dispute Resolution Panel (DRP) upheld the TPO’s order, and thereafter, the taxpayer filed an appeal before Income Tax Appellate Tribunal (ITAT).


ITAT upheld the taxpayer’s contention in relation to the selection of comparable companies. However, with respect to working capital adjustment, ITAT held that the taxpayer, a captive service provider, does not bear any risk and has no working capital contingencies; therefore, the requirement for negative working capital adjustment is not warranted.

It stated that the taxpayer being a captive service provider and the fact that it earns sufficient margins for its functions performed, its pricing policy compensates for the said working capital risk, and no adjustment is warranted. The appeal was upheld in the taxpayer’s favor.

Our Comments

In the case of captive service providers, negative adjustment is not warranted and typically, the pricing policy inherently compensates the working capital risk.

Whether per hour recovery rate can be taken as CUP for BPO services?

Aricent Technologies (Holding) Limited [TS-253-ITAT-2021(DEL)-TP]


The taxpayer provides Business Process Outsourcing (BPO) services, primarily in the areas of online customer care. The taxpayer had benchmarked its international transactions of services provided using the Comparable Uncontrolled Price (CUP) Method and by comparing the per hour recovery rate of USD 19.20 that it charged its Associated Enterprise (AE)’s versus the comparable uncontrolled hourly recovery rate of USD 14.

However, the TPO rejected the said approach of the taxpayer and determined Transactional Net Margin Method (TNMM) as the MAM, thereby leading to an adjustment. The said adjustment was upheld by the CIT(A).


ITAT held that there is no dispute on part of the Revenue that in the BPO industry, the prevalent rate for services was in the range of USD 8 to USD 15 per hour, which was comparable / lower to the rate of USD 19 charged by the taxpayer from the AE. In the prior year, the coordinated bench adopted a similar approach of considering the per hour recovery rate and CUP as the MAM in the taxpayer’s own case and hence deleted the adjustment made by the lower tax authorities.

Our Comments

The approach of the use of per hour recovery rate in the BPO industry to benchmark the international transactions has been adopted by the taxpayers where they are able to obtain comparable data for the uncontrolled transaction.

However, in such case and especially since CUP is used as the MAM, stringent comparability in terms of contractual terms, nature and volume of services rendered in both the cases, employee skillset (which includes designation, experience, qualification), etc. should be done before adopting this approach.

Indirect Tax

Whether the applicant’s activities carried out in India would constitute as ‘intermediary service’ under GST law?

M/s Airbus Group India Private Limited, [2021-VIL-241-AAR, Karnataka]

Facts and applicant’s contentions

  • Airbus India (the applicant) is a subsidiary of Airbus Invest SAS, France.
  • Airbus India assists Airbus SAS by carrying out certain support functions/activities in relation to its global procurement strategy, including review of Indian supplier landscape, continuous update of supplier operations, conducting onsite supplier assessments , providing market information, etc.
  • The applicant contended that these services are in the nature of professional, technical advisory and business support services and that the applicant has agreed to render these services on its own account as an independent contractor.
  • Furthermore, remuneration received for the performance of such services by the applicant is on a ‘cost plus basis’. Therefore, the applicant submitted that the above services cannot be construed as intermediary services.

Based on the above, the Advance Ruling Authority ruled as follows:

  • In the case of an agent or broker, activity is undertaken on another's behalf which is not necessary in the case of an intermediary.
  • Therefore, claiming to be an independent contractor is not relevant for the purpose of determining an intermediary.
  • The applicant plays an important part in identifying the vendors, without which Airbus France will not be able to procure goods from the vendors.
  • Thus, the instant activity is nothing but facilitating the supplies to them from India.
  • Furthermore, the criterion of the nature of payment does not from a part of the definition of ‘intermediary’. Cost plus mark up can also be one of the ways for payment.
  • Thus, the activities performed by the applicant clearly satisfy the definition of an ‘intermediary’, as specified under Section 2(13) of the IGST Act.

Our Comments

This ruling has once again sought to cover a wide array of services within the ambit of ‘intermediary’, resulting in a denial of export benefits. Now, whether this was the intention of the lawmakers is a question that remains unanswered.

As per the latest media reports, the government is undertaking a comprehensive review of legal issues under the GST regime, which includes examining whether support services provided by the back office of MNCs will qualify as ‘intermediary services’.

Whether the discount provided by M/s Castrol to their customers through the appellant (distributor) liable to be taxed under GST law?

M/S. SANTHOSH DISTRIBUTORS, [2021 (7) TMI 789 - AAAR, Kerala]


  • The appellant has entered into a contract with M/s Castrol to supply/distribute certain products to the authorized dealer/stockiest (customers), on a principal-toprincipal basis, at the prices fixed by Castrol.
  • As per Castrol’s instructions, the appellant provides additional postsale discounts to the customers.
  • In this regard, Castrol issues commercial credit notes for reimbursement of the reduced prices provided by the appellant to the customers.

Based on the above, the AAAR ruled as follows

  • As per Section 15(3)(b)(i) of the CGST Act, if a discount is given after the supply of goods has taken place, then the discount shall be given in terms of an agreement, i.e., it cannot be openended; not based on any criteria.
  • Thus, the word ‘discount’ mentioned in an agreement without there being any parameters or criteria mentioned would not fulfill the requirement of Section 15.
  • The appellant has no control over the quantum of scheme discounts to be offered. The discounts so offered as per instructions of the supplier of goods/principal company are completely reimbursed by the supplier of goods/principal company.
  • Thus, the additional discount given by Castrol to the appellant is a consideration to offer the reduced price in order to augment the sales.
  • This additional discount squarely falls under the definition of the term “consideration” as specified under Section 2(31) of the CGST Act.
  • Thereby, additional discount in the form of reimbursement of discount or rebate, received from Castrol over and above the invoice value, is liable to be added to the consideration payable by the customer to the appellant.
  • Furthermore, if registered, the customer, would be eligible to claim ITC of the tax charged by the appellant only to the extent of the tax paid by the said customer to the appellant.

Our Comments

The present ruling is similar to clarifications provided by the government in Circular No. 105 /24 / 2019-GST, dated 28 June 2019, which was later withdrawn ab initio.

While arriving at a conclusion, the ruling expressly states that the legal position as per Section 15 does not change irrespective of the Circular.

However, the question remains whether such an interpretation of Section 15 will hold good, given that a Circular providing an identical interpretation was withdrawn by the government.

Merger & Acquisition Tax

Chennai ITAT denies set-off of losses of amalgamating company on non-satisfaction of section 2(1B) conditions on the appointed date

Citation: Roca Bathroom Products Pvt. Ltd [TS-508-ITAT-2021(Chny)]

On 1 April 2013, Roca Bathroom Products Pvt. Ltd (assessee/ amalgamated company) held 26% shares of Espiem Plastics Ltd. (amalgamating company). Later, on 10 February 2014, it acquired the balance 74% shares, and on the same day itself, both the companies applied for amalgamation. On 28 April 2014, the Madras HC sanctioned the scheme of amalgamation with effect from 1 April 2013. The Ld. AO denied the assessee’s claim of setting off losses of amalgamating company of INR 70.5 million under section 72A of the Act. The Ld. AO cited that the requirements laid down in section 2(1B) were not fully satisfied as only 26% shareholding was held by the assessee company on the court appointed date of 1 April 2013.

The ITAT confirmed the stand of Ld. CIT(A) and has upheld the order of lower authorities by observing as under:

  • Appointed date in the scheme is very crucial.
  • Since the assessee company didn’t have 3/4th shares of the amalgamating company on the appointed date 1 April 2013, the assessee is not entitled to the claim of carry forward and the set-off of loss of the transferor company as of 31 March 2013.

Our Comments

The ruling highlights a unique proposition where amalgamation is effected backdated, and there is practically an impossibility of performance to issue shares to erstwhile shareholders where shares have changed hands subsequently. It is a settled proposition of law that the scheme approved by HC attains statutory force. It will be interesting to wait and watch the position of the HC if the assessee appeals the ruling.

Ahmedabad ITAT holds that temporary funding from sister concern not deemed dividend considering the business nexus and lending being part of the sister concern’s business

Citation: Krishna Coil Cutters Pvt. Ltd. [TS-534-ITAT-2021(Ahd)]

M/s. Krishna Coil Cutters Pvt. Ltd. (assessee) has availed an unsecured loan of INR 196.5 million from its sister concern, Krishna Sheets Processors Pvt. Ltd. The assessee and the sister concern are engaged in a similar line of business. The assessee has 21.45% shareholding in the lender sister company. Thus, the AO observed that the loan received shall fall under the ambit of provisions of section 2(22) (e) of the Act and is susceptible to tax as deemed dividend. On further appeal, the ld. CIT(A) held that the case was covered under the exceptions to section 2(22)(e) and reversed the order.

The ITAT upheld the order of CIT(A) and ruled in favor of the assessee by observing as under:

  • The funds were advanced to secure a price advantage from a common supplier, which is beneficial to both companies. Thus, the funds advanced were for business exigencies and in the ordinary course of business.
  • The sister concern has been advancing funds to assessee since the time it was not even a shareholder.
  • Money lending has been a substantial part of sister concern’s business, and interest is charged on this advance at the same rate as charged on advances to other unrelated parties. Thus, the advance given is in the course of business of the lender company, and this reason on a standalone basis is sufficient to exclude the applicability of deemed dividend provisions.
  • Act requires money so lent to be only a ‘substantial part’ of business, in contrast to the ‘principal business’ as wrongly assumed by the AO.

Our Comments

The ruling lays down certain important factors whereby legitimate funding transactions between group entities should not fall under the ambit of deemed dividend provisions.