2024 (2) TMI 1377 - AT - Income Tax

Software license fees to associated enterprises cannot be treated as NIL without applying section 92C methods

The Boston Consulting Group (India) Private Limited Versus DCIT-3 (3) (2), Mumbai

The ITAT Mumbai ruled on transfer pricing adjustments involving software license fees and cost allocations. The TPO had treated the arm's length price as ... TP adjustment on account of payment of fees for time and billing software - TPO held the payment made by the Assessee to its AE is unwarranted and treated the arm's length price (ALP) of the captioned international transaction at NIL - HE;D THAT:- Similar issue was considered by the coordinate bench in the case of assessee’s own case in the AY 2008-09 [2020 (8) TMI 172 - ITAT MUMBAI] as held TPO/AO has arrived at the ALP by not adopting any of the methods prescribed u/s 92C of the Act in respect of (i) payment of license fees for time and billing software, (ii) payment of regional administration and regional co-ordination cost allocation and (iii) payment of information technology cost allocation - we are of the considered view that the ratio laid down in Lever India Exports Ltd [2017 (2) TMI 120 - BOMBAY HIGH COURT], Merck Ltd. [2016 (8) TMI 561 - BOMBAY HIGH COURT] Johnson & Johnson Ltd.[2017 (3) TMI 1520 - BOMBAY HIGH COURT] and Kodak India Pvt .Ltd [2016 (7) TMI 677 - BOMBAY HIGH COURT] mentioned hereinabove is squarely applicable to the facts of the case. Therefore, following the same we are inclined to allow the grounds Nos. 1 and 3 raised by the assessee. Provisions of regional coordination services - Comparability - assessee has benchmarked this transaction selecting Nine (9) comparables out of which Transfer Pricing Officer has selected four (4) comparables and rejected other comparables in particular Vatika Marketing Limited as this comparable has earned Income from reality Commission which is like broking income. Assessees do not have any such activity - HELD THAT:- As at the time of proceedings before Ld. DRP the assessee has filed annual reports of this comparable substantiating the reasons for selecting this comparable in their study. Since Ld. DRP has not considered the above submissions and not given a clear finding in this regard. In our considered view, this issue may be analysed afresh by the TPO - we remit this issue back to the file of TPO to consider the additional submissions/documents made by the assessee - Ground No. 2 is allowed for statistical purpose. Short granting interest u/s 244A - HELD THAT:- We observe from the record that identical issue has been considered by the coordinate bench of this Tribunal in the case of M/s. Small Industries [2017 (9) TMI 1971 - ITAT MUMBAI] the issue raised by the assessee is allowed with the direction that the Assessing Officer may consider extending the benefit to the assessee upto the date of actual receipt of refund. Accordingly, Ground No. 5 raised by the assessee is allowed. Issues Involved:1. Transfer Pricing Adjustment for Payment of License Fees for Time and Billing Software.2. Transfer Pricing Adjustment for Provision of Regional Coordination Services.3. Transfer Pricing Adjustment for Payment of Information Technology Cost Allocation.4. Short-granting of TDS Credit.5. Short-granting of Interest under Section 244A.6. Charging of Interest under Section 234D.7. Initiation of Penalty Proceedings under Section 271(1)(c).Summary:Issue 1: Transfer Pricing Adjustment for Payment of License Fees for Time and Billing SoftwareThe assessee, a global management consulting firm, paid Rs. 2,64,23,881 to its associated enterprise (AE) for using a time and billing software. The Transfer Pricing Officer (TPO) rejected the assessee's benchmarking analysis and determined the arm's length price (ALP) as NIL, without following any prescribed methods under Section 92C of the Income-tax Act. The Dispute Resolution Panel (DRP) upheld the TPO's adjustments. The Tribunal, following precedents, ruled in favor of the assessee, noting that the TPO did not follow any prescribed methods, thus allowing the appeal on this ground.Issue 2: Transfer Pricing Adjustment for Provision of Regional Coordination ServicesThe assessee provided regional coordination services and followed the Transaction Net Margin Method (TNMM) to substantiate the ALP. The TPO rejected some comparables and made adjustments. The DRP did not consider additional submissions by the assessee. The Tribunal remitted this issue back to the TPO for fresh analysis, directing the TPO to consider the additional submissions and documents provided by the assessee.Issue 3: Transfer Pricing Adjustment for Payment of Information Technology Cost AllocationThe assessee paid Rs. 4,25,00,327 to BCG USA for IT cost allocation. The TPO rejected the assessee's benchmarking analysis and determined the ALP as NIL. The DRP upheld the TPO's adjustments. The Tribunal, following precedents, ruled in favor of the assessee, noting that the TPO did not follow any prescribed methods, thus allowing the appeal on this ground.Issue 4: Short-granting of TDS CreditThe assessee did not press this ground during the hearing, and hence, it was dismissed.Issue 5: Short-granting of Interest under Section 244AThe Tribunal directed the Assessing Officer to consider extending the benefit to the assessee up to the date of actual receipt of the refund, following the precedent set by the coordinate bench in a similar case.Issue 6: Charging of Interest under Section 234DThe assessee did not press this ground during the hearing, and hence, it was dismissed.Issue 7: Initiation of Penalty Proceedings under Section 271(1)(c)The Tribunal found this ground to be premature and dismissed it without specific adjudication.Conclusion:The appeal was partly allowed, with the Tribunal ruling in favor of the assessee on key transfer pricing issues and directing the Assessing Officer to reconsider the interest under Section 244A. Other grounds were either dismissed or remitted back for fresh consideration.