Tribunal Partially Allows Appeal, Sets Aside Transfer Pricing Adjustments and Corporate Tax Additions

The Tribunal partly allowed the appeal, setting aside the Transfer Pricing Adjustments and Corporate Tax Additions. The AO was directed to examine the other grounds as per law. Transfer pricing adjustments related to payment of royalty and service fee were deleted, adjustments for provision of software support services were deemed unsustainable, and adjustments for sales & marketing support services were modified. Corporate tax additions on unearned revenue were deleted due to consistent revenue recognition methods. Other grounds, including non-consideration of revised income return, short granting of TDS credit, non-granting of advance tax credit, interest levy, and penalty proceedings initiation, were left for further examination.

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Issues Involved:
1. Transfer Pricing Adjustments
2. Corporate Tax Additions
3. Other Grounds

Detailed Analysis:

Transfer Pricing Adjustments:

1. Adjustment relating to payment of royalty and service fee:
- The Assessing Officer (AO) and the Transfer Pricing Officer (TPO), under the direction of the Dispute Resolution Panel (DRP), made an adjustment of INR 527,664,612 based on recharacterization of transactions, ignoring the commercial and business aspects, and disregarding the law relating to the determination of the arm's length price under Rule 10B of the Income-tax Rules, 1962.
- The AO and TPO disregarded the 'License and Service' Agreement justifying the arm's length nature of the transactions, misinterpreted the payment of 'service fees' as 'royalty', and ignored the explanations offered by the appellant.
- The TPO and DRP also disregarded the Transactional Net Margin Method (TNMM) as the most appropriate method for determining the arm's length price of payment of service fees and applied the 'Other Method' in contravention of Rule 10B.
- The Tribunal noted that this issue was decided in favor of the assessee in its own case for AY 2012-13 and 2013-14, where it was held that the transfer pricing adjustment was unjustified and deserved to be deleted. Following this precedent, the Tribunal set aside the Transfer Pricing Adjustment (TPA) and directed it to be deleted.

2. Adjustment relating to provision of software support services:
- The AO confirmed the TPO's action of rejecting Akshay Software Technologies Limited as a comparable company despite this comparable being reinstated by the DRP, thereby violating the provisions of Section 144C(10) of the Act.
- The Tribunal noted that the AO did not follow the binding directions of the DRP, wherein Akshay Software Technologies Limited was reinstated as a comparable. Since the AO did not follow the DRP's direction, the adjustment on account of the provision of software support services was not sustainable and was directed to be deleted.

3. Adjustment relating to provision of sales & marketing support services:
- The TPO, confirmed by the DRP, made an adjustment of INR 2,034,038 by determining the arm's length price for the provision of sales and marketing support services.
- The Tribunal found that one of the comparables selected by the TPO, Axis Integrated Systems Limited, suffered from several dis-functionalities. The Tribunal directed that this comparable should be removed from the final set of comparables and the AO should make the computation accordingly.

Corporate Tax Additions:

1. Additions on account of unearned revenue from subscription services of Rs. 18,54,92,479:
- The AO and DRP made an addition of Rs. 18,54,92,479 pertaining to subscription services, forming part of the 'unearned revenue' disclosed in the liabilities side of the balance sheet, as income of the current year.
- The Tribunal noted that the assessee had been following a consistent system of revenue recognition as per Accounting Standard-9 (AS-9) issued by ICAI, which was accepted in the assessee's own case for AY 2012-13 and 2013-14. The Tribunal found that the AO had erred in changing the consistently followed method of revenue recognition and deleted the addition.

Other Grounds:

1. Non-consideration of revised return of income:
- The AO erred in not considering the total income as per the revised return of income filed by the appellant on 15 March 2016.

2. Short granting of credit of Taxes Deducted at Source (TDS):
- The AO erred in short granting credit of TDS to the extent of Rs. 5,55,907 while computing the tax liability for the year.

3. Non-granting of credit of advance tax paid:
- The AO erred in not granting credit of advance tax paid amounting to Rs. 2,42,00,000 while computing the tax liability for the year.

4. Levying of interest under section 234B:
- The AO erred in levying interest under section 234B of the Act.

5. Initiation of penalty proceedings under section 274 read with section 271(l)(c):
- The AO erred in initiating penalty proceedings under section 274 read with section 271(l)(c) of the Act.

Conclusion:

The Tribunal partly allowed the appeal, setting aside the Transfer Pricing Adjustments and Corporate Tax Additions as discussed, and directed the AO to examine the other grounds as per law.

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