Royalty treated as operating cost, TP adjustment deleted within tolerance range, multiple tax issues remitted for reconsideration

ITAT Bangalore ruled on multiple transfer pricing and tax issues. For royalty payments, the Tribunal directed AO/TPO to treat royalty as operating cost and compare margins with comparable company. TP adjustment in SWD segment was deleted as assessee's margin of 10.72% was within 3% tolerance range of comparable companies' 11.37%. Issues regarding interest on delayed receivables, lease payment disallowances under Section 37, and TDS credit denial were remitted to AO/TPO for fresh consideration with proper opportunity of hearing to assessee.

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Issues Involved:
1. Royalty Adjustment
2. Distribution Segment Adjustment
3. Software Development Segment Adjustment
4. Interest on Delayed Receivables
5. Disallowance of Lease Payments on Financial Lease
6. Disallowance under Section 37
7. Non-Giving of TDS Credit

Detailed Analysis:

1. Royalty Adjustment:
The assessee paid a royalty of Rs. 9,41,83,707/- for the use of technology. The Tribunal noted that the TPO did not follow the ITAT's previous directions to either find a comparable transaction or consider the royalty as part of the international transaction in the trading segment. The ITAT had previously directed that if no comparable is found, the royalty should be considered as part of the operating cost for computing the margin in the trading segment. The Tribunal found that the TPO failed to adhere to these directions and made the adjustment without proper benchmarking. The Tribunal allowed the ground raised by the assessee, following its consistent view in earlier years.

2. Distribution Segment Adjustment:
The TPO made an adjustment of Rs. 124,42,65,469/- in the distribution segment. The Tribunal observed that the TPO did not follow the ITAT's earlier directions to restrict the adjustment to the international transaction (AE purchases) and not on the entire transaction in the trading segment. The Tribunal reiterated that the adjustment should be confined to the AE purchases and directed the TPO to apply the Resale Price Method (RPM) as the Most Appropriate Method (MAM), as held in the assessee's own case for earlier years. The Tribunal remitted the issue to the TPO for fresh consideration in line with earlier decisions.

3. Software Development Segment Adjustment:
The TPO made an adjustment of Rs. 85,35,47,785/- in the software development segment. The Tribunal noted that the TPO did not consider the working capital adjustment and included certain comparables that were not functionally similar or had extraordinary high margins. The Tribunal directed the exclusion of such comparables and allowed the working capital adjustment. The Tribunal concluded that the assessee's margin was within the tolerance range and directed the deletion of the TP adjustment in the software development segment.

4. Interest on Delayed Receivables:
The TPO proposed to charge interest on delayed receivables at SBI PLR or LIBOR rate. The Tribunal observed that the TPO did not consider the net amount of receivables and payables and did not identify a comparable transaction. The Tribunal directed the TPO to benchmark the interest rate considering the period of credit enjoyed by the comparables and the applicable LIBOR rate. The issue was remitted to the TPO for fresh consideration.

5. Disallowance of Lease Payments on Financial Lease:
The AO disallowed Rs. 10,08,65,471/- towards lease payments on financial lease, treating it as capital expenditure. The Tribunal noted that the assessee consistently followed the method of allowing lease rentals as revenue expenditure and that the AO did not provide sufficient opportunity to the assessee to substantiate its claim. The Tribunal remitted the issue to the AO for fresh consideration, following its earlier decisions in the assessee's own case and similar cases.

6. Disallowance under Section 37:
The AO disallowed Rs. 36,52,52,459/- under Section 37, treating it as not wholly and exclusively for the purpose of business. The Tribunal observed that the assessee was not given adequate opportunity to furnish details due to the pandemic. The Tribunal directed the AO to verify the details and documentary evidence provided by the assessee and decide the issue afresh.

7. Non-Giving of TDS Credit:
The Tribunal directed the AO to verify the records and give TDS credit in accordance with law.

Conclusion:
The Tribunal allowed the appeal partly for statistical purposes, remitting several issues to the AO/TPO for fresh consideration and directing adherence to earlier decisions and proper benchmarking.

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