2024 (7) TMI 128 - AT - Income Tax

Revenue's appeal dismissed on transfer pricing adjustments for software services with modified guarantee rates

M/s. Tata Consultancy Services Ltd. Versus The Deputy Commissioner of Income-tax, LTU-1 Mumbai And The Deputy Commissioner of Income-tax, LTU-1 Versus. M/s. Tata Consultancy Services Ltd. Mumbai

ITAT Mumbai dismissed Revenue's appeal regarding transfer pricing adjustments for software services provider. The Tribunal upheld CIT(A)'s comparable ... TP Adjustment - provision of software technical and consultancy services - As per the assessee, it has provided software and consultancy services to its AEs in its transfer pricing study report since the assessee is a software service provider, it assumes responsibility for the deliverables while the sales and marketing, business relation and customer contracting is generally undertaken by the AEs - TNMM has been considered as the most appropriate method - Comparable selection - HELD THAT:- We find that this Tribunal in [2019 (11) TMI 408 - ITAT MUMBAI] for A.Y.2009-2010 has considered a similar quarrel and held in course of appeal proceedings, the learned Commissioner (Appeals) examined them in detail and after a detailed analysis approved some comparables selected by the assessee and also added some new comparables. Whereas, the comparable selected by the Transfer Pricing Officer were not on the Tata Consultancy Services Ltd. basis of any detailed search process. At least, no such analysis is either forthcoming from the order of the Transfer Pricing Officer or could be brought to our notice by learned Departmental Representative. On the contrary, on a thorough and careful reading of the impugned order of learned Commissioner (Appeals), we are of the view that learned Commissioner (Appeals) has taken pains to examine in detail the alternative benchmarking done by the assessee with foreign comparables and after detailed analysis has shortlisted the final comparables to be considered for comparability analysis. No convincing argument or evidence has been brought on record by the learned Departmental Representative to persuade us to disturb the finding of learned Commissioner (Appeals) on these issues. In view of the aforesaid, we do not find any merit in the grounds raised by the Revenue on the issues. Provision of guarantee - Performance, financial, and lease guarantees, provided by the assessee for its AEs - main contention of the assessee is that the charges should be levied only on the component of services performed by the AEs - HELD THAT:- The contentions of the assessee have been duly considered by this Tribunal while deciding the quarrel in A.Y. 2009-2010 [2019 (11) TMI 408 - ITAT MUMBAI] as held in respect of performance guarantee, the rate to be applied is 0.88 % as against 1.39% in AY 09-10. The premium has changed to USD 1.1 million and the insurance cover to 125 million in this FY. Further according to assessee as against 48% on site revenue in AY 09-10, the figure is 31.72% in this FY making necessary modification. This claim may be verified by AO/TPO and same approach in calculation by CIT(A) in AY 09-10 may be adopted. In respect of Finance guarantee, the rate remains unaltered at 0.77% (0.75% +mark up of 0.02%) In respect of Lease guarantee, my predecessor CIT(A) has taken the same rate as applicable for performance guarantee. Therefore the rate is to be taken @ 0.88% as against 1.23% in AY 09-10. As the assessee is occupying 40% and the AE is occupying 60%, the guarantee charges should be restricted to 60% only. Assessing Officer is directed to re-compute the figure in accordance with the above direction. Provision of inter-company loans - TPO was of the opinion that since the assessee has advanced loan to its AEs and it is recorded so in the books of both the assessee and the AEs, therefore, in form and substance, the nature of the transaction is loan only - HELD THAT:- Similar quarrel was considered by this Tribunal in A.Y. 2009-2010 [2019 (11) TMI 408 - ITAT MUMBAI] as held Commissioner (Appeals), though, has observed that the loans advanced were not merely for downstream acquisition but for a variety of purpose including working capital requirement and other business uses, however, he has not elaborated as to for what other purpose loans were advanced. Without properly dealing with the factual aspect of the issue, learned Commissioner (Appeals) has jumped to the legal aspect and has held that the amount advanced by the assessee is in the nature of loan and has to be benchmarked as such. After considering the submissions of the parties and examining the material on record, we are convinced that various submissions made by the assessee before learned Commissioner (Appeals) have not at all been dealt with. The primary contention of the assessee that the advance made to the AEs is in the nature of quasi equity and falls within shareholder's activity has not been properly addressed by the Departmental Authorities keeping in view the ratio laid down in the relevant case laws. It also requires deliberation whether it can be considered as an international transaction under section 92B r/w Explanation-1(c). Brand royalty fees - whether Tata Sons Pvt.Ltd. is the legal owner of the trademarks and service marks containing “TATA” including “Tata Consultancy Services” and “TCS” used in relation to the business of the assessee? - main contention of the assessee is that the name TATA is owned and used by Tata Sons since 1868 - HELD THAT:- As decided in A.Y. 2014-2015 [2023 (9) TMI 1114 - ITAT MUMBAI] held that the fee paid by the assessee towards the brand to Tata and Sons Ltd. is not capital in nature for the reason that the brand is not owned by the assessee. Accordingly there cannot be any royalty that needs to be charged on the brand since assessee is not the owner of the brand and there cannot be any TP adjustment towards the amount that ought to have been received by the assessee towards brand royalty. We therefore see no infirmity in the order of the CIT(A). This ground of the revenue is dismissed. Issues Involved:1. Provision of software technical and consultancy services.2. Provision of guarantee.3. Provision of inter-company loans.4. Brand royalty fees.Detailed Analysis:1. Provision of Software Technical and Consultancy Services:The issue pertains to the provision of software and consultancy services by the assessee to its Associated Enterprises (AEs). The assessee, a global IT consulting and outsourcing company, used the Transactional Net Margin Method (TNMM) for benchmarking these transactions. The Transfer Pricing Officer (TPO) believed that the facts were similar to the previous assessment year (A.Y. 2014-2015) and considered the AEs as the tested party. The Tribunal referred to its earlier decision in ITA No.5713/Mum/2016 and 5823/Mum/2016 for A.Y. 2009-2010, which held that the AEs performed significant marketing functions and bore risks, justifying the use of gross margin on sales as the Profit Level Indicator (PLI). Consequently, the Tribunal dismissed the Revenue's appeal and deemed the ground raised by the assessee as infructuous.2. Provision of Guarantee:The assessee provided various guarantees (performance, financial, and lease) for its AEs. The Tribunal noted that this issue had been recurring from earlier assessment years. The CIT(A) had directed the application of specific rates for different types of guarantees (e.g., 0.88% for performance guarantee, 0.77% for financial guarantee, and 0.88% for lease guarantee, with adjustments based on the occupancy of premises). The Tribunal, referencing its earlier decision in ITA No.3262/Mum/2017 and 3389/Mum/2017 for A.Y. 2007-2008, upheld the CIT(A)'s directions and dismissed the Revenue's appeal.3. Provision of Inter-Company Loans:The assessee provided loans to its AEs for acquiring downstream subsidiaries and meeting working capital requirements. The TPO rejected the assessee's contention that these loans were quasi-equity and charged arm's length interest. The Tribunal, referring to its earlier decision for A.Y. 2009-2010, directed a de novo adjudication by the Assessing Officer (AO) to examine the exact nature of the advances and the applicability of relevant case laws. The Tribunal allowed this ground for statistical purposes.4. Brand Royalty Fees:The issue revolved around whether the assessee could charge brand royalty fees from its AEs, given that Tata Sons Pvt. Ltd. was the legal owner of the trademarks and service marks containing 'TATA,' including 'Tata Consultancy Services' and 'TCS.' The Tribunal noted that this issue had been addressed in earlier years (e.g., ITA No.5199/Mum/2019 and 5904/Mum/2019 for A.Y. 2014-2015), where it was held that since Tata Sons Ltd. owned the brand, the assessee could not charge for brand royalty. Consequently, the Tribunal dismissed the Revenue's appeal on this issue.Conclusion:The Tribunal dismissed the Revenue's appeal and deemed the legal issues raised by the assessee as academic, requiring no separate adjudication. The order was pronounced on June 21, 2024.