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

ITAT Mumbai dismissed Revenue's appeal regarding transfer pricing adjustments for software services provider. The Tribunal upheld CIT(A)'s comparable selection for TNMM benchmarking of software and consultancy services to associated enterprises, finding no merit in Revenue's challenge to detailed comparability analysis. For guarantee provisions, rates were modified: performance guarantee at 0.88%, finance guarantee at 0.77%, and lease guarantee at 0.88% with 60% restriction. Inter-company loans issue was remanded for proper examination of quasi-equity nature and shareholder activity claims. Brand royalty adjustment was rejected as assessee was not the trademark owner, confirming no royalty obligation to associated enterprises.

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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.

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