2026 (4) TMI 1763

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....are products abroad. It is submitted that these subsidiaries are the AEs of the assessee and are essential distributors of assessee's software products abroad. 3. For the assessment year 2020-21, return of income was filed on 08.01.2021 declaring nil income after adjusting brought forward losses. The assessee's tax liability u/s. 115JB of the Act was Rs. 10,25,00,091/-. The return was selected for scrutiny and notice u/s. 143(2) of the Act was issued on 29.06.2021. During the course of assessment proceedings, it was noticed that assessee had entered into several international transaction with its AEs. To determine the Arms' Length Price (ALP) of the international transactions entered by the assessee with its AE, the matter was referred to the transfer pricing officer (TPO). The TPO vide his order dated 30.03.2023 passed u/s. 92CA(3) of the Act proposed the following two adjustments (i) interest on overdue receivables of Rs. 4,43,073/- (ii) performance guarantee fee calculated at 2.55% of the guarantee amount of Rs. 77.82 crores i.e. Rs. 1,98,00,000/-. The transfer pricing in respect of other international transactions was to be held at Arm's Length Price. After receipt of the TP....

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....stem Inc, Philippines Eagle Cement Corpn, Philippines 6,98,06,950 7,39,24,250 Product Warranty/Performance Warranty. Value in USD, 0.985 Mln. 4 Ramco System Inc, Philippines Entrego Fulfilment Solutions Inc, Philippines 1,34,65,300 1,42,59,500 Product Warranty/Performance Warranty. Value in USD, 0.19 Mln.     TOTAL   75,31,53,750   8. The total amount outstanding as on 31.03.2020 was Rs. 75,31,53,750. The assessee did not charge any guarantee fee from its AEs. The TPO proposed an adjustment by imputing guarantee commission at 2.55%. The DRP reduced the same to 1%. The AO thereafter made an addition of Rs. 77,82,000 in the impugned final assessment order. 9. The Ld.AR submitted that the Assessing Officer erred in computing the adjustment at 1% on Rs. 77.82 crores, whereas even as per the directions of the DRP, the rate of 1% was required to be applied only on Rs. 75.31 crores, being the outstanding corporate guarantee amount as on 31.03.2020, and therefore the computation itself was factually incorrect. 10. On merits, it was contended that the guarantees in question were purely performance/product warrantie....

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....cial precedents, including the decision of the Mumbai Bench of the ITAT in the case of Everest Kanto Cylinder Ltd., reported in [2013] 34 taxmann.com 19 (Mumbai) as affirmed by the Hon'ble Bombay High Court in the case reported in [2015] 58 Taxman.com 254 (Mumbai). Further, it was submitted that guarantee fee is to be calculated only on prorata for the period during which the guarantee was in force during the year. 11. The Ld.DR strongly relied on the findings of Ld.TPO and the DRP. 12. We have heard the rival submissions and perused the material on record. It is evident from the agreements placed on record that the assessee is the developer and owner of the software products and is contractually obliged to provide updates, upgrades, maintenance and professional services. The guarantees issued to customers of AEs are in the nature of performance/product warranties and are intrinsically linked to the licensing and maintenance of software. The Revenue authorities have treated the same as financial guarantees securing AE's liability. However, the material on record indicates that the performance risk emanates from the software developed by the assessee and the obligation underta....

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....0% was substantially higher than the adjusted median margin of the comparables at 16.26%. Therefore, no separate adjustment on account of interest on receivables was warranted in view of the ratio laid down by the Hon'ble Delhi High Court in the case of Kusum Health Care Pvt. Ltd. reported in 99 taxmann.com 431 and Qualcomm India Pvt. Ltd reported in (2023) 156 taxmann.com 288 (Delhi). It was further submitted that the assessee has consistently maintained a clear distinction between trade receivables and loans to AEs; whenever receivables approached the 270-day limit, loans were extended under RBI's ODI Regulations and interest at 8.75% was charged and offered to tax, which transactions were separately benchmarked and accepted to be at arm's length. Thus, there was no arrangement to benefit the AEs by allowing prolonged credit. The delay in the present year, it was explained, was attributable to COVID-related disruptions, particularly in respect of the Chinese AE, and the amounts were realised within the extended time permitted by the RBI for realisation of export proceeds. It was also contended that the assessee uniformly did not charge interest on delayed receivables from either ....