2015 (1) TMI 870 - AT - Income Tax

Transfer pricing adjustments - payment of Account Management charges by the assessee to 12A and 12B - CIT(A) deleted the addition proposed by TPO, holding that risk factors involved in transactions carried out on the basis of contracts either by assessee himself or through subsidiaries are same and no transfer pricing adjustment is to be made - Held that - In case of the assessee, there is an inherent transfer of risk by 12A / 12B to the assessee vide the MSA in relation to cases where the customer contacts directly with these. AEs and there are financial claims relating to the quality of deliverables. Such a transfer of risk through contractual arrangement is a common risk management practice in commercial world and should be duly recognized. The TPO made adjustment by determining a different revenue split 15% or 13% as the case may be from the one followed by the respondent and 12A / 12B. Such an adjustment made by the TPO was without any basis or analysis. Assessee also calculated the effect of adjustment on profitability of ITC Infotech Group taking into consideration the risk adjustment envisaged by TPO for the AY 2006-07 and submitted that both 12A and 12B would make losses at net level if the risk adjusted pricing model, as proposed by the TPO were put in actual practice. Thus the risk adjusted business model as proposed by the TPO would result in an absurd situation from 12A / 12B s perspectives defeating the concept of stable positive return for a low risk tested party. TPO totally erred in making transfer pricing adjustments in the case of assessee in both the AYs. - Decided in favour of assessee. Disallowance of software expenses - Held that - The application software, being the subject matter of appeal, assist the already set-up business vide enhancing its efficiency and hence can be reliably related to being on revenue account. List of software purchased are enclosed in assessee s paper book for AYs 2005-06 & AY 2006-07. On perusal of the same, we find that the parties from whom the software was acquired were Interwoven, Mercury Interactive (Singapore) Pvt. Limited, Sonata Information Technology and Tata Consultancy Services. All these companies specialize in application software which helps in increasing the efficiency of client deliverable. The details of payments made to M/s Interwoven clears that these are towards payment for renewal of software which the assessee was using for client deliverables. In view of these facts, we are of the view that software expenses are revenue in nature and allowable u/s 37 of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Condonation of delay in filing appeals.
2. Deletion of transfer pricing adjustments by CIT(A).
3. Deletion of disallowance of software expenses by CIT(A).

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing Appeals:
The revenue's appeals were delayed by four days due to redrafting of grounds on the last date. The assessee's counsel did not object to the condonation. The tribunal condoned the delay and admitted the appeals for adjudication on merits.

2. Deletion of Transfer Pricing Adjustments by CIT(A):
The first issue raised by the revenue was against the CIT(A)'s order deleting the addition made by the AO based on transfer pricing adjustments proposed by the TPO. The TPO had made adjustments related to payments on account of Accounting Management Charges by the assessee to its subsidiaries ITC Infotech (USA) Inc. (I2A) and ITC Infotech Limited, UK (I2B). The TPO altered the revenue-sharing model without fully appreciating the functional and risk profile of the assessee and its AEs.

The CIT(A) found merit in the assessee's submissions, noting that the assessee and its AEs operated under an integrated 'Global Delivery Model' and that the functions and risks were shared similarly regardless of whether the contract was with the assessee or its AEs. The CIT(A) held that the TPO's adjustments were arbitrary and unsupported by a proper comparability analysis. The CIT(A) also noted that the assessee enjoyed tax benefits in India, negating the possibility of profit shifting.

The tribunal agreed with the CIT(A), emphasizing that the functional and risk profiles of the assessee and its AEs remained the same under both business models. The tribunal found that the TPO's adjustments were based on conjectures and surmises and dismissed the revenue's appeals on this issue.

3. Deletion of Disallowance of Software Expenses by CIT(A):
The second issue raised by the revenue was against the CIT(A)'s order deleting the disallowance of software expenses. The AO had treated the software expenses as capital expenditure, while the CIT(A) held them to be revenue in nature, incurred for business purposes without resulting in any enduring benefit.

The tribunal found that the software expenses were related to application software used for client projects, which did not result in any enduring benefit. The software had a limited useful life and was used as a tool for business, similar to consumable items. The tribunal agreed with the CIT(A) that the software expenses were revenue in nature and allowable under section 37 of the Income Tax Act. The tribunal dismissed the revenue's appeals on this issue.

Conclusion:
Both appeals of the revenue were dismissed by the tribunal, upholding the CIT(A)'s orders on both the transfer pricing adjustments and the disallowance of software expenses. The tribunal found that the CIT(A) had correctly appreciated the facts and circumstances of the case and that the TPO's adjustments were arbitrary and unsupported by proper analysis.