2022 (5) TMI 1441 - AT - Income Tax

TP Adjustment - adjustment on provision for software development services - comparable selection - upper limit of the turnover for exclusion of companies having higher turnover - HELD THAT - In the instant case, the assessee s turnover is only Rs.40.87 crore. TPO / DRP had excluded companies having turnover of less than Rs.1 crore, however, the TPO / DRP has not put upper limit of the turnover for exclusion of companies having higher turnover. In deciding the above ground, the Tribunal in the case of Barracuda Networks India Private Limited 2022 (5) TMI 322 - ITAT BANGALORE , considered various judicial pronouncements and held that companies whose turnover is exceeding Rs.200 crore has to be excluded. In this case, the assessee s turnover is Rs.40.87 crore and the assessee cannot be compared to the companies having high turnover exceeding Rs.200 crore. Therefore we direct the AO / TPO to exclude Larsen Toubro Infotech Limited, Nihilient Technologies Limited, Persistent Systems Limited, Thirdware Solutions Limited, Infosys Limited, Aspire Systems (India) Private Limited and Cybage Software Private Limited, from the list of comparables. Also we direct the AO / TPO to include R S Software (India) Limited as a comparable company. However, the margins of the said company for assessment years 2014-2015 and 2015-2016 have to be ignored since the turnover exceeded Rs.200 crore for the said period. It is ordered accordingly. Adjustment on Interest on delayed receivables - We direct the AO / TPO to redo the transfer pricing analysis in respect of interest on outstanding receivables by taking into account the directions of the Tribunal in assessee s own case for assessment year 2008-2009 2016 (10) TMI 1211 - ITAT BANGALORE TDS u/s 195 - Disallowance u/s 40(a)(i) - HELD THAT - The assessee has produced End Users License Agreement (EULA) - AR has taken us through various clauses, especially, clause 9, wherein he emphasized that the assessee does not acquire any right, title or interest in any IPR - Hon ble Apex Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. 2021 (3) TMI 138 - SUPREME COURT had clearly held that amounts paid by the resident end users to non-resident computer software manufacturer / suppliers for use of computer software through EULA is not payment of royalty for the use of copyright in computer software and the same does not give rise to any income taxable in India as a result of which the payer is not liable for TDS u/s 195 - we restore the issue to the files of the A.O. A.O. is directed to examine the EULA entered by the assessee with XGISL and decide the issue afresh. A.O. shall follow the dictum laid down by the Hon ble Apex Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT (supra) while taking a decision in the said matter.

Summary

Issues Involved:

1. TP adjustment on provision for software development services (adjustment of Rs.3,47,04,593).
2. Interest on delayed receivables (adjustment amounting to Rs.83,55,708).
3. Corporate Tax Issues – Disallowance of software expenses due to non-deduction of TDS.

Detailed Analysis:

1. TP Adjustment on Provision for Software Development Services:

The assessee, a public limited company providing software development services, had its international transaction scrutinized, leading to a TP adjustment of Rs.3,47,04,593. The TPO rejected the assessee's TP study, which included 12 comparables with a median margin of 10.07%, and instead selected 17 comparables with a median margin of 25.64%. The DRP partly allowed the assessee's objections, reducing the TP adjustment to Rs.3,47,04,593 by excluding certain comparables and including others. The Tribunal, following the precedent set in Barracuda Networks India Private Limited, directed the exclusion of seven comparables with turnovers exceeding Rs.200 crore and adjusted the margins of R S Software (India) Limited by excluding its margins for assessment years 2014-2015 and 2015-2016. The Tribunal ordered the AO/TPO to re-compute the ALP accordingly.

2. Interest on Delayed Receivables:

The TPO re-characterized trade receivables from AEs as loans and imputed interest on delayed receivables, resulting in an adjustment of Rs.83,55,708. The assessee argued that the impact of extended credit periods is subsumed by working capital adjustments. The Tribunal, referencing its own decision in the assessee's case for assessment year 2014-2015, directed the AO/TPO to re-do the TP analysis, considering working capital adjustments and the industry-standard credit period. The Tribunal emphasized that if the international transaction is found to be at arm's length after adjustments, no separate adjustment for delayed receivables is warranted.

3. Corporate Tax Issues – Disallowance of Software Expenses Due to Non-Deduction of TDS:

The assessee made payments to Xchanging Global Insurance Solutions Limited (XGISL), UK, amounting to Rs.50,20,109, claimed as reimbursements for cloud-based applications/tools. The AO disallowed the expenditure under section 40(a)(i) of the I.T.Act, treating it as payment for software licenses and thus subject to TDS. The DRP upheld the AO's decision, relying on the Karnataka High Court's judgment in CIT v Samsung Electronics Ltd. The Tribunal, however, restored the issue to the AO, directing an examination of the End Users License Agreement (EULA) in light of the Supreme Court's judgment in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT, which held that payments for software through EULA are not royalties and not taxable in India, thus not requiring TDS.

Conclusion:

The Tribunal provided detailed directions for re-computation and re-examination of the TP adjustments and corporate tax issues, emphasizing adherence to judicial precedents and proper application of legal principles. The appeal was partly allowed for statistical purposes.