2022 (8) TMI 1341 - AT - Income Tax

TP Adjustment - Erroneous adjustment of management charges - HELD THAT - The nature of services rendered by the Associated Enterprises FWL is broadly in four categories, i.e. Strategic Guidance, Technical Support, Systems and Software and Business and Administrative Support. We noted that the management fee paid by the Assessee which is about 2% of the overall cost which was included in the cost base while determining the ALP under the TNMM approach adopted at an entity level which was accepted by the Transfer Pricing Officer. Assessee has produced all relevant evidences as noted above and the case-law cited by the CIT-DR in the case of M/s. Lite-on Mobile India Private Limited, Kancheepuram Vs. The Deputy Commissioner of Income Tax, Chennai 2021 (11) TMI 678 - ITAT CHENNAI where there was no evidence furnished and as to whether the Associated Enterprises has provided services or not? But the facts in the case are distinguishable and in the present case, Assessee has produced invoices, details of key payment personnel in regard to strategic guidance, series of invoice copies showing third party charges such as Verizon charges in regard to technical software and systems support and also furnished IOCL bid documents in regard to the business and administrative support services. According to us, the Assessee in the present case is able to prove with evidences the services rendered by the Associated Enterprises for which the Assessee has paid management fee for availing various support services pursuant to the management service agreement entered with its AE. We reverse the order of the lower authorities on this issue and allow the claim of deduction claimed by the Assessee on account of the management fee paid to its AE. Thus, this issue in the Assessee s appeal is allowed TDS u/s 195 - royalty - Disallowance of expenditure incurred towards off-the-shelf software - Assessee now argued that the expenditure incurred towards its share of software cost which are in the nature of off-the-shelf software products such as of Microsoft Office MS Office , IBM Lotus Notes, AVEVA, Auto CAD, etc - HELD THAT - This issue stands now covered by the decision in the case of Engineering Analysis Centre of Excellence Private Limited Vs. Commissioner of Income Tax 2021 (3) TMI 138 - SUPREME COURT wherein has held that the amount paid by resident Indian and end-user / distributors to non-resident computer software manufacturers / suppliers , as consideration for resale / use of computer software through EULAs / distribution agreement, is not payment of royalty for use of copyright in computer software, and thus, the same does not give rise to any income taxable in India. This issue is covered by the decision of the Hon ble Supreme Court wherein it is held that the expenditure incurred towards the purchase of the off-the-shelf software products is not in the nature of Royalty for use of copyright in the software and thus not liable for withholding of tax u/s.195 of the Act, we delete the disallowance and allow this issue of the Assessee.

Summary

Issues Involved:
1. Determination of the arm's length value of management services.
2. Disallowance of expenditure incurred towards off-the-shelf software.

Issue-wise Detailed Analysis:

1. Determination of the arm's length value of management services:

The assessee appealed against the final assessment order, which determined the arm's length value (ALP) of management services at Nil, contrary to the assessee's claim of Rs. 1,90,50,727/-. The Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) concluded that the assessee failed to demonstrate the need and benefits of the services received, show enduring benefits, provide comparable information, and produce documentary evidence for receipt of services. Consequently, the ALP was determined at Nil, resulting in an upward adjustment of Rs. 1,90,50,727/-.

The DRP confirmed the TPO's order, noting that the assessee's replies were generic, lacking specific details on how the amounts charged were worked out. The DRP emphasized that the agreement between related parties and invoices raised could not be considered adequate evidence of service performance. The DRP also highlighted the absence of basic evidence to support the cost claims from the AE's books.

The Tribunal, however, found that the assessee had provided sufficient evidence, including invoices, details of key personnel, and documentation of services rendered. The Tribunal noted that the management fee, which was about 2% of the overall cost, was included in the cost base while determining the ALP under the TNMM approach, which the TPO had accepted. The Tribunal reversed the lower authorities' orders, allowing the deduction of the management fee paid to the AE.

2. Disallowance of expenditure incurred towards off-the-shelf software:

The assessee contested the disallowance of expenditure on off-the-shelf software, arguing that it represented cost-to-cost reimbursement of expenditure incurred on its behalf by overseas entities. The Assessing Officer characterized the expenditure as royalty and disallowed it due to non-withholding of taxes under Section 40(a)(i) of the Act.

The DRP upheld the Assessing Officer's decision, stating that the payment for off-the-shelf software products was taxable as royalty under the Income Tax Act, 1961, and the relevant DTAA. The DRP found the decision of the Delhi High Court in the case of Ericsson A.B. inapplicable and relied on the Karnataka High Court's decision in Samsung Electronics Company Limited.

The Tribunal noted that the expenditure incurred towards off-the-shelf software products was covered by the Supreme Court's decision in Engineering Analysis Centre of Excellence Private Limited Vs. Commissioner of Income Tax, which held that payments for software through EULAs/distribution agreements are not royalty and thus not taxable in India. Consequently, the Tribunal deleted the disallowance and allowed the assessee's claim.

Conclusion:

The Tribunal allowed the appeal, reversing the lower authorities' determination of the ALP of management services at Nil and the disallowance of expenditure on off-the-shelf software. The Tribunal's decision was based on the assessee's evidence of services rendered and the Supreme Court's ruling on the nature of software payments.