2022 (2) TMI 1354 - AT - Income Tax

TP Adjustment - characterisation carried out by the TPO of the assessee s business - As submitted TPO characterised assessee differently in both the years as for A.Y. 2011-12 accepted the activity of assessee to be a manufacturer of software products, however, characterised the business of assessee as software development service provider - assessee is a manufacturer of software products, it owns and develop IP of the software product by the name CRM software - HELD THAT - Admittedly, for both the years under consideration, assessee has been noted to be manufacturer of software product. As admitted assessee owns the development of IP of software product being CRM software. Assessee entered into agreement with its AE for being an exclusive distributor for its software product in North America, for which the AE shall pay to assessee a licence fee equal to 30% of gross revenue. This receipt by assessee has been shown as royalty income by assessee. Apart from this, the assessee sells this software directly to third party customers in Asia-pacific region. It is noted that assessee also provides software support services for the CRM software product sold to both AE as well as non-AE. The segments of income generated by assessee are income from licence fee, payment of licence fee, income from software services. As for A.Y. 2010-11, assessee was identically characterised in the TP study which has not been disturbed by the transfer pricing officer therein. Subsequently, assessee has been characterised in different ways in the subsequent assessment years which needs to be verified at the end of Ld.TPO. In the interest of justice and to remain consistent in the approach of characterisation of assessee s business module, we remand the transfer pricing issues to the Ld.AO/TPO for de novo verification. Disallowance of provision for audit fee - HELD THAT - It is a claim of assessee that assessee was disallowed the provision towards audit fee in A.Y. 2010-11 and the same has been reversed in A.Y. 2011-12 which deserves to be allowed and disallowance of the provisions would amount to double taxation. Thus in the interest of justice, we direct the Ld.AO to verify the details filed by the assessee and to consider the claim in accordance with law.

Summary

Issues:
Characterization of the assessee's business for A.Y. 2011-12 and 2012-13; Disallowance of provision for audit fee in A.Y. 2010-11.

Characterization of Business:
The main issue in the appeals pertained to the characterization of the assessee's business by the Transfer Pricing Officer (TPO). The TPO characterized the business as a software development service provider despite the assessee being a manufacturer of software products. The TPO applied filters for software development service providers, leading to transfer pricing issues. The assessee contested the different characterizations by the TPO for the same activity in both years, highlighting inconsistencies. The Tribunal remanded the transfer pricing issues for de novo verification to appreciate the functions performed by the assessee accurately. The TPO was directed to analyze the details provided by the assessee and consider international transactions following established principles.

Additional Grounds - Disallowance of Audit Fee Provision:
The assessee raised additional grounds for A.Y. 2011-12 regarding the disallowance of the provision for audit fees in A.Y. 2010-11. The assessee argued that the provision was reversed in the subsequent year, and disallowance would lead to double taxation. The Tribunal admitted the additional ground raised by the assessee, directing the Assessing Officer (AO) to verify the details and consider the claim in accordance with the law. Consequently, the additional ground raised by the assessee was allowed for statistical purposes, and the appeals for both years were allowed for the same purpose.

This judgment by the Appellate Tribunal ITAT Bangalore addressed the characterization of the assessee's business and the disallowance of the provision for audit fees. The Tribunal emphasized the need for consistent characterization by the TPO and directed a reevaluation of the transfer pricing issues. Additionally, the Tribunal admitted the additional ground raised by the assessee regarding the audit fee provision, instructing the AO to verify the details and consider the claim appropriately.