2016 (7) TMI 1689 - AT - Income Tax

Income taxable in India - royalty receipts - taxability of consideration for facilitating grant of user rights in off-the-shelf software and provision of related support services - India-US Tax Treaty - HELD THAT - As common point between the parties that the issue relating to the taxability in India of consideration received for facilitating grant of user rights in software to Indian entities was decided against the assessee by the Tribunal in 2013 (8) TMI 952 - ITAT- PUNE relating to assessment year 2004-05 and 2006-07 and 2015 (2) TMI 1391 - ITAT PUNE relating to assessment year 2007-08. Receipt of IT charges by the assessee from CIL and CSSL during the year under consideration - As assessee in the year consideration had provided services to the Indian entities and had received charges in respect of desktop/laptop software licence and internet mail and had determined the value of transactions by allocating cost based on cost estimates TPO adopted the actual cost incurred by the assessee in order to determine the adjustment, if any, to be made on account of international transactions. Main plea of the assessee before the authorities below was that cost allocation based on cost estimates was an accepted method for the purpose of determining the arm's length price and if the actual cost allocation results in any erosion of overall base of India, then no adjustment is required to be made to the value of international transaction. This has to be seen from the angle that where the assessee is a foreign company and is recipient of internet mail charges and desktop/laptop service charges from the Indian entities, then in cases where it is held that the assessee should have been charged higher amounts from the Indian entities, then the same would result in reduction of overall tax base of India. In such circumstances, the Indian Transfer Pricing provisions are not to be applied. DRP in assessment year 2007-08 and the AO in assessment year 2009-10 has not made any adjustment in the hands of assessee on account of internet mail service charges and desktop/laptop service charges though identical international transactions were carried out in the later years also. In the totality of the above said facts and circumstances of the case, we reverse the order of CIT(A) and direct the Assessing Officer to delete the addition. Ground of assessee allowed.

Issues Involved:
1. Taxability of consideration for facilitating grant of user rights in off-the-shelf software and related support services.
2. Transfer pricing adjustment of Rs. 22,67,333/- to the arm's length price of the international transaction.
3. Adjudication of the transfer pricing ground by a non-speaking order.
4. Transfer pricing adjustment when the adjustment variation is less than 5% of the total transaction value.
5. Ignoring the base erosion principle.
6. Exclusion of internet mail in cost allocation.
7. Initiation of penalty proceedings under section 271(1)(c) of the Income-tax Act.

Detailed Analysis:

1. Taxability of Consideration for Facilitating Grant of User Rights in Off-the-Shelf Software and Related Support Services:
The assessee contested the addition of Rs. 5,16,20,766/- as 'royalty' under Article 12 of the India-US Tax Treaty. The Tribunal noted that similar issues in previous assessment years (2004-05, 2006-07, and 2007-08) were decided against the assessee. The Bombay High Court admitted substantial questions of law on this matter but had not altered the Tribunal's decision. Following the Tribunal's earlier decisions and the assessee's declaration under section 158A(1) of the Act, the Tribunal directed the Assessing Officer to apply the final decision of the higher courts. Consequently, this ground of appeal was dismissed.

2. Transfer Pricing Adjustment of Rs. 22,67,333/- to the Arm's Length Price:
The assessee argued that cost allocation based on estimates was an accepted method for determining arm's length price and that actual cost allocation should not result in tax erosion in India. The TPO and CIT(A) rejected these arguments, leading to an addition of Rs. 22,67,333/-. The Tribunal found merit in the assessee's argument that the Indian Transfer Pricing provisions should not apply if they result in a reduction of India's overall tax base. The Tribunal also noted that no adjustments were made in subsequent years on similar transactions. Therefore, the Tribunal reversed the CIT(A)'s order and directed the deletion of the addition of Rs. 22,67,333/-.

3. Adjudication of the Transfer Pricing Ground by a Non-Speaking Order:
This ground was not pressed by the assessee and was dismissed as not pressed.

4. Transfer Pricing Adjustment When the Adjustment Variation is Less than 5% of the Total Transaction Value:
The Tribunal's decision on the second issue (transfer pricing adjustment) inherently addressed this ground. Since the addition of Rs. 22,67,333/- was deleted, this issue was resolved in favor of the assessee.

5. Ignoring the Base Erosion Principle:
The Tribunal accepted the assessee's argument that if the arm's length price results in a reduction of India's overall tax base, no adjustment should be made. This principle was upheld in the Tribunal's decision to delete the transfer pricing adjustment.

6. Exclusion of Internet Mail in Cost Allocation:
Given the Tribunal's decision on the second issue, which included considerations of cost allocation, this ground was not separately adjudicated.

7. Initiation of Penalty Proceedings Under Section 271(1)(c) of the Income-tax Act:
The Tribunal found this issue to be premature and dismissed it accordingly.

Conclusion:
The appeal was partly allowed. The Tribunal dismissed the grounds related to the taxability of software user rights and the initiation of penalty proceedings. However, it allowed the grounds related to transfer pricing adjustments, directing the deletion of the addition of Rs. 22,67,333/-. The other grounds were either not pressed or inherently resolved through the Tribunal's decisions on the main issues.

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