2020 (5) TMI 650 - AT - Income Tax

TP Adjustment - payment made to its AE towards Maintenance services relating to software licenses - determine ALP of transaction under TNMM method - TPO has restricted the payment made to AE to 10% by holding that 10% shall be the ALP of the transactions - HELD THAT - The assessee herein is the distributor of software licenses of its AE. Hence there should not be any dispute that core technical problems could only be resolved by its AE. Unless proper and appropriate maintenance services are provided to its customers, it would be difficult to market the software licences. There is merit in the contentions of the assessee that the distribution of software licenses and their maintenance are inter-linked. Accordingly, we are inclined to agree with the contentions of the assessee. TPO was not justified in viewing maintenance services as separate from the distribution activity. We notice that the assessee and its AE have agreed that the assessee shall make payment of 40% of the revenue realised on sale of software licenses and on entering into maintenance contracts. A.R has further pointed out that the above method of sharing the revenue has been accepted to be at Arms length under TNMM method in the immediately preceding year and succeeding year. Hence we agree with the contentions of the assessee that there is no reason to take a different view in this year alone by re-characterising the payment relating to maintenance services alone. Accordingly, we set aside the order passed by the AO/TPO in this regard. Accordingly we direct them to determine ALP of transaction under TNMM method by aggregating them. Appeal of the assessee is allowed.

Summary

Issues:
Transfer pricing adjustment on payment made to AE towards Maintenance services.

Detailed Analysis:
1. The appeal was against the assessment order passed by the assessing officer under section 143(3) r.w.s 144C for the assessment year 2011-12 following directions from the Dispute Resolution Panel (DRP).
2. The dispute revolved around the Transfer pricing adjustment made in relation to payment made to the Associated Enterprise (AE) for Maintenance services linked to software licenses distribution.
3. The assessee, engaged in software license marketing, sales support, and maintenance activities, purchased software licenses from its AE for resale in India. The dispute arose from the remittance of 40% of sales realization and maintenance charges to the AE.
4. The Transfer Pricing Officer (TPO) accepted the TNMM method for software license sales but viewed maintenance services as technical services, leading to a separate benchmarking and adjustment.
5. The DRP upheld the TPO's decision, applying the Profit Split Method (PSM) to determine income split between the assessee and AE for maintenance services.
6. The assessee argued that maintenance services were integral to software distribution, and the TPO's segregation was unjustified, citing past acceptance of TNMM method by the TPO.
7. The Principle of Consistency was invoked by the assessee, emphasizing the need for uniform treatment by tax authorities based on past practices.
8. The TPO defended the separate treatment of maintenance services, based on functions performed by both parties, leading to the 10% ALP determination.
9. The Tribunal observed the interdependence of software distribution and maintenance services, agreeing with the assessee's stance on their linkage and rejecting the TPO's segregation.
10. The Tribunal noted the consistent 40% payment for maintenance services by the assessee to its AE in previous years, supporting the rejection of the TPO's 10% ALP determination for the current year.
11. Consequently, the Tribunal allowed the appeal, directing the authorities to determine the ALP under TNMM method by aggregating the transactions, in line with past practices and the interlinked nature of software distribution and maintenance services.