2020 (11) TMI 93 - AT - Income Tax

Characterization of distribution fee - Royalty or not? - HELD THAT - As decided in own case 2020 (3) TMI 781 - ITAT MUMBAI as the assessee had merely acted as an intermediary between the broadcaster and the ultimate customers to use the channels, therefore, the distribution fee paid by the assessee to its AEs could not be termed as royalty. Accordingly, we herein vacate the view taken by the lower authorities that channel distribution fees paid by the assessee to its AEs was in the nature of payment of royalty. The Ground of appeal No. 4 is allowed. TPA - Comparable selection - HELD THAT - Avance Technology Ltd - From actual position, we find that the aforesaid company which had generated its entire revenue from sale of software product could safely be adopted as a valid comparable for benchmarking the international transactions of the assessee for the year under consideration. As the functions of the aforementioned company had not witnessed any change as in comparison to the immediately preceding and succeeding years i.e A.Y.2012-13 and A.Y. 2013-14, therefore, finding no reason to take a different view we respectfully follow the aforesaid order of the Tribunal, and direct the A.O/TPO to include the aforementioned company in the final list of comparables for benchmarking the international transactions of the assessee for the year under consideration. Empower Industrial India Ltd - Include the said company as a valid comparable for the purpose of benchmarking the international transactions of the assessee for the year under consideration. Sonata Information Technologies Ltd. - In the assesses own case for the immediately preceding year i.e. A.Y. 2011-12 had accepted the aforementioned company whose generation of revenue from software distribution during the said year was 97%, as a valid comparable, for benchmarking the international transactions of the assessee for the said preceding year. Also, the aforementioned company was selected as a valid comparable by the Tribunal while disposing off the assessee s appeal for A.Y. 2013-14. Integra Telecommunications Software Ltd. - We are not inspired by the reasoning given by the TPO for rejecting the aforementioned company which was into software distribution business, as a valid comparable for benchmarking the international transactions of the assessee for the year under consideration. Direct the A.O/TPO to include the aforementioned company as a valid comparable for the purpose of benchmarking the international transactions of the assessee for the year under consideration. Short grant of TDS - HELD THAT - As the adjudication of the aforesaid issue would require verification of records, therefore, we restore the issue to the file of the A.O. The A.O is directed to verify the aforesaid claim of the assessee, and in case there is any short credit of TDS, the same may therein be allowed. Deduction of Education cess and Secondary and higher education cess paid on the income-tax liability while computing of its income under the head Profits and gains of business or profession - Additional ground raise - HELD THAT - We respectfully follow the aforesaid judgment of the Hon ble High Court of Bombay in the case of Sesa Gold Limited 2020 (3) TMI 347 - BOMBAY HIGH COURT and therein conclude that the assessee shall be entitled for deduction under the head Profits and Gains from Business or Profession of the amount of Education Cess and the Secondary higher Education Cess levied on its income under the Act. The additional ground of appeal raised by the assessee is allowed.

Issues Involved:

1. Assessing the total income.
2. Transfer pricing adjustment.
3. Reference to the Transfer Pricing Officer (TPO).
4. Characterization of distribution fee as royalty.
5. Rejection of economic analysis in transfer pricing study.
6. Benchmarking analysis by TPO/DRP.
7. Internal comparability.
8. Short grant of tax deducted at source (TDS).
9. Interest under Section 234D.
10. Penalty proceedings.
11. Additional grounds of appeal.

Detailed Analysis:

1. Assessing the Total Income:
The assessee contested the assessment of total income at ?436,47,34,833 against ?22,51,21,420 as computed in its return. The Tribunal reviewed the details and directed a reassessment considering the correct application of transfer pricing principles and comparables.

2. Transfer Pricing Adjustment:
The Tribunal examined the upward adjustment of ?413,96,13,415 suggested by the TPO. The Tribunal found that the TPO's characterization of the distribution fee as royalty was incorrect, referencing the Bombay High Court's decision in Set India Pvt. Ltd., which held that distribution fees are not royalties.

3. Reference to the TPO:
The Tribunal noted that the reference to the TPO under Section 92CA(1) was contested by the assessee. The Tribunal directed that the TPO should reassess the case without the incorrect characterization of the distribution fee as royalty.

4. Characterization of Distribution Fee as Royalty:
The Tribunal concluded that the distribution fee paid by the assessee to its AE should not be characterized as royalty. This decision was based on the Bombay High Court's ruling in Set India Pvt. Ltd. and similar cases, which clarified that such fees are not royalties but business income.

5. Rejection of Economic Analysis in Transfer Pricing Study:
The Tribunal found that the TPO and DRP had erred in rejecting the economic analysis and comparables selected by the assessee. The Tribunal directed the inclusion of software distributors as comparables for benchmarking the international transactions, consistent with previous years' assessments.

6. Benchmarking Analysis by TPO/DRP:
The Tribunal directed the TPO to reconsider the benchmarking analysis using the Transaction Net Margin Method (TNMM) instead of Comparable Uncontrolled Price (CUP) method, and to include the comparables selected by the assessee, which were functionally similar.

7. Internal Comparability:
The Tribunal emphasized the appropriateness of internal comparables over external royalty agreements selected by the TPO/DRP. It directed adjustments to ensure comparability, including the subtraction of extraordinary items like the waiver of license fees.

8. Short Grant of Tax Deducted at Source (TDS):
The Tribunal acknowledged the short grant of TDS credit and directed the AO to verify and rectify the claim, ensuring the correct computation of tax liability.

9. Interest under Section 234D:
The Tribunal noted the incorrect computation of interest under Section 234D and directed the AO to recompute the interest correctly, considering the Tribunal's observations.

10. Penalty Proceedings:
The Tribunal found the initiation of penalty proceedings under Section 271(1)(c) to be premature and dismissed the ground as such.

11. Additional Grounds of Appeal:
- Ground No. 21: The Tribunal dismissed this ground as not pressed, given the acceptance of software distributors as comparables.
- Ground No. 22: This ground was dismissed as it had already been rectified by the AO.
- Ground No. 23: The Tribunal allowed the deduction of "Education Cess" and "Secondary and Higher Education Cess" based on the Bombay High Court's ruling in Sesa Goa Limited, which clarified that such cess is not disallowable under Section 40(a)(ii).

Conclusion:
The Tribunal partly allowed the appeal, directing the AO/TPO to reassess the case considering the Tribunal's observations and the correct application of transfer pricing principles and comparables. The Tribunal emphasized the need for accurate benchmarking and the correct characterization of transactions, ensuring compliance with legal precedents and correct tax computation.

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