2022 (10) TMI 836 - AT - Income Tax

TP adjustment - treating the overseas associated enterprises as tested party - HELD THAT - Foreign AEs are least complex entities and therefore should be treated as tested parties and thus no interference is called for with the order of Ld. CIT(A) in treating foreign AEs as tested party. Accordingly grounds raised by the revenue on this issue for both the assessment years are dismissed. Nature of expenses - treatment of expenses incurred on software as revenue or capital - HELD THAT - Considering the factual matrix of the present case which are similar to the fact based findings given in the preceding assessment years by the Co-ordinate Bench of ITAT Kolkata in assessee s own case 2020 (2) TMI 1222 - ITAT KOLKATA So also by considering the critical analysis done by the Ld. CIT(A) who had figured out the software expenses as capital asset we do not find any infirmity in the order of Ld. CIT(A) on this issue and accordingly ground raised by the revenue on this issue for AY 2014-15 is dismissed. Segmental accounts for establishing arms length price - HELD THAT - From the factual position of the present case where the segmental data of I2A and I2B for transaction with the assessee are placed on record against which the margin of the assessee has been bench marked for its arms length price respectfully following the findings given by the Co-ordinate Bench in assessee s own case 2020 (2) TMI 1222 - ITAT KOLKATA we do not find any infirmity with the findings given by the Ld. CIT(A) and accordingly delete the additions made in this respect. Accordingly grounds taken by the revenue on this issue for AY 2015-16 are dismissed. Transfer Pricing adjustments in respect of export of software services and receipt of account management charges - HELD THAT - We find that the TPA are primarily on the basis of issues which have already been dealt in these two present appeals in the above paragraphs relating to selection of tested party as foreign AEs and acceptance of segmental accounting data vis- -vis entity level data of the foreign AEs. TPO has rejected the claim of the assessee of taking the tested party as foreign AEs and resorted to taking comparables from the domestic companies. TPO resorted to the entity level data of the domestic companies taken by him as comparables for the purpose of bench marking done by him in respect of the transfer pricing adjustments. Transfer Pricing adjustments on this issue has also been made in AY 2014-15. Revenue is in appeal before us for AY 2014-15 but not on this issue. Further from the feasibility of appeal before ITAT report placed on record in AY 2014-15 we note that no such ground of appeal has been recommended/approved for the transfer pricing adjustment made towards export of software services and payment of account management charges. Further we have already given our findings in respect of the two issues which formed the basis of adopting tested party as foreign AEs and acceptance of segmental accounting data for the purpose of bench marking in favour of the assessee and against the revenue. Thus the premise on which Ld. TPO has made the transfer pricing adjustment itself does not stand and the bench marking exercise adopted by the Ld. TPO cannot be upheld. We also note that Ld. CIT(A) has considered the factual matrix as well as the judicial precedents of the preceding years in assessee s own case which are also on same pattern as in the present case and thus we do not find any reason to interfere with the findings arrived at by the ld. CIT(A) in deleting the transfer pricing adjustment made by the Ld. TPO. Accordingly we uphold the findings of the Ld. CIT(A) and dismiss the ground raised by the revenue on this issue.

Issues Involved:
1. Selection of tested party as overseas associate enterprises (AE).
2. Treatment of expenses incurred on software as revenue or capital.
3. Acceptance of segmental accounts for establishing arm's length price.
4. Transfer Pricing Adjustment made in respect of export of software services and payment of Account Management Charges.

Issue-wise
Detailed Analysis:

1. Selection of Tested Party as Overseas Associate Enterprises (AE)
The primary issue revolves around whether the foreign AEs can be considered as the tested party for establishing the arm's length price. The assessee argued that their foreign AEs, being less complex entities, should be the tested party. The Revenue opposed this, citing differences in accounting standards and the complexity of comparing financials. The Tribunal upheld the assessee's position, referencing previous judgments and the functional, asset, and risk (FAR) analysis which demonstrated that the foreign AEs were indeed the least complex entities. The Tribunal noted that the selection of the tested party should be based on the entity with the least complex FAR profile, which in this case were the foreign AEs.

2. Treatment of Expenses Incurred on Software as Revenue or Capital
The second issue pertains to whether software-related expenses should be treated as capital or revenue expenditure. The assessee treated certain software expenditures as revenue expenses, arguing they did not provide enduring benefits and had limited useful life. The Revenue treated these as capital expenditures. The Tribunal, after examining the nature of the expenses and referencing previous rulings in the assessee's favor, upheld the assessee's treatment of these expenses as revenue expenditure, except for specific software purchases amounting to Rs. 11,20,458, which were deemed capital in nature by the CIT(A).

3. Acceptance of Segmental Accounts for Establishing Arm's Length Price
The third issue involves the acceptance of segmental accounts for transfer pricing analysis. The Revenue rejected the segmental data prepared by the assessee, arguing it was not audited. The Tribunal noted that segmental accounts need not be audited as long as their reliability is demonstrated. The Tribunal upheld the CIT(A)'s acceptance of the segmental accounts, referencing judicial precedents that supported the use of such data for transfer pricing analysis.

4. Transfer Pricing Adjustment Made in Respect of Export of Software Services and Payment of Account Management Charges
The final issue concerns the transfer pricing adjustments made by the TPO regarding the export of software services and account management charges. The Revenue's adjustments were based on the rejection of the foreign AEs as tested parties and the use of entity-level data from domestic comparables. The Tribunal, having upheld the selection of foreign AEs as tested parties and the acceptance of segmental accounts, found no basis for the TPO's adjustments. The Tribunal noted that the adjustments were not justified as the benchmarking exercise adopted by the TPO was flawed. Consequently, the Tribunal upheld the CIT(A)'s deletion of the transfer pricing adjustments.

Conclusion
The Tribunal dismissed the Revenue's appeals for both assessment years, upholding the CIT(A)'s orders on all issues. The judgment reaffirmed the principles of selecting the least complex entity as the tested party, the treatment of software expenses based on their nature and utility, the acceptance of reliable segmental accounts for transfer pricing analysis, and the rejection of unjustified transfer pricing adjustments.

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