2022 (12) TMI 377 - AT - Income Tax

TP Adjustment - Functional dissimilarity - comparability of the entity Thirdware Solutions Ltd. with that of the assessee company, which is purely in nature of software development service provider - HELD THAT - In the absence of segmental results, a company which is engaged into dealing with software products as well as providing software services cannot be compared with a company which is engaged in software development services. Therefore, we direct the Assessing Officer/TPO to exclude this company, Thirdware Solutions Ltd. from the list of the comparables. Addition u/s 40(a)(ia) - payment made for purchase of license in respect of which claim of depreciation was made - tax was not deducted at source - HELD THAT - We find the issue in the present ground of appeal is squarely covered in favour of the assessee by the decision of PCIT vs. Tally Solutions (P.) Ltd 2020 (12) TMI 1160 - KARNATAKA HIGH COURT wherein it was held that the provisions of section 40(a)(ia) are not applicable in the case of claim for allowance of depreciation, which is a statutory deduction available to the assessee. Thus we hold that the Assessing Officer is not justified in invoking the provisions of section 40(a)(ia) in respect of the payment made for purchase of software license in respect of which claim of depreciation was made. Accordingly, this ground of appeal no.2 stands allowed. Short credit for TDS - HELD THAT - We restore this issue to the file of the Assessing Officer with direction to allow the credit for TDS made by MSEDCL on the interest income after due verification of Form 26AS and subject the provisions of section 199 of the Act. Thus, this ground of appeal no.3 stands allowed for statistical purposes.

Summary

Issues involved:
1. Transfer Pricing Adjustments.
2. Addition under Section 40(a)(ia) for non-deduction of TDS on software license fees.
3. Short credit for TDS.

Detailed Analysis:

1. Transfer Pricing Adjustments:

The appellant, a wholly-owned subsidiary of eGain Communication Corp. USA, engaged in software development services, filed its return for AY 2013-14. The assessee reported international transactions and justified the arm's length price (ALP) using the Transactional Net Margin Method (TNMM). The profit margin was computed at 17.49%, compared with an average of 5.96% from 12 comparable entities.

The Assessing Officer referred the case to the Transfer Pricing Officer (TPO), who suggested an upward adjustment of Rs. 2,45,13,781/-. The TPO accepted TNMM but rejected the assessee's comparables, applying specific filters and selecting a different set of comparables with an average profit margin of 23.94%, leading to the adjustment.

The CIT(A) partially allowed the appeal, excluding some comparables but confirming others, including R. S. Software (India) Ltd. and Thirdware Solutions Ltd. The appellant contested the inclusion of Thirdware Solutions Ltd., arguing it was not functionally comparable due to its involvement in software product sales and lack of segmental results.

The Tribunal reviewed the annual report and revenue recognition policy of Thirdware Solutions Ltd., noting its involvement in both software development and product sales, and directed its exclusion from the comparables list. Consequently, other grounds of appeal regarding comparables were dismissed as academic, with liberty to press them if Thirdware Solutions Ltd. is later deemed comparable.

2. Addition under Section 40(a)(ia) for non-deduction of TDS on software license fees:

The appellant made payments totaling Rs. 41,70,849/- for software purchases, which were capitalized and claimed as depreciation. The Assessing Officer disallowed these payments under Section 40(a)(ia) for non-deduction of TDS. The CIT(A) confirmed this disallowance.

The Tribunal referred to the Karnataka High Court's decision in PCIT vs. Tally Solutions (P.) Ltd., which held that Section 40(a)(ia) does not apply to depreciation claims, as depreciation is a statutory deduction, not an expenditure. Thus, the Tribunal allowed this ground of appeal, overturning the disallowance.

3. Short credit for TDS:

The appellant claimed short credit for TDS. The Tribunal restored this issue to the Assessing Officer, directing verification of Form 26AS and compliance with Section 199 provisions. This ground was allowed for statistical purposes.

Conclusion:

The appeal was partly allowed for statistical purposes, with significant adjustments in transfer pricing and disallowance under Section 40(a)(ia) being overturned, and the TDS credit issue remanded for verification.