2024 (12) TMI 856 - AT - Income Tax

TP Adjustment of international transaction pertaining to payment of royalty and service fee - HELD THAT - Respectfully following the decision of the co-ordinate bench in assessee s own case A.Y. 2012-13, A.Y. 2013-14 2022 (12) TMI 1256 - ITAT MUMBAI and A.Y. 2014-15 2021 (11) TMI 851 - ITAT MUMBAI we set aside the Transfer Pricing Adjustment on account of payment of service fee and direct the same to be deleted. Adjustment on account of provision of software support services - working capital adjustment - Considering that this issue has been examined and decided in favor of the assessee in its own case of A.Y. 2016-17 2022 (2) TMI 1283 - ITAT MUMBAI and the fact that there has been no change in the functions, assets, and risk profile of the assessee in the impugned year, we are of the considered view that the assessee is entitled to working capital adjustment. The TPO/AO is directed to grant the working capital adjustment to the assessee on the final set of comparables used by the TPO. Comparable selection - Axis Integrated Systems Limited - Considering that this issue has been examined and decided in favor of the assessee in its own case of A.Y. 2014-15 2021 (11) TMI 851 - ITAT MUMBAI and the fact that there has been no change in the functions, assets, and risk profile of Axis Integrated Systems Limited in the impugned year vis- -vis previous year, we are of the considered view that this comparable should be removed from the final set of comparables. Adjustment on account of provision of sales and marketing support services - revenue recognition policy has been consistently being followed by the assessee over the years. This identical issue has also been dealt with by the Hon ble Delhi High Court in the case of CIT vs. Dinesh Kumar Goel 2010 (10) TMI 287 - DELHI HIGH COURT by relying upon the decision of E.D. Sassoon Co. Ltd. 1954 (5) TMI 2 - SUPREME COURT wherein the issue whether the customer had paid entire fee in advance on which services remained due to be rendered in succeeding years, such receipts could not be considered as income accrued in the year of receipts has been decided as there must be the right to receive the income on a particular date, so as to bring about a creditor and debtor relationship on the relevant date . The Court further explained that a right to receive a particular sum under the agreement would not be sufficient unless the right accrued by rendering of services and not by promising for services and where the right to receive is interior to rendering of service, the income, therefore, would accrue on rendering of services and addition made by the Ld. AO/DRP on account of unearned revenue qua subscription services is not sustainable in the eyes of law. Levying of interest u/s 234A and interest u/s 234C - As per the facts mentioned by the assessee, it had paid the advance tax due on the returned income for A.Y. 2015-16 within the statutory timelines. However, an interest has been charged as per the Assessment Order. Given the facts, we are of the view that no interest under Section 234A and 234C of the Act should be levied. The AO is directed to recompute the tax payable by / refund due to the assessee without said interest.

Issues Involved:

1. Adjustment relating to international transaction pertaining to payment of royalty and service fee.
2. Adjustment relating to international transactions pertaining to provision of software support services.
3. Adjustment relating to international transactions pertaining to provision of sales and marketing support services.
4. Additions on account of unearned revenue from subscription services.
5. Short granting of credit for Taxes Deducted at Source (TDS).
6. Non-granting of credit for advance tax paid.
7. Levying of interest under sections 234B, 234A, and 234C.
8. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Adjustment on Payment of Royalty and Service Fee:

The tribunal found that the adjustment made by the Ld. AO and Ld. TPO regarding the payment of service fees was not justified. The tribunal relied on its previous decisions in the assessee's own case for earlier assessment years (AY 2012-13, 2013-14, and 2014-15) where it had deleted similar adjustments. It was noted that the functions, assets, and risk profile of the assessee had not changed over the years. The tribunal emphasized that the substance of the transactions, supported by a statutory auditor's certificate, should prevail over the nomenclature used in the agreements. Consequently, the adjustment was directed to be deleted.

2. Adjustment on Software Support Services:

The tribunal addressed the issue of working capital adjustment for software support services. It referred to its decision for AY 2016-17, where a working capital adjustment was granted under similar circumstances. The tribunal directed the Ld. TPO/AO to verify and provide the working capital adjustment to ensure a level playing field between the assessee and comparable companies.

3. Adjustment on Sales and Marketing Support Services:

The tribunal considered the issue of working capital adjustment and the rejection of a comparable company, Axis Integrated Systems Limited. It referred to its decision for AY 2016-17, where working capital adjustment was granted. Additionally, the tribunal upheld the rejection of Axis Integrated Systems Limited as a comparable, based on its decision for AY 2014-15, due to functional dissimilarities. The tribunal directed the AO to make computations accordingly.

4. Additions on Unearned Revenue:

The tribunal found that the addition made by the Ld. AO/DRP on account of unearned revenue from subscription services was not sustainable. It relied on its previous rulings for AY 2012-13, 2013-14, 2014-15, and 2016-17, where it had upheld the assessee's revenue recognition policy. The tribunal emphasized that the consistent system of revenue recognition followed by the assessee was in accordance with Accounting Standard-9 and other relevant guidelines. It noted that the revenue recognition method should not be disturbed unless there was a change in facts or circumstances.

5. Short Granting of TDS Credit:

The tribunal directed the AO to address the issue of short granting of TDS credit based on evidence provided by the assessee. The assessee had filed an application under section 154, which was pending disposal.

6. Non-Granting of Advance Tax Credit:

Similar to the TDS credit issue, the tribunal directed the AO to address the non-granting of advance tax credit based on evidence provided by the assessee.

7. Levying of Interest under Sections 234B, 234A, and 234C:

The tribunal found that the levying of interest under sections 234B, 234A, and 234C was consequential. It directed the AO to recompute the tax payable or refund due without the said interest, based on the facts presented by the assessee.

8. Initiation of Penalty Proceedings:

The tribunal considered the initiation of penalty proceedings under section 271(1)(c) as premature and consequential, requiring no finding at this stage.

Conclusion:

The appeal was partly allowed for statistical purposes, with directions to the AO to address specific issues based on the tribunal's findings and previous rulings in the assessee's own case.

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