2021 (11) TMI 851 - AT - Income Tax

TP adjustment - Comparable selection - international transactions pertaining to provision of sales and marketing support services - Comparability of Axis Integrated Systems Limited - HELD THAT - Axis is engaged in the business of trading digital signatures. Further, Axis is also engaged in providing Liasioningservices in the area of service tax, excise, foreign trade policy licensing, duty free credit entitlement certificates, etc -Axis develops and owns unique intellectual property tool 'Axis Mine'. Judicial Pronouncements supporting exclusion of companies deriving significant benefit from proprietary process - See M/S ROLLS ROYCE MARINE INDIA PVT. LTD. 2014 (11) TMI 429 - ITAT MUMBAI ,GLOBAL LOGIC INDIA PVT. LTD. 2015 (6) TMI 132 - ITAT DELHI ,GENZYME INDIA PVT. LTD. 2018 (4) TMI 1772 - ITAT DELHI - Axis rejected as a comparable as relying on LI AND FUNG (INDIA) PVT. LTD. 2018 (5) TMI 1009 - ITAT DELHI . Unearned revenue from subscription services - HELD THAT - As decided in own case we find that assessee has been following consistent system of revenue recognition. The assessee is inter alia engaged in the business of marketing, promotion and sale of 'Red Hat subscriptions' to customers in Indian sub-continent to avail support services that are for the open source software system during the subscription period ranging from one to seven year, which is established by the special services agreement or contract. AO has clearly erred in changing consistently followed method of revenue recognition adopted by the assessee.We find due merits of the revenue recognition adopted by the assessee which is duly supported by mandate of AS-9 and other parameters referred above - it is also a settled law that unless there is change in the facts and circumstances or that it can be said that earlier adopted system was wrong, revenue recognition method cannot be disturbed. We note that such case exists here. In these circumstances, we set aside the order of the Assessing Officer and delete the addition in this regard.- Decided in favour of assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Corporate Tax Additions
3. Other Grounds

Detailed Analysis:

Transfer Pricing Adjustments:

1. Adjustment relating to payment of royalty and service fee:
- The Assessing Officer (AO) and the Transfer Pricing Officer (TPO), under the direction of the Dispute Resolution Panel (DRP), made an adjustment of INR 527,664,612 based on recharacterization of transactions, ignoring the commercial and business aspects, and disregarding the law relating to the determination of the arm's length price under Rule 10B of the Income-tax Rules, 1962.
- The AO and TPO disregarded the 'License and Service' Agreement justifying the arm's length nature of the transactions, misinterpreted the payment of 'service fees' as 'royalty', and ignored the explanations offered by the appellant.
- The TPO and DRP also disregarded the Transactional Net Margin Method (TNMM) as the most appropriate method for determining the arm's length price of payment of service fees and applied the 'Other Method' in contravention of Rule 10B.
- The Tribunal noted that this issue was decided in favor of the assessee in its own case for AY 2012-13 and 2013-14, where it was held that the transfer pricing adjustment was unjustified and deserved to be deleted. Following this precedent, the Tribunal set aside the Transfer Pricing Adjustment (TPA) and directed it to be deleted.

2. Adjustment relating to provision of software support services:
- The AO confirmed the TPO's action of rejecting Akshay Software Technologies Limited as a comparable company despite this comparable being reinstated by the DRP, thereby violating the provisions of Section 144C(10) of the Act.
- The Tribunal noted that the AO did not follow the binding directions of the DRP, wherein Akshay Software Technologies Limited was reinstated as a comparable. Since the AO did not follow the DRP's direction, the adjustment on account of the provision of software support services was not sustainable and was directed to be deleted.

3. Adjustment relating to provision of sales & marketing support services:
- The TPO, confirmed by the DRP, made an adjustment of INR 2,034,038 by determining the arm's length price for the provision of sales and marketing support services.
- The Tribunal found that one of the comparables selected by the TPO, Axis Integrated Systems Limited, suffered from several dis-functionalities. The Tribunal directed that this comparable should be removed from the final set of comparables and the AO should make the computation accordingly.

Corporate Tax Additions:

1. Additions on account of unearned revenue from subscription services of ?18,54,92,479:
- The AO and DRP made an addition of ?18,54,92,479 pertaining to subscription services, forming part of the 'unearned revenue' disclosed in the liabilities side of the balance sheet, as income of the current year.
- The Tribunal noted that the assessee had been following a consistent system of revenue recognition as per Accounting Standard-9 (AS-9) issued by ICAI, which was accepted in the assessee's own case for AY 2012-13 and 2013-14. The Tribunal found that the AO had erred in changing the consistently followed method of revenue recognition and deleted the addition.

Other Grounds:

1. Non-consideration of revised return of income:
- The AO erred in not considering the total income as per the revised return of income filed by the appellant on 15 March 2016.

2. Short granting of credit of Taxes Deducted at Source (TDS):
- The AO erred in short granting credit of TDS to the extent of ?5,55,907 while computing the tax liability for the year.

3. Non-granting of credit of advance tax paid:
- The AO erred in not granting credit of advance tax paid amounting to ?2,42,00,000 while computing the tax liability for the year.

4. Levying of interest under section 234B:
- The AO erred in levying interest under section 234B of the Act.

5. Initiation of penalty proceedings under section 274 read with section 271(l)(c):
- The AO erred in initiating penalty proceedings under section 274 read with section 271(l)(c) of the Act.

Conclusion:

The Tribunal partly allowed the appeal, setting aside the Transfer Pricing Adjustments and Corporate Tax Additions as discussed, and directed the AO to examine the other grounds as per law.