SAS INSTITUTE (INDIA) P. LTD, MUMBAI V. DCIT CIR 3(3), MUMBAI

ITA 1567/MUM/2014

AI Insights

The case involves M/s SAS Institute (India) Private Limited, which appealed against the assessment order passed by the Dy. Commissioner of Income Tax, Mumbai, concerning transfer pricing adjustments made to their international transactions for the assessment year 2009-10. The primary contention was the inappropriate transfer pricing adjustment amounting to Rs 14,67,22,782, which the assessee argued was not in accordance with the arm's length principle. The assessee had adopted the Comparable Uncontrolled Price (CUP) method for certain transactions and the Transactional Net Margin Method (TNMM) for others, which the Transfer Pricing Officer (TPO) rejected in favor of a different set of comparables and methods. The Dispute Resolution Panel (DRP) upheld the TPO's decision, leading to the appeal before the Tribunal.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 299734 (ITAT-MUMBAI)
• Duration Of Justice: 9 year(s) 4 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: K
• Next Hearing Date: 27-04-2023
• Assessment Year: 2009-2010
• Appeal Filed On: 05-03-2014
• Other Referred Cases: A.Y. 2008-09, A.Y. 2010-11, A.Y. 2013-14, A.Y. 2014-15
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; TDS
• Section: 271(1)(c); 143(3); 234B; 115JB; 13; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “K” BENCH, MUMBAI BEFORE SHRI PRASHANT MAHARISHI, AM AND MS. KAVITHA RAJAGOPAL, JM ITA No. 1567/Mum/2014 (Assessment Year: 2009-10) M/s SAS Inst itute ( I ndia) P ri vate Lim ited Apeeja y Hou se, 3 rd Floo r, 3, Din sha w W achha Road, Mum bai-400 020 Vs. Dy. Commissioner of Income- tax, Circle 3(3) Aaykar Bhavan, Maharshi Karve Road, Mumbai-400 020 (Appellant) (Respondent) PAN No. AAECS3149K Assessee by : Shri M.P. Lohia, AR Revenue by : Ms. Vranda U.Matkari, DR Date of hearing: 28.04.2023 Date of pronouncement : 26.07.2023 O R D E R PER PRASHANT MAHARISHI, AM: 01. This appeal is filed by assessee against the assessment order passed by the Dy. Commissioner of Income Tax, 3(3), Mumbai (the learned Assessing Officer) under Section 143(3) read with section 144C(13) of the Income- tax Act, 1961 (the Act) dated 13 th January, 2014, wherein the assessee has raised following grounds of appeal:- “Based on the facts and circumstances of the case, SAS institute (India) Private Limited (Appellant respectfully craves leave to prefer an appeal against the order passed by the Deputy Commissioner of Income Tax Circle 331, Mumbai (learned AO) under section 1400) read with section 144C) of Income-tax Page | 2 ITA No.1567/Mum/2014 M/s SAS Institute (India) Private Ltd; A.Y. 2009-10 Act, 1961 (the Act) dated 13 January 2014 (received on 17 January 2014) pursuant to the directions issued by Dispute Resolution Panel (Hon'ble DRP, Mumbai, under section 144C(5) of the Act on the following grounds, which are independent of and cut prejudice to each other: On the facts and in the circumstances of the case and in law, the Hon'ble DRP and consequentially the learned AO have Grounds of appeal pertaining to transfer pricing adjustment; 1. Inappropriate transfer pricing adjustment amounting to Rs 14,67,22,782 even though the pricing of all international transactions of the Appellant was at arm's length. Erred in making confirming the transfer pricing adjustment to the international transactions of the Appellant pertaining to software licensing revenue segment Le royalty and software licensing revenue sharing transactions and concluding that the value of the said international transactions is not at arm's length 2. Inappropriate nun acceptance of the approach and analysis provided by the Appellant in transfer pricing study report Erred by not accepting the approach and analysis undertaken provided by the Appellant, in its transfer pricing study report for benchmarking its Page | 3 ITA No.1567/Mum/2014 M/s SAS Institute (India) Private Ltd; A.Y. 2009-10 international transactions including the transaction by transaction approach. 3. Inappropriately not considering the fact that losses are not on account of transfer price Erred by making transfer pricing adjustment without considering the commercial reasons for losses to the Appellant Le due to external factors 4. Inappropriately rejecting comparable uncontrolled price method (CUP) and using transactional net margin method (TNMM") for benchmarking royalty transaction Erred by not considering CUP as the most appropriate method adopted by the Appellant for benchmarking its international transaction pertaining to payment of royalty and inappropriately adopting TNMM as the most appropriate method 5. Inappropriately considering functionally different companies as comparable for benchmarking royalty and software licensing revenue sharing transactions Without prejudice to the above grounds of appeal, erred by concluding that companies engaged in rendering technical support services are comparable to the Appellant for benchmarking the international transactions pertaining to payment of royalty and software licensing revenue sharing. Page | 4 ITA No.1567/Mum/2014 M/s SAS Institute (India) Private Ltd; A.Y. 2009-10 6. Erred by not considering the comparable companies provided by the Appellant engaged in software distribution services Without prejudice to the above grounds of appeal, erred by not considering comparable companies engaged in software distribution services provided by the Appellant for benchmarking the software licensing revenue segment i.e. royalty and software licensing revenue sharing transactions. 7. Inappropriate use of single year and non- contemporaneous financial data of comparable companies for transfer pricing analysis Erred in considering the operating margins on operating revenue of the comparable companies based on the financial data pertaining only to financial year ended 31 March 2009 and rejecting use of financial data of comparable companies for multiple i.e. including 31 March 2008 and 31 March 2007. Further, erred in computing the arm's length price using the financial information of comparable companies available at the time of assessment proceedings, although such information was not available at the time when the Appellant complied with the transfer pricing regulations. 8. Inappropriate computation of transfer pricing adjustment on the total revenue of the Appellant from software licensing revenue segment instead of only on the value of international transactions Page | 5 ITA No.1567/Mum/2014 M/s SAS Institute (India) Private Ltd; A.Y. 2009-10 Erred on the facts and in circumstances of the case by computing transfer pricing adjustment on the total revenue of the Appellant pertaining to software licensing revenue segment for AY 2009- 10 instead of only on the value of international transactions. 9. Inappropriately not considering the operating margins of the Appellant based on the income offered and expenses claimed in the return of income Erred by not considering the operating margins of the Appellant from software licensing revenue segment based on the income offered and expenses claimed in the return of income after negating the impact of deferral of royalty and software licensing revenue sharing transactions. Other Grounds of appeal: 10. Non grant of tax deducted at source ('TDS') credit of Rs 1,04,54,206 Erred in granting credit for TDS at Rs 4,14,68,631 instead of Rs 5,19,22,837 and consequentially erroneously levying interest under section 234B of the Act. 11. Erroneous levy of interest under section 234B of the Act Without prejudice to the above grounds of appeal, even if the transfer pricing adjustment is sustained, the learned AO has erred in levying Page | 6 ITA No.1567/Mum/2014 M/s SAS Institute (India) Private Ltd; A.Y. 2009-10 interest under section 234B of the Act, without considering the fact that the addition on account of transfer pricing adjustment is due to difference of opinion and as at the due date of payment of advance tax by no means the Appellant could have estimated such adjustments and consequential tax on such adjustment. 12. Erroneous levy of penalty under section 271(1)(c) of the Act Without prejudice to the above grounds of appeal even if the transfer pricing adjustment is sustained, the learned AO has erred in proposing to levy penalty under section 271(1)(c) of the Act, without considering the fact that adjustment to transfer price is just on account of difference of opinion which has consequently resulted in an adjustment to income.” 02. The brief facts of the case shows that assessee is a company engaged in the business of software products and consultancy, filed its return of income on 30 th September, 2009, declared total income of ₹10,86,16,530/-. The book profit under Section 115JB of the Act was also shown at ₹3,33,10,219/-. The return of income was picked up for scrutiny. 03. As the assessee has entered into certain international transaction with its Associated Enterprises reference under Section 92CA(1) of the Act was made to the learned Transfer Pricing Officer being Dy. Commissioner of Income Page | 7 ITA No.1567/Mum/2014 M/s SAS Institute (India) Private Ltd; A.Y. 2009-10 Tax (OSD) 3(1), Mumbai. The learned Transfer Pricing Officer noted that assessee is wholly owned subsidiary of SAS Incorporation. It is engaged in the business of distribution of software products development by SAS Incorporation, USA. It is also providing professional services like, consulting, training to customers and software maintenance, etc. The assessee has entered into seven different international transactions. For purchase of manual and royalty payment, assessee adopted the CUP as the most appropriate method for benchmarking international transaction. For training fees and of other services assessee adopted Transactional Net Margin Method as most appropriate method. The learned Transfer Pricing Officer noted that as the assessee has engaged in the business of licensing and a similar segment of consultancy and training. The learned Transfer Pricing Officer asked the assessee to produce the segmental profit and loss account. According to that, the total net profit ratio of the assessee was (-) 2.16%. In the software licensing revenue segment it had a loss of 10.84% and in consultancy and training segment it is a profit of 26.52%. For consultancy and training segment assessee has selected five comparable companies whose average profit level indicator is OP/ OR of 18.33% and therefore, consultancy and training segment remuneration is considered at Arm's Length Price. For the software licensing segment, the assessee used Comparable Uncontrolled Price (CUP) for royalty paid and Transactional Net Margin Method for the other receipts. Assessee Page | 8 ITA No.1567/Mum/2014 M/s SAS Institute (India) Private Ltd; A.Y. 2009-10 selected six comparable companies whose margin was 22.8%, whereas the margin of the assessee was considered at 23.52% for services. Therefore, software licensing segment with respect to the manuals etc was considered at Arm's Length Price. The learned Transfer Pricing Officer questioned that software licensing and revenue segment has shown profit margin of -10.24%, which is much below the industry average and therefore, it should not be rejected. The assessee submitted that assessee used the comparables which were used in the same manner as last year. According to the learned Transfer Pricing Officer as per the last year, since the income and expenditure is directly related to the sales of software licensing, all the segment should be combined as these transactions are closely related. He used the comparable selected by the assessee whose margin was considered to be 22.8% and accordingly, made an adjustment of ₹14,67,22,782/- as per order under Section 92CA(3) of the Act dated 23 rd January, 2013. 04. Based on this, the draft assessment order was passed on 25 th February, 2013, determining the total income of the assessee at ₹25,53,39,310/-, against the return of income of ₹10,86,16,530/-. The assessee preferred an objection before the learned Dispute Resolution Panel-2, Mumbai, who passed direction on 29 th November, 2013. The assessee pleaded that the transaction by transaction approach adopted by the assessee in its transfer pricing study report has been wrongly rejected by the learned Transfer Pricing Officer. The learned Dispute Resolution Page | 9 ITA No.1567/Mum/2014 M/s SAS Institute (India) Private Ltd; A.Y. 2009-10 Panel held that the learned Transfer Pricing Officer and assessee both have agreed that Arm's Length Price in respect of software distribution licensing segment is required to be computed by adopting Transactional Net Margin Method as the most appropriate method. In nutshell and in subsistence, the objections of the assessee were rejected the adjustment under Section 92CA (3) of ₹14,67,22,782/- was retained. The assessment order was passed on 13 th January, 2014, determining the total income of the assessee at ₹25,53,39,310/-. The assessee is aggrieved with that and in appeal before us. 05. Though the assessee has raised 12 grounds of appeal, but in substance it is stated that, the co-ordinate Bench in assessee’s own case for A.Y. 2008-09 and 2010-11, has considered this issue. The learned Authorized Representative submitted that identical issue was considered where the learned Transfer Pricing Officer has not given any reason in rejecting the CUP method and resale price method adopted by the assessee in respect of royalty and other international transaction. He extensively referred to paragraph no.14 of the order dated 24 th February, 2016, for A.Y. 2008-09. He further stated that for A.Y. 2010-11, the co-ordinate Bench in case of the assessee has also followed the order for A.Y. 2008-09. He further referred to the direction of the learned Dispute Resolution Panel for A.Y. 2013-14, wherein in Para no.11.11, the use of the CUP method was even to be the most appropriate method. Similarly, for A.Y. 2014-15, the direction of A.Y. 2013-14 are followed. Therefore, the Page | 10 ITA No.1567/Mum/2014 M/s SAS Institute (India) Private Ltd; A.Y. 2009-10 matter needs to be sent back to the file of the learned Assessing Officer/Transfer Pricing Officer. 06. The learned Departmental Representative vehemently supported the order of the learned Transfer Pricing Officer/ Dispute Resolution Panel. 07. We have carefully considered the rival contention. We find that here the only dispute is with respect to the most appropriate method. The assessee has also adopted CUP as the most appropriate method. The learned Transfer Pricing Officer has used the TNMM for benchmarking royalty transactions. The identical issue arose in the case of the assessee for A.Y. 2008-09, as well as for A.Y. 2010- 11. This is the A.Y. 2009-10. In both the previous assessment year and subsequent assessment year, the co-ordinate Bench has sent the issue about most appropriate method back to the file of the learned Transfer Pricing Officer. Paragraph no.15 of the order of the co- ordinate Bench categorically deals with this issue as under. The order of the co-ordinate Bench reads as under:- “15. We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant paper books filed before us. The undisputed facts are that the TPO has not given any reasons for rejecting the CUP / RPA methods adopted by the assessee in respect of „royalty‟ and other international transactions. It is also a fact that the TPO travelled in the wrong presumption that the Page | 11 ITA No.1567/Mum/2014 M/s SAS Institute (India) Private Ltd; A.Y. 2009-10 assessee used TNMM method for benchmarking the transactions as evident from the language used in the order of the TPO. It is undisputedly wrong as the TP study indicates the application of different methods for different transactions by the assessee, which are already extracted and placed in the above paras of this order. The aggregation approach of benchmarking the international transactions by the TPO is not sustainable as per the today‟s legal position. It is a trait law that the transactions have to be independently benchmarked applying the appropriate method in benchmarking of the transactions. We also perused the submissions of the assessee before the TPO wherein it was categorically submitted by the assessee that the reasons for rejection of the CUP and RPA methods should be given to the assessee and the same is part of the submissions. But, either the AO or the TPO / DRP is bothered to furnish the same. In fact, as seen from para 7.3 of the DRP order, the onus is kept on the assessee by mentioning that the assessee agreed for substituting the TNMM method as an appropriate method, which is not proper. Considering the above deficiencies, inaccuracies and incompleteness, we are of the opinion the matter should be set aside to the file of the TPO / AO for fresh adjudication of the above referred Ground Nos. 8, 9 and 10. AO / TPO shall grant a reasonable opportunity of being heard to the assessee as per the set principles of natural justice. In the set aside proceedings, AO / TPO is directed not to resort repeating of the same additions Page | 12 ITA No.1567/Mum/2014 M/s SAS Institute (India) Private Ltd; A.Y. 2009-10 without passing a speaking order on the following issues which are connected to the grounds raised above. “1. Whether the CUP method, used by the assessee, is most appropriate one in respect of the assessee’s international transactions? If not, reasons for rejecting the same. 2. Whether the TNMM method, which is considered by the TPO, is the most appropriate method for benchmarking the software licensing revenue segment? If yes, reasons for considering the same? 3. Whether the transfer pricing adjustment should be made only to the value of the assessee’s international transactions with its AEs or on the total turnover of the software licensing revenue segment? 4. Any other relevant issue, if any.” 08. Therefore, respectfully following the decision of the co- ordinate Bench, we set aside the ground no.4 of the appeal back to the file of the learned Assessing Officer/ Transfer Pricing Officer with the similar direction as contained in the order of the ITAT for A.Y. 2008-09. Accordingly, all other grounds of appeal left unadjudicated. 09. The assessee has also raised some additional ground but same were not pressed and therefore, those are dismissed. Page | 13 ITA No.1567/Mum/2014 M/s SAS Institute (India) Private Ltd; A.Y. 2009-10 010. In the result, the appeal of the assessee is allowed for statistical purposes with above directions. Order pronounced in the open court on 26.07.2023. Sd/- Sd/- (KAVITHA RAJAGOPAL) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 26.07.2023 Sudip Sarkar, Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. BY ORDER, True Copy// Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai