Parametric Technology (India) Private Limited, Bangalore V. DCIT, Bangalore

ITA 359/BANG/2016

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 1677 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 2 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 03-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MUZAFFAR HUSSAIN
• Assessee Lawyers: DR RAKESH GUPTA
• Keywords: Transfer pricing; Rule of consistency; TDS
• Section: 143(3); 144C

Judgement Text

1 IT(TP)A NO.359(B)/2016 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES : B, BANGALORE BEFORE SHRI N.V.VASUDEVAN, VICE PRESIDENT AND SHRI B.R.BASKARAN, ACCOUNTANT MEMBER ITA NO.359(BANG)/2016 (ASSESSMENT YEAR : 2011-12) M/S PARAMETRICS TECHNOLOGY PRIVATE LIMITED., 4 TH FLOOR, PHOENIX TOWERS, NO.16 & 16/1, MUSEUM ROAD, BANGALORE-560 025 PANNO.AABCP2629J APPELLANT VS THE DEPUTY COMMISSIONER OF INCOME CIRCLE-5(1)(2), 2 ND FLOOR, BMTC BUILDING, KORAMANGALA, BANGALORE RESPONDENT APPELLANT BY : DR. RAKESH GUPTA, ADVOCATE & SHRI PIYUSH JAIN, CA REVENUE BY : SHRI MUZAFFAR HUSSAIN, CI T DATE OF HEARING : 20-0 2-202 DATE OF PRONOUNCEMENT : 13-05-2020 O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER : THE APPEAL OF THE ASSESSEE IS DIRECTED AGAINST TH E ASSESSMENT ORDER DATED 22-12-2015 PASSED BY THE ASS ESSING OFFICER U/S 143(3) R.W.S 144C OF THE ACT FOR ASSESS MENT YEAR 2 IT(TP)A NO.359(B)/2016 2011-12 IN PURSUANCE OF DIRECTIONS GIVEN BY LD DISP UTE RESOLUTION PANEL (DRP). 2. THE ASSESSEE IS AGGRIEVED BY THE TRANSFER PR ICING ADJUSTMENT MADE IN RESPECT OF PAYMENT MADE TO ITS A E TOWARDS MAINTENANCE SERVICES RELATING TO SOFTWARE LICENSES. 3. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSI NESS OF MARKETING OF SOFTWARE LICENSE OF ITS AE, SALES SUPP ORT SERVICE, MAINTENANCE OF SOFTWARE, CONSULTING AND TRAINING AC TIVITIES. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE H AS PURCHASED SOFTWARE LICENCES FROM ITS AE NAMED PTC, USA FOR RESALE IN INDIA. IT HAS ALSO ENTERED INTO MAINTENA NCE SERVICES WITH ITS CUSTOMERS WHO PURCHASED THE SOFTWARE LICEN SES. THE ASSESSEE HAS REMITTED 40% OF THE SALES REALISATION TO ITS AE TOWARDS THE COST OF PURCHASE OF SOFTWARE. IT HAS AL SO REMITTED 40% OF THE MAINTENANCE CHARGES COLLECTED FROM ITS C USTOMERS TOWARDS MAINTENANCE OF SOFTWARE TO ITS AE. THE DIS PUTE HERE IS RELATED TO THE AMOUNT REMITTED BY THE ASSESSEE TO I TS AE TOWARDS MAINTENANCE CHARGES. 4. THE ASSESSEE SUBMITTED THAT THE MAINTENANCE SERVICES ARE CLOSELY LINKED TO SALE OR DISTRIBUTION OF SOFTWARE LICENSES. ACCORDINGLY THE ASSESSEE BENCH MARKED THE ENTIRE TR ANSACTIONS BY AGGREGATING THEM UNDER TNMM METHOD. THE TPO ACC EPTED THE TNMM METHOD FOR SALE OF SOFTWARE LICENSES AND H ELD THAT THE PAYMENT MADE BY THE ASSESSEE TOWARDS PURCHASE OF SO FTWARE LICENSES IS AT ARMS LENGTH. WITH REGARD TO MAINTEN ANCE SERVICES, THE TPO TOOK THE VIEW THAT THE SAME IS IN THE NATUR E OF PROVIDING TECHNICAL SERVICES. ACCORDINGLY, THE TPO TOOK THE VIEW THAT THE 3 IT(TP)A NO.359(B)/2016 SAME SHOULD BE BENCHMARKED SEPARATELY. HE ALSO RE- CHARACTERISED THE TRANSACTIONS AS IN THE NATURE OF PROVISION OF TECHNICAL SERVICES. AFTER EXAMINING THE FUNCTIONS P ERFORMED BY THE ASSESSEE AND ITS AE IN RESPECT OF MAINTENANCE A CTIVITIES, THE TPO TOOK THE VIEW THAT THE PAYMENT OF 40% OF MAINTE NANCE CHARGES IS EXCESSIVE. THE TPO ANALYSED THE EXPLANA TIONS GIVEN BY THE ASSESSEE AND TABULATED THE SAME AS UNDER ALO NG WITH HIS REMARK:- SL. FUNCTION REMARKS REMARKS OF TPO 1 SIGNING ANNUAL MAINTENANCE AGREEMENT WITH CUSTOMER ASSESSEE APPROACHES THE CUSTOMER WHO HAS PURCHASED SOFTWARE FOR RENEWING MAINTENANCE CONTRACT. RENEWAL IS DONE BY ASSESSEE. TAXPAYER PURSUES THE CUSTOMER, REDRESSES GRIEVANCES ETC. SO AS TO RETAIN THE CUSTOMER. 5% WEIGHTAGE IS GIVEN TO IT. 2 FIRST LEVEL REMOTE SUPPORT SERVICE TELEPHONIC SUPPORT, WEB BASED ONLINE SUPPORT BY APPLICATION ENGINEERS AND SUPPORT ENGINEERS DONE BY TAXPAYER. NO FUNCTION OF AE. TAXPAYER PROVIDES THIS SUPPORT FROM 8M TO 5PM FROM MONDAY TO FRIDAY. IT AS TO MAINTAIN A RUNNING CALL CENTRE, WHICH IS THE CORE ACTIVITY IN MAINTENANCE SERVICE PROVISION. CALL CENTRE. EMPLOYEES AND SUPPORT ENGINEERS ARE MAINTAINED BY TAXPAYER. 60% OF TOTAL MAINTENANCE SERVICE FEES RECEIVED IS FOR TH IS FUNCTION. 3 SITE VISIT TO RESOLVE DEFECTS/ERRORS PERSONNEL OF TAXPAYER VISIT CUSTOMER TO RECTIFY ERRORS WHEN REMOTE SUPPORT SERVICE DOES NOT WORK. THEY ALSO VISIT TO PROVIDE GENERAL MAINTENANCE SERVICES. NO FUNCTION OF TAXPAYER. TAXPAYERS APPLICATION ENGINEERS ALSO VISIT THE PREMISE OF CUSTOMERS TO DEBUG ANY PROBLEMS. TAXPAYER HAS TO MAINTAIN SUCH ENGINEERS AND SEND THEM, AT ITS EXPENSE, TO VARIOUS SITES IN 4 IT(TP)A NO.359(B)/2016 DIFFERENT METRO CITIES OF INDIA FOR SITE VISIT. 25% WEIGHTAGE IS GIVEN TO THIS FUNCTION. 4 THIRD LEVEL SUPPORT WHEN APPLICATION ENGINEERS CANNOT RESOLVE ERRORS TAXPAYER ACTS AS FACILITATOR/COORDINATOR BETWEEN CUSTOMER AND AE.AE RECEIVES REQUESTS WHEN TAXPAYERS PERSONNEL CANNOT RESOLVE THE ERROR AND RESOLVES IT. THE AE PERFORMS VALUABLE FUNCTION OF GIVING ADVICE TO TAXPAYER WHEN THE ERROR IS DUE TO VERY TECHNICAL REASON. USUALLY SUCH ERROR IS DUE TO PROBLEMS IN BASIC ARCHITECTURE/ ALGORITHM OF THE SOFTWARE. SO THE MATTER IS REFERRED TO THOSE ENGINEERS WHO HAD DEVELOPED THE SOFTWARE. IT IS A RARITY IN RELATION TO ALL ERRORS COMPLAINTS RECEIVED BY TAXPAYER. IT ALSO BENEFITS THE AE SINCE SUCH SERIOUS DEFECT ACT AS FEEDBACK; SO THAT THE AE CAN MODIFY THE DEFECTS BY A SERVICE PATCH OR NEW VERSION. 10% WEIGHTAGE IS GIVEN TO THIS FUNCTION. ACCORDINGLY, THE TPO TOOK THE VIEW THAT THE REVENUE FROM MAINTENANCE SERVICES SHOULD BE ALLOCATED BETWEEN TH E ASSESSEE AND ITS AE IN THE RATIO OF 90 : 10. ACCORDINGLY HE DETERMINED THE ALP OF PAYMENT OF MAINTENANCE SERVICES AT 10% OF TH E REVENUE REALISATION AND ACCORDINGLY MADE TRANSFER PRICING A DJUSTMENT OF RS.5,09,90,962/-. 5. THE LD DRP UPHELD THE SAME WITH THE FOLLOWING OBSERVATIONS:- 5 IT(TP)A NO.359(B)/2016 4.2 THE PROFIT SPLIT METHOD (PSM) IS USED WHERE THE INCOME ARISING OUT OF ANY PARTICULAR TRANSACTION OR CLASS OF TRANSACTIONS IS TO BE SPLIT BETWEEN THE PARTIES TO THE TRANSACTION. SINCE IN THE TRANSACTION RELATING TO MAINTENANCE SERVICES THE ASSESSEE AND AE WERE INVOLVED, PSM IS THE MOST APPROPRIATE METHOD TO FIN D OUT THE RATIO IN WHICH THE INCOME NEEDS TO BE SPLIT BET WEEN THE TWO. THE TPO HAS RIGHTLY DIVIDED THE MAINTENAN CE SERVICES INTO DIFFERENT TASKS OR FUNCTIONS AND ALSO DETERMINED THE NATURE OF RESPONSIBILITY OR FUNCTION S PERFORMED BY EACH PARTY. MAXIMUM WEIGHT WAS GIVEN TO THE CORE ACTIVITY AND THEN REVENUE WAS SPLIT BETWEE N PARTIES ON THE BASIS OF THESE TASKS. SO THERE DOES NT APPEAR TO BE ANY INFIRMITY IN THE ORDER OF THE TPO. ... EVEN THOUGH THE ASSESSEE HAS COUNTERED THE OBSERVAT IONS MADE BY THE TPO WITH REGARD TO THE SERVICES RENDERED BY THE ASSESSEE AND ITS AE, YET THE LD DRP TOOK THE VIEW THAT THE A SSESSEE HAS FIRST TIME MADE THE FRESH CLAIM BEFORE IT THAT THE MAJOR SERVICES ARE RENDERED BY ITS AE. ACCORDINGLY, THE LD DRP RE JECTED THE EXPLANATIONS OF THE ASSESSEE AND CONFIRMED THE TRAN SFER PRICING ADJUSTMENT. 6. BEFORE US, THE LD A.R SUBMITTED THAT THE MAI NTENANCE SERVICES ARE CLOSELY LINKED WITH THE DISTRIBUTION O F SOFTWARE LICENCES, WHICH ARE OWNED BY ITS AE. HE SUBMITTED THAT IN THE TRADE CIRCLES, IT IS UNDERSTOOD THAT THE DISTRIBUTI ON ACTIVITY IS COMBINED WITH MAINTENANCE SERVICES ALSO. HENCE THE CORE TECHNICAL PROBLEMS COULD BE RESOLVED ONLY BY ITS AE . HE 6 IT(TP)A NO.359(B)/2016 SUBMITTED THAT THE TPO HAS ACCEPTED PAYMENT OF 40% OF SALES REALISATION ON SALE OF SOFTWARE LICENSES TO BE AT A RMS LENGTH. HENCE, HE WAS NOT JUSTIFIED IN SEGREGATING THE MAIN TENANCE SERVICES, RE-CHARACTERISING IT AS TECHNICAL SERVICE S AND BENCH MARKING THE SAME UNDER PROFIT SPLIT METHOD. HE SUB MITTED THAT THE LD DRP WAS NOT JUSTIFIED IN NOT CONSIDERING THE EXPLANATIONS OF THE ASSESSEE IN AN OBJECTIVE MANNER. 7. THE LD A.R FURTHER SUBMITTED THAT THE ASSESS EE HAS BEEN CONSISTENTLY BENCHMARKING THE TRANSACTIONS IN ALL T HE YEARS UNDER TNMM METHOD BY COMBINING BOTH SALE OF SOFTWAR E LICENSES AND MAINTENANCE SERVICES. THE ASSESSEES METHOD HAS BEEN ACCEPTED BY THE TPO IN THE IMMEDIATELY PRECEDI NG YEAR AND IN THE SUCCEEDING YEAR. HENCE THERE IS NO REASON F OR THE TAX AUTHORITIES TO TAKE A DIFFERENT VIEW IN THIS YEAR A LONE. BY PLACING RELIANCE ON THE DECISION RENDERED BY HONBLE SUPREM E COURT IN THE CASE OF RADHASWOMY SATSANGH (193 ITR 321), THE LD A.R SUBMITTED THAT THE PRINCIPLE OF CONSISTENCY SHOULD HAVE BEEN FOLLOWED BY THE TAX AUTHORITIES. 8. THE LD D.R SUBMITTED THAT THE TPO HAS FOUND THAT THE MAINTENANCE SERVICES ARE SEPARATE FUNCTIONS. THE T RANSFER PRICING OFFICER HAS FURTHER ANALYSED THE NATURE OF SERVICES PERFORMED BY THE ASSESSEE AND ITS AE AND ACCORDINGL Y ARRIVED AT THE CONCLUSION THAT PAYMENT OF 10% OF THE MAINTENAN CE CHARGES COLLECTED BY THE ASSESSEE WOULD BE AT ARMS LENGTH A S PER FUNCTIONS PERFORMED BY EACH OF THEM. HE SUBMITTED THAT THE ASSESSEE HAS, HOWEVER, GIVEN DIFFERENT KIND OF EXPL ANATION BEFORE LD DRP AND HENCE THE LD DRP HAS REJECTED THE SAME. 7 IT(TP)A NO.359(B)/2016 9. WE HEARD THE PARTIES AND PERUSED THE RECORD. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DISTRIBUTION OF SOFTW ARE LICENCES OF ITS AE. THE ASSESSEE HAS SUBMITTED THAT THE SOFTWA RE LICENSES ARE DISTRIBUTED ALONG WITH ONE YEAR FREE MAINTENANC E SERVICES. AFTER COMPLETION OF ONE YEAR PERIOD, THE CUSTOMER I S FREE TO ENTER INTO A SEPARATE CONTRACT FOR MAINTENANCE SERVICES O N PAYMENT OF AGREED FEES. THE AMOUNT SO COLLECTED IS SHARED BET WEEN THE ASSESSEE AND ITS AE. THE ASSESSEE HAS RETAINED 60% AND THE BALANCE 40% WAS PAID TO ITS ASSOCIATED ENTERPRISE. THE TPO HAS RESTRICTED THE PAYMENT MADE TO AE TO 10% BY HOL DING THAT 10% SHALL BE THE ALP OF THE TRANSACTIONS. THE SAME WAS UPHELD BY LD DRP. 10. IT IS THE SUBMISSION OF THE LD A.R THAT THE ASSESSEE HAS BEEN CONSISTENTLY MAKING PAYMENT OF 40% OF AMOUNT R EALISED TOWARDS MAINTENANCE SERVICES TO ITS AE YEAR AFTER Y EAR. THE LD A.R ALSO TOOK US TO THE ORDERS PASSED BY TPO IN AY 2010-11, ITS TP STUDY FOR THAT YEAR IN SUPPORT OF HIS SUBMISSION S. THE LD A.R FURTHER SUBMITTED THAT THE TPO HAS ACCEPTED THE PAYMENT OF 40% OF MAINTENANCE SERVICES BY THE ASSESSEE TO ITS AE IN AY 2012-13 ALSO. ACCORDINGLY HE HAS CONTENDED THAT TH ERE WAS NO REASON TO TAKE A DIFFERENT VIEW IN THIS YEAR ALONE. 11. THE ASSESSEE HEREIN IS THE DISTRIBUTOR OF S OFTWARE LICENSES OF ITS AE. HENCE THERE SHOULD NOT BE ANY DISPUTE T HAT CORE TECHNICAL PROBLEMS COULD ONLY BE RESOLVED BY ITS AE . UNLESS PROPER AND APPROPRIATE MAINTENANCE SERVICES ARE PRO VIDED TO ITS CUSTOMERS, IT WOULD BE DIFFICULT TO MARKET THE SOFT WARE LICENCES. HENCE THERE IS MERIT IN THE CONTENTIONS OF THE ASSE SSEE THAT THE 8 IT(TP)A NO.359(B)/2016 DISTRIBUTION OF SOFTWARE LICENSES AND THEIR MAINTEN ANCE ARE INTER-LINKED. ACCORDINGLY, WE ARE INCLINED TO AGRE E WITH THE CONTENTIONS OF THE ASSESSEE. HENCE WE ARE OF THE V IEW THAT THE TPO WAS NOT JUSTIFIED IN VIEWING MAINTENANCE SERVIC ES AS SEPARATE FROM THE DISTRIBUTION ACTIVITY. WE NOTICE THAT THE ASSESSEE AND ITS AE HAVE AGREED THAT THE ASSESSEE S HALL MAKE PAYMENT OF 40% OF THE REVENUE REALISED ON SALE OF S OFTWARE LICENSES AND ON ENTERING INTO MAINTENANCE CONTRACTS . THE LD A.R HAS FURTHER POINTED OUT THAT THE ABOVE METHOD O F SHARING THE REVENUE HAS BEEN ACCEPTED TO BE AT ARMS LENGTH UNDER TNMM METHOD IN THE IMMEDIATELY PRECEDING YEAR AND SUCCEEDING YEAR. HENCE WE AGREE WITH THE CONTENTIO NS OF THE ASSESSEE THAT THERE IS NO REASON TO TAKE A DIFFEREN T VIEW IN THIS YEAR ALONE BY RE-CHARACTERISING THE PAYMENT RELATIN G TO MAINTENANCE SERVICES ALONE. ACCORDINGLY, WE SET AS IDE THE ORDER PASSED BY THE AO/TPO IN THIS REGARD. ACCORDINGLY WE DIRECT THEM TO DETERMINE ALP OF TRANSACTION UNDER TNMM MET HOD BY AGGREGATING THEM. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE I S ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 13/0 5/2020. SD/- SD/- (N.V.VASUDEVAN) (B.R.BASKARAN) VICE PRESIDENT ACCOUNTANT MEMBER DATED: 13/05/2020. * AM / DESAI S MURTHY 9 IT(TP)A NO.359(B)/2016 COPY OF THE ORDER FORWARDED TO: 1.APPELLANT; 2.RESPONDENT; 3.CIT; 4.CIT(A); 5. DR 6. ITO (TDS) 7.GUARD FILE BY ORDER ASSTT.REGISTRAR