Hewlett-Packard (India) Software Operation Pvt. Ltd Vs JCIT (ITAT Bangalore)
Conclusion: The ITAT in the case of Transfer Pricing observed that the exclusion and inclusion of comparable companies could be determined on basis of the Judgments of Yahoo Software Development (India) Pvt. Ltd. (2020) 115 taxmann.com 60 (Bang Trib) and Goldman Sachs Services Pvt. Ltd. (IT(TP)A No. 2355/Bang/2019. Also while dealing with the issue of capitalisation of software expenses it was held that “period of license” cannot be considered but the kind of software “system software or application software” shall be taken into consideration.
Facts: The assessee is a private limited company and engaged in the business of providing software development support services in the field of e-commerce, e-solutions, e-services, internet security and management etc. to its AEs. During the year under consideration the assessee filed return of income on 29.11.2015 declaring total income of Rs.197,11,40,320/- under normal provisions of the Act and book profits u/s.115JB of the Act at Rs.213,86,35,291. The case was selected for limited scrutiny under CASS and notice under Section 143(2) of the Act was duly served on the assessee. Since the assessee had international transactions the case was referred to the Transfer Pricing Officer (TPO) to determine the arm’s length price (ALP) of the international transactions the assessee has entered into with its Associate Enterprises (AE). The TPO made an adjustment of Rs.88,57,09,275/-. The Assessing Officer passed the draft assessment order incorporating the transfer pricing adjustment. The Assessing Officer further made an adjustment under Section 28(iv) of the Act for an amount of Rs.42,06,52,318/- towards the assets received by the assessee free of cost from its AEs. The Assessing Officer further made disallowance towards software expenses though allowed depreciation on the software expenses including those treated as capital asset in earlier years thereby arriving at the assessed income of Rs.256, 82,16,330. Aggrieved assessee raised its objections before the DRP. The DRP partially accepted the plea of the assessing on selection of comparable companies for determination of operating profit margin and directed the assessing officer to verify the nature of expenditure claimed with respect to software packages. Subsequently giving effect to the directions of the DRP and considering the various details furnished by the assessing the TPO recomputed the TP adjustment to ₹ 56,71,72,441 and the assessing officer by passing the final assessment order recomputed the disallowance on software expenses thereby the final assessed income was arrived at Rs.296,20,00,306. Aggrieved assessee is in appeal before the tribunal. The assessee has chosen Transactional Net Marginal Method (TNMM) to be the most appropriate method for determination of ALP. The operating profit and operating rate ratio has been taken as the profit level indictor in the TNMM analysis.
The TPO rejected the filters applied by the assessee and proceeded to apply new filters and selected comparables and then the TPO computed the TP adjustment. The learned A.R., with regard to the exclusion of the 4 comparable companies, submitted that all the four exclusions sought by the assessee is covered by the decision of the coordinate bench of the tribunal in the case of Yahoo Software Development (India) Pvt. Ltd. (2020) 115 taxmann.com 60 (Bang Trib). The ld AR further submitted that the reasons for exclusion of these companies by TPO/DRP is similar to the above case and therefore submitted that the decision of the coordinate bench in Yahoo Software (supra) is applicable in assessee’s case also.
The Hon’ble ITAT observed that the coordinate bench of the tribunal in the case of Yahoo Software Development (India) Pvt. Ltd (supra) has considered exclusion of the four comparable companies contended by the assessee and has held that the four companies shall be excluded. With regard to inclusion of 3 comparable companies as sought by the assessee the learned A.R. submitted that these companies have been held to be included as comparables in the decision of the coordinate bench of the tribunal in the case of Goldman Sachs Services Pvt. Ltd. (IT(TP)A No. 2355/Bang/2019. The Hon’ble ITAT followed the same and remit the matter of inclusion of the above three comparable companies to the file of TPO/A.O for examination.
On another issue of Capitalisation of Software Expenses, the assessee during the year under consideration has remitted a sum of Rs.1,78,18,565/- as expenses incurred towards software purchases. The AO disallowed the said amount by stating that the software purchases are perpetual and gave benefit of enduring nature to the assessee and should be treated as capital in nature. The AO allowed depreciation on the software treated capital in nature for an amount of Rs.89,78,862/- thereby making a disallowance of Rs.97,39,701/-. The DRP directed the AO to examine the nature of expenditure and if it is found that the expenses incurred were towards renewal of licence for application software for a period less than one year, the same may be allowed and if it is more than one year the same may be capitalised and depreciation can be allowed. Accordingly the AO called for the relevant details from the assessee and on perusal found that the software licence for an amount of Rs.18,15,263/- is for a period of less than one year and allowed the same as revenue expenditure as per the directions of the DRP and recomputed the disallowance accordingly.
The Hon’ble ITAT while placing its reliance in the case of CIT vs. IBM India Ltd. (2014) 43 taxxman.com 470 (Kar), wherein Hon’ble Karnataka High Court has dealt with the issue of payment made towards purchase of application software and have observed that the distinction of capital or revenue should be based on whether it is a system software or application software. Therefore it was that the distinction made by the DRP/AO based on the period of license is not tenable. The software purchased is system software or application software needs to be factually examined and therefore the matter was remitted to the AO.
Accordingly, the appeal of the assessee was partly allowed.
FULL TEXT OF THE ORDER OF ITAT BENGALURU
This appeal is against the final assessment order passed by Joint Commissioner of Income Tax, Special Range -3, under Section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the Act) dated 21.10.2019 for AY 2015-16.
2. The assessee raised grounds pertaining to the following issues: –
i. Ground Nos. 1 & 2 are general
ii. Ground No. 3: Rejection of the Transfer Pricing Study of the assessee.
iii. Ground No. 4: Use of multiple year data
iv. Ground No. 5: Filters and qualitative criteria applied by the appellant
v. Ground No. 6: Use of Information gathered under section 133(6) of the Act is inappropriate to object or reject the TP study undertaken by the appellant.
vi. Ground No. 7: Working capital adjustment and risk adjustment
vii. Ground No. 8: Other transfer pricing related grounds
viii. Ground No. 9: Assets received on free of cost basis
ix. Ground No. 10: Capitalization of software expenditure
x. Ground No. 11: Other matters
3. With regard to TP adjustment, out of the various grounds raised,during the course of hearing the learned A.R. pressed for exclusion and inclusions of certain comparables as listed below and also working capital adjustments:
Exclusions
(a) Mindtree Limited
(b) Larsen & Toubro Infotech Limited
(c) Persistent Systems Limited
(d) Infosys Limited
Inclusions
(a) I2T2 India Limited
(b) Evoke Technologies Limited
(c) Melstar Information Technologies Limited.
4. The assessee is a private limited company and is the wholly owned subsidiary of Compaq Computer Holdings Ltd., Mauritius and is ultimately held by Hewlett Packard Company, USA. The assessee is engaged in the business of providing software development support services in the field of e-commerce, e-solutions, e-services, internet security and management etc. to its AEs. During the year under consideration the assessee filed return of income on 29.11.2015 declaring total income of Rs.197,11,40,320/- under normal provisions of the Act and book profits u/s.115JB of the Act at Rs.213,86,35,291. The case was selected for limited scrutiny under CASS and notice under Section 143(2) of the Act was duly served on the assessee. Since the assessee had international transactions the case was referred to the Transfer Pricing Officer (TPO) to determine the arm’s length price (ALP) of the international transactions the assessee has entered into with its Associate Enterprises (AE). The TPO made an adjustment of Rs.88,57,09,275/-. The Assessing Officer passed the draft assessment order incorporating the transfer pricing adjustment. The Assessing Officer further made an adjustment under Section 28(iv) of the Act for an amount of Rs.42,06,52,318/- towards the assets received by the assessee free of cost from its AEs. The Assessing Officer further made disallowance towards software expenses though allowed depreciation on the software expenses including those treated as capital asset in earlier years thereby arriving at the assessed income of Rs.256, 82,16,330. Aggrieved assessee raised its objections before the DRP. The DRP partially accepted the plea of the assessing on selection of comparable companies for determination of operating profit margin and directed the assessing officer to verify the nature of expenditure claimed with respect to software packages. Subsequently giving effect to the directions of the DRP and considering the various details furnished by the assessing the TPO recomputed the TP adjustment to ₹ 56,71,72,441 and the assessing officer by passing the final assessment order recomputed the disallowance on software expenses thereby the final assessed income was arrived at Rs.296,20,00,306. Aggrieved assessee is in appeal before the tribunal.
5. During the year under consideration the assessee has entered into the following international transactions with its AEs: –
