BMC Software India P. Ltd Vs DCIT (ITAT Pune)
ITAT Pune held that charges of Primary Rate Interface doesn’t require human intervention and hence doesn’t qualify as fees for technical services. Accordingly, TDS not deductible u/s 194J of the Income Tax Act.
Facts-
Assessee challenged the disallowance of Primary Rate Interface (PRI) line charges paid to telecom companies amounting to Rupees 1,18,04,423 on account of non-withholding of taxes. AO held that it is a technical service and TDS has to be deducted u/s 194J of the Income Tax Act.
Conclusion-
In assessee’s own case, Pune Tribunal has held that charges of Primary Rate Interface doesn’t require human intervention and hence doesn’t qualify as fees for technical services.
In view of the aforestated judicial pronouncement where the addition on lease line charges have been deleted, respectfully following the same, on the same parity of reasoning this ground of appeal of the assessee is allowed and the A.O/T.PO is directed to delete addition on lease line charges from the hands of the assessee.
FULL TEXT OF THE ORDER OF ITAT PUNE
This appeal preferred by the assessee emanates from the findings of the D.R.P. dated 21-04-2021 for A.Y. 2016-17 as per the following original grounds of appeal.
Based on the facts and circumstances of the case, BMC Software India Private Limited (hereinafter referred to as ‘the Appellant’) respectfully craves leave to prefer an appeal under section 253(1)(d) of the Income-tax Act, 1961 (hereinafter referred to as ‘Act’), against the order dated 22 April 2021 (received on 22 April 2021) passed by the Additional/Joint / Deputy / Assistant Commissioner of Income Taxi Income-tax Officer, National e- Assessment Centre, Delhi (hereinafter referred to as ‘learned AO’) under section 143(3) r.w.s. section 144C(13) r.w.s. section 144B of the Act in pursuance of the directions dated 23 March 2021 issued by the Honorable Dispute Resolution Panel -3, WZ (hereinafter referred to as ‘Hon’ble DRP’), on the following grounds:
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 Objections in respect of transfer pricing adjustment
1. General ground challenging the transfer pricing adjustment of INR 44,64,54,953 consequential to non-consideration of comparability analysis as documented in the transfer pricing study report
Erred in making transfer pricing adjustment of INR 33,06,35,792 to Appellant’s international transactions in the nature of provision of software development services and of INR 11,58,19,161 to the international transactions in the nature of information technology enabled services (hereinafter referred to as ‘ITeS’) and not considering the comparability analysis documented in the transfer pricing study report for benchmarking analysis.
2. Non-consideration of comparability analysis as documented in the transfer pricing study report
Erred in law on facts and in circumstances of the case by not considering comparability analysis documented in the transfer pricing study report for the purpose of determination of arms-length price for benchmarking analysis.
3. Use of different turnover filter for identification of comparable companies
Erred in law on facts and in circumstances of the case in applying a upper turnover filter at 10 times the turnover of the Appellant and a lower turnover filter of 1/1 O” times the turnover of the Appellant, as against the turnover filter of INR 1 crores to INR 800 crores in case of provision of software development services (i.e. rejecting companies having turnover less than INR 1 crore and higher than INR 800 crores) and INR 1 crore to INR 350 crores in case of provision of ITeS (i.e. rejecting companies having turnover less than INR I crore and higher than INR 350 crores) applied by the Appellant for identifying the comparable companies.
4. Selecting inappropriate qualitative filters and applying certain filters on selective basis
Erred in selecting following inappropriate qualitative filters and also applying certain filters on selective basis:
Rejection of companies with less than 75% earnings from exports as against 25% earnings from export filter applied by the Appellant;
Rejection of companies with different accounting year;
Rejection of companies with forex spending greater than 75% of operating cost; Rejection of companies having employee cost less than 25% of the total cost; Rejection of companies having gross intangibles greater than 50% of operating revenue: and
Rejection of companies with less than 75% earnings from exports as against 25% earnings from export filter applied by the Appellant;
Rejection of companies with different accounting year;
Rejection of companies with forex spending greater than 75% of operating cost; Rejection of companies having employee cost less than 25% of the total cost; Rejection of companies having gross intangibles greater than 50% of operating revenue: and
Rejection of companies with related party income to operating income or related party expenses to operating expenses of more than 25% as against rejection of companies having more than 25% related party transactions (i.e. income as well as expenses) to total income filter applied by the Appellant;
5. Acceptance of companies having supernormal profits
Erred on facts and in circumstances of the case and in law by including companies having supernormal profits in the set of comparable companies in respect of international transactions pertaining to provision of software development services and provision of IT enabled services.
6. Rejection of certain comparable companies identified by the Appellant in the transfer pricing study report
Erred in rejecting certain comparable companies from the comparable set identified by the Appellant in the transfer pricing report in respect of international transactions pertaining to provision of software development services and ITeS.
7. Accepting certain additional companies as com parable in relation to provision of software development services and ITeS
Erred in accepting certain additional companies as comparable to the Appellant in relation to provision of software development services and ITeS.
8. Accepting MPS Ltd. as a comparable company to ITeS segment of the Appellant
Erred in accepting MPS Ltd. (company identified as comparable by the Appellant in ITP report but provided detailed contentions to reject the same after review of the financial statements for FY 2015-16) on account of it being functionally non-comparable to ITeS segment of the Appellant.
9. Erred in considering foreign exchange difference as non-operating in nature
Erred in treating the foreign exchange difference as non-operating in nature while computing the operating margin of the Appellant as well as comparables companies in the case of provision of software development services and ITeS segment.
10. Erred in rejecting Sundaram Business Services Ltd from the set of comparable companies in IT enabled services segment by stating that the said company is a persistent loss making.
Erred in rejecting Sundaram Business Services Ltd from the final set of comparable companies in IT enabled services segment by stating that the said company had incurred persistent loss, i.e. loss for 3 consecutive years. without appreciating the fact that the aforesaid company is not a persistent loss making company.
11. Non consideration of the directions of the Hon’ble DRP in relation to consideration of the rectified operating margins and working capital adjusted operating margins of the comparable companies pertaining to provision of software development services segment.
Erred on facts and in law by not giving effect to the directions of the DRP issued under section 144C of the Act in relation to consideration of rectified operating margins and working capital adjusted operating margins of the comparable companies pertaining to provision of software development services segment while passing the final assessment order under section 143(3) read with section 144C( 13) read with section 144B of the Act.
12. Non-consideration of adjustment for differences on account of functional and risk profile of comparable companies vis-a-vis the Appellant
Erred in comparing full-fledged risk bearing entities with the Appellant’s captive operations without making any risk adjustment for differences between the functional and risk profile of comparable companies vis-a-vis the risk profile of the Appellant.
II. Grounds of appeal in respect of disallowances/ additions other than transfer pricing adjustment
13. Erred in disallowance of Primary Rate Interface (PRI) Line charges paid to telecom companies amounting to INR 1,18,04,423 on account of non-withholding of taxes
Erred in disallowance of the charges paid to telecom companies such as Bharti Airtel, Tata Communications, and Vodafone Cellular under section 40(a)(ia) by treating the same as leased line charges and not appreciating the fact that the above charges are for standard PRI line charges, which require no human intervention and consequently, does not qualify as fees for technical services
14. Erred in disallowance of expenditure of INR 3,50,51,094 made pursuant to ESOP scheme floated by the Appellant’s parent company
Erred in disallowance of the expenses incurred pursuant to ESOP scheme treating the same as a capital item akin to securities premium and not appreciating the fact that these expenses are deductible under section 37 of the Act
III. Other grounds of appeal
15. Erroneous levy of interest under section 234B and 234C of the Act
Erred in levying additional interest under section 234B and section 234C of the Act of INR 11,33,09,568 and INR 3,37,970 respectively on account of unanticipated additions made to the total income of the Appellant on account of transfer pricing and corporate tax adjustment which 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.
16. Initiation of penalty proceedings under section 271 (1)( c) of the Act
Erred in initiating penalty proceedings under section 271(1)(c) of the Act without appreciating the facts that transfer pricing adjustment to the international transactions of the Appellant and corporate tax adjustment made is on account of difference of opinion as to application of selection criterion for selection of comparable companies, incoherent approach, interpretation of the provisions, interpretation of case laws etc.
IV Additional ground of appeal
17. Deduction in respect of education cess
On the facts and circumstances of the case and in law, the Appellant prays that the liability for education cess on Income-tax paid for the year ought to be allowed as a deduction while computing the total income.
2. At the very outset, the ld. Counsel for the assessee, submitted that with respect to grounds No. 1 to12 in the original grounds of appeal, they have been adjudicated as per the Advanced Pricing Agreement (‘APA’) entered between the assessee and the CBDT dated 15-12-2021. That after the outcome of APA the assessee has filed Modified Grounds of Appeal before the Tribunal. Now, in APA as per clause (2) the terms of the agreement have been spelt out as follows:
The agreement shall apply to consecutive five years commencing from previous year 2015-16 to previous 2019-20 (relevant to assessment years 2016-17 to 202021) (hereinafter referred to as “APA years”.
The Agreement shall also apply to consecutive four years commencing from previous year 2011-12 to 2014-15 (relevant to assessment years 2012-13 to 201516) (hereinafter referred to as “Rollback years”).
The covered transactions are given at para 3 vide para 3.1 onwards as follows:
A. Provision for software development services (including professional services)
B. Provision of information technology enables service;
C. Provision of sales support services;
D. Allocation of communication cost;
E. Purchase of fixed assets;
F. Recovery of expenses; and
G. Reimbursement of expenses.
The Arm’s Length Price (‘ALP’) of the transactions and the concerned issues are given at para 6 of the said agreement in sub-clause (a) and (b) as follows:
(a) The international transaction related to provision of software development services (including professional services) shall be considered to be at arm’s length for previous years 2011-12 to 2019-20 if the operating profit margin in relation to operating cost of the Applicant in each previous year is not less than 16.00%.
(b) The international transaction related to provision of information technology enables services shall be considered to be at arm’s length for previous years 2011-12 to 2019-20 if the operating profit margin in relation to operating cost of the applicant in each previous year is not less than 15.00%.
3. In this background the assessee further submitted as follows:
2. For your honour’s consideration it is submitted that BMC India had filed the captioned appeal against the additions made by the A.O on transfer pricing issues as well as corporate tax disallowances and the same is pending for adjudication with the Hon’ble ITAT. The details of the transfer pricing adjustment as well as corporate tax disallowances as per the final assessment order is provided below:
