Hewlett Packard (India) Software Operation Pvt. Ltd. Vs DCIT (ITAT Bangalore)
Summary: The Bangalore Bench of the Income Tax Appellate Tribunal considered the assessee’s appeal for assessment year 2016–17 against the final assessment order dated 31 March 2021. The assessee challenged a transfer-pricing adjustment of ₹1,18,75,36,269 relating to international transactions, disputed the selection and rejection of software-development comparables, and contested an adjustment on outstanding receivables. It also challenged disallowance of ₹18,18,00,000 in employee stock option plan (ESOP) expenditure under section 37 of the Income-tax Act, 1961.
In the software-development segment, the Tribunal examined functional comparability and followed decisions of coordinate benches concerning Larsen & Toubro Infotech Ltd., Persistent Systems Ltd. and Infosys Ltd. It directed exclusions and considered the inclusion of other disputed companies on the basis of the cited rulings and facts relevant to the year. Other general transfer-pricing grounds required no separate adjudication, while the ground relating to computation of margins was not pressed.
On receivables from associated enterprises, the assessee argued that its average collection period was short, that the contractual credit period was longer, and that no separate notional-interest adjustment was warranted. The Tribunal examined authorities concerning whether deferred receivables constitute a separate international transaction and the appropriate benchmarking of such balances, and gave directions in accordance with the legal principles discussed in its order.
Regarding ESOP expenditure, the Tribunal relied on the Karnataka High Court ruling in CIT v. Biocon Ltd. and coordinate-bench decisions recognising the deductibility of qualifying employee stock-option costs under section 37. It allowed the assessee’s relevant grounds, while the independent withholding-tax objections under section 195 were not separately adjudicated in the cited reasoning. Other corporate-tax grounds were not pressed; interest under sections 234B and 234C was consequential. The appeal was ultimately partly allowed for statistical purposes.
Cases Discussed
- EIT Services India Pvt. Ltd. v. DCIT, IT(TP)A No. 210/Bang/2021, order dated 22 August 2022 (ITAT Bangalore) — Relied upon in the examination of software-development comparables.
- ADP Pvt. Ltd., ITA Nos. 227 and 228/Hyd/2021, order dated 3 February 2022 (ITAT Hyderabad) — Considered in relation to the effect of amalgamation on comparability.
- Entercoms Solutions (P.) Ltd. v. ACIT, [2022] 134 taxmann.com 59 (ITAT Pune) — Cited on extraordinary events affecting comparable-company selection.
- CIT v. Biocon Ltd., [2020] 121 taxmann.com 351 (Karnataka High Court) — Relied upon concerning deduction of ESOP expenditure under section 37.
- PCIT v. AMD (India) Pvt. Ltd., ITA No. 274/2018, order dated 31 August 2018 (Karnataka High Court) — Discussed in connection with benchmarking deferred receivables.
- Advice America Software Development Centre Pvt. Ltd., IT(TP)A No. 2531/Bang/2017, order dated 23 May 2018 (ITAT Bangalore) — Cited on comparability of software-development companies.
- Saxo India Pvt. Ltd. v. ACIT, ITA No. 6148/Del/2015, order dated 5 February 2016 (ITAT Delhi) — Cited regarding Larsen & Toubro Infotech as a comparable.
- Novo Nordisk India Pvt. Ltd., [2014] 42 taxmann.com 168 (ITAT Bangalore) — Cited concerning ESOP expenses.
- Trilogy E-Business Software India Pvt. Ltd. v. DCIT, ITA No. 1054/Bang/2011, order dated 23 November 2012 (ITAT Bangalore) — Cited regarding onsite versus offshore software operations.
- Danfoss Industries (P.) Ltd., (2004) 268 ITR 1 (Authority for Advance Rulings) — Cited by the Assessing Officer on withholding-tax treatment and distinguished by the assessee.
