SAP INDIA PRIVATE LIMITED,BANGALORE vs. JURISDICTIONAL ASSESSING OFFICER - DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 6(1)(1), BANGALORE

The learned Transfer Pricing Officer (TPO) computed the Profit Level Indicator (PLI) of the assessee and determined it to be 6.18% for the distribution activity and 83.88% for the consultancy activity. Upon examining the software and services distribution segment, the TPO rejected the assessee’s transfer pricing study report on the grounds that the Transfer Pricing Study Report (TPSR) failed to meet the filters adopted by the assessee and relied on data available only as of 1 April 2020. Consequently, the TPO conducted a fresh search and initially examined eight comparable companies, which were subsequently rejected for not meeting the metrics applied by the TPO Using revised filters, the TPO conducted a search on the Prowess database on 29 May 2023 and identified 12 comparable companies. The margins of these companies ranged from the 35th percentile at 8.37% to the 65th percentile at 16.09%, with a median margin of 10.13%. After inviting objections from the assessee, the TPO finalized a set of 11 comparable companies, with the 35th percentile margin at 9.02%, the 65th percentile margin at 16.09%, and the median margin at 11.08%. Based on this analysis, the TPO computed a shortfall of ₹1,813,813,200 in the distribution segment.

During the transfer pricing audit, the learned Transfer Pricing Officer (TPO) observed that there was a delay in the receipt of payments from the assessee’s associated enterprises beyond the agreed contractual terms. He concluded that such delay constituted a separate international transaction. Accordingly, the TPO determined that interest should be levied on the outstanding receivables and, applying the LIBOR rate of 6.818%, computed an interest adjustment amounting to ₹41,195,410. Consequently, an order under section 92CA (3) of the Income-tax Act was passed.

Based on this, the draft assessment order under section 144C (1) of the Act was issued on 29 August 2023, incorporating a total transfer pricing adjustment of ₹1,855,008,610 and assessing the total income of the assessee at ₹11,825,669,920. 08. The assessee approached the Dispute Resolution Panel (DRP), which issued its directions on 14 May 2024. Pursuant to these directions, the transfer pricing adjustment was revised from ₹1,813,813,200 to ₹1,704,986,366. However, no relief was granted in respect of the adjustment pertaining to interest on overdue receivables. 09. Consequently, the final assessment order was passed by the learned Assessing Officer on 18 June 2020, determining the total income of the assessee at ₹11,716,843,086. The assessee is in appeal against the said assessment order.

Though in the grounds of appeal

The learned CIT DR vehemently supported the orders of the learned lower authorities and submitted that the exclusion of Designtech systems private limited, Quick heal technologies Ltd and Tally solutions private limited has been dealt with by the learned TPO as well as the learned DRP. Further if the margins taken by the learned TPO of Compucom software Ltd is required to be adjusted, the issue may be restored back to the file of the learned AO for correction. With respect to the claim of the assessee that interest overdue receivable needs to be computed only after the set off of dues payable to associated enterprises cannot be accepted because overdue receivable becomes a separate international transaction which needs to be benchmarked. Further the outstanding payable may be within the due date also and therefore also it cannot be set off against each other.

We have carefully considered the rival contention and perused the orders of the learned lower authorities.

Regarding correct margin of Compucom Software Limited, we find that the learned transfer pricing officer has passed an order giving effect to the direction under section 144C of the learned dispute resolution panel on 20 May 2024. We find that as per para No 2.3 the learned DRP has directed the learned TPO to adopt the figure for the learning solutions segment and compute the segmental margin. The answer of the learned that TPO is that that only the TPO has adopted the figures for the learning solutions segment only and computed the segmental margin. To this the learned authorised representative has drawn our attention to the adjustment of trading of software segment comparable post DRP direction at serial No. 5 of the table wherein the computer, software Ltd has been shown the weighted average margin of 10.68%. The learned authorised representative stated that this margin is the Consolidated margin and not only be segmental margin of that company with respect to the learning solutions. It was submitted that assessee has also provided the margin computation of the learning solutions segment of that company at page No. 1363 – 1364 of the paper books along with the relevant annual report references corresponding to the numbers stated therein. According to the assessee the margin of the comparable company is (-) 1.81%. We direct the learned AO/TPO to adopt the margins of only the learning solutions segment after proper verification. Accordingly ground No. 2.2 of the appeal of the assessee is allowed with above directions.

In the software distribution segment, the margin computed by the assessee by adopting the transactional net margin method is 6.18% whereas the learned transfer pricing officer has considered the median margin of 11.08% and computed the adjustment of ₹ 1,813,813,200/–.

The functions performed by the SAP India Ltd in the distribution segment is that in terms of its software distribution agreement entered into with SAP SE, assessee markets a range of SAP products and provides support services to independent customers in India. The support services provided on SAP products include maintenance services for the products licensed, which includes information on updates, 24- hour online customer support services. Assessee obtained a non- exclusive license to use, market and sublicense the software products in India. It also pays royalty to the parent for these sublicensing of software and maintenance services provided to the end-user, to compensate it for the right to sublicense and use of the intellectual property in the software developed by parent. Assessee has been granted permission by the Secretariat for Industrial Assistance, government of India, permitting payment of royalty for software licensing and maintenance revenue to AE. Assessee performs the sales activity of customer lead identification and developing probable client contact for sale of products in India. It enters into an end-user's license agreement with its Indian customers for sale or sublicense of the products. It also engages into marketing and advertisement activity wherein assessee maintains qualified salesforce that together with its partners sales those products in India. This sales team is responsible to undertake the activities related to performing presales activities, carrying out demonstration of product, price negotiation, signing of contracts, delivery of software, installation, sales support services and advertisement and promotion of products in India. The advertising activities undertaken by the assessee include designing product brochure, deciding the medium of advertisement and developing advertising content for the product. The parent company provides Indian entity with technical, advertising, and promotional literature with respect to the software products. The parent company provides an indicative price range for the products and based on the same Indian entity identifies and negotiates with the customer for the sale of such products. The architectural team of assessee understands the requirement of the client and suggest appropriate product architecture based on the client requirements. SAP provides assessee with the access to its software products on a server, assessee records and replicates that software on blank computer desk to produce the software for sale to customers in India. The assessee also undertakes integration of different modules into their final product. Post-integration the assessee undertakes product testing and marketing the product ready for use in the form of a computer disk for the end-user. Assessee also performs quality control on the products reproduced and it to be distributed and sublicense the same in India. As per the sales and distribution activities, as per the terms of end-user license agreement, software is delivered to the customers either on computer disk or downloaded directly by the customer. Assessee also provides maintenance services to the products licensed which includes information on updates and 24-hour online customer support services. It also provides consultancy services to independent customers as part of the distribution of the products which includes the implementation of software systems, customisation of software products and business solutions. The assessee also provides the training services by developing training module specific to domain and business areas and conducts training on products to both the working professionals and graduating college students. The training programs are conducted with an objective of creating resources to cater to industry requirement of the product. The training is imparted by experienced practising SAP consultants with Fortune and SIP certified instructors, having in-depth knowledge, project implementation experience and a proficient teaching skill. Assessee also partners with various educational institutes who cater to the needs of industrial standards offers a varied level of courses. It has also different kind of module of training for the same. Thus, the functions performed by the assessee of distribution of SAP products in India is presale activity, marketing and advertisement, pricing, product customisation, replication of SAT software, quality control, sales and distribution, maintenance services, consultancy services and training services. This is extracted from paragraph No. 6.2.2 of the transfer pricing study report. This shows that the assessee is not a simple distributor but provides the host of activity which enables the sale of SAP products in India.

The assessee has challenged the inclusion of Designtech systems private limited which has a margin of 11.46%, Daffodil software private limited which has a margin of 16.09%, Quick Heal technologies Limited having a margin of 32.71% and Innovana Think Labs Limited having a margin of 34.25% and Tally solutions private limited having a margin of 40.06%.

While considering the comparability of Designtech systems private limited the assessee submitted that it is functionally dissimilar as it is carrying on the business of computer programming, consultancy, and other related services. The comparable is also involved in providing high quality design and product development services in the engineering industry and the expertise in computer-aided design and computer added machine services as per the website extract. Accordingly, the assessee submitted that this comparable is not functionally like the distribution function performed by the assessee and therefore it should not be included. It was further submitted that the comparable does not maintain segment information by segregating revenue generated between the provision of engineering design services and sale of products. Therefore, it cannot be considered comparable with the assessee which is only engaged in software distribution activity.

The learned transfer pricing officer commented at page No. 20 stating that this company is into traded goods including software licenses and is functionally similar. It has only one segment and therefore no segmental information as required.

When the issue was raised before the learned dispute resolution panel, at paragraph No. 7.1.5 it was held that as per the annual report the companies engaged in business as my, sale, lease, install, import and export all kinds of computer software, software technology and hardware technology and to carry on the business of consultancy and training in relation to software and hardware technology in respect thereof therefore it is functionally comparable.

Assessee has produced the extract of the annual accounts of this company at page No. 1 – 9 of the paper books. We have carefully considered the same and find that the company is engaged in the business as buy, sale, lease, install, import, export, distribute, market and deal in all kinds of computer softwares, software technology and hardware technology and to carry on business of consultancy and training in relation to software and hardware and the technology in respect thereof. Its income stream is revenue from sale of products and revenue from sale of services. The website extract is provided to show us that it is engaged in integrating augmented and mixed reality in their processes. We find that the functions performed by the assessee are more complex and therefore this company functionally it is comparable. Further the sale of products and sale of services are two segments of the assessee as it also provides to training similarly the comparable company has also sale of products and sale of services. The description of the business also shows it near to the distributor in relation to the software and hardware technology. Therefore, we do not find any infirmity in the order of the learned TPO or the learned dispute resolution panel in including the above company in the comparability analysis. Thus, this comparable is rightly included.

The second comparable that is requested for exclusion is daffodil software private limited. The claim of the learned authorised representative is that the above company is majorly software development and high research and development high employee cost company, and it does not have the segmental data available and therefore it should be excluded.

The TPO has considered this explanation and held that the companies into design and development services of software applications including customised and packaged software which is for the purposes of trading thus this company is functionally like the taxpayer.

The learned dispute resolution panel also on the similar line held it to be comparable is the revenue from sale of product is ₹ 63.60 crores out of the total revenue of 65.83 crores thus the sale of product is more than 96% and held it to be comparable.

Before us also the assessee has repeated the same submission. It was further stated that the employee benefit expenditure is almost 67% of the total expenses and from that it was submitted that it is different to the distribution function and therefore could not have been compared with the assessee.

On careful consideration of the annual report submitted by the assessee at page No. 10 – 15 of the paper books we find that the company derives its revenue from sale of third-party products and licenses and provision of software development services. We also find that it is into the similar line of the business as the assessee is into. Further the claim of the assessee that it has incurred 68% of the total cost towards the employee benefit expenses could not be considered for exclusion of the above comparable company as assessee as well as the learned TPO has not taken it as a filter. It is also not shown by the assessee that what is the cost of employee expenditure of the assessee. In view of this we do not find any infirmity in the order of the learned AO/TPO and the learned dispute resolution panel in selecting this comparable.

The third comparable that is contested as Quick heal technologies Ltd the assessee objected to the same before the learned transfer pricing officer stating that it is into the diversified business activities and segmental information is not available, it owned significant intellectual property rights and the margin computation are erroneous.

The learned transfer pricing officer held that it is a well-known company into distribution of security software hence it is functionally comparable. He further held that because of the brand value or intangibles unless the impact the profit margin could not be the reason to exclude a comparable.

The learned dispute resolution panel also held that security software products sold are 99.64% of the total operating revenue and further the company is engaged in the business of providing security software products therefore it is functionally comparable to the assessee.

Before us, the assessee has stated that the company is engaged into providing diverse services apart from distribution of software products and is also engaged in carrying out software development, research and development and other software support activities. The assessee also stated that research and development expenditure made by the company were around 19% of the total revenue and that research and development team is also approximately of 340 people. It was further stated that this company is also engaged in providing training and running educational institutes. It was further stated that it owns a significant intellectual property right and therefore the same company cannot be held to be comparable.

We have considered the submission of the assessee and look that the annual accounts submitted before us at page No. 16 – 24 of the paper books we find that this company is licensing its own product for security, and it is not a distributor of product. No doubt assessee also provides training and also engaged in educational activities and this company is also engaged in the similar activities but because of the reason that it has its own products which is been licensed to the customer whereas the assessee does not have its own product but it is a product of its parent which is improvised, customised and sold to its client. Therefore because of the difference of this function only we direct the learned transfer pricing officer to exclude this company from comparability analysis.

The assessee has also asked for exclusion of Innovana Think Ltd stating that it is a software development company and its research and development activities, and ownership of intellectual property rights and absence of any segmental data makes it not comparable. The similar arguments were raised before the learned TPO wherein it the learned transfer pricing officer held that its entire revenue is from software sales in this company is functionally like the taxpayer.

The learned dispute resolution panel also held that the revenue from sale of software is ₹ 40.73 crores against total revenue of ₹ 42.58 crores which is more than 95% of the total revenue which consist of other income and finance income also. As the revenue from the sale of products are more than 95% there is no need of any segmental data and therefore the above company was held to be functionally comparable.

On careful perusal of the company overview we find that this company is engaged in software and application development business which directly provide services to create new applications and enhance the functionality of its users of existing software products. The company's product portfolio consists of application and software such as ad blocker, disk cleanup, space reviver, file opener, privacy protector. It has also developed new various products which are sold in over 126 countries in 13 different languages. This itself shows that the company is in the software development activities and is having their own products for sale and it's not a distributor at all. Therefore, this company is functionally dissimilar to the assessee and the learned TPO is directed to exclude the same.

Another company which is requested for exclusion is Tally solutions private limited wherein the assessee has challenged it to be functionally dissimilar, diversified business activity and in absence of segmental information availability this requires to be excluded.

The learned transfer pricing officer considered all these explanations and found that company is into packaged software which is for the purpose of trading thus this company is functionally like the assessee company. We find that Tally solutions private limited has its own product for sale and therefore it is not merely a distributor and therefore it is required to be excluded as a functionally dissimilar company. The learned TPO is directed to exclude the same.

The assessee has also requested for inclusion of Sonata information technology Ltd, Ducon Infra technologies Ltd, Apporva IT solution private limited, Redington India Ltd. The claim of the assessee is that these companies are functionally like the functions performed by the assessee and therefore they should be included.

We have carefully considered the rival contention we find that at paragraph No. seven of the transfer pricing order we find that as per the TP study report of the taxpayer it selected eight comparable companies in respect of distribution of software services. These eight companies were rejected by the learned transfer pricing officer stating that these were not part of the transfer pricing officer search metrics. In paragraph No. 11.2 of the transfer pricing orders the learned TPO has stated that assessee has proposed a new comparables however same were rejected as those they do not appear in the accept reject matrix of the TPO. When we find that all these companies which are requested for inclusion are not finding a place in the accept reject matrix prepared by the assessee in transfer pricing study report as well as in the search metrics adopted by the learned transfer pricing officer, if those are directed to be included or excluded, it will amount to cherry picking and destroy the sanctity of the comparability analysis of the transfer pricing analysis of the international transaction. This is also because of the reason that none of the filters, keywords adopted by the learned transfer pricing officer were challenged by the assessee before us. Further there is no explanation given by the assessee that why these companies did not appear in the accept reject matrix of the assessee also if they are performing the similar functions. In view of this, we reject the explanation of the assessee for inclusion of all the companies which did not appear in the search metrics of the assessee in its transfer pricing study report as well as in the accept reject matrix of the learned TPO. No infirmity can be found in the order of the learned transfer pricing Officer in not including all these comparables.

The ground No. four of the appeal is against the charging of interest on overdue receivable from its associated enterprises. The assessee says that it is not arising from any capital financing transaction but in course of provision of services to its associated enterprises. Continuing debit balance of trade receivable is not an international transaction per se in respect of which arm's-length price adjustment can be made but it is a result of international transaction. It is further stated that once the primary transaction has been tested to be at arm's length price, there is no requirement to test the credit period of outstanding receivable for determination of the arm's-length price independently. It is further stated that assessee is a debt free company during the year and does not pay any interest to the associated enterprises in relation to outstanding payable from its associated enterprises. Assessee also do not charge any interest from third-party customers on the overdue receivable. The assessee's only arguments are to consider the receivable after net of against the payable from its associated enterprises and only the net amount should be subject to determination of arm's-length price so far as the international transaction of overdue outstanding receivable is concerned. For this proposition, the assessee has relied upon the decision of the coordinate bench in assessee's own case for assessment year 2017 – 18 and 2018 – 19. Indeed, in assessee's own case for assessment year 2017 – 18 and 2018 – 19 identical issues arose as per ground No. 2 in for assessment year 2018 – 19. This ground has been dealt with at paragraph No. nine of the order of the coordinate bench at page No. 11. In paragraph No. 13 the coordinate bench has held that "however, in the present case, while arriving at the quantum of the said receivables, we do accept the contention of the learned counsel of the assessee for netting of the outstanding payables by the assessee to the AE so that the interest is computed on the net outstanding receivable for the year under consideration." We do not find any logic, any reason, any judicial precedent, any provision of law, any commentary considered by the coordinate bench while holding so. Against this it is held by the bench in the same paragraph that in view of the retrospective amendment with effect from 1 April 2002 the deferred receivable would constitute an independent international transaction which is required to be benchmarked independently. Thus, if it is an independent transaction, it could not have been offset by the other transaction which does not have any impact on the income of the assessee. The basic rule according to the provisions of section 92 is that the international transaction should impact the income arising. Thus, clubbing together, the transactions which does not result into income arising [ outstanding payable] be off set with the transaction [ interest on overdue receivable] which relate to the income. Even otherwise there is no reason that outstanding payable to the associated enterprises should be net of with the outstanding receivable from the associated enterprises. Had that been the case, the assessee would itself have adjusted the same in its annual accounts which has not been done. This clearly shows that it is not the intention of the assessee also to consider both the transaction as one transaction, otherwise the assessee would have disclosed the same in its annual accounts on net basis only. This is neither in accordance with the accounting standards, accounting policies of the assessee which are approved by the board of directors and the auditors and therefore the contention of the netting of the outstanding debt with the outstanding liability of the associated enterprises is rejected. Further the assessee is a debt free company cannot be a reason that it should not charge any interest from outstanding view receivable from its associated enterprises. If such an argument is accepted then any debt free company advancing loan to anybody would not have charged any interest, this is not the reality. An independent party will not provide advances to anybody without charging interest even if it is not paying interest to anybody. Therefore, this argument also stands rejected.

As assessee did not press any other ground other than those adjudicated above, the appeal of the assessee is allowed to the extent indicated above. Order pronounced on 17.11.2025.