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Income Tax Appellate Tribunal, “C” BENCH, Bangalore
Before: SHRI PRASHANT MAHARISHI & SHRI SOUNDARARAJAN K, JM
PER PRASHANT MAHARISHI, Vice President:
for assessment year 2019 – 20 is filed by SAP India private limited (the assessee/appellant) against the assessment order passed under section 143 (3) read with section 144C (13) read with section 144B of The Income - Tax Act, 1961 (the Act) passed by the assessment unit, income tax Department on 24 July 2023 pursuant to the transfer pricing assessment order under section 92CA (3) passed by The Deputy Commissioner Of Income Tax (Transfer Pricing) – 2 (2) (1) Bangalore (the learned TPO) on 28th of January 2022 and the direction issued by The Dispute Resolution Panel – 2, Bangalore (the learned dispute resolution panel/the DRP) under section 144C (5) of the act Page 2 of 13 wherein the total income of the assessee as per return of income filed on 30 November 2019 of ₹ 7,901,553,920/– which was revised on 29/9/2020 at ₹ 7,804,453,360 is assessed at ₹ 8,423,688,054/–.
Assessee has raised several grounds of appeal however at the time of hearing itself ground No. 1 which is general in nature, ground No. 2 on the issue of limitation contesting that the order passed is barred by limitation, ground No. 3 absence of document identification No. in the direction issued by the learned dispute resolution panel, were not pressed and therefore same are dismissed.
3. The ground No. 9 regarding charging of interest under section 234D of the act and ground No. 10 on initiation of the penalty proceedings are consequential as well as premature respectively and therefore same are dismissed.
4. Thus, the assessee has contested ground No. 4 which is with respect to the consideration of the employee's stock compensation cost amounting to ₹ 55. 4 crores holding that same is capital in nature and not allowable under section 37 of the act. As per ground No. 5 the assessee is requesting that the dividend distribution tax paid to its non-resident shareholders at the rate of 20.56% charged in terms of section 115- O of the act should have been charged at the rate of 10% in terms of article 10 of the India German Double Taxation Avoidance Agreement. Thus, assessee claims that the excess tax deducted/withheld/collected under section 115- O should be refunded. As per ground No. 6 the assessee challenges the treatment of outstanding overdue receivable from its associated enterprises is considered as a separate international transaction and therefore the notional interest charged thereon of ₹ 65,234,694 cannot be considered as an international transaction and further it cannot be used to compute the interest considering the fact that assessee is a debt free company and it has no funds which have been borrowed externally further. The assessee also does not charge interest from third party. It is also the contention that that considering the 30 days' time as a reasonable credit period is also not proper and further the interest which Page 3 of 13 is been considered and computed based on state bank of India short-term deposit interest rates is not correct it should have been computed based on Euribor. As per ground No. 7 the assessee challenges the computation of the arm's-length price of international transaction of distribution segment challenging some of the filters, some of the comparable selected by the learned TPO and computation of margin in case of the some of the companies. Further sum of the functionally comparable companies was also excluded. The assessee also requested for the working capital adjustment. As per ground No. 8 there is a short grant of TDS wherein the assessee claimed in its return of income the TDS of ₹ 3,545,912,359/– whereas the learned transfer pricing Ofc/the learned assessing officer has granted credit of ₹ 354,51,31,579 and therefore the short credit of ₹ 780,770 was granted.
At the time of the hearing the assessee has submitted a chart of the issues and the arguments advanced thereon. It also submitted the annual report extracts of the various comparable is challenged for exclusion and inclusion as well as the case law compilation on the various issues.
Facts of the case shows that the SAP India is a subsidiary of SAP AE, Germany and SAP India Holdings PTE Ltd Singapore incorporated on 14 March 1996 principally engaged in the sublicensing, distribution and after sale support for support product of SAP AE. The assessee performs the distribution function in terms of the distribution agreement wherein the assessee markets a range of its products and provides support services to independent customers in India. It has a non-exclusive license to use, market and sublicense SAP AG software products in India. It pays royalty to that company for the sublicensing of the software and maintenance service provided to the end-user to compensate it for the right to sublicense and use of the intellectual property in the software developed by the SAP AG. The functions performed by the assessee as a part of the distribution products are resale activity, marketing, and advertisement, rising, deduct customisation, replication of SAP software, quality control, sales and distribution, maintenance services, consultancy services, training
Page 4 of 13 services et cetera. It also renders a consultancy service for implementation of software systems, customisation of software products and business solutions.
It has entered an international transaction of royalty payment in respect of software licensing and maintenance revenue of ₹ 19,532,077,658/–, consultancy services received from its associated enterprises of ₹ 4,060,762,300 and consultancy services provided to its associated enterprises of 1,283,03,86,141, expenses reimbursement of ₹ 20,202,906 and IT services and support services provided by its associated enterprises of ₹ 600,63,49,599. It has also entered some Specified domestic transactions.
As per the transfer pricing document the assessee segregated its distribution activity and consultancy services. The margin in the distribution activity considering the profit level indicator of operating profit/sales was 5.58% whereas in the consultancy services considering the profit level indicator of operating profit to operating cost was computed at 34.71%. The assessee adopted the transactional net margin method as the most appropriate method, for software distribution services it selected eleven comparable and contended that the international transaction is at arm's-length.
The learned transfer pricing officer rejected the transfer pricing study report challenging some of the filters and the fact that the search process executed by the assessee has been conducted using data available as of April 2019 only. He conducted this fresh search by applying filters he also evaluated the 11 comparable selected by the assessee and retained only five comparable and rejected balance six comparable. On his fresh search he reached at a thirteen comparable set computed their margin at 35th percentile at 6.25%, 65th percentile at 13.30% and median margin of 11.49% and thereafter issued a show cause notice to the assessee.
The assessee challenged the exclusion of the certain comparable as well as inclusion of the certain comparable and thereafter the request of the assessee for granting the working capital adjustment was rejected.
Page 5 of 13 Accordingly a final set of 12 comparable were retained whose 65th percentile margin was 13.30% 35th percentile margin was 6.25% and median margin was 11.58% therefore on that basis the taxpayers profit level indicator was computed at 4.14% and computed the total taxpayers operating cost of ₹ 3,6020,000,000 at arm's-length price of 332,22,930,800 and computed the transfer pricing adjustment of ₹ 2,797,069,200/–.
11. The learned TPO further found that there is a delay in receipt of payment for the receivables, he treated it as a separate international transaction, granted 30 days credit period, applied SBI short-term deposit interest rates for the computation of interest and thereafter the interest adjustment was computed at ₹ 65,234,694/–. Accordingly, the order under section 92CA (3) of the act was passed on 28th of January 2022.
While computing the income of the assessee the learned assessing officer found that assessee has incurred expenses towards employee stock compensation cost of ₹ 554,000,000. The assessee was issued show cause notice asking for the breakup of the employee benefit expenses which is provided by the assessee based on this it was stated that it should be disallowed. The assessee submitted its reply on 23 September 2022 stating that the ultimate parent company of the assessee has established an incentive scheme as part of its stock options were issued to certain key employees of the assessee. The scheme was conceptualised with a view to encourage/ownership among employees and to motivate and encourage employees and to compensate them for their dedication, hard work, and commitment. It was further stated that during the year the parent company has cross charged to assessee ESOP cost pertaining to its India employees which is the difference between the market value and the exercise price of stock options offered to Indian employees which is spread over the life of the scheme. The assessee company has actually paid by way of debit notes raised on the company and there is an actual outflow of such funds from the company. It relied upon the several judicial precedents wherein it has been held that that ESOPs expenditure in such Page 6 of 13 circumstances is allowable as deduction under section 37 of the income tax act. The learned assessing officer after examining the complete scheme held that it is a capital expenditure, and it is a notional loss and not an actual loss for which any liability is incurred. Accordingly, he disallowed the same.
The draft order passed by the learned AO dated 29 September 2022 was challenged before the learned dispute resolution panel which passed its direction on 6 June 2023. The learned dispute resolution panel agreed with most of the views of the learned AO. However, on account of adjustment of the transfer pricing some directions were given. However, adjustment on interest on delayed receivable was retained. Final assessment order was passed which is under the challenge.
On the issue of ground No. 4, the assessee challenged the disallowance of expenditure on employee stock option plan of ₹ 55,40,00,000. The learned authorised representative submitted that this issue is covered in assessee's own case for assessment year 2017 – 18 and 2018 – 19 by the decision of the honourable Karnataka High Court. It was further stated that even otherwise in the decision of CIT versus Biocon Ltd 121 taxmann.com 351 (Karnataka) this issue is also decided in favour of the assessee and therefore the assessee is eligible for deduction of the above sum.
The learned CIT DR vehemently supported the orders of the learned lower authorities.
We find that that the honourable Karnataka High Court vide its order dated 9 August 2024 in income tax appeal No. 65 of 2024 has considered as per substantial question of law No. 1 – 3 wherein on identical facts and circumstances, for assessment year 2017 – 18 relying upon the decision of the honourable Karnataka High Court in case of Biocon Ltd held that same is an allowable expenditure and there is no merit in the contention sought to be put forth by the revenue. Accordingly, respectfully following the decision of the honourable Karnataka High Court in assessee's own case, we also direct the learned assessing officer to delete the disallowance of ₹ 554,000,000 on account of the employee stock option expenditure being
Page 7 of 13 compensation cost paid to its parent company considering it allowable under section 37 of the act. Accordingly ground No. 4 of the appeal is allowed.
Ground No. 5 is with respect to the refund of excess dividend distribution tax. The claim of the assessee is that dividend distribution tax was calculated originally at the rate of 20.56% paid to its foreign shareholders wherein according to the double taxation avoidance agreement the impugned tax rate should have been 10%. Therefore, the assessee has computed tax under section 115O of the act at the rate of 20.56% amounting to ₹ 513,882,353/– which as per 10% rate should have been ₹ 25 lakhs and therefore the excess tax paid of ₹ 26,38,82,353 should be refunded to the assessee.
The arguments of the assessee are same as were raised before the special bench in case of Deputy Commissioner of income tax versus the Total Oil India private limited in by/2019. As the issue is squarely covered against the assessee, ground No. 5 of the appeal of the assessee, respectfully following the decision of the special bench in case of Total Oil India private limited, this ground is dismissed.
Ground No. 6 of the assessee is against the interest on overdue outstanding receivable. The assessee submitted that the receivable should be netted off against the payable from its associated enterprises and the net amount should be subject to interest determination of the arm's-length price. The second argument of the assessee is that the rate of SBI Term deposit rates adopted by the learned assessing officer/transfer pricing officer for computation of interest on overdue receivable is incorrect and EURIBOR should be adopted for benchmarking the transaction. The claim of the assessee is that in its own case for assessment year 2017 – 18 and 2018 – 19 in and 875/Bengaluru/2022 ITAT has decided in favour of the assessee and therefore this ground needs to be decided accordingly and the interest on outstanding receivable should be computed in accordance with that.
The learned CIT DR vehemently stated that receivable cannot be netted off against the amount payable to its associated enterprises and the net amount cannot be subjected to determination of the ALP. It was submitted that interest on overdue outstanding receivable is an independent international transaction of capital financing to its associated enterprises. There is no link between the outstanding payable to associated enterprises and outstanding receivable from associated enterprises as both these transactions are arising out of different transaction. With respect to the applicability of EURIBOR instead of short-Term deposit rates of SBI, she submitted that it is the currency in which the invoices were outstanding, should be adopted.
We have carefully considered the rival contention and perused the orders of the learned lower authorities. The facts are stated above clearly shows that the assessee has not received the consideration from its associated enterprises beyond the agreed due date/credit period of 30 days and therefore the learned transfer pricing officer treating it as a separate international transaction, computed the interest on the overdue receivable adopting the SBI short-term deposit interest rate. The learned dispute resolution panel also rejected the contention of the assessee to adopt a LIBOR rate and held that SBI short-term deposit interest rates is an index rate adopted under Indian conditions to charge interest which is neither an ad hoc nor inappropriate as contended by the assessee. 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.
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
Page 9 of 13 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.
However, we agree with the contention of the assessee that as invoices are prepared in Euro, then Euribor should have been accepted as the proper benchmarking index rates. Accordingly ground No. 6 of the appeal is allowed to that extent.
In the comparability analysis the assessee has stated that Microsoft Corporation (India) private limited is functionally not comparable and there are no segmental data for software distribution segments are available in this comparable company. It was further stated that it fails
Page 10 of 13 RPT filter for assessment year 2020 – 21 and has already been excluded by the learned dispute resolution panel and therefore for this assessment year, it should also be excluded.
The learned CIT DR specifically referred to the paragraph No. 6.1.4 of the direction of the learned dispute resolution panel and stated that this issue has been considered by the learned dispute resolution panel and same was not accepted.
We have carefully considered the rival contention and perused the orders of the learned lower authorities as well as the direction of the learned dispute resolution panel. We find that the TPO has already used segmental data to compute the margin. Therefore, this company is functionally comparable as the margins are used of the segment which is comparable with the assessee. Further as far as the issue of the RPT filter is concerned, the learned dispute resolution panel has categorically held that the taxpayer itself has shown that the RPT income/sales is at 1.71%. The ratio of RPT income/cost is inapplicable since PLIs OP/OR and not OP/OC, therefore RPT is to be checked for RPT/sales and not RPT/cost. Therefore, the objection of the taxpayer was not acceptable, but the learned dispute resolution panel directed the learned transfer pricing officer to verify the RPT calculations as per the filter applied by him and include this company if it passes the RPT filter. We find that the direction of the learned dispute resolution panel is half-hearted if PLI is operating profit/operating revenue, the operating profit will include the operating cost also. Therefore, if the cost segment of operating profit is also hit by RPT and it crosses the maximum percentage of RPT transactions as far as cost is involved, even then this comparable is to be excluded. Therefore, we modify the direction of the learned dispute resolution panel and direct the learned transfer pricing officer that if the comparable company fails the RPT filter with respect to sales or with respect to cost, it needs to be excluded. However, we are not impressed with the argument that the learned dispute resolution panel has excluded this comparable for assessment year 2020 – 21, therefore it should be excluded for this year
Page 11 of 13 also, the filters are required to be evaluated and applied for each year independently and separately.
The second comparable company challenged by the assessee is Tally solutions private limited stating that it is functionally dissimilar and no segmental reporting for distribution is available. The learned dispute resolution panel has dealt with this comparable at paragraph No. 6.1.8 and held that on perusal of the annual report of the company it was found that that company is into distribution and sale of ERP software like the distribution of software functions undertaken by the assessee. The expenditure incurred on R& D is not significant enough to impact the margins. Since there is only one business segment of sale and distribution of software, there is no need for segmental reporting the objections raised by the assessee were rejected.
The assessee reiterated the same arguments that were raised before the learned dispute resolution panel. The learned CIT DR also relied upon the orders of the learned lower authorities.
We have carefully considered the rival contention and perused the direction of the learned dispute resolution panel. We find that the learned dispute resolution panel itself has agreed that that company is involved in the research and development which is not the function carried on by the assessee. Further that company also has incurred substantial expenditure on research and development. Such cost is 7.17% of its annual turnover. Further when we look at the corporate information of this company, it shows that this company is engaged in the business of development and sale of accounting and business management software and incidental services. Thus, it also develops that software and then sells it which is different from the mere distribution activities. Therefore, we direct the learned transfer pricing officer to exclude the above comparable.
In case of Innovana think labs Ltd, we find that the learned dispute resolution panel has dealt with this comparable at paragraph No. 6.1.9 wherein it is stated that the revenue from sale of software is ₹ 40.80 crores against the total revenue of ₹ 42.28 crores which is more than 95%
Page 12 of 13 of the total revenue which consist of other income and finance income also. Since the revenue from the sale of products are more than 95% there is no need of segmental data. However, the objection of the assessee is that that company is engaged into the business of software development and not distribution. The learned dispute resolution panel has also recorded sales segment but has included this company. On reading the explanation of the assessee we find that this company is not comparable as it is engaged in software development. Hence the learned transfer pricing officer is directed to exclude the same.
The next comparable challenged is the quick Heal technologies Ltd, the learned transfer pricing officer has included this comparable but the learned dispute resolution panel in paragraph No. 6.1.10 has held the action of the learned TPO correct but has directed to recompute the margin. The assessee has challenged before us that this company is engaged in the development of the software and then sell it and is not in a mere distribution activity. After considering the argument of the parties and looking at the annual accounts placed before us, we find that the quick heal technologies Ltd is engaged in various products developed by it being sold and is not merely a distributor of a product developed by somebody else. Therefore, this comparable company is not functionally like the functions performed by the assessee. The learned transfer pricing officer is directed to exclude the same.
In case of Compucom software Ltd, the learned dispute resolution panel has directed the learned transfer pricing officer to consider only the segment margin of the learning solution, but the learned TPO has not followed the same. The learned TPO is directed to follow the direction of the learned dispute resolution panel mentioned at paragraph No. 6.1.1 of the direction.
Accordingly, ground No. 7 of the appeal along with all its sub- grounds are partly allowed.
Ground No. 8 is with respect to the short grant of tax deduction at source, both the parties agreed that necessary direction may be given to the Page 13 of 13 learned assessing officer to compute and grant the correct tax deducted at source credit. The learned that AO is directed to grant the tax credit of ₹ 780,770/– after verification. Ground No. 8 of the appeal is allowed.
In the result appeal filed by the assessee is partly allowed. Order pronounced in the open court on 11th November, 2025.