M/S ANZ OPERATIONS & TECHNOLOGY PRIVATE LIMITED,BANGALORE vs. INCOME-TAX OFFICER, WARD-1(1)(1), BENGALURU

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ITA 57/BANG/2019Status: DisposedITAT Bangalore11 August 2021AY 2014-157 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the APA's provisions, including the 60-day realization period for receivables, should apply to the assessment year under review due to the rollback provision. For software expenses, the Tribunal restored the issue to the AO to verify invoices and allow expenses if the license period was less than one year, as per DRP directions.

What were the facts?

The assessee challenged transfer pricing adjustments and capitalization of software expenses. The assessee had entered into a bilateral Advance Pricing Agreement (APA) with the CBDT, which included a rollback provision for the assessment year in question.

What were the issues?

Applicability of APA rollback provisions to transfer pricing adjustments for receivables and the treatment of software expenses as revenue or capital expenditure.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 144C

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “C’’BENCH: BANGALORE

Before: SHRI B. R. BASKARAN & SMT. BEENA PILLAI

For Appellant: Shri Chavali Narayan, A.R
For Respondent: Shri Pradeep Kumar, D.R
Hearing: 11.08.2021Pronounced: 11.08.2021

The assessee has filed this appeal challenging the final assessment order dated 31.10.2018 passed by the A.O. for assessment year 2014-15 u/s 143(3) r.w.s. 144C of the Income-tax Act,1961 ['the Act' for short] pursuant to directions given by Ld. Dispute Resolution Panel (DRP). The issues urged in the appeal relate to transfer pricing adjustments made in respect of Software development services, ITES segment, outstanding receivables and a corporate issue relating to capitalization of software expenses.

2.

The assessee is engaged in the business of software development and providing IT enabled services.

3.

At the time of hearing, the Ld. A.R. submitted that the assessee has entered into bilateral Advance Pricing Agreement (APA) with CBDT on 31.8.2018, which is applicable for 5 years commencing from financial years 2015-16 to 2019-20 (relevant to assessment years 2016-17 to 2020-21) with roll back of 4 years commencing from financial years 2011-12 to 2014-15 (relevant to assessment years 2012-13 to 2015-16). Accordingly, the Ld. A.R. submitted that the APA would apply for the year under consideration. Accordingly, he submitted that the ground Nos.2 to 11 relating to transfer pricing adjustment made in software development segment and ITES segment are not pressed. Accordingly, ground Nos.2 to 11 are dismissed as not pressed.

4.

Ground Nos.12 to 17 relates to transfer pricing adjustment made on outstanding receivables. The Ld. A.R. submitted that under APA entered with CBDT, the period of realization of receivables has been fixed at 60 days. He submitted that the above period of 60 days may be adopted for determining the transfer pricing adjustment in respect of outstanding receivables. In this regard, the Ld. A.R. placed reliance on the decision dated 6.8.2021 passed by the Tribunal in the assessee’s sister concern case named M/s. ANZ Support Services India (P) Ltd. (IT TP A No.58/Bang/2019), wherein similar claim of the assessee was accepted.

5.

We heard Ld. D.R. on this issue and perused the record. We notice that an identical issue was examined by the coordinate

Page 3 of 7 bench in the assessee’s sister concern’s case referred above and it has been decided as under:- “7. The learned Counsel for the assessee brought to our notice that it had filed an application for Bilateral Advance Pricing Agreement to the competent authority under the Act in respect of the international transaction of allowing credit period to the AE also. As per the APA, a realization period of 60 days has been agreed for the realisation of invoices pertaining to international transactions (i.e. ITeS) from 01 April 2017 entered into with the AEs (refer Pg No. 643 of Paperbook I). Further. the actual weighted realization period for AY 2014-15 is 48 days (refer Pg No. 626 to 632 of Paperbook I). It was submitted by him that the realization period of 60 days as agreed in the APA for subsequent years (FY 2016-17 onwards) should also be applicable for AY 2014-15 (rollback year). It was submitted that during the APA proceedings, the detailed weighted average realization period for rollback years including AY 2014-15 were submitted with the India Competent Authority office (Pg No. 622 to 632 of Paperbook I). The Indian Competent Authority office observed that the 60 days credit period will be considered as normal and for late realization beyond 60 days prevailing bank rate will be charged.

8.

It is the plea of the learned Counsel for assessee that the concept and the methodology laid down in APA can have a guidance value for the revenue authorities. The main intent of the APA is to protect the fair share of the revenue of the states in simple and efficient manner and to protect the tax base. Therefore, the agreement entered into by CBDT with the assessee, which has considered all the aspects of the manner of determination of ALP should be given highest sanctity and hence, mechanism suggested in that agreement should be necessarily followed, wherein the APA clearly provides a realization period of 60 days to the assessee.

9. Our attention was drawn to the clarifications on rollback provisions issued by the CBDT vide Circular No. 10/2015 dated 10 June 2015, Rule 10MA(2)(i) of the Income Tax Rules mandates that the rollback provision shall apply in respect of an international transaction that is same as the international transaction to which the agreement (other than the rollback provision) applies. Further, the Functions, Assets and Risks ("FAR") analysis should not differ materially. Since there is no change in the FAR analysis of the assessee and the nature of international transactions are identical in nature for all the nine years covered under APA, that the approach on credit period agreed in the APA for subsequent years is applicable to the AY 2014-15 (rollback year) as well.

Page 4 of 7 10. The learned Counsel for the assessee further placed reliance on judicial precedents in support of its arguments wherein, the Hon'ble Benches of the Tribunal have held that the methodology/approach as agreed with CBDT in the APA covered years shall be applied for other years as well which are not covered under APA. Ameriprise India Pvt. Ltd. [TS-174-HC-2016(DEL)-TP] Celltick Technologies Ltd. [TS-552-ITAT-2019(Mum)-TP] AbicorBinzel Production (India) Pvt Ltd. [TS-1036- ITAT2017(PUN)-TP]

11.

We have considered the submissions and are of the view that AY 2014 -15 is covered under roll-back period of the APA. Also, the FAR for all the years covered under APA is same. Hence, the period of realization of 60 days which is agreed in the APA for 01 April 2017 onwards should be considered for AY 2014-15 as well. The principle laid down in the decisions referred to in paragraph 10 of this order will apply to the present case also. We hold and direct accordingly.”

6.

Following the above said decision, we restore this issue to the file of AO/TPO with a direction to follow the principle laid down in the above said case.

7.

Ground Nos.18 to 20 relates to disallowance of software expenses claimed by the assessee by treating them as capital in nature. The Ld. A.R. submitted that the A.O. has treated the software expenses as capital expenditure and allowed depreciation @ 30%. However, Ld. DRP passed the order directing the A.O. to verify the invoices and allow the software expenditure, if the license is for a period of less than 1 year. The Ld. A.R. submitted that the assessee, however, could furnish only partial details only before the A.O. during the course of assessment proceedings. Even though the assessee filed balance details before A.O. vide its letter dated 10.10.2018, the same was not accepted by the A.O. He submitted that the software expenses incurred by the assessee consists of

Page 5 of 7 payments made towards license fees and subscription and the period of license/subscription was less than 1 year. Hence, as per the direction given by Ld DRP, entire claim is allowable as revenue expenditure. The Ld. A.R. submitted that an identical issue was considered by the coordinate bench of Tribunal in the case of ANZ Support Services India Pvt. Ltd. (supra) and the matter was restored to the file of the A.O. for examining the claim of the assessee and follow the direction given by Ld. D.R.P.

8. We heard Ld. D.R. on this issue and perused the record. Before us, the assessee has filed the details of software expenses incurred by the assessee as under:

• Period of license/ Name of payee Invoice No Invoice amount subscription JQ Network 7590026595 2,615,130 12 months Redington N044239 1,415,610 12 months 3402 1,331,608 12 months JQ Network Dimension data 7930029941 839.744 Proportionate onsite support charges - for the period 1 April'13 to 31 March'14

AGC Network 723,813 6 months 0017 691,930 Idea Device 12 months 014 683,429 1 months Silicomp India 12 months Dimension India 7930028306 414,343 Dynamic computer Services S-53 347,192 1 month

JQ Network 7590027445 343,098 12 months 1 months Wipro Limited 282,744 Softcell 00339 234,239 12 months Reach Automation 586 147,700 1 month Manuputra 0923 121,800 Proportionate expense for renewal for database subscription — for the period 1 April'13 to 31 March'14 Page 6 of 7 LDS Infotech 87,806 1 month LDS/2013- 14/K0238 56,180 1 month Holistic 166 Others 17,54,988 Less than 12 months

Idea Device 0034 50,562 1 month Idea Device 0006 50,562 1 month Idea Device 0011 50,562 1 month Idea Device 0012 50,562 1 month Idea Device 0016 50,562 1 month 50,562 1 month Idea Device 0018 Sigma Byte 1033 47,641 1 month Dynamic Computer Services S-34 44.481 1 month

1 month Silicomp India 015 39,326 Tax India Online Oct-17-2013-14 22,472 12 months Reach Automation 587 21,337 1 month Dynamic Computer Services S-68 12,788 1 month

WCT/1119/13-14 12,333 1 month Micro Data Products

1 month Workware 7932 11,955 Workware 8026 10,502 1 month 1 month 7962 10,256 Workware Total 1,26,27,817

9.

It is the submission of the assessee that the period of license/subscription was less than 1 year or less in all the above said cases. It was submitted that the Ld. DRP has also directed the A.O. to allow software expenses as deduction, if the license period is 1 year or less. Under identical set of facts, the coordinate bench has restored an identical issue in the case of ANZ Support Services India Pvt. Ltd. (supra) with the following observations:- “23. We have considered the submissions of the learned Counsel for the assessee who reiterated the facts stated above. Learned DR relied on the order of the A.O. We have given a careful consideration to the rival submissions. As far as grounds 17 to 20 raised by the assessee are concerned, we are of the view that it would be just and appropriate to direct the AO to consider the claim of the assessee regarding software expenses in the light of the invoices admitted as additional evidence by us. To the extent that the software expenditure is in the nature of payment of license fee for a period of less than 1 year, the same could not be regarded Page 7 of 7 as a capital expenditure and should be allowed as a deduction as was directed by the DRP in its directions dated 6.9.2018.” 10. Following the above said decision, we restore this issue also to the file of the A.O. with similar directions.

11. Other grounds urged by the assessee are either general or consequential in nature.

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