BMC SOFTWARE INDIA PRIVATE LIMITED,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-1(1), PUNE

IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER

ITA No. 270/PUN/2021 : A.Y. 2016-17

BMC Software India P. Ltd., Business Bay, Wing I, Tower B, 9th floor, Survey No. 103, Hissa No. 2, Airport Road, Yerawada, PUNE – 411 016 PAN: AABCB 6110 E :Appellant

Vs. The Dy. C.I.T. tp-1, Pune. Respondent

Appellant by : Shri Madhur Agarwal (through virtual) Respondent by : Shri Kalika Singh (through virtual) Date of Hearing : 05-09-2022 Date of Pronouncement : 09-09-2022

ORDER PER SHRI PARTHA SARATHI CHAUDHURY, JM : This appeal preferred by the assessee emanates from the findings of the ld. 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

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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;

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.

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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

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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 2020- 21) (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 2015- 16) (hereinafter referred to as “Rollback years”).

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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%.

Sr.No. Nature of international Amount INR) transaction

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A. Related oto transfer pricing 1. Provision of software 33,06,35,792 development services 2. Provision of IT enabled 11,58,19,161 services (‘ITeS) Total B. Related to Corporation tax 1. Disallowance u/s 40(a)(ia) of 1,18,04,423 leased line charge on account of non-deduction of TDS 2. Addition on account of ESOP 3,50,51,094 expenses

SrNo Nature of Total TP TP adjustment Proportionate TP international adjustment towards international adjustment

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transaction upheld as per transactions covered towards BMC final assessment under APA Finland and BMC order Software GMBH, Amount (INR) Austria 1 Software 33,06,35,792 33,06,32,712 3,080 development (99.99%)** (0.0014%)** services 2 Information 11,58,19,161 11,58,19,161 0 technology (100%) enabled services Total 44,64,54,953 44,64,51,873 3,080

··Percentage (%) of transactions with covered AEs and Non-covered AEs as computed In Annexure 2 7. ln view of the above, BMC India would like to mention that the international transactions pertaining to software development services and information technology enabled services and undertaken with AEs covered under signed APA do not require any further adjudication by the Hon'ble ITAT as they have been settled through the APA between the Appellant and the CBDT. 8. In view of this it is required to file modify the general ground of appeal contesting the quantum of transfer pricing addition of Rs 3,080 only as against total quantum of transfer pricing addition challenged in original ground of Rs 44,64,54,953. The appellant is submitting the modified ground to alter the quantum of addition for adjudication of the Hon'ble Bench. Kindly refer Attachment 2 for modified ground of appeal. “

Therefore, as per the submissions of the assessee, the quantum of 4 transfer pricing additions after Advance Pricing Agreement is Rs. 3,080/- only as against the total quantum pricing additions of Rs. 44,64,51,873/- as per the original grounds. In this regard, the assessee filed a modified ground of appeal as follows: I Grounds of objection in respect of transfer pricing adjustment 1. General ground challenging the transfer pricing adjustment of INR 3,080/- consequential to non-consideration/acceptance of comparability analysis as documented in the transfer pricing study report. Erred in making transfer pricing adjustment to Appellant’s international transactions in the nature of provision of software develo0pment services not considering/accepting the comparability analysis documented in the Transfer Pricing study report for benchmarking analysis. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above ground of appeal, at any time before or at the time of hearing of the appeal, so as to enable the Honourable ITAT to decide this appeal according to law.”

The ld. Counsel for the assessee submitted that because of smallness of 5. the amount, this modified ground of appeal is not pressed. The ld. D.R

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conceded. Having heard the parties, this modified ground of appeal in pursuant to the outcome of the Advance Pricing Agreement dated 15-12-2021 is dismissed as not pressed.

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consumer, it is seen that the assessee has not furnished any documentary evidence by way of authentic technical literature in support of its claim that PRI lines are in the nature of standard facilities. The ratio of the decision of the Hon'ble Supreme Court cannot be considered to be applicable to the facts of the assessee's case, as the assessee failed to substantiate its claim that PRl lines are in the nature of standard facilities.

16.7 In view of the above the contentions advanced by the assessee to state that the payments made for the use of PRl lines do not fall under the scope of fees for technical services and consequently they are not liable for TDS uls. 194J are considered to be unsubstantiated. We are therefore of the view that the A.O. has rightly treated the said payments as fees for technical services liable for TDS uls.194J and has rightly disallowed the said expenditure uls.40(a)(ia) in view of the failure of the assessee to make TDS. Hence, this ground of objection is rejected. "

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Respectfully following the aforesaid decision, we direct the A.O/T.P.O to delete the addition on lease line charges from the hands of the assessee. Accordingly, this ground of appeal of the assessee is allowed.”

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expenditure incurred by the assessee is not allowed in the absence of verification of taxability of the same in the hands of the employees. Finally, the A.O makes a disallowance of Rs. 3,50,51,094/- u/s 37 of the Act. This has been upheld by the ld. D.R.P at para 16.2 onwards where vide para 16.2.3 before the D.RP we find that there was certain additional evidences submitted by the assessee because it was submitted that the assessee had inadvertently given the details of payments made to the employees pertaining to financial year 2014-15 instead of the amount debited to P & L account amounting to Rs. 3,50,51,094/- and claimed that the amount debited in P & L account was deductible expenditure. The additional evidences submitted by the assessee were forwarded to the A.O and his comments were recorded. It is noted by the ld. D.R.P that in the said report of the A.O he had constantly harped upon the point that the assessee was not able to substantiate that the amounts were paid to employees as perquisites on which TDS has been deducted. In our considered view, once the addition is sustained by the D.R.P and made by the A.O for non-deduction of TDS the provisions for addition and confirming the disallowance should have been u/s 40(a)(ia) of the Act and not u/s 37 of the Act as has been invoked by the A.O and sustained by the ld. D.R.P. In view thereof, we set aside the findings of the ld. D.R.P on this issue and allow this ground of appeal of the assessee. Ground No. 14 is allowed.

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Order pronounced in the open Court on this 09th September 2022. Sd/- sd/- (R.S. SYAL) (PARTHA SARATHI CHAUDHURY) VICE PRESIDENT JUDICIAL MEMBER Pune; Dated, this 09th day of September 2022 Ankam

Copy of the Order forwarded to : 1. The Appellant. 2. The Respondent. 3. The Pr. CIT- 1, Pune . 4. The CIT – DRP-3) 5. The D.R. ITAT ‘C’ Bench Pune. 6. Guard File BY ORDER, Sr. Private Secretary ITAT, Pune

13 ITA 270/PUN/2021 BMC Software India A.Y. 2016-17 Date 1 Draft dictated on 05-09-2022 Sr.PS 2 Draft placed before author 06-09-2022 Sr.PS 3 Draft proposed and placed before the JM/AM second Member 4 Draft discussed/approved by second AM/JM Member 5 Approved draft comes to the Sr. PS/PS Sr.PS/PS 6 Kept for pronouncement on 09-09-2022 Sr.PS/PS 7 Date of uploading of order 09-09-2022 Sr.PS/PS 09-09-2022 8 File sent to Bench Clerk Sr.PS/PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R 11 Date of dispatch of order