Software Cost Reimbursement to Foreign AEs Cannot Be Treated as Profit-Making Service: ITAT
ITAT Delhi held that reimbursement of software costs to foreign associated enterprises could not be treated as a profit-making service transaction and deleted the TPA made by applying a markup on such reimbursements.
The Income Tax AppellateTribunal (ITAT), Delhi Bench, deleted the TPA relating to software cost reimbursement after holding that allocation of software expenses among group entities could not be treated as a profit-making intra-group service transaction. The assessee, SRFLimited, had allocated software costs to its foreign associated enterprises during AY 2020-21. The...
The Income Tax AppellateTribunal (ITAT), Delhi Bench, deleted the TPA relating to software cost reimbursement after holding that allocation of software expenses among group entities could not be treated as a profit-making intra-group service transaction.
The assessee, SRFLimited, had allocated software costs to its foreign associated enterprises during AY 2020-21. The assessee contended that the expenses related to software implementation and licence costs incurred for group entities were recovered on a cost-to-cost basis.
During the transfer pricing proceedings, the Transfer Pricing Officer (TPO) re-characterised the transaction relating to allocation of software cost as intra-group services and applied a markup of 10.04% on the reimbursed amount, resulting in a transfer pricing adjustment of Rs. 15.04 lakh.
The DRP upheld the action of the TPO and directed recomputation of the adjustment based on revised margins of the comparable companies.
Aggrieved, the assessee filed an appeal before the Tribunal contending that the transaction represented pure cost allocation among group entities.
The Tribunal, comprising Ramit Kochar (Accountant Member) and Vimal Kumar (Judicial Member), noted that the assessee had furnished pricing policy documents, invoices and debit notes relating to allocation of software costs to its associated enterprises. The Tribunal further noted that similar issues in the assessee’s own case for earlier assessment years had already been decided in its favour.
The Tribunal also observed that the TPO had wrongly applied margins of manufacturing companies while benchmarking a transaction relating to software cost allocation and reimbursement of expenses.
Following the earlier decisions in the assessee’s own case, the Tribunal deleted the transfer pricing adjustment of Rs. 15.04 lakh.
The assessee’s appeal was accordingly allowed on this issue.
Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
