Mumbai ITAT rejects Assessees’s claim for selling software without mark-up to AE. Cites BEPS Concerns

Mumbai ITAT rejects assessee’s (engaged in software development and provision of technical services related thereto) commercial expediency plea for sale of software purchased from its Chinese parent company (AE) to HCL Technologies (third party) without any mark-up during AY 2010-11, terms it as an attempt to shift profits to its foreign parent company and erode tax base in India; Noting that assessee purchased software for Rs. 3.2 crore from its AE and sold it to HCL Technologies Ltd. at the same price (without any mark-up), AO had made addition to the tune of 10% as mark-up u/s 92; Rejects assessee’s invocation of doctrine of commercial expediency for not charging mark-up on the grounds that it did not do any value addition to the software supplied by the parent and that it would be benefitted by a simultaneous contract it got for services/maintenance/ AMC with respect to software supplied to HCL, remarks that “On the first blush, the arguments of the assessee looks quite attractive but there lies a basic fallacy in the arguments of the assessee”; Referring to the tripartite agreement (entered between assessee, HCL and National Insurance Co. Ltd. [i.e. ultimate user]) under which the core insurance software was supplied to HCL, ITAT observes that the AE was not a consortium partner in the tripartite agreement and it was the assessee who had entered into all agreements in India; Further, observing that the assessee being consortium partner had to execute and undertake vast activities by way of participating in RFP, tendering, negotiations etc. which entails huge efforts and costs, holds that such huge costs enter P & L account which needs to be neutralised with Revenues from these contracts based on the concept of matching principles; Remarks that “Entire revenue model followed by the assessee in its wisdom wherein purchase and sale of software is made without any mark-up …is to be evaluated on the touchstone of commercial prudence and expediency to see that it does not transgress those limits and boundaries as set out by doctrine of commercial expediency to shift profits to foreign tax jurisdiction while Indian tax jurisdiction is burdened with costs”; Clarifies that in this situation protection granted by doctrine of commercial jurisprudence shall fail and revenue will be definitely entitled to lift the veil and see behind the smoke screen, the true colours of transaction entered into by the assessee with a view to shift profits to foreign tax jurisdiction:ITAT