Steria (India) Ltd. vs Addl. CIT Spl. Range-8, New Delhi – Dispute Over Transfer Pricing Adjustments and Management Fees for AY 2015-16

Case Overview: Steria (India) Ltd. vs Addl. CIT Spl. Range-8, New Delhi – AY 2015-16

This article provides an in-depth analysis of the Income Tax Appellate Tribunal (ITAT) Delhi Bench ‘I-2’ ruling in the case of Steria (India) Ltd. vs Addl. CIT Spl. Range-8, New Delhi. The case, identified by case number ITA 6687/DEL/2019, pertains to the assessment year (AY) 2015-16 and addresses issues related to transfer pricing adjustments, the disallowance of management fees, and the treatment of payments made for software licenses. The final order was pronounced on May 1, 2020, following a hearing on February 7, 2020.

Background of the Case

Steria (India) Ltd., the appellant, is a subsidiary of a UK-based company and operates as a software service provider, offering systems integration, enterprise solutions, and software development services to clients across various regions, including the United Kingdom, the United States, and other countries in Europe and India. The company also provides IT-enabled services (ITES), such as back-office process outsourcing and voice-based services.

Why the Case Was Filed

The case was filed by Steria (India) Ltd. to contest several issues raised by the Addl. CIT Spl. Range-8, New Delhi, during the assessment proceedings for AY 2015-16. Key issues included significant transfer pricing adjustments proposed by the Transfer Pricing Officer (TPO) for both IT services and software development services segments, as well as the disallowance of management fees under Section 40(a)(i) of the Income Tax Act due to the alleged failure to deduct tax at source.

Proceedings Before the ITAT

The appeal was heard by a bench consisting of Shri R.K. Panda, Accountant Member, and Shri Sudhanshu Srivastava, Judicial Member. The appellant was represented by Sh. Neeraj Kumar Jain, Advocate, and Ms. Shaily Gupta, CA, while the Revenue was represented by Sh. H.K. Choudhary, CIT-DR.

The Appellant’s Arguments

Steria (India) Ltd. raised multiple grounds in its appeal, challenging the TPO’s selection and rejection of comparable companies in the transfer pricing analysis, the treatment of foreign exchange fluctuations as non-operating items, and the disallowance of management fees and software license payments. The appellant argued that these issues led to an inflated income assessment, which did not reflect the true nature of the company’s operations or its international transactions.

In the IT-enabled services (ITES) segment, the appellant contended that the TPO had incorrectly included certain companies, such as Infosys BPO Ltd., which had significant brand value and economies of scale, making them incomparable to Steria (India) Ltd., a smaller service provider. The appellant also argued that foreign exchange fluctuations should be considered as operating items in the transfer pricing analysis, aligning with the company’s treatment of these items in its financials.

Regarding the disallowance of management fees, Steria (India) Ltd. cited a favorable ruling from the Delhi High Court in its own case for previous assessment years, which held that the management services provided by Steria France were not taxable as Fees for Technical Services (FTS) under the India-France Double Tax Avoidance Agreement (DTAA). The appellant argued that this precedent should apply to the current assessment year as well, leading to the deletion of the disallowance.

The Revenue’s Arguments

The Revenue defended the TPO’s adjustments and the disallowance of management fees, arguing that the comparables selected by the TPO were appropriate and that foreign exchange fluctuations should be treated as non-operating items to accurately reflect the company’s profitability. The Revenue also supported the disallowance of management fees, asserting that the payments made to Steria France fell within the definition of FTS and were therefore subject to withholding tax under Section 195 of the Income Tax Act.

Final Decision of the ITAT

After considering the submissions from both parties, the ITAT ruled on several key issues:

1. Transfer Pricing Adjustments in ITES Segment

The ITAT agreed with the appellant that Infosys BPO Ltd. was not a suitable comparable for Steria (India) Ltd., citing the significant differences in size, brand value, and operational scale. The ITAT directed the TPO to exclude Infosys BPO Ltd. from the final set of comparables. The ITAT also instructed the TPO to treat foreign exchange fluctuations as operating items, provided they related to trading activities with associated enterprises (AEs). The matter was remanded back to the TPO for verification and recalculation of the operating margin without Infosys BPO Ltd. and with the correct treatment of foreign exchange fluctuations.

2. Transfer Pricing Adjustments in Software Development Segment

The ITAT accepted the appellant’s contention that foreign exchange fluctuations should be considered as operating items. The Tribunal remanded the issue to the TPO for verification of the 35th and 65th percentiles of the comparables’ margins and directed the TPO to ensure that the appellant’s margin fell within this range before making any adjustments.

3. Disallowance of Management Fees

The ITAT upheld the appellant’s argument that the management fees paid to Steria France were not taxable as FTS under the India-France DTAA, following the precedent set by the Delhi High Court in the appellant’s own case for previous assessment years. Consequently, the ITAT directed the deletion of the disallowance of Rs. 10,17,89,369 made under Section 40(a)(i) of the Income Tax Act.

4. Disallowance of Payments for Software Licenses

The ITAT also ruled in favor of the appellant on the issue of payments made for software licenses. The Tribunal concluded that these payments did not constitute royalties under Section 9(1)(vi) of the Income Tax Act or the India-France DTAA, as they were made for the purchase of copyrighted articles rather than for the use of copyright. As such, no tax was required to be deducted at source, and the disallowance of Rs. 9,28,28,017 was directed to be deleted.

Conclusion of the Case

The ITAT’s decision in Steria (India) Ltd. vs Addl. CIT Spl. Range-8, New Delhi, represents a significant victory for the appellant, particularly in the context of transfer pricing disputes and the interpretation of international tax agreements. The Tribunal’s ruling underscores the importance of accurate comparability analysis in transfer pricing and reaffirms the principle that payments for management services and software licenses must be carefully examined within the framework of applicable DTAAs.

This case serves as an important reference for multinational companies engaged in cross-border transactions, highlighting the need for robust documentation and legal recourse when challenging tax assessments that may not fully consider the nuances of international tax laws.

Overall, the ITAT’s order provides clarity on several complex tax issues and sets a precedent for future cases involving similar disputes.

Steria (India) Ltd. vs Addl. CIT Spl. Range-8, New Delhi – Dispute Over Transfer Pricing Adjustments and Management Fees for AY 2015-16