Income Tax Appellate Tribunal - Chennai
Ramco Systems Ltd.,Rajapalayam vs Acit, Corporate Circle,, Madurai on 11 March, 2026
आयकर अपील य अ धकरण, 'डी' यायपीठ, चे नई IN THE INCOME TAX APPELLATE TRIBUNAL 'D' BENCH, CHENNAI ी जॉज जॉज के, उपा य एवं ी एस.आर.रघन ु ाथा, लेखा सद य के सम BEFORE SHRI GEORGE GEORGE K, VICE PRESIDENT AND SHRI S.R. RAGHUNATHA, ACCOUNTANT MEMBER आयकर अपील सं./IT(TP)A No.: 33/CHNY/2024 िनधारण वष/Assessment Year: 2020-21 Ramco Systems Ltd., The Assistant Commissioner 47, PSK Nagar, Vs. of Income Tax, Kumarasamy Raja Nagar, Corporate Circle, Rajapalayam - 626 108. Madurai PAN: AABCR 2076B (अपीलाथ /Appellant) ( यथ /Respondent) अपीलाथ क ओर से/Appellant by : Shri S. Muralidhar, CA यथ क ओर से/Respondent by : Shri AR V Sreenivasan, CIT सुनवाई क तारीख/Date of Hearing : 02.03.2026 घोषणा क तारीख/Date of Pronouncement : 11.03.2026 आदेश/ O R D E R PER GEORGE GEORGE K, VICE PRESIDENT:
This appeal filed by the assessee is directed against the final assessment order dated 25.07.2024 passed u/s.143(3) r.w.s144C(13) r.w.s.144B of the Income Tax Act, 1961 (hereinafter called 'the Act'). The relevant Assessment Year is 2020-21.
2. The assessee is a company established in the year 1997. The assessee is a software product company engaged in the business of :- 2 -: IT(TP)A No.33/CHNY/2024 development and selling of four software products namely ERP Software, Aviation Software, HR Software and Logistics Software. The assessee sells its software products in India as well as abroad. It is stated that assessee company has established 14 subsidiaries abroad in various countries for selling its licensed software products abroad. It is submitted that these subsidiaries are the AEs of the assessee and are essential distributors of assessee's software products abroad.
3. For the assessment year 2020-21, return of income was filed on 08.01.2021 declaring nil income after adjusting brought forward losses. The assessee's tax liability u/s.115JB of the Act was Rs.10,25,00,091/-. The return was selected for scrutiny and notice u/s.143(2) of the Act was issued on 29.06.2021. During the course of assessment proceedings, it was noticed that assessee had entered into several international transaction with its AEs. To determine the Arms' Length Price (ALP) of the international transactions entered by the assessee with its AE, the matter was referred to the transfer pricing officer (TPO). The TPO vide his order dated 30.03.2023 passed u/s.92CA(3) of the Act proposed the following two adjustments (i) interest on overdue receivables of Rs.4,43,073/- (ii) performance guarantee fee calculated at 2.55% of :- 3 -: IT(TP)A No.33/CHNY/2024 the guarantee amount of Rs.77.82 crores i.e., Rs.1,98,00,000/-. The transfer pricing in respect of other international transactions was to be held at Arm's Length Price. After receipt of the TPO's order, the AO passed the draft assessment order u/s.144C(1) of the Act on 28.09.2023 by incorporating the above two TP additions proposed by the TPO.
5. Aggrieved by the draft assessment order, assessee filed objections before the Dispute Resolution Panel (DRP) on 19.10.2023. The DRP vide its direction dated 25.06.2024 disposed off the objections raised by the assessee company. The DRP confirmed the addition of interest on overdue receivables of Rs.4,43,073/-. As regards the performance guarantee / product warranty fee, the DRP reduced the rate from 2.55% proposed by the TPO to 1%. On receipt of DRP's directions, the AO passed the impugned final assessment order on 25.07.2024.
6. Aggrieved by the final assessment order, the assessee company has filed the present appeal before the Tribunal. Before the Tribunal, assessee had raised eight issues running into 24 grounds (both TP adjustment as well as corporate tax addition / disallowances). However, during the course of hearing, the Ld.AR :- 4 -: IT(TP)A No.33/CHNY/2024 had only pressed two issues namely, issue Nos.3 & 4, which are detailed below:-
Issue for adjudication Corresponding Grounds Issue No.3 - TP upward adjustment on Ground Nos.10 to 15 account of Performance Guarantee/Product warranty fee Issue No.4 - TP adjustment on account Ground Nos.16 to 20 of interest on overdue receivables We shall adjudicate the above two issues as under:-
7. Issue No.3: TP upward adjustment on account of Performance Guarantee/Product warranty fee (Ground Nos.10 to 15):-
Brief facts in relation to above issue are as follows: During the year under consideration, the assessee had issued product performance warranty (guarantees) in favour of customers of its AEs in Australia and Philippines. The details of the guarantees outstanding as on 31.03.2020 are as under:
Guarantee Name of Name of the Transactions Amount Purpose and No. the AE AE's customer during the outstanding in value in to whom the year in INR INR as on 31-3- respective Guarantee was 2020 currency given 1 Ramco Glen Cameron, Nil 11,46,50,000 Product Warranty Systems Australia / Performance Australia Pty Warranty. Value Ltd, Australia in AUD, 2.5 Mln.
2 Ramco Lendlease, Nil 55,03,20,000 Product Warranty
Systems Australia / Performance
Australia Pty Warranty. Value
Ltd, Australia in AUD, 12 Mln.
3 Ramco Eagle Cement 6,98,06,950 7,39,24,250 Product Warranty
System Inc, Corpn, / Performance
Philippines Philippines Warranty. Value
in USD, 0.985
Mln.
4 Ramco Entrego 1,34,65,300 1,42,59,500 Product Warranty
System Inc, Fulfilment / Performance
Philippines Solutions Inc, Warranty. Value
Philippines in USD, 0.19
Mln.
TOTAL 75,31,53,750
:- 5 -: IT(TP)A No.33/CHNY/2024
8. The total amount outstanding as on 31.03.2020 was
Rs.75,31,53,750. The assessee did not charge any guarantee fee from its AEs. The TPO proposed an adjustment by imputing guarantee commission at 2.55%. The DRP reduced the same to 1%.
The AO thereafter made an addition of Rs.77,82,000 in the impugned final assessment order.
9. The Ld.AR submitted that the Assessing Officer erred in computing the adjustment at 1% on Rs.77.82 crores, whereas even as per the directions of the DRP, the rate of 1% was required to be applied only on Rs.75.31 crores, being the outstanding corporate guarantee amount as on 31.03.2020, and therefore the computation itself was factually incorrect.
10. On merits, it was contended that the guarantees in question were purely performance/product warranties intrinsically linked to the licensing and maintenance of software products and not financial guarantees. The assessee, being the developer and owner of the software and source code, was contractually and technically obliged to provide software licence, updates, upgrades, professional services and maintenance. It was submitted that the obligations undertaken by the AEs towards their customers merely mirrored the :- 6 -: IT(TP)A No.33/CHNY/2024 obligations undertaken by the assessee towards the AEs. The guarantee, according to the AR, merely acknowledged the assessee's own contractual responsibility and could not be disaggregated from the principal transaction of sale/licensing of software. It was further submitted that the assessee earns royalty at 30% of the AE's sales and AMC revenue, which includes consideration for product warranty, and since the main transaction has been accepted at arm's length, no separate remuneration could be attributed to the warranty obligation. The AR also submitted that similar indemnity/performance clauses exist in agreements with domestic customers in India and no separate fee is charged. It was stated that even where bank guarantees were arranged in favour of Indian customers / in lieu of performance guarantee, no separate consideration was recovered. Therefore, it is submitted that, on the basis of internal CUP, the arm's length price of such guarantee is NIL. It was additionally pointed out that during the year the assessee had paid damages of Rs.2,86,14,809 to a customer of its Singapore AE, which was disclosed in Form 3CEB and examined and accepted by the TPO without adjustment, thereby establishing that the performance risk lies with the assessee and no separate guarantee fee can be imputed. The AR further relied on the principle of consistency, submitting that an identical issue was raised in AY :- 7 -: IT(TP)A No.33/CHNY/2024 2018-19 but dropped by the TPO after considering the assessee's explanation, and there being no change in facts, a contrary view was unwarranted. It was also contended that performance guarantees of this nature do not fall within the scope of Section 92B, as Explanation (i)(c) covers financial guarantees and not performance warranties, and since the benefit attaches to the product and not to the AE, no service is rendered to the AE. Without prejudice, it was argued that even if a fee were to be imputed, the rate should be restricted to 0.5% in line with judicial precedents, including the decision of the Mumbai Bench of the ITAT in the case of Everest Kanto Cylinder Ltd., reported in [2013] 34 taxmann.com 19 (Mumbai) as affirmed by the Hon'ble Bombay High Court in the case reported in [2015] 58 Taxman.com 254 (Mumbai). Further, it was submitted that guarantee fee is to be calculated only on pro- rata for the period during which the guarantee was in force during the year.
11. The Ld.DR strongly relied on the findings of Ld.TPO and the DRP.
12. We have heard the rival submissions and perused the material on record. It is evident from the agreements placed on record that the assessee is the developer and owner of the software :- 8 -: IT(TP)A No.33/CHNY/2024 products and is contractually obliged to provide updates, upgrades, maintenance and professional services. The guarantees issued to customers of AEs are in the nature of performance/product warranties and are intrinsically linked to the licensing and maintenance of software. The Revenue authorities have treated the same as financial guarantees securing AE's liability. However, the material on record indicates that the performance risk emanates from the software developed by the assessee and the obligation undertaken under the guarantee mirrors the primary contractual obligations of the assessee itself.
13. Further, the assessee has demonstrated that similar indemnity/performance obligations are undertaken in contracts with unrelated domestic customers without charging separate consideration. This supports the contention that such obligations are commercially embedded in product pricing.
14. We also note that in AY 2018-19, on identical facts, no adjustment was made by the TPO. In the absence of any change in facts or law, a consistent approach ought to have been followed. In these circumstances, we are inclined to hold that the performance guarantees issued by the assessee are closely linked to its primary :- 9 -: IT(TP)A No.33/CHNY/2024 business of software development and licensing and do not warrant a separate benchmarking as a financial guarantee transaction.
15. Accordingly, the TP adjustment made on account of guarantee fee is directed to be deleted. Therefore Ground Nos.10, 11 & 15 are decided in favour of assessee.
Issue No. 4: TP Adjustment on account of Interest on Overdue Receivables - Rs.4,43,073 (Ground Nos. 16 to 20)
16. Brief facts of the case are as follows: The assessee provides a credit period of 270 days to its AEs. In comparison, the credit period allowed to non-AEs ranges from 30 to 75 days. During the year, total receivables from AEs amounted to Rs.95,46,21,720. The assessee furnished invoice-wise details before the TPO, segregating the receivables into:
• Part A: Rs.88,81,00,163 - collected within 270 days • Part B: Rs.3,84,97,356 - collected beyond 270 days
17. The TPO imputed interest at LIBOR + 350 bps (5.818%) only on the amount of Rs.3,84,97,356 collected beyond 270 days, resulting in an adjustment of Rs.4,43,073. The DRP upheld the TP adjustment made by the TPO.
18. The Ld.AR submitted that the assessee had allowed a credit period of 270 days to its AEs and that out of the total year-end :- 10 -: IT(TP)A No.33/CHNY/2024 receivables of Rs.95.46 crores, a sum of Rs.88.81 crores was realised within the agreed credit period and only Rs.3.84 crores was collected beyond 270 days. It was contended that the assessee had already granted working capital adjustment while benchmarking its international transactions under TNMM, wherein the actual average working capital days of 391.33 days were considered, and even after such adjustment, the assessee's margin of 24.60% was substantially higher than the adjusted median margin of the comparables at 16.26%. Therefore, no separate adjustment on account of interest on receivables was warranted in view of the ratio laid down by the Hon'ble Delhi High Court in the case of Kusum Health Care Pvt. Ltd. reported in 99 taxmann.com 431 and Qualcomm India Pvt. Ltd reported in (2023) 156 taxmann.com 288 (Delhi). It was further submitted that the assessee has consistently maintained a clear distinction between trade receivables and loans to AEs; whenever receivables approached the 270-day limit, loans were extended under RBI's ODI Regulations and interest at 8.75% was charged and offered to tax, which transactions were separately benchmarked and accepted to be at arm's length. Thus, there was no arrangement to benefit the AEs by allowing prolonged credit. The delay in the present year, it was explained, was attributable to COVID-related disruptions, particularly in respect of the Chinese AE, :- 11 -: IT(TP)A No.33/CHNY/2024 and the amounts were realised within the extended time permitted by the RBI for realisation of export proceeds. It was also contended that the assessee uniformly did not charge interest on delayed receivables from either AEs or non-AEs and hence no differential treatment was given. Accordingly, it was argued that the imputation of notional interest of Rs.4,43,073 on overdue receivables was unjustified and liable to be deleted.
19. The Ld.DR supported the findings of the TPO and the DRP.
20. We have heard the rival submissions and perused the material placed on record. The short issue for consideration is whether the TPO was justified in imputing interest at LIBOR + 350 bps on receivables amounting to Rs.3,84,97,356 realised beyond the agreed credit period of 270 days, resulting in a TP adjustment of Rs.4,43,073/-. It is an undisputed fact that the assessee benchmarked its international transactions under the TNMM and was granted working capital adjustment to the comparables. The working capital computation was based on actual average working capital days of 391.33 days and not merely the stipulated credit period of 270 days. The assessee's operating margin of 24.60% remained substantially higher than the adjusted median margin of :- 12 -: IT(TP)A No.33/CHNY/2024 16.26% of the comparables even after such adjustment. Therefore, the impact of delay in realisation of receivables stood factored into the pricing analysis. In view of the ratio laid down by the judgment of Hon'ble Delhi High Court in the case of Kusum Health Care Pvt. Ltd. (supra) and reiterated in Qualcomm India Pvt. Ltd., (supra) once the impact of receivables is subsumed in the working capital adjustment, a separate imputation of interest would amount to duplication and distort the arm's length analysis.
21. Further, there is no material on record to indicate any pattern of accommodation or disguised loan to the AEs. In the preceding years, there were no receivables beyond the agreed credit period. Whenever financial assistance was required, the assessee extended loans under RBI regulations, benchmarked them separately, charged interest at 8.75%, and offered the same to tax. Such transactions were accepted by the TPO to be at arm's length. Thus, trade receivables and loans were consistently treated as distinct transactions. The delay during the year has been explained as attributable to COVID-related disruptions. The amounts in question were realised within the extended time permitted by the RBI for realisation of export proceeds. Such bona fide delay, :- 13 -: IT(TP)A No.33/CHNY/2024 occasioned by extraordinary circumstances, cannot by itself justify imputation of notional interest.
22. It is also not disputed that the assessee does not charge interest on delayed receivables from non-AEs. In the absence of any differential treatment between AE and non-AE customers, and in view of the decision of the Hon'ble Bombay High Court in the case of Indo American Jewellery Ltd., reported in [2014] 44 Taxmann.com 310 (Bombay), no notional interest can be imputed. Considering the cumulative effect of the above facts and judicial precedents, we hold that the adjustment of Rs.4,43,073 on account of interest on overdue receivables is unsustainable. The same is hereby deleted. Accordingly, the Ground Nos.16 to 20 raised by the assessee stand allowed.
23. In the result, the appeal filed by the assessee is partly-allowed.
Order pronounced in the open court on 11th March, 2026 at Chennai.
Sd/- Sd/-
(एस.आर. रघुनाथा) (जॉज जॉज के)
(S.R. RAGHUNATHA) (GEORGE GEORGE K)
लेखा सद य/ACCOUNTANT MEMBER उपा य /VICE PRESIDENT
चे ई/Chennai,
दनांक/Dated, the 11th March, 2026
:- 14 -: IT(TP)A No.33/CHNY/2024
RSR
आदे श क त ल प अ े षत/Copy to:
1. अपीलाथ /Appellant
2. यथ /Respondent
3. आयकर आयु त /CIT, Madurai
4. वभागीय त न ध/DR
5. गाड फाईल/GF.