2015 (7) TMI 1276 - AT - Income Tax

Transfer pricing addition - comparable selection criteria - functional similarity - Held that - The assessee is engaged in the business of developing and providing custom Ebusiness applications thus companies functionally dissimilar with that of assessee need to be deselected from final list. Computation of deduction u/s 10A - Held that - Direction to reduce the expenses both from export turnover as well as total turnover for computation of deduction u/s 10A of the Act as relying on case of Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT Disallowance of interest amount paid on delayed remittance of tax - assessee submitted that interest amount paid on delayed remittance of tax is compensatory in nature and is not penal in nature and therefore it is not disallowable u/s 37(1) - Held that - We agree with the contention of the assessee that interest paid on delayed deposit of TDS amount into Government account cannot be held to be penal in nature. See case of CIT Vs. Mahalakshmi Sugar Mills(1980 (4) TMI 1 - SUPREME Court) - Thus we direct the AO to allow the said expenditure in the hands of the assessee. TDS u/s 194C or 194I - Non-deduction of tax at source on rent paid towards service apartments - Held that - These payments made are of 95, 000/- each to three of the employees and not to the owner of the service apartments. Nothing has been brought on record by the AO that there is any contract between the assessee and the service apartment owner for rendering of any regular service during the relevant previous year. The services rendered by service apartments are similar to service rendered by Hotels and therefore clearly provisions of sec.194C are not applicable. Also even if it is exigible to tax as rent under section 194- I the limit fixed for such application of the provision is 1, 20, 000/- for the relevant assessment year and therefore provisions of sec.194-I are also not applicable. - Decided in favour of assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Deduction under Section 10A
3. Disallowance of Interest on Delayed Remittance of TDS
4. Disallowance under Section 194C for Rent Paid towards Service Apartments

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee challenged the AO's order which upheld the TPO's rejection of the assessee's Transfer Pricing (TP) documentation. The TPO adopted his own comparables and made an adjustment of Rs. 17,785,678. The Tribunal noted that the TPO used selective information not available in the public domain and relied on current year data, ignoring the multiple year data used by the assessee. The Tribunal directed the exclusion of companies with turnovers exceeding Rs. 200 crores and those with Related Party Transactions (RPT) exceeding 15%. The Tribunal also excluded companies functionally dissimilar to the assessee, such as KALS Info Systems Ltd., Tata Elxsi Ltd., and Accel Transmatics Ltd. Infosys Ltd. was excluded based on functional differences and ownership of IPRs. The Tribunal remitted the matter to the AO/TPO for redetermination of the ALP.

2. Deduction under Section 10A:
The assessee contested the AO's computation of deduction under Section 10A, specifically the treatment of telecommunication, insurance, and foreign currency expenses. The Tribunal upheld the alternative claim, directing the AO to reduce these expenses from both export turnover and total turnover, following the jurisdictional High Court's decision in Tata Elxsi Ltd.

3. Disallowance of Interest on Delayed Remittance of TDS:
The AO disallowed Rs. 44,859/- as penal in nature under Section 37(1). The Tribunal held that interest on delayed TDS remittance is compensatory, not penal, citing the Supreme Court's decision in CIT Vs. Mahalakshmi Sugar Mills. The Tribunal directed the AO to allow the expenditure.

4. Disallowance under Section 194C for Rent Paid towards Service Apartments:
The AO disallowed Rs. 2,85,000/- paid as rent for service apartments, applying Section 194C. The Tribunal found that the payments were reimbursements to employees for short-term stays during training and not subject to TDS under Section 194C. Even if considered rent under Section 194-I, the payments were below the exemption limit of Rs. 1,20,000/-. The Tribunal allowed the assessee's claim.

Conclusion:
The Tribunal allowed the appeal partly, directing the AO/TPO to re-evaluate the TP adjustments and compute the Section 10A deduction as per the Tribunal's guidelines. The disallowances for interest on delayed TDS remittance and rent for service apartments were overturned.