2022 (12) TMI 1412 - AT - Income Tax

TP adjustment - Exclusion of subcontracting charges - determination of net cost margin excluding the sub-contract charges is decided against the assessee by coordinate bench of this Tribunal in assessee's own case for the AY 2011-12 2016 (9) TMI 1458 - ITAT BANGALORE . Comparable selection - directions to the AO/TPO to apply 15% RPT filter - We direct exclusion of Larsen Tubro Ltd., Persistant systems Ltd., RS Software (India) Ltd., and Infosys Ltd., from the final list. Interest on receivables - TPO proposed transfer pricing adjustment in respect of outstanding receivables in respect of trade creditors being the AEs by using 6 months LIBOR 450 basis points and CUP as the most appropriate method - HELD THAT - This Bench referred to decision of Special Bench of this Tribunal in case Instrumentation Corpn. Ltd. 2016 (7) TMI 760 - ITAT KOLKATA held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act We deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Ld.AO/TPO for deciding it in conformity with the above referred judgment. We also direct the Ld.TPO that in the event the WCA subsumes the outstanding receivables, no separate characterisation is to be made. For those receivables that fall out of the WCA pertaining to year under consideration, then, the rate of interest to be charged must be LIBOR 300 basis points which is in accordance with the principles laid down in case of CIT vs. Cotton Naturals (I) Pvt. Ltd. 2015 (3) TMI 1031 - DELHI HIGH COURT by considering a credit of 90 days. Disallowance u/s. 40(a)(ia) - salary cost reimbursed to Applied Material Inc. on an at cost basis - non-deduction of TDS on reimbursement of salary expenses made on behalf of the seconded employees as fee for technical services - HELD THAT - We remand this issue to the Ld.AO to consider the claim in accordance with the decision of M/s. Flipkart Internet Pvt. Ltd. 2022 (6) TMI 1251 - KARNATAKA HIGH COURT and M/s. Toyota Boshoku Automotive India Pvt. Ltd. 2022 (4) TMI 1443 - ITAT BANGALORE , Goldman Sachs Services Pvt. Ltd. 2022 (4) TMI 1444 - ITAT BANGALORE having regard to the evidences filed by the assessee. Needless to say that proper opportunity of being heard must be granted to assessee in accordance with law. On verification once it is ascertained that the assessee has deducted tax on the entire salary payable to the seconded employee u/s 192 of the act, no disallowance is warranted under section 40(a) (i) of the act. Denial of depreciation claimed on leasehold improvements - Assessee failed to submit documentary proof/ evidences substantiating the date of put to use of assets for leasehold improvements acquired during FY 2014-15 - HELD THAT - Both sides submits that the facts of the issue in the present year is identical with that of A.Y. 2014-15 2022 (6) TMI 1357 - ITAT BANGALORE . We therefore direct the Ld.AO to verify the additions made to the asset during the year under consideration based on the evidences filed by assessee for determining the disallowance in accordance with law.

Summary

Issues Involved:
1. Exclusion of subcontracting charges.
2. Exclusion of certain comparables.
3. Inclusion of certain comparables.
4. Interest on receivables.
5. Disallowance under Section 40(a)(i) for salary cost reimbursed.
6. Denial of depreciation on leasehold improvements.

Detailed Analysis:

1. Exclusion of Subcontracting Charges:
The Tribunal upheld the decision of the lower authorities, referencing the assessee's own case for AY 2011-12, which concluded that subcontracting charges form part of the operating cost and cannot be excluded as pass-through costs. The Tribunal emphasized that excluding these charges would artificially inflate the assessee's margins on other services. Hence, the ground raised by the assessee was dismissed.

2. Exclusion of Certain Comparables:
The Tribunal examined the functional dissimilarities and lack of segmental details for several comparables:

- Tata Elxsi Ltd.: Excluded due to its engagement in diverse activities within the software development segment, which are not comparable to the assessee's services.
- Rheal Software Pvt. Ltd.: Remanded for reconsideration by the AO based on new submissions regarding functional dissimilarities and fluctuating margins.
- Infobeans Technologies Ltd.: Excluded due to its engagement in business IT services and lack of segmental details.
- Nihilent Technologies Ltd.: Excluded for being functionally dissimilar and engaging in diverse activities without segmental details.
- Aspire Systems (India) Pvt. Ltd.: Excluded due to its diverse services and significant onsite expenses.
- Cybage Software Pvt. Ltd.: Excluded for being engaged in diversified activities and lack of segmental details.
- Inteq Software Pvt. Ltd.: Excluded as it provides diverse services without segmental details.
- Mindtree Ltd.: Excluded due to its engagement in diversified activities and significant intangible assets.
- Larsen and Toubro Infotech Ltd.: Excluded for its diverse services, proprietary software products, and significant intangibles.
- R S Software (India) Ltd.: Excluded due to engagement in diverse services and significant onsite expenses.
- Persistent Systems Ltd.: Excluded for its focus on product development and significant R&D activities.
- Infosys Ltd.: Excluded due to its diverse services, significant intangibles, and high brand value.

3. Inclusion of Certain Comparables:
The Tribunal remanded the inclusion of Akshay Software Technologies Ltd., I2T2 India Limited, Infomile Technologies Limited, Isummation Technologies Pvt. Ltd., Orangescape Technologies Ltd., Maveric Systems Limited, and Batchmaster Software Private Limited to the AO for fresh consideration.

4. Interest on Receivables:
The Tribunal remitted the issue to the AO/TPO for fresh consideration, emphasizing that interest on receivables should not be considered a separate international transaction if it is subsumed in the working capital adjustment. If not, the interest rate should be LIBOR + 300 basis points with a credit period of 90 days.

5. Disallowance under Section 40(a)(i) for Salary Cost Reimbursed:
The Tribunal remanded the issue to the AO, directing consideration of the claim in light of the Karnataka High Court's decision in M/s. Flipkart Internet Pvt. Ltd. vs. DCIT (IT) and other relevant cases. The AO was instructed to verify if the entire salary was subjected to TDS under section 192 and to allow the claim accordingly.

6. Denial of Depreciation on Leasehold Improvements:
The Tribunal remanded the issue to the AO for verification of additions made during the year based on the evidence submitted by the assessee. The AO was instructed to determine the disallowance in accordance with law, considering the directions issued for AY 2014-15.

Conclusion:
The appeal was partly allowed, with several issues remanded for fresh consideration and others decided in favor of the assessee based on functional dissimilarities and lack of segmental details.