2022 (8) TMI 1412 - AT - Income Tax

TDS u/s 195 - Disallowance of legal and professional fees made u/s 40(a)(i) - HELD THAT - In order to bring the impugned payments within the Article 12 of India- USA DTAA the services should have been made available technical knowledge etc to the assessee herein. In the instant case the assessee has only availed professional services of non-residents in connection with tax compliances and the technical knowledge has not been made available . Since the make available clause fails the impugned payments cannot be taxed as Fee for Included services under Article 12 of the India-USA DTAA. In this view of the matter there is no necessity to refer to Article 15 also. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance of legal and professional fees made u/s 40(a)(i) - Thus direct the AO to delete the disallowance of legal and professional charges. TP adjustment - comparable selection - HELD THAT - Companies functionally dissimilar with that of assessee and with extraordinary events need to be deselected from final list. Infosys BPO - Considering the financial report that there was extraordinary events occurred during the financial year we direct AO/TPO exclude this company as comparable. Excel Infoways Ltd (Seg) (IT/BVPO) company as engaged in software testing verification and validation of software and also on the basis that it had huge turnover and was engaged in providing KPO services. should be excluded from the final list of comparable companies. TCS E-serve Ltd. company be excluded on the basis that it was engaged in software testing verification and validation of software and also on the basis that it had huge turnover and was engaged in providing KPO services. BNR Udyog Ltd. (Seg) (Medical Transcription) - RPT filters applied by the TPO is a 25% but the RPT turnover ratio works out to 49.60% therefore on the basis of RPT filter the assessee cannot be considered as good comparable for the relevant assessment year. Therefore the AO/TPO to is directed to exclude this comparable for computation of ALP. Informed Technologies Pvt. Ltd. - TPO has considered it while calculating PLI and the ld.AR has also requested for inclusion of this company vide written synopsis cited supra and it is not clear why the assessee has raised this issue before us. However while calculating the PLI of the assessee company if this company has not been considered in the final set of comparable for computation then the AO/TPO shall consider it for calculating PLI.

Summary

Issues Involved:
1. Transfer pricing adjustment.
2. Disallowance of deduction claimed under section 80JJAA.
3. Disallowance of software expenditure.
4. Disallowance of payment of legal and professional expenditure.
5. Disallowance of expense on annual maintenance contract and software.
6. Deduction in respect of education cess and secondary higher education cess under section 37(1).

Detailed Analysis:

1. Transfer Pricing Adjustment:
The Tribunal addressed the transfer pricing adjustment concerning the Information Technology enabled Services (ITeS) transaction. The taxpayer's Transfer Pricing Officer (TPO) rejected the taxpayer's Transfer Pricing (TP) study for using outdated data and not applying appropriate filters. The Tribunal referred to previous decisions, emphasizing the importance of using current financial year data and appropriate filters. The Tribunal directed the exclusion of certain companies (Infosys BPO Ltd., Excel Infoway Ltd., TCS E-Serve Ltd., BNR Udyog Ltd.) from the comparables list due to functional dissimilarities and extraordinary events. The Tribunal also directed the inclusion of "Informed Technologies Pvt. Ltd." and "Crystal Voxx Pvt. Ltd." if they pass necessary filters.

2. Disallowance of Deduction Claimed Under Section 80JJAA:
The Tribunal noted that the issue of disallowance under section 80JJAA was previously decided in favor of the assessee by the Karnataka High Court in Texas Instruments India (P.) Ltd. The Tribunal reiterated that the deduction under section 80JJAA is available for employees who complete 300 days of employment, even if spread across two years. The Tribunal remitted the issue back to the Assessing Officer (AO) for fresh consideration, directing the AO to examine the issue afresh in light of the High Court's decision.

3. Disallowance of Software Expenditure:
The Tribunal acknowledged that the issue concerning disallowance of software expenses under section 40(a)(i) had been settled under the Vivad Se Vishwas Scheme (VSVS), and Form No.5 had been issued by the department. Consequently, the Tribunal dismissed the related grounds as not pressed.

4. Disallowance of Payment of Legal and Professional Expenditure:
The Tribunal referred to its previous decision in the assessee's case for the assessment year 2011-12, where it was held that legal and professional fees paid to foreign firms for services rendered outside India are not taxable in India. The Tribunal directed the AO to delete the disallowance of legal and professional fees made under section 40(a)(i) of the Act, as these payments do not constitute income under Indian tax laws and are not subject to tax deduction at source under section 195.

5. Disallowance of Expense on Annual Maintenance Contract and Software:
The Tribunal acknowledged that the issue concerning disallowance of AMC and software expenses under section 40(a)(i) had been settled under the VSVS. Consequently, the Tribunal dismissed the related grounds as not pressed.

6. Deduction in Respect of Education Cess and Secondary Higher Education Cess Under Section 37(1):
The Tribunal dismissed the additional ground concerning the deduction of education cess and secondary higher education cess on income tax, citing the amendment brought by the Finance Act 2022, which mandates the disallowance of such claims.

Conclusion:
The Tribunal provided detailed directions on each issue, emphasizing the need for fresh consideration by the AO in light of previous judicial decisions and clarifications. The appeal was partly allowed for statistical purposes, with specific instructions for the AO to re-examine certain issues.