2020 (5) TMI 86 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Assessee-company is engaged in the activities in India, which includes design and sales agent support services NXP s design competence centre in Bangalore offers user solutions for vibrant medis technologies and focuses on automotive, identification and software businesses, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Disallowing the stock compensation expense - HELD THAT - There was an amendment to section 17(2)(iiia) with effect from 01.04.2000, however, the same was deleted by the Finance Act, 2000 with effect from 01.04.2001. Being so, the judgment of the Hon ble Supreme Court in the case of Infosys Technologies Limited 2006 (12) TMI 62 - HIGH COURT, KARNATAKA is squarely applicable to the facts of the case. Accordingly, we hold that the element of shares to employees under ESOP could not be treated as perquisite as there was no benefit and value of benefit, if any, was unascertainable at the time when the options were exercised. Accordingly, we allow this ground raised by the assessee.

Issues Involved:
1. Incorrect appreciation of facts and wrong interpretation of law.
2. Errors in assessing total income and tax demand.
3. Transfer Pricing adjustments and comparability of companies.
4. Disallowance of stock compensation expense.
5. Disallowance of payment for software purchase.
6. Erroneous computation of depreciation.
7. Levy of interest under sections 234B, 234C, and 234D.
8. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Incorrect Appreciation of Facts and Wrong Interpretation of Law:
The appellant contended that the order and directions of the Hon’ble DRP were based on an incorrect appreciation of facts and wrong interpretation of law, rendering them bad in law.

2. Errors in Assessing Total Income and Tax Demand:
The appellant argued that the AO/TPO erred in assessing the total income at INR 324,935,945 against the returned income of INR 244,543,220 for AY 2012-13 and determining a balance tax demand of INR 40,638,140.

3. Transfer Pricing Adjustments and Comparability of Companies:
The appellant raised multiple issues regarding the transfer pricing adjustments made by the AO/TPO, including the rejection of the appellant's economic analysis and the selection of comparables.

Persistent Systems Limited:
The Tribunal noted that Persistent Systems Limited was engaged in product development and product design services, which are functionally different from the appellant's software development services. The Tribunal directed the TPO to exclude Persistent Systems Limited from the list of comparables.

Larsen & Toubro Infotech Limited:
The Tribunal observed that Larsen & Toubro Infotech Limited was engaged in software product development and its segmental information on SWD services was not available. The Tribunal directed the TPO to exclude Larsen & Toubro Infotech Limited from the list of comparables.

Infosys Limited:
The Tribunal found that Infosys Limited was functionally different from the appellant as it owned significant intangibles, had high brand value, and incurred substantial R&D expenditure. The Tribunal directed the TPO to exclude Infosys Limited from the list of comparables.

Genesys International Corporation Limited:
The Tribunal noted that Genesys International Corporation Limited was engaged in providing GIS-based services, which are functionally different from the appellant's software development services. The Tribunal directed the TPO to exclude Genesys International Corporation Limited from the list of comparables.

Sasken Communication Technologies Limited:
The Tribunal observed that Sasken Communication Technologies Limited was engaged in software product development and had high R&D expenditure and intangibles. The Tribunal remitted the issue to the TPO for fresh consideration.

4. Disallowance of Stock Compensation Expense:
The appellant argued that the AO erred in disallowing the stock compensation expense of INR 6,523,426 on the basis that tax was not deducted at source on the perquisite taxable in the hands of employees. The Tribunal relied on the Supreme Court judgment in CIT v. Infosys Technologies Limited, holding that the element of shares to employees under ESOP could not be treated as a perquisite as there was no benefit and the value of the benefit was unascertainable at the time the options were exercised. The Tribunal allowed this ground.

5. Disallowance of Payment for Software Purchase:
The appellant contended that the AO erred in disallowing the payment for software purchase amounting to INR 134,700 due to non-deduction of taxes at source, without appreciating that this expenditure did not pertain to the current assessment year. This ground was not pressed by the appellant during the hearing and was dismissed.

6. Erroneous Computation of Depreciation:
The appellant argued that the AO inadvertently increased the income by adding depreciation of INR 3,125,527 instead of reducing it. This ground was not pressed by the appellant during the hearing and was dismissed.

7. Levy of Interest under Sections 234B, 234C, and 234D:
The appellant contended that the AO erred in levying interest under sections 234B and 234C of the Act. These grounds were not pressed by the appellant during the hearing and were dismissed.

8. Initiation of Penalty Proceedings under Section 271(1)(c):
The appellant argued that the AO erred in initiating penalty proceedings under section 271(1)(c) of the Act. This ground was not pressed by the appellant during the hearing and was dismissed.

Conclusion:
The Tribunal partly allowed the appeals for statistical purposes, directing the TPO to exclude certain comparables and reconsider others, and allowed the ground related to the disallowance of stock compensation expense based on the Supreme Court judgment in CIT v. Infosys Technologies Limited. Other grounds raised by the appellant were dismissed as not pressed.

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