2020 (10) TMI 24 - AT - Income Tax

TP Adjustment - comparable selection - Functional similarity - HELD THAT - The assessee is engaged in the business of software development, maintenance and IT enabled services.It provides system integration, enterprise solutions, software development services to the clients of its associated enterprise and two other independent customer is in UK, US and other countries in Europe as well as in India. It provides information technology enabled services in the nature of back-office process outsourcing and inbounds and outbound voice based services (BPO), thus companies functionally dissimilar with that of assessee need to be deselected from final comparable list. TDS u/s 195 - Disallowance of management services fees u/s 40 (a) (i) - Addition on account of management services fee on which no tax is been deducted - Indo French DTAA - HELD THAT - As relying on own case 2016 (8) TMI 166 - DELHI HIGH COURT payment made by the petitioner for the managerial services provided by the latter cannot be taxed as fee for technical services thus said payments are not liable to withholding of tax under section 195. Disallowance of deduction u/s 10 AA - reasons for restricting the disallowance as AO excluded foreign exchange outgo, telecommunication charges, subsistence allowance for on-site employees and standby and callout charges from the total turnover for the purpose of computing deduction u/s 10 AA - claim of the assessee is that both the export turnover and total turnover for computing that deduction under this Section should be on the same basis - HELD THAT - In view of the decision of the coordinate benches and the honourable High Court in assessee s own case we reverse the order of the learned assessing officer and direct to consider a sum of all items in total turnover also for computing deduction u/s 10 AA of the income tax act. Accordingly, ground of the appeal is allowed. Disallowance of foreign-exchange loss on account of unrealized foreign exchange forward contracts entered into for hedging the export proceeds against the currency fluctuation holding the same to be contingent in nature - HELD THAT - Assessee has claimed to place on record party-wise break up of revenue earned by the appellant, which comprises break up of MTP (Management Transfer Price) and LTP (Legal Transfer Price)/ true-up values of invoices raised on AEs. On sample basis, the appellant is furnishing invoice wise break up and corresponding invoices raised on Steria Ltd., UK, revenue wherefrom comprises 81% of the total revenue for the year. All these evidences need to be closely examined by the learned assessing officer to follow the direction of the learned dispute resolution panel. The direction of the learned dispute resolution panel is to only disallow the excess sum debited by the assessee in the books which is not been recovered. In view of this with respect to the submission of the assessee made during the course of hearing before us we set aside the whole issue before the learned that assessing officer with a direction to the assessee to show that the amount of loss that has been disallowed has also been recovered by the assessee from its associated enterprise. The learned assessing officer may examine the same and if it is found already been recovered by the assessee from its associated enterprise, to delete the disallowance. In view of this, ground number of the appeal is allowed accordingly. Short credit of advance tax paid - HELD THAT - On careful consideration of the rival arguments raised before us we direct the assessing officer to consider the credit of advance tax paid to the assessee of the above sum after proper verification. No TDS liability on a sum paid by the assessee to its group entity based in France - See INRASOFT LTD. 2013 (11) TMI 1382 - DELHI HIGH COURT

Issues Involved:
1. Transfer Pricing Issues
2. Corporate Tax Issues
3. Disallowance of Management Services Fees
4. Disallowance of Deduction under Section 10AA
5. Disallowance of Foreign Exchange Loss
6. Additional Ground of Appeal on Limitation

Detailed Analysis:

Transfer Pricing Issues:

The assessee contested adjustments made to the arm's length price of international transactions of IT enabled services and software development services. The primary contention was the inclusion of certain companies as comparables by the Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP). The Tribunal examined each comparable in detail:

- Infosys BPO Ltd and TCS E-Serve Ltd: The Tribunal excluded these companies due to their significant brand value and functional dissimilarity with the assessee, a captive service provider.
- Larsen & Toubro Infotech Ltd and Mindtree Ltd: The Tribunal upheld the inclusion of these companies, finding them functionally similar despite the assessee's objections regarding their brand value and segmental information.
- Thirdware Solutions Ltd: The Tribunal found inconsistencies in the company's financial statements and excluded it from the comparability analysis.
- Persistent Systems Ltd and Sasken Technologies Ltd: The Tribunal upheld their inclusion, rejecting the assessee's claims of functional dissimilarity and significant intangibles.
- ABM Knowledgeware Ltd and Cybercom Datamatics Information Solutions Ltd: The Tribunal excluded ABM Knowledgeware Ltd due to a mismatch in data regarding export turnover but included Cybercom Datamatics Information Solutions Ltd, finding it functionally similar.

Corporate Tax Issues:

Disallowance of Management Services Fees:

The Tribunal addressed the disallowance under Section 40(a)(i) for non-deduction of tax on management services fees paid to Groupe Steria SCA, France. The Tribunal followed the Delhi High Court's decision in the assessee's favor, holding that the payment was not taxable as Fees for Technical Services (FTS) under the India-France Double Tax Avoidance Agreement (DTAA).

Disallowance of Deduction under Section 10AA:

The Tribunal addressed the partial disallowance of deduction under Section 10AA. The assessee claimed that certain expenses should be excluded from both 'export turnover' and 'total turnover' for computing the deduction. The Tribunal followed the Supreme Court's decision in CIT v. HCL Technologies Ltd., directing the Assessing Officer to exclude the specified expenses from the total turnover.

Disallowance of Foreign Exchange Loss:

The Tribunal addressed the disallowance of mark-to-market (MTM) losses on foreign exchange forward contracts. The assessee argued that these losses were fully recovered from its associated enterprises and should not impact the profit and loss account. The Tribunal set aside the issue to the Assessing Officer for verification, directing the assessee to substantiate its claim.

Additional Ground of Appeal on Limitation:

The assessee raised an additional ground, arguing that the assessment order was barred by limitation. The Tribunal dismissed this ground, following the coordinate bench's decision in the assessee's own case for the assessment year 2015-16, holding that the provisions of Section 144C form a self-contained code and are not subject to the time limits prescribed under Section 153.

Conclusion:

The Tribunal provided detailed directions on each issue, allowing partial relief to the assessee on several grounds, including the exclusion of certain comparables and the deletion of disallowances under Sections 40(a)(i) and 10AA. The Tribunal also set aside certain issues for verification by the Assessing Officer, ensuring a thorough examination of the assessee's claims.

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