2022 (11) TMI 1139 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - We direct the TPO to exclude (i) Infosys BPO Limited, (ii) SPI Technologies India Private Limited, and (iii) Eclerx Services Limited from the list of comparables and recompute the ALP of the international transaction. Informed Technologies India Limited and Crystal Voxx Limited - As we find that the Tribunal in assessee's group case in the case of EIT Services Private Limited v. DCIT 2022 (8) TMI 1309 - ITAT BANGALORE had restored the matter to the TPO to examine whether the above two companies can be considered as comparable company. Thus we direct the AO/TPO to examine afresh whether the above two companies, namely, Informed Technologies India Limited and Crystal Voxx Limited can be included as comparable companies. Ace BPO Services Private Limited - Restore the comparability of Ace BPO Services Private Limited to the files of the TPO. Disallowance of ESOP expenses u/s. 37 - employees of the assessee was eligible to participate in share based compensation scheme of the ultimate holding company, whereby the shares of the ultimate holding company are granted to the employees of the assessee on satisfying certain conditions - HELD THAT - In assessee's group case, namely, EIT Services India Pvt. Ltd. v. DCIT 2022 (8) TMI 1309 - ITAT BANGALORE had held that the ESOP expenditure is to be allowed as a deduction u/s. 37 of the I.T. Act. The Tribunal had followed the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Biocon Limited 2020 (11) TMI 779 - KARNATAKA HIGH COURT TDS u/s 195 - The assessee has raised grounds with regard to the issue that the assessee is not liable for TDS u/s. 195 of the I.T. Act - We are of the view that these grounds need not be adjudicated, since, on perusal of the final assessment, it is clear that the disallowance of ESOP expenses has made under the provisions of section 37 of the I.T. Act (though there was some discussion in the draft assessment order with reference to disallowance u/s. 40(a)(i). Payment towards leave encashment - HELD THAT - In the light of the decision of the Hon'ble Supreme Court in the case of Exide Industries 2020 (4) TMI 792 - SUPREME COURT assessee will not be entitled to claim deduction on leave encashment on the basis of the provision. Taking into consideration the circumstances under which the assessee did not claim a sum being leave encashment actually being paid during the previous year relevant to Assessment Year 2016-2017 we are of the view that the assessee should be allowed leave encashment actually paid as per provisions of section 43B(f) of the Act. We remit the issue to the AO to verify the claim of the assessee and allow deduction to the assessee as per law after affording assessee opportunity of being heard.

Issues Involved:
1. Transfer Pricing Adjustment
2. Corporate Tax Disallowance of ESOP Expenses
3. Deduction for Leave Encashment
4. Initiation of Penalty Proceedings

Detailed Analysis:

Transfer Pricing Adjustment:

Exclusion of Comparables (Ground 1.12):
The appellant sought the exclusion of three companies as comparables: Infosys BPO Limited, SPI Technologies India Private Limited, and Eclerx Services Limited. The Tribunal referred to the case of EIT Services India Pvt. Ltd. v. DCIT, where these companies were excluded due to functional dissimilarities. The Tribunal noted that Infosys BPO Limited offers diversified services and has significant intangibles and brand value, making it not comparable to the appellant. SPI Technologies India Private Limited was excluded due to extraordinary events like mergers and acquisitions affecting its financials. Eclerx Services Limited, being a high-end KPO service provider, was also deemed not comparable to the appellant, which provides low-end ITES.

Inclusion of Comparables (Ground 1.13):
The appellant sought the inclusion of three companies: Ace BPO Services Private Limited, Informed Technologies India Limited, and Crystal Voxx Limited. The Tribunal directed the TPO to examine whether Informed Technologies India Limited and Crystal Voxx Limited could be included as comparables, referencing past Tribunal decisions that supported their inclusion. For Ace BPO Services Private Limited, the Tribunal restored the comparability issue to the TPO, noting that it was considered a comparable in the previous assessment year 2015-2016.

Corporate Tax Disallowance of ESOP Expenses (Grounds 2.1 to 2.15):

Disallowance under Section 37:
The appellant claimed ESOP expenses as a deduction under Section 37 of the I.T. Act. The AO disallowed the claim, considering it fictitious and notional. The Tribunal referred to the case of EIT Services India Pvt. Ltd. v. DCIT and the jurisdictional Karnataka High Court's decision in CIT v. Biocon Limited, which held that ESOP expenses are deductible under Section 37. The Tribunal directed the AO to verify if the ESOP expenses were subject to TDS under Section 192/195 and allow the deduction accordingly.

Non-Applicability of Section 195:
The appellant argued that ESOP expenses are not liable for TDS under Section 195, as they were subject to TDS under Section 192 in the hands of employees. The Tribunal did not adjudicate these grounds, as the disallowance was made under Section 37 and not under Section 40(a)(i).

Deduction for Leave Encashment (Grounds 3 to 3.3):

The appellant claimed a deduction for leave encashment paid during the financial year 2015-2016 but did not claim it in the return of income due to pending litigation. The Tribunal noted the Supreme Court's decision in the case of Exide Industries, which upheld the constitutional validity of Section 43B(f) for deduction on a payment basis. The Tribunal directed the AO to verify the claim and allow the deduction as per law.

Initiation of Penalty Proceedings (Ground 4):

No arguments were raised regarding the initiation of penalty proceedings under Section 271(1)(c), and hence, the ground was rejected.

Conclusion:

The appeal was partly allowed, with directions to the AO/TPO to re-examine the issues related to transfer pricing adjustments and deductions for ESOP expenses and leave encashment as per the Tribunal's findings and applicable law.

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