2022 (12) TMI 995 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Companies functionally dissimilar with that of assessee need to be deselected from final list of comparables. Working capital adjustment - HELD THAT - We Direct the Ld.TPO to delete the (-)ve Working Capital Adjustment computed under the software development segment. Working Capital Adjustment computed under ITES segment, we direct the Ld.TPO to compute the working capital on actuals. Assessee is directed to provide all necessary details for both the segments in order to compute the Working Capital Adjustment on actuals by the Ld.TPO. Recomputation of deduction u/s. 10AA reducing telecommunication expenses from the export turnover - HELD THAT - Both sides submitted that this issue is no longer resintegra in lieu of the decision of Hon ble Supreme Court in case of HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT Accordingly, we direct the Ld.AO / TPO to compute the deduction u/s. 10AA of the Act in accordance with the principles laid down by Hon ble Supreme Court in case of HCL Technologies Ltd.(supra). Disallowance of software expenses u/s. 40(a)(i) - HELD THAT - AO disallowed the expenses by relying in case of Samsung Electronics Co. Ltd 2011 (10) TMI 195 - KARNATAKA HIGH COURT The Ld.AR submitted that this decision has been reversed by Hon ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd 2021 (3) TMI 138 - SUPREME COURT we direct the Ld.AO/TPO to verify the invoices raised against which the payments were made by assessee in the light of principles laid down by Hon ble Supreme Court in the above referred case. The Ld.AO is directed to consider the claim in accordance with law by granting appropriate. Belated remittance of PF/ESI - HELD THAT - As addition deleted by the Ld.CIT(A) by following the decision in case of CIT vs. Sabari Enterprises 2007 (7) TMI 169 - KARNATAKA HIGH COURT and in the case of Spectrum Consultants India (P.) Ltd. 2013 (7) TMI 414 - KARNATAKA HIGH COURT Subsequently, we note that in case of ESSAE TERAOKA PVT. LTD. 2014 (3) TMI 386 - KARNATAKA HIGH COURT is followed same decision and deleted the disallowance made.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Re-computation of Deduction under Section 10AA
3. Disallowance of Software Expenses under Section 40(a)(i)
4. Levy of Interest under Sections 234B and 234D
5. Belated Remittance of PF/ESI

Detailed Analysis:

1. Transfer Pricing Adjustments:
- Adjustment to Arm's Length Price: The CIT(A) upheld the adjustment made by the AO/TPO to the arm's length price of the international transactions for software development and IT-enabled services rendered by the assessee to its AEs.
- Rejection of TP Documentation: The CIT(A) rejected the TP documentation and economic analysis undertaken by the assessee, invoking Section 92C(3)(a) and (c) without providing cogent reasons.
- Comparable Companies: The CIT(A) upheld the TPO/AO's action of disregarding certain comparable companies selected by the assessee and instead selecting additional comparable companies.
- Multiple Year Data: The CIT(A) upheld the rejection of the use of multiple year data for determining the arm's length price.
- Quantitative and Qualitative Filters: The CIT(A) upheld the application of various filters by the AO/TPO, including software development services less than 75% of total revenue, employee cost greater than 25% of turnover, export sales less than 75% of sales, and related party transactions filter greater than 25% of sales.
- Provision of Doubtful Debts: The CIT(A) upheld the TPO's view that the provision for doubtful debts should be considered operating in nature for margin computation.
- Working Capital Adjustment: The CIT(A) upheld the computation of working capital adjustment.
- Exclusion of Comparables: The Tribunal directed the exclusion of certain comparables like Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., Genesys International Services Ltd., and Infosys Ltd., based on functional dissimilarities and ownership of intangibles.
- Inclusion of Comparables: The Tribunal directed the inclusion of certain comparables for ITES and software development services.

2. Re-computation of Deduction under Section 10AA:
- Reduction of Telecommunication Expenses: The CIT(A) erred in reducing telecommunication expenses from export turnover for computing the deduction under Section 10AA. The Tribunal directed re-computation in line with the Supreme Court's decision in HCL Technologies Ltd.

3. Disallowance of Software Expenses under Section 40(a)(i):
- Non-deduction of TDS: The CIT(A) disallowed software expenses for non-deduction of TDS, treating the payments as 'royalty'. The Tribunal directed the AO to verify the invoices and reconsider the claim based on the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd.

4. Levy of Interest under Sections 234B and 234D:
- Consequential Nature: The levy of interest under Sections 234B and 234D was deemed consequential to the additions made in the assessment order.

5. Belated Remittance of PF/ESI:
- Deletion of Addition: The CIT(A) deleted the addition made on account of belated remittance of PF/ESI, following the Karnataka High Court's decision in CIT vs. Sabari Enterprises. The Tribunal upheld this deletion.

Conclusion:
The assessee's appeal was allowed on various grounds, including the exclusion of certain comparables, re-computation of deductions under Section 10AA, and reconsideration of disallowed software expenses. The revenue's appeal was dismissed.