2023 (9) TMI 1615 - AT - Income Tax

TP Adjustment - Treatment of notional costs related to share based compensation (SBC) - HELD THAT - The cost incurred by Associate Enterprises and not charged the assessee in line with the inter company agreement and it is a mere book entry recognised pursuant to additional disclosure requirement as per the Accounting Standard and there is no liability or obligation on the assessee to pay or reimburse such cost to the AE. Hence, such cost should not be included in the operating cost of the assessee for computing margins of the assessee. Since no cost incurred towards ESOP/RSU granted to its employees same to be excluded from the operating cost. Accordingly, the ground nos.4 to 7 are allowed. Comparable selection - A.R. submitted that the TPO proceeded to recharacterize the SWD services as being R D in nature - HELD THAT - TPO applied R D expenses filter to select comparables incurring R D expenses without specifying any specific threshold. Accordingly, TPO applied R D expenses filter to select comparables incurring R D expenses without specifying any specific threshold. The assessee carried the issue to the ld. DRP. DRP accepted the contention of the assessee as recharacterization of SWD services as contract R D services and directed the TPO to remote the R D filter. This resulted in inclusion of 27 comparables from the TPO s stay which were earlier rejected by the ld. TPO due to application of the R D filter. Being so, there is violation of principles of natural justice while inclusion of additional comparables by ld. TPO without giving opportunity of commenting on this by assessee. Hence, in the interest of justice, we remit the entire issue in ground Nos. 12 13 to the file of ld. TPO/AO for fresh consideration to grant an opportunity of hearing on this issue for inclusion of additional comparables by ld. TPO. Tech Mahindra Business Services Ltd. is engaged in the BPO service provider delivering high end diversification support services and there was presence of significant intangibles and have high grant value.As gone through the financials of M/s. Tech Mahindra Business Services Ltd. Both the assessees are engaged in providing Voice based call centre services. The contention of the assessee s counsel is that they are functionally different and Tech Mahindra Business Services Ltd. is having high grant value and significant intangibles. In our opinion, these facts required to be examined at the end of ld. TPO/AO by comparing the financials of both these companies. Accordingly, this issue is remitted to the file of ld. TPO/AO to examine these two issues specifically and decide afresh. Datamatics Business Solutions Ltd. be excluded from the list of comparables as this company is a KPO company and not comparable to assessee company. Infosys BPM Services Pvt. Ltd. company focuses of delivering solutions to its clients which goes beyond rendering routine ITeS. From the above, it is evident that Infosys BPO is engaged in rendering business solutions and consultancy to its customers which is different from the Appellant s functional profile. Vitae International Accounting Services Pvt. Ltd. - The activities carried on by the present assessee are namely Software Development Services including contract and R D services, IT enabled services and marketing services. Accordingly, in our opinion, it is appropriate to remit the issue to the file of ld. TPO/AO to examine whether assessee has carried on any activities like that of VIASP Ltd. The impugned issue is remitted to the file of ld TPO/AO for fresh consideration after giving an opportunity of hearing to the assessee. Manipal Digital Systems Pvt. Ltd. is directed to be excluded from the list of comparables. CES Ltd. be excluded as providing both BPO and KPO services, cannot therefore be held as comparable. SPI Technologies India Pvt. Ltd. - If an extraordinary event has taken place by way of amalgamation that company cannot be considered as a comparable one and following the same parity of reasoning, we direct the Assessing Officer/TPO to exclude SPI Technologies India Pvt. Ltd. from the final set of comparables while computing international transactions in respect of the assessee in ITes segment. Inteq BPO Services Pvt. Ltd. - as submitted that the services offered by Inteq are high end services, akin to a KPO, requiring highly skilled professionals with higher qualifications in comparison to an ITeS provider - As in view of the above argument of ld. A.R., it is appropriate to remit the issue to the file of ld. TPO/AO to consider the above arguments of the assessee s counsel and decide it afresh. Eclerx Services Ltd be excluded from the list of comparables. Suprawin Technolgies Ltd. issue to the file of ld. TPO/AO for fresh consideration in the ITeS segment. Crystal Voxx Ltd and Surevin BPO Services Ltd - As in the case of Prism Networks Pvt. Ltd. 2022 (2) TMI 1296 - ITAT BANGALORE this comparable has been excluded only on the reason that it does not feature in the search matrix. In our opinion, it is appropriate to remit this Crystal Voxx Ltd. issue to the file of ld TPO/AO for conducting fresh TP study and decide the issue accordingly. Selection of MAM - If the assessee is following the same method in respect of MSS segment that cannot be disturbed by the ld TPO/AO in this assessment year under consideration. Accordingly, we direct the ld. AO/TPO to follow the same method of TNMM to benchmark the ALP. Ordered accordingly. Grant actual working capital adjustment while determining the ALP of the international transactions. Ordered accordingly. Disallowance of deduction u/s 80G - We remit the issue to the file of ld TPO/AO to grant deduction u/s 80G of the Act in accordance with law. Nature of expenditure - revenue v/s capital - purchase of computer peripherals - HELD THAT - In our opinion, the claim of the assessee is justified and accordingly, we direct the ld. TPO/AO to grant depreciation at 60% or at applicable rates. Non-grant of depreciation on the disallowances made in the preceding previous years - In our opinion, the plea of the assessee is justified. Accordingly, we direct the ld. TPO/AO to grant depreciation at applicable rates on the expenditure which was disallowed in the earlier year as capital expenditure. Ordered accordingly. Disallowance of expenses u/s 36(1)(va) - In the draft assessment order, the Assessing Officer upheld the said disallowance without providing any opportunity to the Appellant to submit its contentions against such disallowance. Upon obtaining a remand report and upon accepting the contentions of the Appellant, the DRP directed deletion of the disallowance. In the final assessment order, an amount of Rs. 54, 064/- only was considered as the disallowance u/s 36(1)(va) - the CPC while computing the assessed income has considered the entire disallowance of Rs. 51, 49, 036/- and the disallowance of Rs. 54, 064/- was also considered once again while computing the assessed income resulting in double disallowance to the extent of Rs. 54, 064/-. Thus we remit this issue to the file of ld TPO/AO for fresh consideration after giving an opportunity of hearing to the assessee. Disallowance u/s 40(a)(ia) in intimation issued u/s 143(1) - though the same has already been disallowed under section 37 of the Act suo moto by the Appellant in its return of income - After haring both the parties, we remit this issue to the file of ld TPO/AO to verify whether there is a double disallowance on this count and decide accordingly. Non-consideration of the consolidated revised return of income - We remit this issue also to the file of ld TPO/AO to consider revised return of income in accordance with law. Ordered accordingly. Short grant of TDS - We remit this issue to the file of ld TPO/AO with direction to give correct advance and TDS credit. Ordered accordingly.

Summary

Issues Involved:

1. Transfer Pricing Adjustment
2. Treatment of Notional Costs Related to Share-Based Compensation (SBC)
3. Inclusion and Exclusion of Comparable Companies
4. Methodology for Marketing Support Services (MSS) Segment
5. Working Capital Adjustment
6. Disallowance of Deduction Under Section 80G
7. Disallowance of Expenditure Under Section 37
8. Non-Grant of Depreciation on Disallowances from Previous Years
9. Disallowance of Expenses Under Section 36(1)(va)
10. Addition of Income Towards Sub-Lease Rental Income
11. Disallowance Under Section 40(a)(ia)
12. Non-Consideration of Consolidated Revised Return of Income
13. Short Grant of Credit for Advance Tax and TDS
14. Levy of Interest Under Sections 234B, 234C, and 234D

Issue-Wise Detailed Analysis:

1. Transfer Pricing Adjustment:
- The Tribunal addressed the adjustments made by the Transfer Pricing Officer (TPO) to the international transactions of the assessee. The TPO had recomputed the profit margin by adding notional expenses related to the employee stock option plan. The Tribunal examined the comparables selected by both the assessee and the TPO, and the directions issued by the Dispute Resolution Panel (DRP). The Tribunal directed the TPO to re-evaluate the comparables and the methodology used for determining the arm's length price.

2. Treatment of Notional Costs Related to Share-Based Compensation (SBC):
- The Tribunal held that the notional SBC costs, which were not incurred by the assessee but by the Associated Enterprise, should not be included in the operating cost base. The Tribunal relied on previous decisions to conclude that only actual expenses incurred should be considered as operating expenses, and not notional expenses.

3. Inclusion and Exclusion of Comparable Companies:
- The Tribunal addressed the inclusion and exclusion of various companies as comparables for the purpose of transfer pricing analysis. It remitted the issue back to the TPO/AO for fresh consideration, emphasizing the need to grant an opportunity for the assessee to comment on the inclusion of additional comparables.

4. Methodology for Marketing Support Services (MSS) Segment:
- The Tribunal found that the TPO's ad-hoc methodology of revenue split was not in accordance with the prescribed methods under the Act. It directed the TPO/AO to follow the Transactional Net Margin Method (TNMM) to benchmark the arm's length price for the MSS segment, as the assessee was a contract service provider and not a distributor.

5. Working Capital Adjustment:
- The Tribunal directed the TPO/AO to grant an actual working capital adjustment while determining the arm's length price of the international transactions.

6. Disallowance of Deduction Under Section 80G:
- The Tribunal remitted the issue to the TPO/AO to grant deduction under Section 80G in accordance with the law, as the CSR expenditure was eligible for deduction under other sections subject to fulfillment of conditions.

7. Disallowance of Expenditure Under Section 37:
- The Tribunal accepted the assessee's claim that the expenditure on computer peripherals was revenue in nature and directed the TPO/AO to grant depreciation at 60% or applicable rates.

8. Non-Grant of Depreciation on Disallowances from Previous Years:
- The Tribunal directed the TPO/AO to grant depreciation on the expenditure disallowed in earlier years as capital expenditure, in accordance with the applicable rates.

9. Disallowance of Expenses Under Section 36(1)(va):
- The Tribunal remitted the issue to the TPO/AO for fresh consideration, directing them to give effect to the DRP's directions by deleting the disallowance.

10. Addition of Income Towards Sub-Lease Rental Income:
- The Tribunal remitted the issue to the TPO/AO for verification, as the assessee had already offered the income to tax, which resulted in a double addition.

11. Disallowance Under Section 40(a)(ia):
- The Tribunal remitted the issue to the TPO/AO to verify whether there was a double disallowance and decide accordingly.

12. Non-Consideration of Consolidated Revised Return of Income:
- The Tribunal remitted this issue to the TPO/AO to consider the revised return of income in accordance with the law.

13. Short Grant of Credit for Advance Tax and TDS:
- The Tribunal directed the TPO/AO to give the correct credit for advance tax and TDS as claimed by the assessee.

14. Levy of Interest Under Sections 234B, 234C, and 234D:
- The Tribunal noted that these grounds are consequential and mandatory, and interest is to be charged accordingly.

In conclusion, the Tribunal allowed the appeal of the assessee partly for statistical purposes, providing directions for several issues to be reconsidered or verified by the TPO/AO.