2025 (2) TMI 189 - AT - Income Tax

Characterization of Profile of assessee - Whether the assessee is KPO or software developer? - HELD THAT - As following the decision of the ITAT Hyderabad Bench in assessee s own case for A.Y. 2020-21 2025 (2) TMI 154 - ITAT HYDERABAD as held non-availability of the reasons for treating the assessee as KPO by TPO / DRP we are of the considered opinion that the finding given by the DRP/TPO will not be as binding and issue of whether the assessee is KPO or software developer is left open to be decided based on the facts and circumstances arising in the subsequent year - ground no.2 of the assessee is treated as allowed for statistical purpose. Benchmark the Corporate Guarantee Fee - As in assessee s own case for A.Y. 2020-21 2025 (2) TMI 154 - ITAT HYDERABAD wherein the Tribunal directed the TPO / Assessing Officer to benchmark the Corporate Guarantee Fee @ 0.53% on total corporate guarantee given by the assessee and also restrict the commission / fees to the period of actual guarantee given by the assessee. TDS u/s 192 - assessee has failed to deduct TDS on salaries and wages paid to employees - as argued assessee is required to deduct TDS on estimated income of the employee and in case the estimated income of the employee including income from salary is less than the taxable income then there is no requirement of deducting TDS - HELD THAT - Since the assessee claims that in many of the employees cases the income does not exceed the taxable net the assessee has not deducted TDS. AO and the DRP completely erred in disallowance of 30% of salary expenses u/s 40(a)(ia) of the Act without verifying the evidence filed by the assessee. Since the assessee has filed various evidences to justify its case and the DRP has not considered additional evidence filed by the assessee and further these evidences were not filed before the AO during the assessment proceedings in our considered view the matter needs to be set aside to the file of AO for further verification. Thus we set aside the order passed by the AO on this issue and restore the issue back to the file of JAO for the limited purpose of verification of additional evidence filed by the assessee with reference to salaries and wages paid to the employees without deducting TDS as per Section 192 of the Act in light of various averments of the learned counsel for the assessee. Ground is allowed for statistical purposes.

Issues Presented and Considered

The core legal questions considered in this judgment include:

Whether the assessee should be characterized as a Knowledge Process Outsourcing (KPO) service provider or a software development provider.
The appropriateness of the corporate guarantee fee rate applied by the Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP).
The disallowance of salary expenses due to non-deduction of tax at source under Section 40(a)(ia) of the Income Tax Act.

Issue-Wise Detailed Analysis

Characterization of Assessee's Services (Ground No. 2)

Relevant Legal Framework and Precedents: The classification of services affects the transfer pricing analysis and the applicable tax provisions. The Tribunal referred to its previous decision in the assessee's own case for A.Y. 2020-21.
Court's Interpretation and Reasoning: The Tribunal noted that the TPO and DRP had not provided reasons for classifying the assessee as a KPO. The lack of reasoning led the Tribunal to conclude that the issue should remain open for future determination.
Conclusions: The Tribunal allowed the ground for statistical purposes, indicating that the classification issue remains unresolved and may be reconsidered in subsequent years.

Corporate Guarantee Fee (Ground No. 3)

Relevant Legal Framework and Precedents: The determination of an arm's length rate for corporate guarantee fees involves comparing the rate charged by financial institutions and previous Tribunal decisions.
Court's Interpretation and Reasoning: The Tribunal followed its prior decision, directing the TPO to apply a 0.53% rate, aligning with precedents like Hetero Labs Limited v. ACIT.
Application of Law to Facts: The Tribunal reasoned that the corporate guarantee fee should be based on the actual period of the guarantee and not exceed the 0.53% rate established in prior cases.
Conclusions: The Tribunal directed the Assessing Officer to apply a 0.53% rate for the corporate guarantee fee and limit it to the actual period of the guarantee.

Disallowance of Salary Expenses (Ground No. 7)

Relevant Legal Framework and Precedents: Section 40(a)(ia) of the Income Tax Act pertains to disallowance of expenses for non-deduction of tax at source. Section 192 governs TDS on salaries.
Court's Interpretation and Reasoning: The Tribunal noted procedural lapses, such as the Assessing Officer's failure to submit a remand report and the DRP's oversight in evaluating additional evidence.
Key Evidence and Findings: The assessee provided employee details and argued that many employees' incomes were below the taxable threshold, negating the need for TDS.
Application of Law to Facts: The Tribunal emphasized the need for verification of the assessee's claims and remanded the matter for further examination.
Conclusions: The Tribunal set aside the disallowance and remanded the issue to the Assessing Officer for verification of the additional evidence.

Significant Holdings

Characterization of Services: The Tribunal left open the classification of the assessee's services, indicating a need for further examination in future assessments.
Corporate Guarantee Fee: The Tribunal established that the fee should be 0.53%, following its previous decisions and emphasizing the need to calculate the fee based on the actual guarantee period.
Disallowance of Salary Expenses: The Tribunal underscored the necessity of verifying the assessee's evidence regarding non-deduction of TDS due to employees' incomes being below the taxable threshold.
Final Determinations: The Tribunal allowed the appeal partly for statistical purposes, indicating unresolved issues and directing further verification by the Assessing Officer.