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2025 (4) TMI 1565 - AT - Income TaxTP Adjustment u/s 92CA (3) - international transaction of provision of Software Development Services - TPO held that XS CAD India Private Limited is functionally comparable to the Assessee and retained as a comparable company on the ground that the services provided by the Company are predominantly software development services which are similar to the services provided by the Assessee - HELD THAT - XS CAD India Private Limited cannot be said to be functionally comparable to the Appellant accordingly we direct the TPO/A.O. to exclude excess XS CAD India Private Limited while benchmarking the international transaction pertaining to provisions of IT support and related services. Since AR submitted that by excluding the XS CAD India Private Limited from comparables the Assessee will be at Arm s Length accordingly not canvassed any argument on the other comparable companies thus the Ground is partly allowed. Corporate tax addition made by disallowing the claim of donation made u/s 80G - HELD THAT - As donation made to a Trust and Societies register under 80G of the Act for the purpose of compliance with the provision of Companies Act 2013 regarding CSR activities and the subsequent claim made u/s 80G of the Act has been decided in the case of Tera data India Pvt. ltd 2023 (10) TMI 1376 - ITAT DELHI as held assessee in the instant case had duly complied the provisions of Companies Act 2013 read with CSR rules thereon and as per the provisions of the Income Tax Act had also voluntarily disallowed the CSR expenditure while computing the taxable income. Since the donee institutions are eligible institutions enjoying exemption u/s 80G of the Act the assessee has claimed deduction u/s 80G of the Act which is also provided in the statute itself to the assessee. Hence denial of deduction u/s 80G of the Act to the assessee would result in gross injustice. Thus we are of the opinion that denial of deduction u/s 80G of the Act to the Assessee would resulting gross injustice accordingly we direct the A.O. to grant deduction u/s 80G of the Act if other conditions of Section 80G of the Act are fulfilled - Decided in favour of assesssee.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered in the appeal are: - Whether the total income assessment and consequent tax demand, including interest under Sections 234B and 234C of the Income Tax Act, 1961, were correctly made by the Assessing Officer (AO). - Whether the Transfer Pricing Officer (TPO), AO, and Dispute Resolution Panel (DRP) erred in making a transfer pricing adjustment of Rs. 9,86,16,386 under Section 92CA(3) of the Act on the international transaction of provision of software development services. - Whether the economic analysis and selection of comparable companies in the Transfer Pricing documentation were erroneous, including rejection of comparables selected by the Assessee and introduction of new comparables without establishing functional comparability. - Whether the computation of working capital adjusted operating profit margin of comparable companies was incorrect. - Whether the disallowance of deduction of Rs. 10,14,600 under Section 80G of the Act on account of donations made by the Assessee was justified. - Whether the initiation of penalty proceedings under Section 270A for under-reporting or misreporting of income was justified. 2. ISSUE-WISE DETAILED ANALYSIS Transfer Pricing Adjustment and Comparable Companies (Grounds 2, 3, 4, and 5) The Assessee is a subsidiary providing software development services to its parent company abroad and adopted the Transactional Net Margin Method (TNMM) with Net Cost Plus (NCP) as the Profit Level Indicator for transfer pricing. The Assessee selected nine comparable companies and concluded that its margin of 12.51% was within the arm's length range of 8.63% to 10.47% (35th to 65th percentile). The TPO rejected four comparables selected by the Assessee and introduced seven new companies, arriving at a higher margin range of 18.85% to 25.01%, leading to a transfer pricing adjustment of Rs. 9,07,61,015. The DRP upheld the exclusion of two comparables (E-Zest Solutions Ltd. and Sasken Technologies Ltd.) on the export income filter and confirmed the corporate tax adjustment. The TPO further revised the margin range to 16.64% to 23.07% after working capital adjustment, resulting in an increased adjustment of Rs. 9,86,16,386. The Assessee challenged the inclusion of XS CAD India Private Limited as a comparable, contending that the company's primary business-computer-aided design (CAD) services related to construction and building-is functionally dissimilar to software development services provided by the Assessee. The Assessee highlighted that XS CAD earns 94.94% revenue from CAD services and does not provide segmental information specific to software development, only geographical segmentation. The Department argued that XS CAD India Private Limited performs software development services similar to the Assessee and hence is a valid comparable. The Tribunal examined the snapshot of XS CAD India Private Limited's website and financials, noting that the company provides design support, 3D modeling, and related services primarily in the CAD sector, which is distinct from the software coding services of the Assessee. The Tribunal relied on a coordinate bench decision which held that XS CAD's segmental reporting based on geography, absence of software development segment, and diversified revenue streams make it functionally incomparable. The Tribunal concluded that XS CAD India Private Limited cannot be considered a comparable company for benchmarking the Assessee's international transactions. Since the Assessee's margins would fall within the arm's length range excluding XS CAD, the Tribunal allowed the ground partly by directing exclusion of XS CAD from comparables. Consequently, the issue of incorrect computation of margins (Ground 5) became academic and was dismissed. Corporate Tax Addition on Donation under Section 80G (Ground 6) The Assessee made donations amounting to Rs. 20,29,000 to trusts and societies registered under Section 80G, treating the amount as inadmissible under business expenditure (Section 37(1)) but claiming deduction under Section 80G. The AO disallowed the claim on the ground that the donations were made as part of mandatory Corporate Social Responsibility (CSR) obligations under the Companies Act, 2013, and thus lacked the element of charity and voluntariness required for deduction under Section 80G. The Assessee relied on judicial precedents from coordinate benches which held that donations made to eligible institutions registered under Section 80G are entitled to deduction under Section 80G even if made in compliance with CSR obligations. These precedents emphasized that CSR contributions are philanthropic in nature and not made with reciprocal benefits or obligations that would negate voluntariness. The Department maintained that CSR donations are statutory obligations and thus not voluntary, justifying disallowance. The Tribunal examined the precedents, including decisions where it was held that:
Accordingly, the Tribunal held that denial of deduction under Section 80G would cause gross injustice and directed the AO to allow the deduction subject to fulfillment of other conditions under Section 80G. Levy of Interest and Penalty Proceedings (Grounds 1, 7, and 8) The Assessee did not press Grounds 1 to 3, which included the levy of interest under Sections 234B and 234C. Ground 7 and 8 challenged the initiation of penalty proceedings under Section 270A for under-reporting or misreporting of income, contending that the additions were differences of opinion rather than concealment or misreporting. The Tribunal did not find it necessary to adjudicate on these grounds in light of the partial allowance of the appeal and dismissal of other grounds. 3. SIGNIFICANT HOLDINGS "XS CAD India Private Limited cannot be said to be functionally comparable to the Appellant... the said company provides design support pre-construction planning building information modeling, 3D modeling and walk through services for building engineering consultants/contractors and fabricators etc. The services rendered by the said company is entirely different from the software development services provided by the Assessee." "Since this company is earning revenue from various streams, therefore, in the absence of relevant segmental information, this company cannot be said to be functionally comparable to the assessee." "Denial of deduction u/s 80G of the Act to the assessee would result in gross injustice... the assessee has claimed deduction u/s 80G of the Act which is also provided in the statute itself to the assessee." "Voluntary nature of donation is by nature of fact that it is not on the basis of any reciprocal promise of donee. The CSR expenditures are also without any reciprocal commitment from beneficiary being philanthropic in nature... The reasoning of learned Tax Authority, the CSR expenditure is mandatory, does not justify disallowance of these expenditures u/s 80G, if other conditions of section 80G are fulfilled." Core principles established include:
Final determinations on issues:
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