2020 (11) TMI 464 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Comparable Persistent Systems Limited was excluded based on the RPT filter and the L T InfoTech Limited was considered for exclusion because of trading in software and owned significant intangible assets, and further the Infosys Limited was excluded considering the brand presence and turnover criteria. We follow the judicial precedence A.Y. 2015-16 and direct the TPO to exclude L T InfoTech Limited, Persistent Systems Limited and Infosys Limited from the final list of comparables for determination of ALP. Persistently loss making unit cannot be said as comparable - Disputed issue in respect of losses of continuous three years has to be verified/ tested by the Assessing Officer. Accordingly we remit this matter to the file of TPO/A.O for examination. Working capital adjustment - The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory) Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits - we direct the TPO/A.O with similar directions to grant Working Capital Adjustment. Disallowance u/s 14A r.w.r. 8D - HELD THAT - Admittedly, there is no exempt income earned by assessee during the year, as has been noted by Ld.AO in impugned order. Under such circumstances, we direct Ld.AO to delete addition made under section 14 a read with rule 8D for year under consideration. Accordingly this ground raised by assessee stands allowed. Disallowance of deduction under Section 80G - HELD THAT - Where these two exceptions are provided in Section 80G of the Act, it can be inferred that the other contributions made u/s. 135(5) of the Companies Act are also eligible for deduction u/s. 80G of Income Tax Act subject to assessee satisfying the requisite conditions prescribed for deduction u/s.80G of the Act. In the present case the A.O. has not dealt on these aspects, prima facie, considered the contributions as not voluntary but a legal obligation and has accepted the genuineness of the contributions. We are of the opinion, that the matter has to be considered for examination and verification of facts subject to the assessee satisfying the requirements of claim u/s.80G of the Act. Accordingly, we restore the entire disputed issues to the file of A.O. for fresh examination and verification as discussed above and the assessee should be provided adequate opportunity of hearing.

Summary

Issues Involved:
1. Adjustment under section 92CA of the Act
2. Disallowance under section 14A of the Act
3. Disallowance under section 40(a)(i) of the Act towards reimbursement of salary cost
4. Disallowance of corporate social responsibility expenses claimed as deduction under section 80G of the Act

Issue-Wise Detailed Analysis:

1. Adjustment under section 92CA of the Act:
- Rejection of Transfer Pricing Documentation: The Tribunal noted that the TPO rejected the assessee's TP documentation for the IT & ITES segments, stating it was "not reliable or correct" under Section 92C(3) of the Act. The TPO conducted a fresh search for comparable companies using non-contemporaneous data, which the assessee contested.
- Comparability Analysis: The Tribunal found that the TPO did not provide the assessee an opportunity to undertake a fresh search for comparable companies. The Tribunal directed the exclusion of certain comparables such as L&T Infotech Limited, Persistent Systems Limited, and Infosys Limited due to functional dissimilarities and other factors like brand ownership and extraordinary events.
- Inclusion of Comparables: The Tribunal restored the inclusion of I2T2 India Limited, Evoke Technologies Limited, and Melstar Information Technologies Limited to the TPO/A.O. for further examination and verification.
- Non-availability of Data: The Tribunal highlighted the TPO's error in selecting companies only if FY 2014-15 data was available, disregarding other judicial pronouncements.
- Employee Cost and Export Earning Filters: The Tribunal found that the TPO erred in using a 25% employee cost filter and a 75% export earning filter without proper justification.
- Abnormal Profits: The Tribunal directed the exclusion of Rheal Software Private Limited due to its abnormal profits.
- Operating Profit Margins: The Tribunal noted errors in the computation of operating profit margins of comparable companies, particularly the inclusion of provisions for bad and doubtful debts.
- Working Capital Adjustment: The Tribunal directed the TPO to grant working capital adjustment, following the guidelines from previous judicial pronouncements and OECD guidelines.

2. Disallowance under section 14A of the Act:
- Disallowance of ?1,37,500: The Tribunal found that the assessee did not earn any exempt income during the relevant AY, thus the provisions of Section 14A were not applicable. The Tribunal directed the A.O. to delete the disallowance, following the precedent set by the Hon'ble Delhi High Court in Cheminvest Ltd. Vs. CIT.

3. Disallowance under section 40(a)(i) of the Act towards reimbursement of salary cost:
- Secondment Agreement: The Tribunal noted that the assessee's issue regarding the secondment agreement with GS & Co. was pending before a Special Bench. The Tribunal restored this issue to the DRP for examination and comments.
- Reimbursement of Salary Costs: The Tribunal found that the DRP and A.O. erred in treating the reimbursement of salary costs as Fees for Technical Services (FTS) and directed a re-examination of the facts.

4. Disallowance of corporate social responsibility expenses claimed as deduction under section 80G of the Act:
- CSR Contributions: The Tribunal observed that the A.O. disallowed the deduction under Section 80G on the grounds that CSR contributions were not voluntary. The Tribunal noted that contributions to PM National Relief Fund were allowed, indicating inconsistency in the A.O.'s approach.
- Eligibility for Deduction: The Tribunal directed the A.O. to verify the nature of contributions and determine their eligibility for deduction under Section 80G, considering the specific clauses of the Act that allow for such deductions.

Conclusion:
The Tribunal provided detailed directions for the TPO and A.O. to re-examine various aspects of the case, including the inclusion/exclusion of comparables, granting working capital adjustments, and verifying the eligibility of CSR contributions for deduction. The appeal was partly allowed for statistical purposes, with several issues restored for further examination and verification.