9911796707
TMI Blog2022 (8) TMI 1309X X X X Extracts X X X X X X X X Extracts X X X X ..... at the expenses are not genuine expenses. The said expenses are incurred wholly and exclusively for the business of the Company and therefore, eligible for deduction under section 37 of the Act. ESOP expense is nothing, but compensation paid to employees of the Company and accordingly, taxed in the hands of employees as Perquisites (Company submitted the sample Form 16 s of employees). Provision of section 37(1) of the Act inter alia provides that any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession, not being in the nature of capital expenditure or personal expenses, shall be eligible for deduction in computation of total income . ESOP schemes for stock options enables in attracting and retaining the employees of the Company, resulting in better performance of the Company s business operations. The scheme is designed primarily to incentivise and for retaining the employees and thereby, earn more revenue by securing consistent and concentrated efforts of dedicated employees. The share-based compensation under the ESOP scheme is construed both by the employees and the Company as a part of employment remuneration package, which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Study ('TP' study) maintained by the Appellant in the manner Prescribed under Section 92D of the Income Tax Act, 1961 ('the Act). d. The AO/TPO erred on facts and in law in conduct ing a fresh benchmarking analysis based on his own conjectures and surmises. The DRP erred in upholding the act ions of the AO/ TPO 3. Comparability analysis adopted by TPO for determination of arm's length prices of the transactions of provision of SWD and ITE services. a. That the TPO erred in applying arbitrary filters to arrive at fresh sets of companies as comparables to the Appellant, without establishing their functional comparability. The DRP erred in confirming the action of the TPO. b. That the TPO erred in selecting companies only if the data pertaining to financial year 2015-16 is available in the public database. The DRP erred in upholding the action of the TPO. c. That the TPO erred in arbitrarily rejecting companies merely on the ground that they have a different financial year ending (i.e. other than 31st March 2016) or the data which does not fall within 12-month period (i.e. 1St April 2015 to 31St March 2016) The DRP erred in confirming the same. d. That the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... master Software Private Limited. DCIS Dot Corn Solutions India Private Limited. Sagarsoft (India) Ltd., [summation Technologies Private Limited. despite the functions performed. assets employed and risks assumed by the said companies are comparable to that of the Appellant. e. That without prejudice. the DRP erred in upholding the rejection of Sasken Communication Technologies Limited. and Agilisys IT Services India Private Limited on the above basis. despite the Appellant having selected the said companies in its TP study. f. That the TPO erred in computing the margin of Orion India Systems Private Limited. 5. Determination of arm's length price relating to IT Enabled Services a. That Infosys BPO Limited. SPI Technologies India Private Limited. and Eclerx Services Limited ought to be excluded from the list of comparables as the functions performed. assets employed and risks assumed by the said companies are entirely different and incomparable to that of the Appellant b. That Jindal Intellicom Limited, R Systems International Limited. Micro genetic Systems Limited, Ace BPO Services Private Limited, Informed Technologies India Private Limited and Crystal Voxx Limited o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e price of shares is being taxed as perquisite in the hands of the employees under Section 192 of the Act which is evidenced by sample Form 16 furnished by the Appellant d The AO and DRP erred in law and on facts. in disregarding the sample debit note/invoices. Employee listing Sample Form 16, cost reimbursement agreement, sample RSU agreement and scheme document submitted during the DRP proceedings by the Appellant. e. That the AO erred in disallowing the ESOP expenses reimbursed by the Appellant to its parent entity on the erroneous basis that the (i) loss in the hands of the parent entity is notional in nature. (ii) the payment is fictitious in nature; and (iii) the payment is a colourable device adopted by the Appellant for avoidance of tax. The DRP erred in upholding the same. f. The AO and DRP has erred in law and on facts by placing reliance on the case laws decided on different context and not applicable to the facts of the Appellant. g. That the DRP erred in upholding the disallowance on the basis that the expenditure cannot be claimed by the Appellant as a deduction prior to the date of exercise of option by employee. h. That the DRP erred in upholding the disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the final assessment order. 13. That in the final assessment order the AO erroneously adopted the TP adjustment at Rs. 339.44,00.000/- against Rs 310,47,31.000/- as computed in the order passed by the TPO giving effect to the DRP's directions. 14. Initiation of penalty proceedings a. That the AO erred in initiating penalty proceedings under Section 271(1)(c). The Appellant craves leave to add to or alter, by deletion, substitution or otherwise. the above grounds of appeal, at any time before or during the hearing of the appeal. 15. Rel ief a. The Appellant prays that the appeal may be allowed and the impugned final assessment order be set aside". 2. Ground Nos.1 to 3 are general in nature which do not require any adjudication. 3. In Ground No.4(a) the assessee pressed exclusion of following comparables:- i. L&T Infotech Ltd. ii. Persistent Systems Ltd. iii. Infobeans Technologies Ltd. iv. Infosys Ltd. i. L&T Infotech Ltd. 3.1 Ld. A.R. submitted that L&T Infotech Ltd. is engaged in diversified business activities and thereby functionally dissimilar. According to the Ld. A.R., L&T Infotech Ltd. has two business segments namely: • "Services clust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity capital carrying voting rights for treating an enterprise as Associated Enterprise. if the limit is reduced further it would only result in eliminating more and more companies, on the other hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrolled transactions. Therefore, on a balancing note, 25% is a proper threshold limit for related party transactions. The companies having more than 25% related party transactions should therefore be rejected as comparables. The Hon'ble ITAT has upheld the application of this filter by the TPO in its order in the case of M/s. Supporisoft India Pvt. Ltd for AY 2005-G6 in IT (TP)A 1372/B/11 & 20/2012 dated 28.03.2013 following its own decision in the case of M/s. Actis Advertisers Pvt. Ltd vide ITA No.5277/De1/2011 dated 12.10.2012. On perusal of the Annual Report of Persistent, we observe that the company has RPT in excess of 25% of the sales. The calculation of the same has been provided below for your ease of reference: R PT to Sales ratio for FY 2014-15 Particulars Amount (INR Million) Sale of services 2,410.02 Commission received 10.26 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osen any other onsite software service provider with a revenue composition of more than 75% from onsite software services as comparable. As rightly observed by the TPO, the pricing is different in onsite when compared to offshore operations. The further observations of the TPO that the reasons for the same lie in the fact that while in the case of OFFSHORE projects most of the costs are incurred in India; an ONSITE project has to be carried out abroad significantly increasing the employee cost and other costs. 65. The next objection of the Assessee is with regard to Assets employed. The companies, which predominantly generate revenues from onsite activity, do not have significant assets as most of the work is carried on the site of customer outside India. The argument that the TPO has himself observed that software service providers do not require much assets cannot be basis to accept the Assessee's plea. Those observations are made by the TPO in the context of application of turnover filter and have been quoted out of context by the Assessee. 66. The next argument of the Assessee is that TPO has held that margins are lower in onsite software services and that margin is not a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lter and the decision was rendered on the facts of its own case. 37. On the issue of RPT filter, we notice that the TPO in para 16 has accepted that the RPT filter should be @ 25%. In the case of Persistent Systems Ltd., the RPT is at 31.32% as extracted in the earlier part of this order and therefore this company should be excluded by application of RPT filter. In view of the above, we do not wish to go into other grounds on which this company is sought to be excluded viz., that it is a product company and there is no segmental data between product and services segment, presence of onsite activity and the impact of extra-ordinary event of acquisition during the relevant previous year. Therefore, this company is directed to be excluded from the list of comparable company. (B) LARSEN & TOUBRO INFOTECH LTD:- 38. As far as L&T Infotech Ltd. is concerned, the ld. counsel for the assessee brought to our notice the decision of ITAT Delhi Bench in the case of Saxo India Pvt. Ltd. v. ACIT, ITA No.6148/Del/2015 for AY 2011-12, order dated 5.2.2016, wherein the Tribunal took note of the fact that this company was also trading in software and owned insignificant intangible assets. The c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rushed aside. In our view, the difference pointed out by the ld. counsel for the assessee before us show that this company cannot be compared with that of the assessee basically because of its business model, presence of onsite revenue generation and other reasons cited before us. Besides, the reason that turnover of this company is huge and more than 10 times that of the assessee." 8. We notice that M/s. Infobeans Technologies Ltd. have been directed to be excluded by the coordinate bench in the case of Metric Stream Infotech (India) Pvt. Ltd. with the following observations: "14.3. Infobeans Technologies Ltd., Ld.AR submitted that this comparable was selected by authorities below as it passes all filters, based upon response received from this company under section 133 (6) of the act. He submitted that this observation is contrary to the facts and figures appearing in annual report. Referring to page 1015 Ld.ARsubmitted that this company is operating at CMMI Level 3 and-is a software service company specialising in business application development for web and mobile. In the company overview this company has been stated to be primarily engaged in providing custom developed s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Companies Act, 2013, we observe that the company information system resource centre Pvt. Ltd. (ISRC) was amalgamated with the company with effect from September, 21, 2015 and the appointed for the scheme was October, 17 2014, which reads as under: "Pursuant to the Scheme of Amalgamation sanctioned by the Hon'ble High Court of Bombay vide its order dated September 04, 2015, Information Systems Resource Centre Pvt. Ltd. (ISRC) was amalgamated with the Company with effect from September 21, 2015. The appointed date for the Scheme was October 17, 2014. Consequently, the entire business, assets, liabilities, duties and obligations of ISRC have been transferred to and vested in the Company with effect from October 17, 2014. ISRC was engaged in the business of software services with respect to application development, information technology support and maintenance service to OTIS Elevator Company, USA and other companies of UTC group and was acquired by the Company on October 16, 2014." 4.4 From the above observations, which were extracted from the financial statements, the company named ISRC amalgamated with the company (Larsen & Toubro) and profitability with thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17 by the Hyderabad Tribunal. 4.5 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to exclude this comparable from the final list of SWD/IT Segment. 4.6 The Ld. D.R. relied on the order of lower authorities. 4.7 We have heard the rival submissions and perused the materials available on record. In the case of ADP Pvt. Ltd. in the assessment year 2016-17, cited (supra) the coordinate bench of Hyderabad has considered this company as not comparable by observing as under:- "6.2 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The co-ordinate bench in assessee's own case in ADP (P.) Ltd. (supra) directed the AO to exclude this company from the list of comparables for determining ALP by observing as under: "27. As regards Persistent Systems Ltd, the objections of the assessee are as under: (a) The Company is functionally not comparable. It is engaged in selling of the following: i. Software products (IP); ii. Platforms (Solutions & Integration); and iii. services (product engineering) b. There are no segmental details between software products and services. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, Big Data, UX & UI, Automation engineering services, including product engineering and lifecycle solutions, and business process management); in the Verticals of Storage & Virtualization, Media & Publishing, HR & Payroll and e commerce. 5.2 The company has been rejected in Appellant's own case for AY 2015-16 [ITA No.2498/Bang/2019 and since the company has the same functional profile in AY 2015-16 and AY 2016-17 (He referred Annual Report Compilation Pages: 448, 502). Ld. A.R. therefore requested to exclude this company from the list of comparable companies. 5.3 Further, Ld. A.R. submitted that in the case of Sandisk India Device Design Centre Pvt Ltd [TS-464-ITAT-2022(Bang)-TP], AY 2016-2017 at Page 26 of the Order the Bangalore Tribunal has directed the Ld. TPO to exclude Infobeans Technologies Limited from the final list of comparable under the IT Segment. The relevant para from the ITAT Order is reproduced below for reference: Quote 17.9 In respect of Nihilent Ltd., Infobeans Technologies Ltd. and Aspire Systems (India) Pvt. Ltd., Hon'ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. vs. Addl. CIT (supra) observed as under: "Comparable Sought to be excluded b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and change management, Digital transformation services and Enterprise IT services but segmental financials are not available as is apparent from its financials available at page A305, A412 & A413 of the paper book. When this company is into various segments but segmental financials are not available it cannot be a valid comparable vis-à-vis assessee which is a routine software development service provider working on cost + markup model, hence ordered to be excluded." "Infobeans Technologies Ltd. (Infobeans) 49. The assessee sought exclusion of Infobeans on the ground that it is also functionally dissimilar being into providing business IT services (CAD) (application development and maintenance, Big Data, UX and UI, Automation engineering services, including product engineering and lifestyle solutions and business process management) in verticals of storage and virtualization, media and publishing, HR and Payroll and e-commerce. It is also providing software engineering services primarily in Custom Application Development (CAM), enterprise mobility and Big Data Analytics (BDA). 50. Perusal of financials available at page A303, A418 to A421, Infobeans shows that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een finally selected to be comparable. In respect of Infobeans Systems Pvt. Ltd., the financials of said concern clearly reflect that in addition to providing software development services to its associated enterprises, it had also earned foreign exchange from export of goods on FOB basis. The event of export of goods was also mentioned in notes and also in the Profit and Loss Account, where revenue from sale of software was declared. The segmental details of two activities carried on by the said concern were not available and in the absence of the same, the concern could not be equated as functionally comparable to a concern which was providing software development services to its associated enterprises. Applying the same set of reasoning as in the paras hereinabove, we hold that Infobeans Systems Pvt. Ltd. is not comparable to the assessee". 22. Respectfully following the same, we direct that Infobeans be excluded from the final list of comparables in this case also. 7.4 On perusal of the order of the co-ordinate bench of this Tribunal and on perusal of the financial statements of Infobeans Technologies Ltd., we observe that the company is functionally not comparable and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities. The coordinate bench in assessee's own case in ADP (P.) Ltd. (supra), directed the AO/TPO to exclude this company from the list of comparables for determining ALP by observing as under: '25. Having regard to the rival contentions and the material on record, we find that in a number of decisions including the assessee's own case, Infosys Ltd has been held to be not comparable with any other software development company such as the assessee due to its huge turnover and high profit margin and also as it is into software products and owns intangible intellectual property rights. In the case of Agnity India Technologies Ltd, 36 Taxmann.com 289 (Del), the Hon'ble Delhi High Court has held that Infosys Ltd is not comparable to other software development company. Relevant paragraphs are reproduced hereunder: " 8. It is a common case that Satyam Computer Services Ltd. should not be taken into consideration. The Tribunal for valid and good reasons has pointed out that Infosys Technologies Ltd. cannot be taken as a comparable in the present case. This leaves L&T Infotech Ltd. which gives us the figure of 11.11 %, which is less than the figure of 17% margin as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable should be included in the final list of comparables (He referred page 2020 of the paper book). 7.3 Further, the comparable has been accepted by the Ld. DRP in AY 2017-18 in Appellant's own case. 7.4 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to include this comparable to the final list of SWD/IT Segment. 7.5 Ld. D.R. relied on the order of Ld. DRP 7.6. We have heard the rival submissions and perused the materials available on record. It has been submitted by Ld. A.R. that this comparable has been accepted by the Ld. DRP in assessment year 2017-18 in assessee's own case. As seen from the direction in para 2.11.7.1 of the order, wherein observed as under:- "2.11.7.1 Having considered the submissions, and on perusal of the annual report, it is seen that the TPO has rejected the comparable for the reason that it fails export revenue filter. However, on examination of the financials of the company as per Note 13 forming part of financial statements the company has reported Rs.2,20,11,325/- of revenue from export sales as against total sales of Rs.220,84,825/- constituting 99.67% of the total revenue. Thus, the company satisfies the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecord. The main contention of the Ld. A.R. is that Batchmaster Software Pvt. Ltd. is engaged in software development services and not sale of products. However, the Ld. A.R. was not able to distinguish between software development services and sale of products. As rightly observed by the Ld. TPO, Batchmaster Software Pvt. Ltd. is engaged in sale of products and engaged in software development services. Being so, we do not find any infirmity in the finding of lower authorities with regard to exclusion of this company from the list of comparables. iii. DCIS Dot.com Solutions Pvt. Ltd. 9. The Ld. AR submitted that this company clearly states on page 18 of the of the Annual Report that it is 100% engaged in Software Development Services. 9.1 The Ld. A.R. submitted that DCIS was erroneously rejected by the learned TPO in the TPO Order on account of functional dissimilarity by stating that company principal business activity is that of Information and Communication which constitutes 99.54% of the total turnover of the company. The learned TPO (at page 50 of the TP Order) also erroneously stated that the financial statements do not provide sufficient information on the business of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de this comparable to the final list of SWD/IT Segment. 9.11 Ld. D.R. relied on the order of Ld. DRP 9.12 We have heard the rival submissions and perused the materials available on record. It was the contention of Ld. A.R. that in the year 2017-18, the Ld. DPR itself included this comparable while determining the ALP in that assessment year. In our opinion, there is no reason to not include this company as a comparable in the A.Y. 2016-17. Accordingly, we direct the AO/TPO to include Sagar Soft (India) Ltd. in the assessment year 2016-17 also. v. Ace Software Export Ltd. 10. The Ld. A.R. submitted that the learned TPO has erroneously rejected Ace Software in the TPO order at page 50 by stating that the company fails the persistent loss filter. To this the Appellant states that Ace Software has been profitable for the FYs 2015-16, 2014-15 and 2013-14 and hence passes the filter. The relevant extracts from the financial statements of Ace Software are given at page 2019 of the paper book. The company is functionally similar as it is engaged in SWD activity which is evident from page 7 of the Annual Report. 10.1 Further, the comparable has been accepted by the Ld. DRP in AY 2017- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 014-15 and 2015-16 (supra) have already included M/s.Evoke Technologies Private Limited and M/s.Sasken Communication Technologies Limtied; respectively. The assessee's ground Nos.4(i) and 4(iv) are accepted therefore. 11.4 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to include this comparable to the final list of SWD/IT Segment. 11.5 Ld. D.R. relied on the order of Ld. DRP. 11.6 We have heard the rival submissions and perused the materials available on record. It was submitted that Sasken Communication Technology Ltd. has been included in the case of Info India Pvt. Ltd. in IT(TP)A No.198/Hyd/2021 dated 6.10.2021 wherein held as under:- "5. The assessee's 4th substantive ground (having sub grounds (i) to (xiii) challenges correctness of learned lower authorities' action rejecting its comparables. Both the parties are ad idem during the course of hearing that this tribunal's co-ordinate bench's order(s) for AY.2014-15 and 2015-16 (supra) have already included M/s. Evoke Technologies Private Limited and M/s. Sasken Communication Technologies Limited; respectively. The assessee's ground Nos.4(i) and 4(iv) are accepted therefore." 11.7 In view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is no requirement that the comparables should render the same or identical services. It would be sufficient, if the services fall under the broad industry segment ITES. In this regard the DRP relied on the Bangalore Tribunal decision in the case of GE India Technology Centre (P.) Ltd. v. Dy. DIT [2013] 30 taxmann.com 249/141 ITD 245 and other decisions wherein it was observed that TNMM requires only broad comparability. 14. The contention of the assessee that Infosys BPO has various Revenue Models and its revenues are generated principally on time and material basis, transaction basis and fixed price contracts and therefore, it should not be compared with the assessee, the DRP observed that as the assessed failed to demonstrate as to how the different methods of billing would affect the Functional comparability or impact the profitability. Unless the same is demonstrated with credible evidence, it remains a theoretical argument without any backing with facts and figures and hence rejected it. 15. The assessee pointed out that this company has reported an amount of Rs. 136 crore as 'cost of Technical sub-contractors' which constitutes about 4.45% of total revenue of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were rejected and the action of the AO/TPO was upheld by the DRP. 20. We have heard both the parties and perused the material on record. This comparable has been considered as not comparable in SwissRe Global Business Solutions India (P.) Ltd. v. Dy. CIT [2020] 116 taxmann.com 716 (Bang. - Trib.) wherein it was observed as under :- "We have perused submissions advanced by both sides in light of records placed before us. We note that this company is providing services in various areas of sourcing and procurement, customer services, finance and accounting legal process outsourcing, sales and fulfilment, analytics, business platforms, business transformation services, human resource outsourcing and technology solution optimisation. It is noted that this comparable also provides services in financial services and insurance, manufacturing, energy utilities communications and services and retail, consumer packaged foods, logistics and life services. Further in the annual report it has been mentioned that this comparable provides services that are different from routine back-office services. This noting itself makes this comparable not functionally similar with that of assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l contentions and the material on record, we find we find that the Co-ordinate Bench of this Tribunal in the assessee's own case not only for the A.Ys 2009-10 for the A.Y 2010-11 has also considered this issue at Paras 6 to 9 in ITA No. 221/Hyd/2015 which reads as under: "6. The TPO has selected many comparables and among them M/s. Infosys BPO Ltd., TCS E-serve Ltd., and Eclerx Services Ltd., were objected to on the reason of high turnover and functionally different. With reference to Infosys BPO, the objection was that the said company renders vide array of services and has high brand value and turnover is also very high. With reference to TCS E-serve Ltd., there was exceptional event as the company was taken over by Tata Consultancy Services in the year 2008-09 and heavy turnover is due to its takeover. Further, it was submitted that the company was functionally different as it has three different services and segmental information was not arrived. As far as E-clerx Services Ltd., it was submitted that this company caters to high end KPO services and cannot be compared to routine BPO services provided by assessee. The DRP vide para 3.10 has accepted the assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inary event for which this company has to be excluded from the list of comparables, it cannot be excluded. Such claim has to be supported by evidence on record. As regards the functional dissimilarity and huge turnover and brand value is concerned, we find that this Tribunal in assessee's own case for A.Y.2009-10 while considering the comparability of the assessee with Infosys BPO Ltd., has taken note of the possession of the brand value and intangibles which influenced the financial results of this company. The Hon'ble Delhi High Court in the case of CIT v. Agnity India Technologies (P.) Ltd., [2013] 219 Taxman 26 (Del.), held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee therein. In the case before the Hon'ble High Court (supra), the turnover of the assessee was about Rs. 15.79 crores as against the turnover of Rs. 1016 crores of the Infosys. Considering these facts, the Hon'ble High Court had directed for exclusion of Infosys BPO because of its brand value and also on the grounds of functional dissimilarity and huge turnover. Though, the company before us is TCS e-Service Ltd., and not In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direct the TPO to exclude this comparable from the final list of ITeS Segment. 14.3 Ld. D.R. relied on the order of Ld. DRP. 14.4 We have heard the rival submissions and perused the materials available on record. This company has been considered as not a comparable in the case of Entercoms Solutions Pvt. Ltd. in assessment year 2015-16 in ITA No.1826/Pune/2019 dated 25.10.2021 wherein held as under:- 8. We find the Hon'ble Jurisdictional High Court in the case of Pr. Commissioner of Income Tax Vs. PTC Software (I) (P) Ltd. (2019) 101 taxmann.com 117 (Bombay) has held that in case the assessee rendering ITES services to AE, a company in whose case extraordinary event of amalgamation took place during relevant year, could not be accepted as comparable and was decided in favour of the assessee. Similarly in the case of Pr. Commissioner of Income Tax Vs. J.P Morgan India (P) Ltd. (2019) 102 taxmann.com 335 (Bombay) , the Hon'ble Jurisdictional High Court on the same issue has held as follows: "(iv) Mr. Percy Pardiwalla, learned senior counsel appearing on behalf of the respondent invited our attention to the final decision of this Court in Pr. CIT v. Aptara Technology (P.) Ltd. [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lip;….The learned Authorized Representative for the assessee has pointed out that though the CIT (A) says that there is no such amalgamation but his finding is totally incorrect. In this regard, reliance was placed on the ratio laid down by Pune Bench of Tribunal in Dover India (P.) Ltd. v. Dy. CIT [2017] 88 taxmann.com 115 (Pune - Trib.), wherein for assessment year 2010-11 itself, the said concern Accentia Technologies Ltd. was excluded being high end KPO service provider. Further, the Tribunal in BNY Mellon International Operations (India) (P.) Ltd. (supra) have noted the extraordinary event of acquisition and also amalgamation of another concern and held that the said concern could not be selected as comparable. The relevant findings of Tribunal are in paras 12 and 13, which read as under:- '12. The next concern against which the assessee has raised objections is Accentia Technologies Ltd. on the ground of extraordinary events during the year under consideration. The said concern had acquired IQ group of companies in the United Kingdom and there was amalgamation of Asscent Infoserve Pvt. Ltd. with the said concern and because of these extraordinary events, the marg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In particularly, it has been pointed out that for the very same assessment year, the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. v. ITO, (2013) 38 taxmann.com 55 (Bang.) has excluded the said concern from the list of comparables in a similar situation following the decision of the Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited v. DCIT, (2013) 32 taxmann.com 21 (Hyd.). 15. We have considered the submissions of the Ld. Representative for the assessee and also the stand of the Revenue as emerging from the order of the TPO. In our view, the ratio laid down by the Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited (supra) and by the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) is squarely applicable to the present case also. The aforesaid Benches of the Tribunal found that during the year under consideration there were extraordinary events that took place in the said concern which warranted exclusion of this company as a comparable. We therefore hold that the said concern canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thin line of difference between BPO and KPO services. KPO is termed as an upward shift of the BPO industry in the value. chain. Thus, BPO trying to upgrade itself as KPO is likely to render both BPO as well as KPO services in the process of evolution and therefore, such an entity cannot be considered strictly as either BPO or KPO. In view of the above, ITeS service's cannot be further classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM, functional similarity is more relevant than product similarity. The DRP noted that the functional profile of this company was similar to the assessee. 23. Regarding the amalgamation of wholly owned subsidiary Agilyst Consulting Pvt. Limited has taken place with effect from 1-4-2015, the DR observed that the assessee has not demonstrated any increase in profits due to this amalgamation. Therefore, this amalgamation has no impact on comparability. Accordingly, the plea was rejected. 24. With regard to acquisition resulting in inorganic growth, the DRP noted that the company has acquired entire shareholding of CLX Europe SPA, Italy, as on 22nd April 2015 and this acquisition was made by the company' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in the field of reinsurance. In our opinion functions performed by this company is not similar to that of assessee even though assessee before us also carries out certain services on contract basis. Ld. AR has placed reliance upon decision of Hon'ble Delhi High Court in case of Rampgreen Solutions (P.) Ltd. v. CIT [2015] 60 taxmann.com 355/234 Taxman 573/377 ITR 533 Hon'ble Court had held that once a company falls into the category of high-end KPO, it cannot be functionally comparable with a BPO service provider like that of assessee. Applying this reissue in the present case, we direct Ld.AO to eliminate this comparable from final list." 30. In view of the above order of the Tribunal, we are inclined to direct that Eclerx Services Ltd. be excluded from the list of comparables. 15.2 The company has also been excluded in the case of ADP (P.) Ltd. [2022] 135 taxmann.com 44 (Hyderabad - Trib.) AY 2016-2017 by the Hyderabad Tribunal. 15.3 In view of the above-mentioned reasons, the Ld. A.R. requested to direct the TPO to exclude this comparable from the final list of ITeS Segment. 15.4. Ld. D.R. relied on the order of Ld. DRP 15.5 We have heard the rival submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this issue at Paras 6 to 9 in ITA No. 221/Hyd/2015 which reads as under: "6. The TPO has selected many comparables and among them M/s. Infosys BPO Ltd., TCS e-serve Ltd., and Eclerx Services Ltd., were objected to on the reason of high turnover and functionally different. With reference to Infosys BPO, the objection was that the said company renders vide array of services and has high brand value and turnover is also very high. With reference to TCS E-serve Ltd., there was exceptional event as the company was taken over by Tata Consultancy Services in the year 2008-09 and heavy turnover is due to its takeover. Further, it was submitted that the company was functionally different as it has three different services and segmental information was not arrived. As far as E-clerx Services Ltd., it was submitted that this company caters to high end KPO services and cannot be compared to routine BPO services provided by assessee. The DRP vide para 3.10 has accepted the assessee's objections and accordingly, directed the TPO to exclude the above three companies. There are other directions of the DRP on TP adjustments on which neither party has raised grounds, except the Revenue on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... huge turnover and brand value is concerned, we find that this Tribunal in assessee's own case for A.Y.2009-10 while considering the comparability of the assessee with Infosys BPO Ltd., has taken note of the possession of the brand value and intangibles which influenced the financial results of this company. The Hon'ble Delhi High Court in the case of CIT vs. Agnity India Technologies P. Ltd., (2013) 219 Taxman 26 (Del.), held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee therein. In the case before the Hon'ble High Court (supra), the turnover of the assessee was about Rs. 15.79 crores as against the turnover of Rs. 1016 crores of the Infosys. Considering these facts, the Hon'ble High Court had directed for exclusion of Infosys BPO because of its brand value and also on the grounds of functional dissimilarity and huge turnover. Though, the company before us is TCS E-Service Ltd., and not Infosys BPO, we find that the turnover of the assessee company for this assessment year is around Rs. 50 crores as against the turnover of TCS e-Serve Limited of Rs. 1405.10 crores. Therefore, following the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d TPO. 16.1 Further, Informed Technology has been included in the case of Ocwen Financial Solutions (P.) Ltd. [2019] 108 taxmann.com 306 (Bangalore - Trib.) AY 2014-2015 (He referred Page 178-179 of the Case Law Compilation, Para 10). The company has the same functional profile in AY 2014-15 and AY 2016-17. The Ld. A.R. therefore requested to include this company. 16.2 The relevant extract from the Tribunal's order is reproduced below for ready reference: "10. Informed Technologies Ltd., ('Informed') 10.1 This company 'Informed' was selected by the assessee as a comparable company in its TP study. The TPO in his order rejected this company stating that since 'Informed' is being primarily engaged in the business of Business Process Outsourcing, it fails the service income filter. On the objections filed by the assessee, the DRP concurred with the finding of the TPO by observing that the Annual Report shows that the sale of services is Rs. 2,58,53,362/- as against the total revenue of Rs. 3,81,86,665/- which comes to only 67.7% and therefore fails the service income filter applied by the TPO. 10.2 Before us, the learned AR for the assessee contended th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore in our considered view, the service income filter of 75% of service income to be from ITES as applied by the TPO, is satisfied in this case. In view of this factual finding rendered in the matter, we hold that this company 'Informed Technologies Ltd.,' satisfies the service income filter and is therefore to be included in the final set of comparables. We hold and direct the AO/TPO accordingly. 16.3 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to include this comparable to the final list of ITeS Segment. 16.4. Ld. D.R. relied on the order of Ld. DRP. 16.5 We have heard the rival submissions and perused the materials available on record. The contention of Ld. A.R. is that this has been considered in the case of Ocwen Financial Solutions Pvt. Ltd. (2019) 108 Taxmann.com 36 (Bang- Trib.) for the AY 2014-15, wherein it was held as under:- "10. Informed Technologies Ltd., ('Informed') 10.1 This company 'Informed' was selected by the assessee as a comparable company in its TP study. The TPO in his order rejected this company stating that since 'Informed' is being primarily engaged in the business of Business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrent investments and miscellaneous income and evidently these incomes cannot be considered as operating income. The percentage of 67.7% worked out by the TPO is after considering these "other income" as service income; which is factually incorrect. It is evident from a perusal of the profit and loss account of 'Informed' that the service income is Rs. 2,58,53,362/- which is entirely the revenue from operations and therefore in our considered view, the service income filter of 75% of service income to be from ITES as applied by the TPO, is satisfied in this case. In view of this factual finding rendered in the matter, we hold that this company 'Informed Technologies Ltd.,' satisfies the service income filter and is therefore to be included in the final set of comparables. We hold and direct the AO/TPO accordingly. 16.6 In view of this, we remit this issue to the file of AO/TPO to examine this issue in the light of above findings of the Tribunal cited (supra) to decide afresh, after giving an opportunity of hearing to assessee. Crystal Voxx Ltd.:- 17. Assessee wants for inclusion of Cystal Voxx Ltd. in the list of comparables. 17.1 In this regard, Ld. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough the relevant pages of the Annual Report of this company, 'Crystal', which is placed at pages 474 to 497 of the paper book. 11.3 Per contra, the learned DR for Revenue supported the orders of the authorities below in not including this company, Crystal Voxx Ltd., in the final set of comparables. 11.4 We have considered the rival contentions/submissions and perused the material on record. We have carefully perused the Annual Report of this company, 'Crystal'. At Note 3 of the Notes forming part of the accounts, at page 491 of the paper book, it is stated that the operations of the company predominantly relate to a single segment, namely "BPO Activity". At note 6, the income in foreign currency is shown as Rs. 3,23,08,386/-. In the Director's Report, at page 480 of the paper book, the foreign exchange earnings is given as Rs. 3,23,08,386/-. In the factual matrix of the matter, as laid out above, we are of the considered opinion that the reason ascribed by the TPO and DRP for exclusion of this company, 'Crystal' is factually incorrect. Taking into consideration that the company 'Crystal' is otherwise comparable to the assessee in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Report of this company, 'Crystal'. At Note 3 of the Notes forming part of the accounts, at page 491 of the paper book, it is stated that the operations of the company predominantly relate to a single segment, namely "BPO Activity". At note 6, the income in foreign currency is shown as Rs. 3,23,08,386/-. In the Director's Report, at page 480 of the paper book, the foreign exchange earnings is given as Rs. 3,23,08,386/-. In the factual matrix of the matter, as laid out above, we are of the considered opinion that the reason ascribed by the TPO and DRP for exclusion of this company, 'Crystal' is factually incorrect. Taking into consideration that the company 'Crystal' is otherwise comparable to the assessee in the case on hand as it is operating as a BPO company which is a provider of ITES, we direct that this company, Crystal Voxx Ltd., be included as a comparable company in the final set of comparables in the case on hand. The AO/TPO are accordingly directed." 17.8 Accordingly, in view of the above order, we remit this issue to the file of AO/TPO to examine it in the light of above findings of the Tribunal. 18. No other comparable has been p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment Order: 20.6 The Learned AO contented the following: The Appellant, at the time of reimbursing the ESOP expenses to Ultimate Holding Company has not deducted TDS on the crosscharge expenses which is violative of the provisions of Section 195(1) of the Act. Consequently, the Learned AO stated that the provisions of section 40(a)(i) get triggered on the facts. 20.7 The Learned AO has relied on the decision of the Supreme Court in the case of GVK Industries vs Income Tax Officer [2015] 54 taxmann.com 347 (SC) and on the ruling of Authority for Advance Rulings ("AAR") in the case of Danfoss Industries P Ltd (2004) 268 ITR 1. 20.8 The Learned AO also stated that the ESOP expenditure booked by the Appellant and reimbursed to the holding company is a fictitious expenditure and is notional in nature. Also, that it is merely a strategy/ colourable device adopted for avoidance of income tax prima facie with a view to shift profits outside the country. Further, the Learned AO has mentioned that the ESOP expense does not satisfy the conditions of allowance as specified by section 37 of the Act and has disallowed such expenditure. b) DRP Direction 20.9 In the directions issued, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted the documents such as cross charge invoices, employee listing and Form 16 issued to the employees. Hence, the expense is a genuine expense and the question of these expenses being a colourable device does not arise. The Learned AO has also not alleged that the expenses are not genuine expenses. The said expenses are incurred wholly and exclusively for the business of the Company and therefore, eligible for deduction under section 37 of the Act. 20.17 The ESOP expense is nothing, but compensation paid to employees of the Company and accordingly, taxed in the hands of employees as 'Perquisites' (Company submitted the sample Form 16's of employees). 20.18 Provision of section 37(1) of the Act inter alia provides that "any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession, not being in the nature of capital expenditure or personal expenses, shall be eligible for deduction in computation of total income". 20.19 The ESOP schemes for stock options enables in attracting and retaining the employees of the Company, resulting in better performance of the Company's business operations. The scheme is designed primarily to incentivi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Courts including the Hon'ble Supreme Court in the case of GE India Technology Cen.(P.). Ltd vs CIT [2010] 327 ITR 456 (SC). While the AO has considered the decision of GE India Technology Cen. (P.). Ltd in the FAO but without examining the facts of the case, has proceeded to conclude that ESOP cross charge is in the nature of income and are taxable under the Act. 20.24 Given the above facts and the judicial precedents, the Company submits that ESOP expense is a deductible expenditure under section 37 of the Act and provisions for section 195 of the Act is not applicable. 20.25 Case laws relied on by the Company provided by Ld. A.R. are as follows: - CIT, LTU vs Biocon Limited (430 ITR 151) (Karnataka HC); - Nova Nordisk India Private Limited (ITA No. 1275/Bang/2011); - GE Technology Cen. (P) Ltd. Vs CIT [2010] 327 ITR 456 (SC); - CIT vs PVP Ventures Ltd. [2012] 23 taxmann.com 286/211 Taxman 554 (Mad.); - Lemon Tree Hotels Ltd. IT Appeal No. 107/2015 dated 18-8- 2015; - Principal Commissioner of Income Tax vs Nova Technocast (P.) Ltd [2018] 94 taxmann.com 322 (Gujarat HC); - Commissioner of Income-tax vs Prism Cement Unit [2015] 61 taxmann.com 273 (Madhya Pradesh HC); ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the shares would be expenditure incurred for the purposes of section 37(1). The primary object of the exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, it cannot be construed as short receipt of capital. Held, dismissing the appeal, that the deduction of the discount on the employees stock option plan over the vesting period was in accordance with the accounting in the books of account, which had been prepared in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. For assessment year 2009-10 onwards the Assessing Officer had permitted the deduction of the employees stock option plan expenses. The Revenue could not be permitted to take a different stand with regard to the assessment year 200405. The expenses were deductible." 21. In view of the above judgement of Hon'ble Karnataka High Court in the case of Biocon Ltd., we are in agreement with the contention of assessee's counsel in principle on this issue. However, we make it clear that the AO has to verify whether the said amount has been subject to TDS in the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X
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