2022 (11) TMI 1338 - AT - Income Tax

TP Adjustment - appropriate adjustments towards working capital differential existing between the Appellant vis-a-vis independent comparable companies - HELD THAT - Tribunal consistently granting working capital adjustment to the assessee while computing ALP of international transactions and this view was fortified by the order of the Tribunal in the case of Huawei Technologies India Pvt. Ltd. 2021 (8) TMI 1334 - ITAT BANGALORE - Thus we direct the AO/TPO to grant working capital adjustment. Comparable companies Information Technology Enabled Services ( ITES ) - Microland Limited - As seen from its annual report total ITES revenue is 60%. The AO/TPO included 17% of selling services revenue as part of the revenue from ITES which is not correct. In our opinion it does not satisfy the 75% of sales as filter and the income from ITES services is only 60%. Hence it is directed that Microland Limited is to be excluded from the list of comparables. Manipal Digital Systems Private Limited is directed to be excluded from the list of comparables. Datamatics Business Solutions Limited - As contented segmental financials are not available and also TPO has not considered the correct percentage of export revenue in the earlier 3 assessment years and also margin of last 2 assessment years cannot be considered in view of the export revenue filter. In our opinion these facts are required to be examined by the AO/TPO. Accordingly we remit this issue to the file of AO/TPO for reconsideration of this comparable and include this comparable i.e. Datamatics Business Solutions Limited in the list of comparables if it satisfies the export revenue filter. Infosys BPO Limited company is functionally dissimilar and use robotics automation and diversified activities. Therefore we direct the AO/TPO to exclude this company as comparable for determining ALP. Incorrect disallowance with respect to expenditure on ESOP under section 37 - HELD THAT - In assessee s group case namely EIT Services India Pvt. Ltd. v. DCIT ( 2022 (8) TMI 1309 - ITAT BANGALORE ) had held that the ESOP expenditure is to be allowed as a deduction u/s 37 of the I.T.Act. The Tribunal had followed the judgment of the Hon ble jurisdictional High Court in the case of CIT v. Biocon Limited ( 2013 (8) TMI 629 - ITAT BANGALORE - Decided in favour of the assessee

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Incorrect Disallowance with respect to ESOP Expenditure
3. Disallowance of Depreciation on Slump Sale
4. Disallowance of Employees' Contribution to Welfare Fund
5. Initiation of Penalty Proceedings and Levy of Interest

Detailed Analysis:

1. Transfer Pricing Adjustments:
- Grounds 1.1 to 1.9: These grounds were deemed general and did not require adjudication.
- Ground 1.10: The assessee argued that service tax refunds should be considered as part of "Operating Revenue." The Tribunal remitted the issue to the AO/TPO for fresh consideration, stating that if service tax payments were considered operating expenses, then refunds should be considered operating income.
- Ground 1.11: This was deemed academic and did not require adjudication.
- Ground 1.12: This ground was kept open pending the findings on grounds 1.15 to 1.16.
- Ground 1.13: The Tribunal directed the AO/TPO to grant working capital adjustment, following the precedent set in previous Tribunal decisions.
- Ground 1.14: This ground was dismissed as academic.
- Ground 1.15: The Tribunal directed the exclusion of Microland Limited, Manipal Digital Systems Pvt. Ltd., and Infosys BPO Ltd. from the list of comparables. Datamatics Business Solutions Ltd. was remitted to the AO/TPO for reconsideration.
- Ground 1.16: The Tribunal directed the inclusion of Bhilwara Infotechnology Ltd., R Systems International Ltd., ISN Global Solutions Ltd., and E-Zest Solutions Ltd. in the list of comparables, subject to verification by the AO/TPO.

2. Incorrect Disallowance with respect to ESOP Expenditure:
- Grounds 2.1 to 2.8: The Tribunal allowed these grounds, following the precedent set in the assessee's group case and the Karnataka High Court decision in Biocon Ltd. The Tribunal held that ESOP expenditure is deductible under Section 37 of the Act.
- Grounds 2.9 to 2.15: These grounds were not adjudicated as the disallowance was made under Section 37, not under Section 40(a)(i).

3. Disallowance of Depreciation on Slump Sale:
- Grounds 3.1 to 3.5: These grounds were not pressed and were dismissed as not pressed.

4. Disallowance of Employees' Contribution to Welfare Fund:
- Grounds 4.1 to 4.4: These grounds were not pressed and were dismissed as not pressed.

5. Initiation of Penalty Proceedings and Levy of Interest:
- Ground 5.1: This ground was deemed preposterous and dismissed.
- Ground 5.2: This ground was deemed consequential and mandatory, thus not requiring adjudication.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing fresh consideration on specific grounds and adjustments to be made by the AO/TPO. The Tribunal upheld the principles set in previous decisions regarding the treatment of ESOP expenditure and transfer pricing adjustments.