EIT Services India Pvt. Ltd Vs DCIT (ITAT Bangalore)
ITAT Bangalore held that expression ‘expenditure’ also includes loss and therefore the difference between the price at which the shares are issued to the employees and the market value of the shares would be expenditure incurred for section 37(1) of the Income Tax Act.
Facts- Assessee has challenged the order of DCIT passed u/s 143(3) r.w.s. 144C(13) r.w.s. 143(3A) & 143(3B) on various grounds like –
- Rejection of value of international transactions relating to software development services and information technology enabled services as the arm’s length price. Importantly, assessee wants inclusion of some comparables and exclusion of some comparables;
- Disallowance of ESOP expenses u/s 37.
Conclusion-
With regard to value of international transactions vis-à-vis inclusion/ exclusion of comparables, the matter is remanded back to AO/ TPO to examine the same in the lights of specific findings given by the Tribunal.
With regard to ESOP expenses it is held that company has deducted appropriate TDS under section 192 of the Act in respect of share-based compensation under ESOP schemes, which have been taxed in the hands of employees as ‘perquisites’ under section 17 of the Act.
Hon’ble Karnataka High Court in the case of CIT vs. Biocon Ltd. has held that the expression “expenditure” also includes a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which they are issued and the market value of the shares would be expenditure incurred for section 37(1).
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal by assessee is directed against order of DCIT 2(1)(1), Bengaluru dated 27.3.2021 passed u/s 143(3) r.w.s. 144C(13) r.w.s. 143(3A) & 143(3B) of the Act. The grounds raised by the assessee are as under:-
The Appellant submits that:
1. That the order of the Assessing Officer (AO’ for short) pursuant to the directions of the Dispute Resolution Panel (‘the DRP. for short), to the extent prejudicial to the Appellant, is bad in law and liable to be set aside.
2. Determination of arm’s length price by the TPO-
a. The Transfer Pricing Officer (‘the TPO) erred in rejecting the value of international transactions relating to software development services (‘SWD services’) and information technology enabled services (‘ITE Services’) as recorded in the books of accounts, as the arm’s length price. The DRP erred in upholding the actions of the AO!TPO.
b. The AO!TPO erred in law and facts in making an aggregate Transfer Pricing adjustment (‘TP adjustment’) of Rs. 339,44,00,000!-(adjustment of Rs. 286.96.00.000!- to the SWD services segment and an adjustment of Rs. 52,48,00,000!- to the ITE services segment) to the income returned by the Appellant and in holding that the international transactions of provision of SWD services and ITE services by the Appellant to its Associated Enterprises (‘AEs”) was not at arm’s length.
c. The AO!TPO has erred in rejecting the Transfer Pricing 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 conducting a fresh benchmarking analysis based on his own conjectures and surmises. The DRP erred in upholding the actions 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 TPO erred in rejecting companies having export service income less than 75% of sales and the DRP erred in confirming the same.
e. That the TPO erred in rejecting companies having losses for 2 years out of 3 years and the DRP erred in confirming the same
f. That the TPO erred in not rejecting companies that earned abnormal profits and the DRP further erred in confirming the action of the TPO.
g. That the TPO grossly erred in excluding provision for bad and doubtful debts as non-operating in nature, while computing the operating margins of alleged comparable companies. The DRP further erred in upholding the same.
h. That the TPO grossly erred in applying the RPT filter by taking the RPT income/total income or RPT expenditure/total expenditure instead of taking the total value of RPT transactions/total sales and the DRP further erred in upholding the same.
i. That the TPO erred in using information gathered under Section 133(6) of the Act, which information was not available while preparing the transfer pricing documentation for the relevant financial year.
4. Determination of arm’s length price of the SWD Services
a. That Inteq Software Private Limited, Larsen & Toubro Infotech Limited, Nihilent Limited, Persistent Systems Limited, lnfobeans Technologies Limited, Aspire Systems (India) Private Limited, lnfosys Limited, Thirdware Solution Limited, Cybage Software Private 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, Minvesta Infotech Limited, Eluminous Technologies Private Limited, and Ace Software Exports Limited ought to be included in the list of comparables as the functions performed, assets employed and risks assumed by the said companies are comparable to that of the Appellant.
c. That the DRP erred in holding that inclusion of certain comparables need not be adjudicated for the reason that the companies did not feature in the TPO’s search matrix/Appellants TP study and their inclusion would therefore amount to cherry picking. although the companies are otherwise comparable
d. That the TPO and the DRP grossly erred in not including Sasken Communication Technologies Limited. Evoke Technologies Private Limited. Agilisys IT Services India Private Limited. Batchmaster 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 ought to be included in the list of comparables as the functions performed, assets employed and risks assumed by the said companies are comparable to that of the Appellant.
c. That without prejudice, the DRP grossly erred in not including Informed Technologies India Private Limited and Crystal Voxx Limited on the basis of the said companies did not feature in the search matrix of the TPO, although the said companies are otherwise comparable to the Appellant.
6. Non-allowance of appropriate adjustments to the margins of the comparable companies.
a. That the TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B of the Income-tax Rules, 1963 to account for the differences in: (a) working capital positions; and (b) risk profiles of the Appellant and of the companies selected as comparables. The DRP further erred in confirming the same.
7. That the DRP erred in observing that decisions of this Hon ’ble Tribunal cannot be relied upon while adjudicating the comparability of the companies and that companies cannot be rejected for non-availability of segment details.
8. That the TPO grossly erred in the computing the TP adjustment at entity level without restricting the same to the value of international transactions, and the DRP erred in upholding the same.
9. That the disallowance made under Section 37 of the Act by the Assessing Officer ought to have been taken into consideration while computing the TP adjustment, by reducing the disallowed expenditure from the operating cost base of the appellant, which the DRP failed to appreciate
10. Erroneous disallowance of ESOP expenses under Section 37 of the Act.
a. The AO erred in law and on facts. in disallowing the expenditure on Employee Stock Option (‘ESOP’) of INR 28.72.00.000 under section 37 of the Act without appreciating the submission furnished by the Appellant.
b. The AO erred in law. in disregarding the decision of Hon’ble High Court of Karnataka in the case of Biocon Limited ([2020] 121 taxmann.com 351 (Kar.)) and the decision of this Hon’ble Tribunal in the case of Novo Nordisk ([2014] 42 taxmann.com 168) wherein it was held that discount on issuance of ESOP is an allowable business expenditure under section 37 of the Act.
c The AO and DRP erred in law and on facts by not appreciating that the difference between the market value and the purchase 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 disallowance on the basis that the expenditure if at all is a capital expenditure and therefore cannot be allowed as a deduction.
i. That the AO erred in holding that there is no outflow of money resulting in an expenditure when in fact there is a clear outflow of economic resources/cash in the hands of the Appellant which is wholly and exclusively used for the purpose of business in India. The DRP erred in law and on facts by stating that the ESOP is uncertain and not appreciating the fact that the ESOP expenses are actual expenses claimed by the Appellant and is based on actual invoices issued and payments made.
j. That the AO grossly erred in holding that the payment made by the Appellant to its parent entity is liable for deduction of tax at source under Section 195 of the Act, without appreciating that the payment is merely in the nature of reimbursement without any income element embedded therein and thereby not attracting the provisions of Section 195 of the Act.
k. That the AO grossly erred in holding that a disallowance under Section 40(a)(i) of the Act is warranted for non-deduction of tax at source under Section 195 of the Act, without appreciating that provisions of Section 195 of the Act are not applicable to the reimbursement made by the Appellant.
l. That the AO erred in holding that income is embedded in the reimbursement without any basis
m. The AO erred in law and on facts. in disregarding that the remittance towards recovery of ESOP charges is not taxable under the provision of India-USA Double Taxation Avoidance Agreement
n. That the AO while on the one hand held that there is an element of income embedded in the reimbursement made by the Appellant to the parent entity, contradicted himself by holding on the other hand that the expenditure is notional/fictitious in nature.
11. That the AO. while assessing the total income of the Appellant for the year under consideration. ought to have allowed a deduction for education cess and secondary & higher education cess (collectively known as “education cess’) paid during the year under consideration. although not claimed as a deduction by the Appellant while filing its return of income.
12. That in the computation sheet annexed to the final assessment order, the AO erroneously considered the total income at Rs 1271,74,65,420/- as against Rs. 1269,72,60,217/- computed in 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. Relief
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:
