Appeal partially allowed, excluding subcontracting charges, remanding comparables, fresh assessment on interest & disallowances.

The appeal was partly allowed, with the Tribunal upholding the exclusion of subcontracting charges as part of operating costs, dismissing the inclusion of certain comparables due to functional dissimilarities and lack of segmental details, remanding the inclusion of other comparables for fresh consideration, and directing fresh assessment on interest on receivables, disallowance under Section 40(a)(i) for salary cost reimbursed, and denial of depreciation on leasehold improvements. The decision was based on ensuring accurate assessment and considering relevant legal precedents.

---

---

Issues Involved:
1. Exclusion of subcontracting charges.
2. Exclusion of certain comparables.
3. Inclusion of certain comparables.
4. Interest on receivables.
5. Disallowance under Section 40(a)(i) for salary cost reimbursed.
6. Denial of depreciation on leasehold improvements.

Detailed Analysis:

1. Exclusion of Subcontracting Charges:
The Tribunal upheld the decision of the lower authorities, referencing the assessee's own case for AY 2011-12, which concluded that subcontracting charges form part of the operating cost and cannot be excluded as pass-through costs. The Tribunal emphasized that excluding these charges would artificially inflate the assessee's margins on other services. Hence, the ground raised by the assessee was dismissed.

2. Exclusion of Certain Comparables:
The Tribunal examined the functional dissimilarities and lack of segmental details for several comparables:

- Tata Elxsi Ltd.: Excluded due to its engagement in diverse activities within the software development segment, which are not comparable to the assessee's services.
- Rheal Software Pvt. Ltd.: Remanded for reconsideration by the AO based on new submissions regarding functional dissimilarities and fluctuating margins.
- Infobeans Technologies Ltd.: Excluded due to its engagement in business IT services and lack of segmental details.
- Nihilent Technologies Ltd.: Excluded for being functionally dissimilar and engaging in diverse activities without segmental details.
- Aspire Systems (India) Pvt. Ltd.: Excluded due to its diverse services and significant onsite expenses.
- Cybage Software Pvt. Ltd.: Excluded for being engaged in diversified activities and lack of segmental details.
- Inteq Software Pvt. Ltd.: Excluded as it provides diverse services without segmental details.
- Mindtree Ltd.: Excluded due to its engagement in diversified activities and significant intangible assets.
- Larsen and Toubro Infotech Ltd.: Excluded for its diverse services, proprietary software products, and significant intangibles.
- R S Software (India) Ltd.: Excluded due to engagement in diverse services and significant onsite expenses.
- Persistent Systems Ltd.: Excluded for its focus on product development and significant R&D activities.
- Infosys Ltd.: Excluded due to its diverse services, significant intangibles, and high brand value.

3. Inclusion of Certain Comparables:
The Tribunal remanded the inclusion of Akshay Software Technologies Ltd., I2T2 India Limited, Infomile Technologies Limited, Isummation Technologies Pvt. Ltd., Orangescape Technologies Ltd., Maveric Systems Limited, and Batchmaster Software Private Limited to the AO for fresh consideration.

4. Interest on Receivables:
The Tribunal remitted the issue to the AO/TPO for fresh consideration, emphasizing that interest on receivables should not be considered a separate international transaction if it is subsumed in the working capital adjustment. If not, the interest rate should be LIBOR + 300 basis points with a credit period of 90 days.

5. Disallowance under Section 40(a)(i) for Salary Cost Reimbursed:
The Tribunal remanded the issue to the AO, directing consideration of the claim in light of the Karnataka High Court's decision in M/s. Flipkart Internet Pvt. Ltd. vs. DCIT (IT) and other relevant cases. The AO was instructed to verify if the entire salary was subjected to TDS under section 192 and to allow the claim accordingly.

6. Denial of Depreciation on Leasehold Improvements:
The Tribunal remanded the issue to the AO for verification of additions made during the year based on the evidence submitted by the assessee. The AO was instructed to determine the disallowance in accordance with law, considering the directions issued for AY 2014-15.

Conclusion:
The appeal was partly allowed, with several issues remanded for fresh consideration and others decided in favor of the assessee based on functional dissimilarities and lack of segmental details.

---