2020 (5) TMI 86 - AT - Income Tax

Tribunal allows appeals, excludes comparables & reconsiders, based on Supreme Court judgment. Dismisses errors in income assessment & interest levy.

The Tribunal partly allowed the appeals, directing the exclusion of certain comparables and reconsideration of others. The ground related to the ... Arm's length price - comparability analysis - transfer pricing adjustment - functional comparability (product development vs IT services) - segmental information requirement for comparables - inclusion and exclusion of comparable companies - remand to the Transfer Pricing Officer for verification - taxability and timing of ESOP/stock based compensation perquisitesComparability analysis - functional comparability (product development vs IT services) - exclusion and inclusion of comparable companies - Exclusion of Persistent Systems Limited from the final set of comparables for AY 2012-2013 - HELD THAT: - The Tribunal examined the nature of Persistent Systems Limited's operations and financials and followed earlier coordinate bench decisions holding Persistent engaged in outsourced software product development (OPD) and product design activities which are functionally different from a pure software development services provider. Absence of segmental data, presence of significant intangibles and an abnormal year of operation led the Tribunal to conclude Persistent Systems is not comparable and directed the TPO to exclude it from the comparables. [Paras 6]Persistent Systems Limited excluded from the list of comparables for AY 2012-2013.Comparability analysis - functional comparability (product development vs IT services) - exclusion and inclusion of comparable companies - Exclusion of Larsen & Toubro Infotech Limited from the final set of comparables (AY 2012-2013 and AY 2013-2014) - HELD THAT: - Having regard to the company's business profile, segmental information absence and prior Tribunal precedents treating L&T Infotech as a software product company with significant intangibles and purchase for resale costs, the Tribunal held it functionally dissimilar to the assessee's software development services and directed the TPO to exclude it from the comparable set. [Paras 7, 22]Larsen & Toubro Infotech Limited excluded from the list of comparables.Comparability analysis - brand/intangible ownership as a comparability factor - exclusion and inclusion of comparable companies - Exclusion of Infosys Limited from the final set of comparables for AY 2012-2013 - HELD THAT: - The Tribunal applied coordinate bench precedent that a large technology corporation owning significant intangibles, brand value and product revenues is functionally dissimilar to a captive low risk software services provider. On the material showing substantial brand value, R&D expenditure and proprietary products, the Tribunal held Infosys Ltd. not comparable and directed its exclusion. [Paras 8]Infosys Limited excluded from the list of comparables.Comparability analysis - segmental information requirement for comparables - functional comparability (GIS services vs software development) - Exclusion of Genesys International Corporation Limited from the final set of comparables for AY 2012-2013 - HELD THAT: - On review of the company's business (GIS and geospatial services), its significant intangibles, R&D and absence of segmental break up, the Tribunal held Genesys functionally different from the assessee's software development services. The Tribunal applied the reasoning in prior coordinate bench decisions and directed the TPO to exclude Genesys from the comparable list. [Paras 9]Genesys International Corporation Limited excluded from the list of comparables.Transfer pricing adjustment - remand to the Transfer Pricing Officer for verification - Treatment of Sasken Communication Technologies Limited for AY 2012-2013 - remitted to the TPO - HELD THAT: - The Tribunal noted conflicting precedents and the absence of segmental operating margins for Sasken. Applying coordinate bench authorities, the Tribunal found that composite entity level figures without segmental margins are not reliably comparable with the assessee's software development segment and therefore set aside the issue to the AO/TPO for verification and fresh decision after giving the assessee an opportunity of hearing. [Paras 10]Issue remitted to the TPO/AO for fresh consideration and verification regarding Sasken Communication Technologies Limited.Taxability and timing of ESOP/stock based compensation perquisites - ascertainability of benefit - Allowability of stock compensation expense (ESOP provision) - not taxable as perquisite in the relevant year (AY 2012-2013 and AY 2013-2014) - HELD THAT: - Relying on the Supreme Court's decision in CIT v. Infosys Technologies Ltd., the Tribunal held that where the value of the benefit was not ascertainable and no legislative provision made the notional benefit taxable in the relevant year, the ESOP element could not be treated as a taxable perquisite at that stage. The Tribunal found the provision for stock compensation to be a legitimate business expense and, therefore, allowed the ground raised by the assessee. [Paras 12, 16, 17, 36]Stock based compensation provision allowed; ESOP perquisite not treated as taxable in the assessment years under consideration.Comparability analysis - exclusion and inclusion of comparable companies - remand to the Transfer Pricing Officer for verification - Exclusion of C G VAK Software & Exports Limited from the final set of comparables for AY 2013-2014 - HELD THAT: - The Tribunal found CG VAK to be engaged not only in software services but also in product manufacturing and outsourced product development, with significant intangibles and R&D. In absence of segmental data to separate product and services margins, the Tribunal held it not comparable and directed the TPO to exclude CG VAK. [Paras 24]C G VAK Software & Exports Limited excluded from the list of comparables for AY 2013-2014.Comparability analysis - computation of comparable margins - remand to the Transfer Pricing Officer for verification - ICRA Techno Analytics Limited treated for AY 2013-2014 - remit to TPO to recompute margin - HELD THAT: - Assessee had not objected to inclusion before lower authorities and only challenged margin computation. The Tribunal therefore remitted the matter to the TPO to compute the correct margin after verifying available data and methodology. [Paras 25, 26]Matter remitted to the TPO for recomputation of ICRA Techno Analytics Limited's margin.Comparability analysis - use of information obtained under section 133(6) - remand to the Transfer Pricing Officer for verification - Tech Mahindra Limited comparability (AY 2013-2014) - remitted to TPO for reconsideration - HELD THAT: - Because data relied upon by the TPO under section 133(6) were not in the public domain at the time of the assessee's TP study, and given activity profile differences and intangibles/inventories, the Tribunal remitted the issue to the TPO for fresh consideration with opportunity to the assessee. [Paras 27]Issue remitted to the TPO for reconsideration regarding Tech Mahindra Limited.Comparability analysis - inclusion and exclusion of comparable companies - Directives to include certain comparables (AY 2013-2014): Caliber Point Business Solutions Ltd., R.Systems International Ltd., Akshay Software Technologies Ltd., Cat Technologies Ltd., Cigniti Technologies Ltd., Lucid Software Ltd.; and to consider Helios & Matheson Information Technology Ltd. (extrapolation/different year ending) - HELD THAT: - On review of each candidate's business profile and available financials, the Tribunal directed the TPO to consider Caliber Point and R.Systems as comparables. It found Akshay's revenue predominantly from software services and directed inclusion. Cat Technologies and Cigniti were held to derive predominantly software services revenue (with testing as part of development), and Lucid likewise; the Tribunal directed their inclusion. For Helios & Matheson (different year end) the Tribunal allowed extrapolation/different year treatment and remitted consideration to the TPO. [Paras 31, 32, 33, 34, 35]TPO directed to include or consider the named companies as comparables (or to apply appropriate extrapolation) in determining the ALP for AY 2013-2014.Final Conclusion: Both appeals are partly allowed: several comparable companies were directed excluded (Persistent Systems, Larsen & Toubro Infotech, Infosys, Genesys, C G VAK) while multiple items were remitted to the TPO for verification or recomputation (Sasken, ICRA Techno Analytics, Tech Mahindra), several additional comparables were directed to be considered for AY 2013-14, and the stock based compensation (ESOP) expenditure was allowed on the ground that the perquisite value was not ascertainable and therefore not taxable in the years under consideration. Issues Involved:1. Incorrect appreciation of facts and wrong interpretation of law.2. Errors in assessing total income and tax demand.3. Transfer Pricing adjustments and comparability of companies.4. Disallowance of stock compensation expense.5. Disallowance of payment for software purchase.6. Erroneous computation of depreciation.7. Levy of interest under sections 234B, 234C, and 234D.8. Initiation of penalty proceedings under section 271(1)(c).Detailed Analysis:1. Incorrect Appreciation of Facts and Wrong Interpretation of Law:The appellant contended that the order and directions of the Hon’ble DRP were based on an incorrect appreciation of facts and wrong interpretation of law, rendering them bad in law.2. Errors in Assessing Total Income and Tax Demand:The appellant argued that the AO/TPO erred in assessing the total income at INR 324,935,945 against the returned income of INR 244,543,220 for AY 2012-13 and determining a balance tax demand of INR 40,638,140.3. Transfer Pricing Adjustments and Comparability of Companies:The appellant raised multiple issues regarding the transfer pricing adjustments made by the AO/TPO, including the rejection of the appellant's economic analysis and the selection of comparables.Persistent Systems Limited:The Tribunal noted that Persistent Systems Limited was engaged in product development and product design services, which are functionally different from the appellant's software development services. The Tribunal directed the TPO to exclude Persistent Systems Limited from the list of comparables.Larsen & Toubro Infotech Limited:The Tribunal observed that Larsen & Toubro Infotech Limited was engaged in software product development and its segmental information on SWD services was not available. The Tribunal directed the TPO to exclude Larsen & Toubro Infotech Limited from the list of comparables.Infosys Limited:The Tribunal found that Infosys Limited was functionally different from the appellant as it owned significant intangibles, had high brand value, and incurred substantial R&D expenditure. The Tribunal directed the TPO to exclude Infosys Limited from the list of comparables.Genesys International Corporation Limited:The Tribunal noted that Genesys International Corporation Limited was engaged in providing GIS-based services, which are functionally different from the appellant's software development services. The Tribunal directed the TPO to exclude Genesys International Corporation Limited from the list of comparables.Sasken Communication Technologies Limited:The Tribunal observed that Sasken Communication Technologies Limited was engaged in software product development and had high R&D expenditure and intangibles. The Tribunal remitted the issue to the TPO for fresh consideration.4. Disallowance of Stock Compensation Expense:The appellant argued that the AO erred in disallowing the stock compensation expense of INR 6,523,426 on the basis that tax was not deducted at source on the perquisite taxable in the hands of employees. The Tribunal relied on the Supreme Court judgment in CIT v. Infosys Technologies Limited, holding that the element of shares to employees under ESOP could not be treated as a perquisite as there was no benefit and the value of the benefit was unascertainable at the time the options were exercised. The Tribunal allowed this ground.5. Disallowance of Payment for Software Purchase:The appellant contended that the AO erred in disallowing the payment for software purchase amounting to INR 134,700 due to non-deduction of taxes at source, without appreciating that this expenditure did not pertain to the current assessment year. This ground was not pressed by the appellant during the hearing and was dismissed.6. Erroneous Computation of Depreciation:The appellant argued that the AO inadvertently increased the income by adding depreciation of INR 3,125,527 instead of reducing it. This ground was not pressed by the appellant during the hearing and was dismissed.7. Levy of Interest under Sections 234B, 234C, and 234D:The appellant contended that the AO erred in levying interest under sections 234B and 234C of the Act. These grounds were not pressed by the appellant during the hearing and were dismissed.8. Initiation of Penalty Proceedings under Section 271(1)(c):The appellant argued that the AO erred in initiating penalty proceedings under section 271(1)(c) of the Act. This ground was not pressed by the appellant during the hearing and was dismissed.Conclusion:The Tribunal partly allowed the appeals for statistical purposes, directing the TPO to exclude certain comparables and reconsider others, and allowed the ground related to the disallowance of stock compensation expense based on the Supreme Court judgment in CIT v. Infosys Technologies Limited. Other grounds raised by the appellant were dismissed as not pressed.