Tribunal directs exclusions & restorations in appeal, disallows fees & payments not subject to tax. Interest levy consequential.

The appeal was partly allowed with directions for verification of certain computations and foreign exchange fluctuations. The Tribunal directed the exclusion of Infosys BPO Ltd. from comparables in the IT Enabled Services segment and restoration of the Software Development Services segment for percentile verification. Disallowances of management services fees and IT cost recharge payments were deleted, as they were not subject to withholding tax. The levy of interest under section 234B was deemed consequential and required no separate adjudication.

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Issues Involved:
1. Limitation of the impugned order.
2. Transfer Pricing Adjustment in IT Enabled Services (ITES) segment.
3. Transfer Pricing Adjustment in Software Development Services segment.
4. Disallowance of Management Services Fees under section 40(a)(i).
5. Disallowance of payment made towards Recharge of IT Cost under section 40(a)(i).
6. Levy of interest under section 234B.

Detailed Analysis:

1. Limitation of the Impugned Order:
The appellant contended that the assessment order was barred by limitation. The Tribunal, following the precedent set in the case of Religare Capital Markets Ltd. vs. ACIT, held that the provisions of section 144C of the Income Tax Act are a self-contained code and cannot be subjected to the time limit prescribed under section 153. Consequently, this ground was dismissed.

2. Transfer Pricing Adjustment in IT Enabled Services (ITES) Segment:
The assessee challenged the inclusion of certain comparables and the exclusion of others. The Tribunal focused on the inclusion of Infosys BPO Ltd., which the assessee argued was functionally different due to its significant brand presence and ownership of intangibles. The Tribunal agreed, citing judicial precedents, and directed the exclusion of Infosys BPO Ltd. from the final set of comparables. The Tribunal also held that foreign exchange fluctuations should be treated as an operating item if related to trading activities with associated enterprises, directing the Assessing Officer (AO)/Transfer Pricing Officer (TPO) to verify this.

3. Transfer Pricing Adjustment in Software Development Services Segment:
The assessee argued that if foreign exchange fluctuations were considered as an operating item, its margin would fall within the 35th and 65th percentiles of the comparables, negating the need for a transfer pricing adjustment. The Tribunal restored the issue to the AO/TPO for verification of the computation of these percentiles and the nature of foreign exchange fluctuations. The Tribunal dismissed other grounds related to the inclusion of comparables as academic since they were not argued.

4. Disallowance of Management Services Fees under Section 40(a)(i):
The assessee contended that payments made to Steria France for management services were not taxable in India and thus not subject to withholding tax under section 195. The Tribunal noted that the Delhi High Court had ruled in favor of the assessee on this issue in previous years, holding that the services were managerial and not technical, and thus outside the ambit of fee for technical services under the India-France DTAA. Accordingly, the Tribunal directed the deletion of this disallowance.

5. Disallowance of Payment Made Towards Recharge of IT Cost under Section 40(a)(i):
The assessee argued that payments for software licenses were not in the nature of royalty and thus not subject to withholding tax. The Tribunal, relying on the Delhi High Court's judgment in the case of DIT vs. Infrasoft Ltd., agreed that the payments were for the purchase of copyrighted articles and not for the use of copyright, and thus did not constitute royalty. Consequently, the Tribunal directed the deletion of this disallowance.

6. Levy of Interest under Section 234B:
This ground was deemed consequential and required no separate adjudication.

Conclusion:
The appeal was partly allowed for statistical purposes, with directions for the AO/TPO to verify certain computations and the nature of foreign exchange fluctuations, and to delete disallowances related to management services fees and software license payments.

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