Tribunal directs re-examination on comparables, working capital adjustments, and CSR deductions

The Tribunal partly allowed the appeal for statistical purposes, directing a re-examination of various aspects including the inclusion/exclusion of comparables, working capital adjustments, and the eligibility of CSR contributions for deduction. The Tribunal provided detailed directions to the TPO and A.O., restoring several issues for further verification.

---

---

Issues Involved:
1. Adjustment under section 92CA of the Act
2. Disallowance under section 14A of the Act
3. Disallowance under section 40(a)(i) of the Act towards reimbursement of salary cost
4. Disallowance of corporate social responsibility expenses claimed as deduction under section 80G of the Act

Issue-Wise Detailed Analysis:

1. Adjustment under section 92CA of the Act:
- Rejection of Transfer Pricing Documentation: The Tribunal noted that the TPO rejected the assessee's TP documentation for the IT & ITES segments, stating it was "not reliable or correct" under Section 92C(3) of the Act. The TPO conducted a fresh search for comparable companies using non-contemporaneous data, which the assessee contested.
- Comparability Analysis: The Tribunal found that the TPO did not provide the assessee an opportunity to undertake a fresh search for comparable companies. The Tribunal directed the exclusion of certain comparables such as L&T Infotech Limited, Persistent Systems Limited, and Infosys Limited due to functional dissimilarities and other factors like brand ownership and extraordinary events.
- Inclusion of Comparables: The Tribunal restored the inclusion of I2T2 India Limited, Evoke Technologies Limited, and Melstar Information Technologies Limited to the TPO/A.O. for further examination and verification.
- Non-availability of Data: The Tribunal highlighted the TPO's error in selecting companies only if FY 2014-15 data was available, disregarding other judicial pronouncements.
- Employee Cost and Export Earning Filters: The Tribunal found that the TPO erred in using a 25% employee cost filter and a 75% export earning filter without proper justification.
- Abnormal Profits: The Tribunal directed the exclusion of Rheal Software Private Limited due to its abnormal profits.
- Operating Profit Margins: The Tribunal noted errors in the computation of operating profit margins of comparable companies, particularly the inclusion of provisions for bad and doubtful debts.
- Working Capital Adjustment: The Tribunal directed the TPO to grant working capital adjustment, following the guidelines from previous judicial pronouncements and OECD guidelines.

2. Disallowance under section 14A of the Act:
- Disallowance of Rs. 1,37,500: The Tribunal found that the assessee did not earn any exempt income during the relevant AY, thus the provisions of Section 14A were not applicable. The Tribunal directed the A.O. to delete the disallowance, following the precedent set by the Hon'ble Delhi High Court in Cheminvest Ltd. Vs. CIT.

3. Disallowance under section 40(a)(i) of the Act towards reimbursement of salary cost:
- Secondment Agreement: The Tribunal noted that the assessee's issue regarding the secondment agreement with GS & Co. was pending before a Special Bench. The Tribunal restored this issue to the DRP for examination and comments.
- Reimbursement of Salary Costs: The Tribunal found that the DRP and A.O. erred in treating the reimbursement of salary costs as Fees for Technical Services (FTS) and directed a re-examination of the facts.

4. Disallowance of corporate social responsibility expenses claimed as deduction under section 80G of the Act:
- CSR Contributions: The Tribunal observed that the A.O. disallowed the deduction under Section 80G on the grounds that CSR contributions were not voluntary. The Tribunal noted that contributions to PM National Relief Fund were allowed, indicating inconsistency in the A.O.'s approach.
- Eligibility for Deduction: The Tribunal directed the A.O. to verify the nature of contributions and determine their eligibility for deduction under Section 80G, considering the specific clauses of the Act that allow for such deductions.

Conclusion:
The Tribunal provided detailed directions for the TPO and A.O. to re-examine various aspects of the case, including the inclusion/exclusion of comparables, granting working capital adjustments, and verifying the eligibility of CSR contributions for deduction. The appeal was partly allowed for statistical purposes, with several issues restored for further examination and verification.

---