Tribunal Excludes Comparables, Confirms Rent Payment Disallowance, Director's Remuneration Addition

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, confirming the exclusion of three comparables: M/s Acropetal Technologies Ltd., eClerx Services Ltd., and Infosys BPO Ltd. It upheld the deletion of disallowance under Section 40a(ia) for rent payments and the deletion of addition under Section 40A(2)(b) for remuneration paid to the director. The Tribunal found that the exclusions were justified based on the differences in business operations and scale. The order was pronounced on 10th May 2021.

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Issues Involved:

1. Exclusion of three comparables: M/s Acropetal Technologies Ltd., eClerx Services Ltd., and Infosys BPO Ltd.
2. Deletion of disallowance under Section 40a(ia) for rent payments.
3. Deletion of addition under Section 40A(2)(b) for remuneration paid to the director.

Issue 1: Exclusion of Three Comparables

The main issue in the Revenue's appeal is the exclusion of three comparables: M/s Acropetal Technologies Ltd., eClerx Services Ltd., and Infosys BPO Ltd. The assessee, a subsidiary of GHF Holdings Ltd., Mauritius, provides IT-enabled services to its AE. During the year, the assessee entered into two international transactions: Provision of IT Enabled Services and Recovery of Expenses, using TNMM as the method. The TPO proposed an adjustment of Rs. 3,42,98,762/- based on nine comparables. The CIT(A) excluded the three comparables based on the following reasons:

- M/s Acropetal Technologies Ltd.: The CIT(A) noted that this company is engaged in software development and has significant on-site development expenses, making it unfit as a comparable for ITES segment. The Tribunal confirmed this exclusion, highlighting that the TPO did not analyze how engineering design services compared with the IT-enabled services of the assessee.

- eClerx Services Ltd.: The CIT(A) excluded this company as it is engaged in high-end KPO services, which are not comparable to the IT-enabled services of the assessee. The Tribunal upheld this exclusion, noting that eClerx Services is a leading KPO service provider with substantial business on an outsourcing model, which is absent in the assessee's case.

- Infosys BPO Ltd.: The CIT(A) excluded this company due to its giant size, substantial intangible assets, and different scale of operations. The Tribunal confirmed this exclusion, citing various judicial precedents where Infosys BPO Ltd. was excluded for being a giant company with significant brand value and operating on a huge economic scale.

Issue 2: Deletion of Disallowance Under Section 40a(ia)

The CIT(A) directed the Assessing Officer to verify whether the copies of non-deduction of tax or deduction at a lower rate were filed before the Assessing Officer. The Tribunal noted that the Assessing Officer, in the order giving effect to the CIT(A)'s order, accepted that the assessee had produced the TDS exemption certificate and deleted the disallowance. The Tribunal also referred to the judgment of the Hon'ble Calcutta High Court in the case of CIT vs. S.K. Tekriwal, which held that no disallowance can be made for short deduction of TDS. Accordingly, this issue was decided against the Revenue.

Issue 3: Deletion of Addition Under Section 40A(2)(b)

The Assessing Officer disallowed 50% of the remuneration paid to the director, Mr. Sunil Baijal, on the ground that the assessee failed to justify the services rendered. The CIT(A) deleted the disallowance, noting that the Assessing Officer did not bring any evidence to support the disallowance and that higher remuneration paid in the subsequent assessment year was accepted in the order passed under Section 143(3). The Tribunal upheld the CIT(A)'s decision, stating that the Assessing Officer's ad hoc reasoning could not be accepted and that the remuneration was commensurate with the services rendered by the Managing Director.

Conclusion:

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, confirming the exclusion of the three comparables, deletion of disallowance under Section 40a(ia), and deletion of addition under Section 40A(2)(b). The order was pronounced in the open Court on 10th May 2021.

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