ITAT rules on transfer pricing: excludes dissimilar comparables, corrects margin calculations, denies PF deduction under Section 43B

The ITAT Bangalore upheld exclusion of comparables with high turnover and those functionally dissimilar to the assessee in the transfer pricing analysis, directing AO/TPO to exclude specified companies. Incorrect margin computations by TPO were set aside, with directions to recompute margins correctly. ESOP expenses were not to be treated as operating costs since no cost was charged to the assessee and employees bore the tax liability. The Tribunal directed granting of working capital adjustment consistent with its earlier rulings. Regarding delayed PF remittance, the Tribunal followed the SC decision in Checkmate Services, confirming that employer contributions must be paid by the statutory due date for deductibility under section 43B, dismissing the assessee's challenge. Overall, the appeal was partly allowed on comparables and margin computation but dismissed on PF remittance.

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Issues Involved:
1. Validity of the final assessment order passed beyond the prescribed time.
2. Errors in the Transfer Pricing Officer's (TPO) search process and application of filters.
3. Inclusion/exclusion of comparable companies in the software development (SWD) and marketing support services (MSS) segments.
4. Treatment of Employee Stock Purchase Plan (ESPP) costs as operating costs.
5. Granting of working capital and risk adjustments.
6. Disallowance of employee provident fund contribution remitted before the due date.

Detailed Analysis:

1. Validity of the Final Assessment Order:
The assessee challenged the validity of the final assessment order on the grounds that it was passed beyond the time prescribed under section 144C(13) of the Income-tax Act. The order of the Dispute Resolution Panel (DRP) was dated 31.12.2021, and the final assessment order was passed on 28.2.2022. The assessee did not provide evidence to substantiate its claim of a belated order. The Tribunal dismissed this issue.

2. Errors in TPO's Search Process and Filters:
Grounds 2 to 5 raised by the assessee were general in nature and did not require separate adjudication.

3. Inclusion/Exclusion of Comparable Companies:
- SWD Segment:
- The assessee sought the inclusion of five comparables: Akshay Software Technologies Ltd, Batchmaster Software Pvt Ltd, DCIS DOT COM Solutions India Pvt Ltd, Evoke Technologies Pvt Ltd, and Sagarsoft (India) Ltd. The Tribunal remitted these to the AO/TPO for verification of functional similarity.
- The assessee sought the exclusion of thirteen comparables, including L&T Infotech Ltd, Persistent Systems Ltd, Tata Elxi Ltd, Nihilent Technologies Ltd, Cybage Software Pvt Ltd, and Infosys Ltd, due to high turnover. The Tribunal directed the exclusion of these comparables based on the turnover filter.
- Infobeans Technologies Ltd and Cygnet Infotech Pvt Ltd were excluded due to functional dissimilarities.

- MSS Segment:
- The assessee sought the exclusion of Pressman Advertising Ltd and Majestic Research Services and Solutions Ltd due to functional dissimilarities. The Tribunal agreed and directed their exclusion.

4. Treatment of ESPP Costs:
The TPO treated ESPP costs as operating costs. The Tribunal found that the purchase cost of shares was charged directly from the employees, and the assessee merely facilitated the payment. The Tribunal held that the 15% discount received by employees could not be treated as operating costs in the hands of the assessee.

5. Working Capital and Risk Adjustments:
- Working Capital Adjustment:
The Tribunal directed the AO/TPO to grant working capital adjustment, following the consistent approach of the Tribunal in similar cases.

- Risk Adjustment:
The assessee did not press for this adjustment, and the Tribunal dismissed it as not pressed.

6. Disallowance of Employee Provident Fund Contribution:
The Tribunal upheld the disallowance of employee provident fund contributions remitted before the due date for filing the return, following the decision of the Hon'ble Supreme Court in the case of Checkmate Services (P.) Ltd. Vs CIT-1.

Conclusion:
The appeal filed by the assessee was partly allowed, with specific directions for inclusion/exclusion of comparables, treatment of ESPP costs, and granting of working capital adjustment. The Tribunal dismissed the issues related to the validity of the final assessment order, risk adjustment, and disallowance of provident fund contributions.

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