Transfer Pricing Appeal Outcome: Exclusions, Interest Treatment, Disallowance, Operating Costs Ruling

The Tribunal partly allowed the appeal, providing detailed directions on the exclusion of certain comparables in Transfer Pricing analysis, treatment of interest on receivables as an international transaction, and the application of Section 40(a)(i) regarding disallowance for reimbursement of salary costs. The Tribunal dismissed the contention to exclude sub-contracting charges from operating costs, upholding that they cannot be excluded as pass-through costs due to the nature of services provided by the assessee.

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Issues Involved:
1. Exclusion of sub-contracting charges from operating cost.
2. Exclusion of certain comparables in Transfer Pricing analysis.
3. Interest on receivables as an international transaction.
4. Disallowance under Section 40(a)(i) for reimbursement of salary costs.

Detailed Analysis:

1. Exclusion of Sub-Contracting Charges from Operating Cost:
The assessee contended that sub-contracting charges should be excluded from the operating cost as they are a pass-through cost. The Tribunal, however, upheld the view taken in the assessee's own case for AY 2014-15, stating that the assessee is not acting as an agent but is providing software development services with a mark-up. Therefore, the cost of sub-contracting cannot be excluded as a pass-through cost as it would artificially inflate the margins. The Tribunal found no merit in the contention and dismissed this ground.

2. Exclusion of Certain Comparables in Transfer Pricing Analysis:
The assessee sought the exclusion of ten comparables, arguing they were not functionally similar. The Tribunal analyzed the functional, asset, and risk (FAR) profile of the assessee, concluding that the assessee is a limited risk captive service provider. Following the decision in ARM Embedded Technologies Pvt. Ltd. vs. DCIT, the Tribunal excluded the following comparables for functional dissimilarities:
- Inteq Software Pvt. Ltd.
- L&T Infotech Ltd.
- Infobeans Technologies Ltd.
- Thirdware Solutions Ltd.
- Persistent Systems Ltd.
- Infosys Ltd.
- Aspire Systems India Pvt. Ltd.
- Cybage Software Pvt. Ltd.
- RS Software (I) Pvt. Ltd.
- Nihilent Technologies Ltd.

3. Interest on Receivables as an International Transaction:
The assessee argued that interest on receivables should not be considered a separate international transaction, citing decisions in Avnet India Pvt. Ltd. vs. DCIT and Kusum Healthcare Pvt. Ltd. vs. ACIT. The Tribunal noted that interest on receivables is indeed an international transaction as per the explanation to Section 92B of the IT Act. However, it directed the AO/TPO to recompute the notional interest considering a credit period of 90 days and using LIBOR + 300 basis points, following the assessee's own case for AY 2014-15 and 2018-19.

4. Disallowance under Section 40(a)(i) for Reimbursement of Salary Costs:
The assessee argued that Section 195 does not apply to the reimbursement of salary costs, relying on several judicial decisions, including DIT(IT) vs. Abbey Business Services India (P.) Ltd. and M/s. Flipkart Internet Pvt. Ltd. vs. DCIT (IT). The Tribunal remanded the issue to the AO for reconsideration in light of these decisions and directed that if TDS has been deducted under Section 192, no disallowance should be made under Section 40(a)(i). The AO was instructed to verify the claim in accordance with the relevant judicial precedents.

Conclusion:
The appeal was partly allowed, with the Tribunal providing detailed directions on the exclusion of comparables, interest on receivables, and the application of Section 40(a)(i) concerning salary cost reimbursements. The Tribunal dismissed the ground regarding the exclusion of sub-contracting charges from operating costs.

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