ITAT allows higher depreciation on IT equipment, deletes TDS disallowance on secondment payments, excludes fraud-tainted comparables

The ITAT Chennai ruled on multiple transfer pricing and tax issues for an IT services company. In TP adjustments, several comparables were excluded including Acropetal Technologies (due to SEBI fraud findings), Vama Industries (different business segments), L&T Infotech (size disparity), and others for operational differences. The tribunal remanded foreign currency loss treatment to AO for fresh determination based on loan utilization purpose. Provision for obsolete inventory was disallowed as mere provisioning without actual disposal. Repair and maintenance expenditure was deemed capital due to workspace expansion. Stamp duty on lease agreements was allowed as revenue expenditure. Higher depreciation at 60% was permitted for printers/scanners and software used with computers. TDS disallowance on secondment payments was deleted, treating them as salary reimbursements rather than technical service fees.

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Issues Involved:
1. Transfer Pricing Adjustments in three segments.
2. Disallowance of forex loss.
3. Disallowance of provision for obsolescence.
4. Disallowance of repairs and maintenance to buildings.
5. Disallowance of stamp duty charges.
6. Disallowance of depreciation on printers and scanners.
7. Disallowance of depreciation on licensed software.
8. Non-grant of additional depreciation.
9. Disallowance of secondment payments.

Detailed Analysis:

Transfer Pricing Adjustments in Three Segments:

1. EDS Segment:
- Acropetal Technologies Ltd.: The entity was excluded as its financial results were based on fraud, as per SEBI findings.
- Vama Industries (Segment): Excluded due to functional dissimilarity; it was primarily a software provider, not comparable to EDS services.

2. IT Segment:
- Larsen and Toubro Infotech Ltd.: Excluded due to diversified businesses and high segment turnover, as per Bangalore Tribunal's decision.
- Thirdware Solutions Ltd.: Excluded as it was primarily into ITeS services and lacked segmental information, as per Mumbai Tribunal's decision.

3. ITeS Segment:
- Infosys BPO Ltd.: Excluded due to high turnover, as per Chennai Tribunal's decision.
- Hartron Communications Ltd.: Excluded due to diversified operations and extraordinary operations during the year, as per Chennai Tribunal's decision.

Disallowance of Forex Loss:
The assessee's claim of Rs. 2020 Lacs as forex loss was denied by Ld. AO and Ld. DRP, considering it as a notional and capital loss. The matter was restored back to Ld. AO for fresh adjudication to determine the utilization of the loan.

Disallowance of Provision for Obsolescence:
The claim of Rs. 1280 Lacs for obsolete inventory was disallowed as it was a mere provision and not an actual loss.

Disallowance of Repairs and Maintenance to Buildings:
The claim of Rs. 152.72 Lacs was disallowed as it was considered capital expenditure, adding more workspace and bringing enduring benefit to the assessee.

Disallowance of Stamp Duty Charges:
The claim of Rs. 27.27 Lacs was allowed as it was crystallized during the year and considered revenue expenditure.

Disallowance of Depreciation on Printers and Scanners:
Higher depreciation @60% was allowed, considering printers and scanners as part of computers.

Disallowance of Depreciation on Licensed Software:
Higher depreciation @60% was allowed, following the decision of the Hon'ble High Court of Madras in the case of Computer Age Management Services.

Non-Grant of Additional Depreciation:
The issue was restored back to Ld. AO for factual finding and adjudication.

Disallowance of Secondment Payments:
The payment of Rs. 7797.40 Lacs to AE for seconded employees was not treated as Fees for Technical Services. The disallowance u/s 40(a)(i) was deleted as the payments were reimbursements and already subjected to TDS u/s 192.

Conclusion:
The appeal was partly allowed, and the cross-objection of the revenue was dismissed as infructuous.

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