2025 (3) TMI 1381 - AT - Income Tax

TPO ordered to recompute working capital margins following OECD guidelines, two comparables excluded from analysis

The ITAT Delhi ruled in favor of the assessee on multiple grounds. The TPO erred in computing working capital adjusted margins despite DRP directions to ... TP Adjustment - addition in ITeS Segment and SDS Segment - incorrect computation of working capital adjusted margins by the TPO by alleging that the DRP via directions has agreed to the Appellant’s contentions and directed TPO to follow the guidelines provided by OECD for the computation of working capital adjusted margin - HELD THAT:- TPO has fallen in error in giving effect to the DRP directions in correct perspective and rather committing a mechanical error, the issue needs to be rested to ld. TPO, for removing the error and further give an opportunity of hearing to the assessee to show as to how after giving effect to the DRP orders the margin of computation of comparables in both segment shall fall within the range. In aforesaid terms the ground no. 2.5 is decided in favour of assessee. Comparable selection - Magnasoft Consulting India Pvt. Ltd. and Aptus Software Labs Pvt. Ltd. - As we sustain the contention of assessee that these two comparables needs to be removed and accordingly ALP be determined. Thus these grounds are allowed partly infavour of the assessee. Deduction claim u/s 80G - We are of considered view that ld. Tax authorities below have fallen in error to deny benefit of Section 80G to the assessee. The ground is sustained. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:Whether the Transfer Pricing Officer (TPO) erred in enhancing the income of the appellant by not adhering to the arm's length principle in the provision of information technology enabled services (ITeS) and software development services (SDS).Whether the TPO correctly computed the working capital adjusted operating margins for the appellant and its comparables.Whether certain comparables were erroneously included or excluded in the SDS segment analysis.Whether the appellant is entitled to a deduction under section 80G of the Income Tax Act for contributions made as part of its Corporate Social Responsibility (CSR) obligations.ISSUE-WISE DETAILED ANALYSISTransfer Pricing Adjustments (ITeS and SDS Segments)Relevant legal framework and precedents: The Income Tax Act, 1961, particularly sections related to transfer pricing, and the OECD guidelines on transfer pricing were considered. The arm's length principle is central to determining whether the transactions with associated enterprises are priced similarly to transactions with independent enterprises.Court's interpretation and reasoning: The Tribunal noted that the TPO had committed a mechanical error in computing the working capital adjusted margins. The Dispute Resolution Panel (DRP) had directed the TPO to follow OECD guidelines, which were not correctly applied.Key evidence and findings: The Tribunal found that the TPO erroneously subtracted the working capital adjustment percentage from the operating margins instead of adding it, leading to incorrect computation.Application of law to facts: The Tribunal held that the TPO must recompute the margins correctly as per DRP's directions and provide the appellant an opportunity to demonstrate that the margins fall within the acceptable range.Treatment of competing arguments: The appellant argued that the operating margin fell within the range requiring no adjustment. The Tribunal agreed, subject to correct computation by the TPO.Conclusions: The Tribunal remanded the issue back to the TPO for correction, deciding the ground in favor of the appellant.Comparability Analysis in SDS SegmentRelevant legal framework and precedents: The Tribunal considered the criteria for selecting comparables, including functional similarity and adherence to filters applied by the TPO.Court's interpretation and reasoning: The Tribunal found that two comparables, Magnasoft Consulting India Pvt. Ltd. and Aptus Software Labs Pvt. Ltd., did not meet the TPO's filters and should be excluded.Key evidence and findings: The Tribunal noted factual discrepancies in the comparables' financial ratios and functional dissimilarities.Application of law to facts: The Tribunal directed the removal of these comparables from the analysis, partially allowing the appellant's grounds.Treatment of competing arguments: The appellant's arguments regarding the inappropriateness of the comparables were sustained, as the Revenue could not dispute the factual aspects.Conclusions: The Tribunal allowed the grounds partly in favor of the appellant, requiring recalibration of the arm's length price.Deduction under Section 80G for CSR ContributionsRelevant legal framework and precedents: Sections 80G and 37 of the Income Tax Act, along with section 135 of the Companies Act, 2013, were considered. The Tribunal also referenced previous judgments, including Interglobe Technology Quotient Private Limited vs. ACIT.Court's interpretation and reasoning: The Tribunal emphasized that the CSR expenditure is an application of income and not a business expense, thus eligible for deduction under section 80G if other conditions are met.Key evidence and findings: The Tribunal found no legislative intent to deny section 80G deductions for CSR contributions, except for specific exclusions.Application of law to facts: The Tribunal concluded that the appellant's CSR contributions were eligible for deduction under section 80G, as they were not voluntary donations but still qualified under the section's provisions.Treatment of competing arguments: The Tribunal rejected the Revenue's argument that CSR contributions are not voluntary and thus not deductible, highlighting the lack of a reciprocal promise in CSR expenditures.Conclusions: The Tribunal sustained the appellant's grounds, allowing the deduction under section 80G.SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'The CSR expenditures are also without any reciprocal commitment from beneficiary being philanthropic in nature. The Act permits deduction of donations as per Section 80G of the Act, even though, assessee is not gaining any benefit out of any reciprocity from donee.'Core principles established: The Tribunal reinforced the principle that CSR expenditures, being an application of income, can qualify for deduction under section 80G if they meet the section's conditions, despite their mandatory nature under the Companies Act.Final determinations on each issue: The Tribunal remanded the transfer pricing computation issue back to the TPO for correction, allowed the exclusion of inappropriate comparables, and sustained the appellant's claim for deduction under section 80G, allowing the appeal with necessary adjustments.