2025 (8) TMI 746 - AT - Income Tax

ITAT directs TP adjustments, accepts economic adjustments under Rule 10B(1)(e), and clarifies disallowances under sections 14A, 36(1)(va), 40(a)(i)

The ITAT Mumbai directed exclusion of MPS, Manipal, Integra, and Wizard from the comparable set for TP adjustments, while including Bhilwara and UBM for ... TP adjustment - provision of information technology and related support services (ITES) segment - comparable selection - exclusion of MPS - HELD THAT:- . MPS is a leading global provider of platforms and content solutions for the digital world and its India’s only listed pure-play publishing services company, provides platforms and publishing services for global publishing industries 82% of total turnover of the company is from providing content solutions in the form of production, transformation, customer support and 18% of total turnover from its platform solutions such as Digicore, THINK, and Scholar Star etc. Further, in assessee’s own case for A.Y. 2013-14 and 2014-15, MPS was excluded. Therefore, the Assessing Officer / TPO is directed to exclude MPS from final set of comparable. Now turning to Manipal. Manipal is also engaged in diversified set of services such as CGI and digital services, packaging pre-press, image retouching, learning and publishing and has undertook pre-media and e-book distribution for its domestic customers. Thus, this comparable is not comparable with the assessee who is engaged in providing IT and related support services. Integra - We find that this company has developed its own products namely iRight, iPMP and iAuthor for provision of development and management of its users. Its products aid in streamlining the project management, photo research, workflow of publishers. It also provides Natural Language Processing (NLP) and Artificially Intelligence (AI) that enable collaborative content authoring and editing. Thus, it is not comparable with the assessee company which is ITES and related support services. Wizard is functionally different with the assessee. This company is also in diversified services and segmental information is not available. This company is involved in various diversified services as recorded above. The functions of these comparable are completely different from ITES related support services provided by assessee. Thus, this comparable is also not fit for comparison with the assessee. Thus, Assessing Officer/TPO is directed to exclude this comparison. We find that TPO in his order has applied an export filter while selecting comparable companies and has accepted only those companies which have 100% Revenue for export of ITES and enable services. Inclusion of Bhilwara is concern, we find that TPO excluded Bhilwara from final set of comparable. We find that once this comparable qualified the filter applied by TPO thus, he was required to retain this comparable. Hence, we direct the AO/TPO to include Bhilwara as in final set of comparable and exclude MPS, Manipal, Integra and Wizard and re- compute adjustment accordingly. Adjustment on account of provision of facilitation support services/market support services segment - Direct the Assessing Officer/TPO to include UBM in final set of comparable and recompute adjustment on account of transaction of marketing support services with its AE. TP adjustment with regard to the provision of engineering and related services - We find that in assessee’s own case for A.Y. 2013-14 and 2014-15 which was followed in 2017-18, the co-ordinate bench of Tribunal in assessee’s own case on similar set of fact, we direct the Assessing Officer/TPO to follow the order of Tribunal in A.Y. 2017-18 and recompute the adjustment accordingly. TP adjustment in respect of manufacturing segment - HELD THAT:- The assessee benchmarked the manufacturing segment by adopting TNMM as the most appropriate method. The assessee claimed that they have made certain economic adjustments as per Rule 10B(1)(e) and claimed that the transaction is at arm’s length. TPO rejected the economic adjustments carried out by the assessee. Pune tribunal in Ariston Thermo India Ltd. [2015 (8) TMI 977 - ITAT PUNE] also held that in term of sub-clause(i) of Rule 10B(1)(e), net profit margin of tested party (assessee) drawn from its financial accounts can be suitably adjusted to facilitate its comparison with the uncontrolled entities/ transactions. Thus, we accept the submissions of assessee and restore the matter back to the file of TPO/AO to allow appropriate adjustment in the operating margin of the assessee for low capacity of utilisation of assessee being initial year of operation. The TPO/ AO shall allow reasonable opportunity to the assessee. The assessee is also directed to provide relevant evidence on his stand to the TPO/ AO. In the result this ground of appeal is allowed for statistical purpose. Disallowance of expenses u/s 14A - assessee submits that during the year under consideration, the assessee has not earned any exempt income and hence no disallowance under section 14A ought to be made - HELD THAT:- Considering the fact that during the year assessee has not earned any exempt income, therefore, no disallowance under section 14A to be made as has been held in a series of decision by various High Courts including in PCIT vs Era Infrastructure (India) Ltd.[2022 (7) TMI 1093 - DELHI HIGH COURT] - In the result, this ground of appeal is allowed. Addition u/s 36(1)(va) - delayed deposit of employee contributions - HELD THAT:- Considering the fairness of assessee and the decision of Checkmate Services P. Ltd. [2022 (10) TMI 617 - SUPREME COURT (LB)]. This ground of appeal of assessee is dismissed. Addition u/s 40(a)(i) - tds on salary payments to a foreign employee - assessee was required to deduct tax u/s 195 for the impugned payments as in the nature of fees for technical services - HELD THAT:- We find that assessing officer as well as DRP has not disputed that assessee made deduction of tax u/s 192. The ratio of deduction of tax u/s 192 is higher than the deduction under section 195. The assessee has paid salary to said employee directly in his bank account. Form 16 was issued to him. The assessing officer or DRP has not brought any adverse material on record to show that during the employment, he has rendered his services which can be classified as technical services. No supporting or adverse material brought on record. AO and DRP made general observation. Salary payment made outside India is not covered by the provisions of section 40(a)(i) and is covered by the provisions of section 40(a)(iii). Thus, the disallowance under section 40(a)(i) r.w.s. 195 is not justified. Further, there is no violation of Chapter XVII-B. Rather, the assessee has deducted from tax under section 195 at higher rate. In the result, this ground of appeal is allowed. 1. ISSUES PRESENTED and CONSIDERED 1. Whether the final assessment order was passed without jurisdiction as per Section 144B of the Income Tax Act. 2. Whether the final assessment order was time-barred under Section 144C(13) of the Act. 3. Whether the final assessment order was invalid due to lack of authentication by digital or physical signature. 4. Whether the upward adjustments made to total income based on directions of the Dispute Resolution Panel (DRP) were justified. 5. Whether the Transfer Pricing (TP) adjustment in respect of provision of IT Enabled Services (ITES) segment was justified, including the selection and rejection of comparable companies. 6. Whether the TP adjustment on facilitation/marketing support services (MSS) segment was justified, including the selection of comparable companies. 7. Whether the TP adjustment on engineering and related services segment was justified, including aggregation approach, foreign exchange loss treatment, and margin computations. 8. Whether the TP adjustment on manufacturing segment was justified, including economic adjustments for start-up phase, capacity utilization, and working capital adjustments. 9. Whether disallowance of expenses under Section 14A read with Rule 8D was justified in absence of exempt income. 10. Whether addition under Section 36(1)(va) for delay in deposit of employee contributions was justified. 11. Whether addition under Section 40(a)(i) read with Section 195 for non-deduction of tax on salary payments to a foreign employee was justified. 12. Whether interest under Section 234B was correctly computed. 13. Whether interest under Section 234C was correctly computed on total income or returned income. 14. Whether penalty proceedings under Section 270A were rightly initiated. 2. ISSUE-WISE DETAILED ANALYSIS 1. Jurisdiction and Validity of Final Assessment Order (Grounds 1, 2, 3, and 4) - The appellant initially challenged jurisdiction under Section 144B, time-bar under Section 144C(13), and lack of authentication of the assessment order. - The appellant later did not press these grounds. - The Tribunal accordingly dismissed these grounds as not pressed. 2. Transfer Pricing Adjustment - ITES Segment (Ground 5) - Legal Framework: Transfer Pricing provisions under Sections 92CA and 92C; TNMM method for benchmarking; adherence to comparability principles. - Facts: The assessee provided ITES to Associate Enterprises (AEs) with operating profit to total cost (OP/TC) of 10.66%. The assessee's TP study selected 19 comparables with median margins between 9.05% and 14.16%. TPO rejected 10 comparables and introduced 5 new ones, resulting in a final set of 14 comparables with median margin of 19.20%, leading to upward adjustment. - DRP sustained final set but directed consideration of updated margins, reducing adjustment to Rs. 7.17 crore. - Assessee's contention: Exclusion of four comparables (MPS Ltd., Manipal Digital Systems Pvt. Ltd., Integra Software Services Pvt. Ltd., Wizard E-Marketing Pvt. Ltd.) and inclusion of Bhilwara Infotech Ltd. Medical Transcription segment based on functional dissimilarity, lack of segmental data, failure to meet export filters, and prior Tribunal decisions. - Court's reasoning: MPS Ltd. is functionally dissimilar, engaged in diversified publishing services, with significant outsourcing costs unlike assessee; previously excluded by Tribunal in similar cases. Manipal Digital Systems Pvt. Ltd. failed export filter (no export revenue), engaged in diversified domestic services, lacking segmental data. Integra Software Services Pvt. Ltd. develops proprietary products and uses AI/NLP technologies, functionally distinct from assessee's ITES services. Wizard E-Marketing Pvt. Ltd. engaged in diversified telecommunication and software services, lacking segmental data, functionally different. Bhilwara Infotech Ltd. Medical Transcription segment qualified export filter with 100% export revenue but was erroneously excluded by TPO. - Conclusion: Directed exclusion of MPS, Manipal, Integra, and Wizard from final comparables and inclusion of Bhilwara; reassessment of TP adjustment accordingly. 3. Transfer Pricing Adjustment - Marketing Support Services (MSS) Segment (Ground 6) - Facts: Assessee's OP/TC was 9.9%, with 15 comparables having mean margin 7.32% to 9.09%. TPO rejected 10 comparables, retaining 5 with mean margin 17.32%, leading to upward adjustment. - DRP sustained final set but directed consideration of updated margins, resulting in adjustment of Rs. 94.48 lakh. - Assessee's contention: Inclusion of two comparables (UBM India Pvt. Ltd. and MCI Management India Pvt. Ltd.) excluded by TPO on related party transaction (RPT) filter grounds. - Court's reasoning: UBM India Pvt. Ltd. had RPT ratio below 25% (15.31%, 9.78%, 12.16% for respective years), thus did not fail RPT filter. MCI Management India Pvt. Ltd. accepted as comparable in assessee's own prior years by Tribunal and TPO/DRP. - Conclusion: Directed inclusion of UBM and MCI in final comparables and recomputation of TP adjustment. 4. Transfer Pricing Adjustment - Engineering and Related Services Segment (Ground 7) - Assessee relied on Tribunal's prior decisions for AYs 2013-14, 2014-15, and 2017-18 holding similar transactions at arm's length. - Revenue supported TPO/DRP orders. - Tribunal directed AO/TPO to follow prior Tribunal decisions and recompute adjustment accordingly. 5. Transfer Pricing Adjustment - Manufacturing Segment (Ground 8) - Facts: Manufacturing division (EEEC-Nasik) is a 100% export-oriented unit in start-up phase with 30% capacity utilization and losses. - Assessee adopted TNMM with economic adjustments per Rule 10B(1)(e), including working capital and capacity utilization adjustments. - TPO rejected economic adjustments and proposed upward adjustment of Rs. 4.92 crore, sustained by DRP. - Assessee also sought depreciation adjustment due to higher capital expenditure and proposed use of cash profit level indicator to eliminate material differences. - Legal Framework: Rule 10B(1)(e) allows adjustments to net profit margin for material differences affecting comparability. - Court's reasoning: Accepted assessee's submission on start-up losses, low capacity utilization, and capital expenditure. Directed AO/TPO to allow appropriate adjustments for capacity utilization and other economic factors. Directed to provide reasonable opportunity to assessee to submit relevant evidence. - Conclusion: Ground allowed; matter remanded for fresh computation considering economic adjustments. 6. Disallowance under Section 14A read with Rule 8D (Ground 9) - Assessee contended no exempt income was earned during the year; thus, no disallowance under Section 14A warranted. - Revenue supported disallowance. - Tribunal relied on consistent judicial precedents holding that disallowance under Section 14A is not warranted in absence of exempt income. - Conclusion: Disallowance under Section 14A deleted; ground allowed. 7. Addition under Section 36(1)(va) - Delay in Deposit of Employee Contributions (Ground 10) - Assessee relied on Supreme Court decision in Checkmate Services P. Ltd. holding against assessee's claim. - Tribunal dismissed this ground in line with binding precedent. 8. Addition under Section 40(a)(i) read with Section 195 - Salary Payment to Foreign Employee (Ground 11) - Facts: Salary paid to foreign employee designated as President, holding Employment Visa and registered with FRRO; salary paid abroad with tax deducted under Section 192 at higher rate. - AO disallowed payment under Section 40(a)(i) on ground that tax should have been deducted under Section 195 as payment was for Fees for Technical Services (FTS). - DRP upheld AO's view, questioning employment relationship and characterizing payment as FTS. - Assessee contended tax was deducted under Section 192, disallowance under Section 40(a)(i) applies only when tax is not deducted under Chapter XVII-B, and salary paid abroad is covered under Section 40(a)(iii), not 40(a)(i). - Court's reasoning: Tax deduction under Section 192 was made and deposited; no failure to deduct tax. Characterization of payment as FTS not supported by material or evidence. Employment visa and registration with FRRO support employment relationship. Salary payments outside India are covered under Section 40(a)(iii), not 40(a)(i). - Conclusion: Addition under Section 40(a)(i) deleted; ground allowed. 9. Interest under Section 234B (Ground 12) - Ground was consequential and did not require separate adjudication. 10. Interest under Section 234C (Ground 13) - Assessee contended interest should be computed on returned income, not on assessed income. - Tribunal directed AO to recompute interest under Section 234C accordingly, following prior Tribunal decision. - Ground allowed. 11. Penalty Proceedings under Section 270A (Ground 14) - No detailed discussion in judgment; presumably left open or not pressed.