TaxTMI 
TaxTMI 
2026 (1) TMI 192
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.... 2. First, we take up assessee's appeal in ITA No. 2153/Bang/2024 The assessee has raised following grounds of appeal: "1. That on the facts and circumstances of the case and in law, the Learned CIT(A) erred, in making an addition of INR 60,79,020 to the total income of the Appellant on account of disallowance of expenditure incurred towards incentive payment for executive gain sharing plan. 2. That on the facts and circumstances of the case and in law, the CIT(A) erred in disallowing the aforesaid amount on erroneous presumption that such amount debited to the Statement of Profit and Loss A/c is in the nature of Severance Pay without any cogent reasons. 3. That on facts and circumstances of the case and in law, the CIT(A) has erred by not considering that payment to employees is in the nature of incentive and is accordingly eligible for deduction under section 37 read with section 43B of the Act as the same has been actually paid on or before the due date of filing the return of income. 4. That on the facts and in circumstances of the case and in law, the CIT(A) has erred in directing the Learned AO to compute the consequential interest on t....
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....irect bearing on the computation of the transfer pricing adjustment. Therefore, such an issue is fundamental to the adjudication of the assessee's appeal and cannot be ignored on technical grounds. 9. In view of the above facts and the settled legal position that additional grounds raising pure questions of law or issues arising from the existing record can be admitted at any stage of appellate proceedings, we admit the additional ground of appeal raised by the assessee. The same is admitted for adjudication on merits. 10. The issue raised by the assessee through Ground Nos. 1 to 4 of the appeal pertain to disallowances of expenditure being incentive payment for executive share plan amounting to Rs. 60,79,020/-. 11. The facts in brief are that the assessee, a Pvt Ltd company, is engaged in the business of providing ITE Services to AE for which it was compensated at cost plus 18% Markup. During the year under dispute, the assessee has operated 3 Units namely STPL Unit, SEZ Unit-1 and SEZ Unit-2 out of which SEZ unit-1 is claimed as exempted unit under section 10AA of the Act. 12. During the assessment proceeding, the AO observed that the assessee company has claimed an e....
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....CIT(A). 18. Before the learned CIT(A), the assessee submitted that during the relevant previous year, it had incurred an expenditure of Rs.8,98,55,020 towards incentive / additional remuneration paid to certain key employees. This payment was made in accordance with the incentive scheme approved by the Board of Directors and formed part of the employees' overall remuneration package. The said expenditure was incurred wholly and exclusively for the purposes of business and was directly linked to employee performance and retention. 19. The assessee explains that out of the total incentive amount, a substantial portion was actually paid to the employees during the financial year 2013-14 itself. The balance amount, though paid in August 2014, but the same was paid before the due date of filing the return of income for AY 2014-15. Therefore, the entire expenditure satisfies the condition of payment within the permissible time under the Act. 20. To substantiate the claim, the assessee has furnished detailed employee-wise break-up of incentive payments, supported by pay slips, Form-16 extracts, and annexures forming part of the paper book. These documents clearly show the total i....
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.... extent of Rs. 69,79,020/- being the amount unpaid during the year by observing as under: "5.4 The next ground of appeal relates to disallowance of Rs. 8,98,55,020 which was the 'severance pay' to the employees exiting from the company Amba Investment Services Ltd (the appellant). 5.4.1 The AO treated this payment as incentive and disallowed whereas the appellant has shown that it is the severance pay paid in the financial year itself (in December 2013) and the balance amount of Rs. 60,79,020 was paid in August 2014 i.e. before filing the return of income for subject AY 2014-15. The appellant also submitted that applicable TDS was done on these payments. The appellant has submitted the pay slips and Form 16 in respect of the employees who received the above said 'severance pay'. However, the appellant's contention that the amount paid after the financial year should be allowed in terms of section 43B cannot be accepted as section 43B covers specific payments of which 'severance pay' is not one. 5.4.2 In view of the above, disallowance of Rs. 60,79,020 is sustained." 27. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal befor....
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.... under section 192 of the Act and the tax so deducted was duly remitted to the Government. This clearly establishes that the assessee itself treated the impugned payment as salary in the hands of the employees and the Revenue has accepted the same as income chargeable under the head "Salaries" in the hands of the recipients. 33. The learned CIT(A), while granting partial relief, sustained the disallowance of Rs.60,79,020/- on the ground that the payment was in the nature of severance pay and that section 43B of the Act, does not cover severance pay. In our considered view, this approach of the learned CIT(A) is not justified on the facts of the present case. From the documents placed on record, it is evident that the payment represents additional remuneration in the nature of incentive / bonus paid to certain employees and not severance compensation. Merely because some employees exited subsequently does not alter the true character of the payment, which remains employee remuneration linked to service conditions and incentive plans. 34. Once the payment is held to be in the nature of bonus or incentive, it clearly falls within the scope of section 43B(c) of the Act. As per th....
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....with AE at ALP. 39. However, the TPO observed that as per Black Book of outsourcing report 2010, the assessee group is recognised as one the best KPO in the world which implies that the assessee company is providing high end professional services. As per the article, the assessee group employed around 725 out which around 50% are chartered accountants (CA) and Chartered Financial Analysist (CFA) and 75% of such highly qualified individuals are employed in India. The TPO observed that as per the report, the assessee is engaged in the sophisticated research work and building complex financial model for its client. Accordingly, the TPO concluded that the assessee is KPO providing High End function to the AE and not the low-end function as claimed by the assessee in the TP study. Hence, the TPO rejected the assessee's TP study report and the comparable set of companies selected by the assessee. The TPO applying own search matrix/filter by treating the assessee as KPO, selected 3 companies as comparable which are detailed as under: S. No. Name of Company Margin 1 Smart Cube India Pvt Ltd 11.17% 2 Vitae International Accounting Services Pvt Ltd. 42.48 % 3....
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....Besides above the assessee also suggested to include Hartron Communication ltd in the list of the comparable companies. 45. The learned CIT(A) after considering facts in totality accepted the assessee contention for exclusion of the TPO's comparable namely eClerx Services Limited and inclusion of the assessee's comparable namely Jindel Intellicom Pvt Ltd, and additional comparable namely Hartron Communication Ltd. However, the learned CIT(A) not accepted the assessee argument for exclusion of TPO's comparable namely Vitae International Accounting Services Pvt Ltd and also not accepted the assessee argument for inclusion of companies namely Allsec Technologies Ltd, RS System International Ltd and Microgentics Systems Ltd in the set of comparables. 46. Being aggrieved by the order of the learned CIT(A), both the revenue as well as the assessee are in appeal before us. 47. The assessee is in appeal through additional ground for not accepting its argument for excluding TPO's comparable companies namely Vitae International Accounting Services Pvt Ltd and not accepting its argument for inclusion of companies Allsec Technologies Ltd, RS System International Ltd and Microgentics S....
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....assessment years, and there has been no material change either in the facts of the assessee or in the functional profile of Jindal Intellicom. In the absence of any change in facts, the principle of consistency applies, and therefore the learned CIT(A) has rightly retained this company in the final set of comparables. Inclusion of Hartron Communications Limited 51. The Learned AR submits that the learned CIT(A) has rightly included Hartron Communications Limited. The Revenue's objection that Hartron is rendering office support services and therefore not comparable is without merit. Office support and back-office services clearly fall within the ambit of IT enabled services. The assessee is also rendering similar IT enabled services. The functional similarity is evident from the nature of activities carried out by Hartron. The Revenue has failed to demonstrate any material functional difference. Therefore, the learned CIT(A) has correctly rejected the Revenue's contention, and the inclusion of Hartron Communications Limited deserves to be sustained. Exclusion of Vitae International Accounting Services Private Limited 52. Without prejudice to the above, the Learned AR sub....
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....rovided that reliable quarterly or relevant financial data is available. R Systems is engaged in providing IT solutions and business process outsourcing services, which are functionally comparable to the assessee. The company operates in two segments, namely IT services and BPO services, and relevant segmental data is available. Judicial precedents have consistently held that such companies should be included if they are otherwise comparable. Therefore, R Systems International Limited deserves to be included in the final set of comparables. 56. In view of the above submissions, the Learned AR respectfully prays to uphold the order of the learned CIT(A) insofar as it relates to the exclusion of Eclerx Services Limited and inclusion of Jindal Intellicom Private Limited and Hartron Communications Limited. Further, the Tribunal may be pleased to direct the exclusion of Vitae International Accounting Services Private Limited and inclusion of Allsec Technologies Limited, Microgenetics Systems Limited and R Systems International Limited in the final set of comparables, in the interest of justice. 57. On the contrary, the learned DR before us vehemently supported the order of the low....
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.... Further, eClerx operates as a full-fledged entrepreneur bearing substantial risks, whereas the assessee is a captive service provider with limited risk. Consistent judicial precedents such Hon'ble Delhi High Court ruling in the case of Rampgreen Solutions Pvt Ltd (supra) and Bangalore Tribunal decision in the case of Tesco Hindustan Service Centre Private Ltd (supra) have also held that eClerx cannot be compared with routine ITES providers. We therefore uphold the exclusion of eClerx Services Limited. Inclusion of Jindal Intellicom Private Limited 62. We also find no infirmity in the decision of the learned CIT(A) to include Jindal Intellicom Private Limited. The Revenue's objection that the assessee is rendering KPO services has already been found to be without basis. Jindal Intellicom is engaged in call centre operations and support services, which clearly fall within the ambit of IT enabled services. The functional profile of this company is comparable with that of the assessee. Further, Jindal Intellicom has been accepted as a comparable in the assessee's own case in earlier assessment years and no change in facts has been brought on record by the Revenue. In the absence....
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....g years. Therefore, there is no justification for its exclusion, and we, accordingly, direct that Allsec Technologies Limited be included in the final set of comparables. Inclusion of Microgenetics Systems Limited 66. With respect to Microgenetics Systems Limited, we note that the TPO has rejected the impugned company by holding that its turnover filter is less than 1 crore which we find factually incorrect. The assessee has demonstrated that turnover of this company for the year ending 31st March 2014 is of Rs. 2.25 crore, hence, the same falls within the acceptable range applied by the TPO. Functionally, Microgenetics is engaged in medical transcription and IT enabled services, which are comparable to the services rendered by the assessee. No specific functional dissimilarity has been pointed out by the lower authorities. Accordingly, we direct that Microgenetics Systems Limited be included in the final set of comparables. Inclusion of R Systems International Limited 67. We also find merit in the assessee's plea for inclusion of R Systems International Limited. The sole reason for its rejection is that it follows a different financial year. It is well settled that a c....
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.... unit, SEZ unit-1 and SEZ unit-2. The SEZ unit-1 is eligible for exemption under section 10AA of the Act. The assessee for such unit claimed an exemption of Rs. 3,94,51,258/- for the year under consideration. 74. The AO during the assessment proceeding asked the assessee to explain the basis of allocation of common and non-identifiable expenses among its different units, namely the STPI unit, SEZ unit and non-eligible unit. On verification of the details, it was observed that several common expenses such as corporate overheads, top management remuneration, auditors' fees, bank charges and other administrative expenses were largely booked to the STPI and SEZ units. This resulted in lower profits being shown in the non-exempted units and higher profits being reflected in the exempt unit. Accordingly, the AO observed that the allocation followed by the assessee did not reflect a fair and reasonable distribution of costs and led to a distorted presentation of unit-wise profits. 75. The AO further noted that the assessee, during the course of assessment proceedings, submitted revised workings for allocation of common expenses. However, even as per the revised workings, the basis a....
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.... 79. The assessee further argued that the learned AO erred in reallocating the expenses without correspondingly adjusting the revenue of the units. Since the assessee operates on a cost-plus basis, any increase or decrease in costs must necessarily lead to a proportionate change in revenue. By reallocating costs alone and keeping the revenue unchanged, the learned AO distorted the cost-plus model and arrived at an artificial increase in taxable income, which is not supported either by facts or by the accounting model consistently followed by the assessee. 80. It was also submitted that the books of account of the assessee were duly audited, regularly maintained, and not rejected by the learned AO under section 145 of the Act. Once the books are accepted, the learned AO could not selectively alter the cost allocation without disturbing the corresponding revenue figures. The assessee submitted that the allocation of expenses adopted by it was arithmetically correct, reasonable, and supported by workings, and therefore no adverse inference was called for. 81. The assessee further contended that the adjustment made by the learned AO resulted in reduction of deduction under sectio....
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....empted amount of 10AA eligible SEZ Unit-I as well as determining the total income of taxable units (STPI Unit & SEZ Unit-II) below the declared amount in ITR. 5.3.2 In view of the above, the addition of Rs. 1,71,48,501 is deleted." 84. Being aggrieved by the order of the learned CIT(A), the revenue is in appeal before us. The learned DR before us vehemently supported the order of the AO. 85. On the other hand, the learned AR before us submitted that the assessee operates all its units under a uniform cost-plus mark-up billing model, wherein the revenue of each unit is directly linked to the costs incurred by that unit along with a fixed mark-up. Therefore, any shifting of expenses from one unit to another would automatically lead to a corresponding change in revenue, and not to any tax advantage to the assessee. 86. The learned AR further contended that the allegation of the AO that common expenses were not properly allocated is incorrect and ignores the business model of the assessee. Even if certain common expenses such as managerial remuneration, audit fee or depreciation were charged to one unit, it would not result in suppression of taxable income, because un....