The New Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has clarified that for a company to be considered as a valid comparable, it must be functionally similar, and significant differences in functions and business profiles can render such company non-comparable. The ITAT held that mere broad functional similarity is insufficient for a reliable analysis, even under the Transactional Net Margin Method (TNMM).
The ITAT also held that discount on shares issued to employees under an Employee Stock Option Plan (ESOP), calculated as the difference between the market price and the exercise price, is an ascertained liability and an allowable business expenditure under Section 37(1) of the Income Tax Act.
Further, the ITAT explained that expenditure on software that requires frequent upgrades, has a short useful life, and does not provide a benefit of an enduring nature is to be treated as revenue expenditure, not capital expenditure.
Also, when a particular receipt is not taxable in the hands of the non-resident payee, the payer is not obligated to deduct tax at source under Section 195 of the Income Tax Act. Consequently, no disallowance under Section 40(a)(ia) can be sustained against the payer for non-deduction of TDS, added the Tribunal.
The Division Bench comprising Madhumita Roy (Judicial Member) and Manish Agarwal (Accountant Member) has agreed with the exclusion of APITCO Ltd. in the final set of comparables, finding that APITCO, being a government company, was functionally dissimilar as it provided technical consultancy and high-end support services, unlike the respondent’s general business support services. The Tribunal noted that APITCO’s functions were specialized and it enjoyed advantages as a government entity, and observed that mere broad functional similarity is insufficient even under the TNMM method.
As far as Global Procurement Consultants Ltd is concerned, the Tribunal found that this company was engaged in providing technical services, procurement services for World Bank projects, and consultancy, which were functionally different from the business support services provided by the respondent. Accordingly, it held this company to be not a valid comparable.
As far as TSR Darashaw Ltd is concerned, the Tribunal observed that this company was mainly providing services such as Registrar and Transfer Agent, Records Management, and Payroll activities, which are different from the services provided by the respondent. Hence, the Tribunal agreed with the DRP and confirmed that this company was not a valid comparable.
Briefly, the respondent (NDTV), engaged in the business of television news broadcasting, had filed a return declaring a loss of INR 20.18 Crores, after which a reference was made to the Transfer Pricing Officer (TPO) to determine the Arm’s Length Price (ALP) of international transactions with its Associated Enterprises (AEs).
The TPO proposed a transfer pricing adjustment of INR 3.29 Crores, and subsequently, the Assessing Officer (AO) passed a draft assessment order proposing a total assessed income of INR 29.59 Crores, after making several additions, including disallowances under Section 14A, Section 40(a)(ia) for commission and transmission charges, and on account of ESOP and software expenses.
After the respondent filed objections before the Dispute Resolution Panel (DRP), which accepted some objections and rejected others, the AO passed the final assessment order, assessing the total income at INR 17.06 Crores, which included a transfer pricing adjustment of INR 3.11 Crores.
Appearances:
CIT-DR, Dharm Veer Singh, for the Appellant/ Revenue
Senior Advocate Sachit Jolly and Advocate Sherry Goyal, for the Respondent/ Taxpayer
