THOUGHTWORKS TECHNOLOGIES (INDIA) PRIVATE LIMITED,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-7(1)(1), BANGALORE

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ITTPA 855/BANG/2022Status: DisposedITAT Bangalore04 July 2023AY 2018-196 pages

In favour of the Revenue: the assessee's appeal was dismissed. From the AI summary of this appeal.

AI SummaryDismissed

What did the Tribunal hold?

The Tribunal noted that the assessee's authorized representative stated that all grounds except Ground No. 6 were settled by an Advance Pricing Agreement (APA) and were not pressed. Accordingly, these grounds were dismissed as not pressed. Regarding Ground No. 6, concerning the disallowance of employees' contribution to provident fund under Section 36(1)(va), the Tribunal relied on the Supreme Court's decision in CHECKMATE SERVICES PVT LTD VS CIT-1. The Supreme Court held that Section 36(1)(va) and Section 43B(b) operate on different parameters for due dates. For employee's contribution, payment must be made before the due dates specified in the respective PF Act or Scheme; failure to do so results in permanent disallowance under Section 36(1)(va). The Tribunal found that the disallowance made by the revenue authorities was justified based on this precedent. Therefore, Ground No. 6 was also dismissed. The appeal was dismissed in its entirety.

What were the facts?

The assessee, Thoughtworks Technologies (India) Pvt. Ltd., filed an appeal before the ITAT, Bangalore, challenging the final assessment order for Assessment Year 2018-19, passed by the Assessing Officer (AO) on July 16, 2022. The appeal raised multiple grounds concerning transfer pricing adjustments, re-computation of mark-ups, use of non-contemporaneous data, treatment of interest on delayed trade receivables, and disallowance of employees' contribution to provident fund. During the hearing, the assessee's authorized representative stated that all issues except Ground No. 6 were settled by an Advance Pricing Agreement (APA) and were not pressed. Consequently, these grounds were dismissed as not pressed.

What were the issues?

1. Whether the AO/TPO erred in rejecting the assessee's Transfer Pricing documentation and its filters for selecting comparable companies, leading to an unreliable computation of Arm's Length Price under Section 92C(3)(c)? 2. Whether the AO/TPO erred in re-computing the Net Cost Plus Mark-up by including domestic revenue instead of only revenue from international transactions? 3. Whether the AO/TPO erred in conducting a fresh benchmarking analysis using non-contemporaneous data and substituting the assessee's analysis with their own conjectures? 4. Whether the AO/TPO erred in using non-contemporaneous data not available in the public domain at the time of the TP study? 5. Whether the AO/TPO erred in treating outstanding receivables from Associated Enterprises (AEs) as a separate international transaction, re-characterizing them as loans, and charging notional interest on delayed receipts? 6. Whether the AO erred in disallowing Rs. 98,02,185 representing delayed remittance of employees' contribution towards provident fund under Section 36(1)(va)? 7. Whether there was a basis for initiating penalty proceedings under Section 270A read with Section 274? 8. Whether the Dispute Resolution Panel (DRP) erred in not considering the assessee's objections and confirming the AO's draft order? Assessee's contentions: Grounds 1-5 and 7-8 were not pressed as they were settled by an APA. For Ground 6, the assessee contended that the payment was made within the due date of filing the return of income. Revenue's contentions: Not recorded for grounds not pressed. For Ground 6, the revenue relied on the Supreme Court decision in CHECKMATE SERVICES PVT LTD VS CIT-1, arguing that Section 36(1)(va) and Section 43B(b) have different due dates and failure to pay employee's contribution by the respective Act's due date results in permanent disallowance.

Which sections of the Income-tax Act were involved?

Section 92C,Section 92C(3)(c),Section 36(1)(va),Section 43B(b),Section 139(1),Section 270A,Section 274

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “C’’ BENCH: BANGALORE

Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI

For Appellant: Shri Harsha M., A.R
For Respondent: Ms. Neera Malhotra, D.R
Hearing: 04.07.2023Pronounced: 04.07.2023

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by assessee is directed against final assessment order passed by AO for the assessment year 2018-19 dated 16.7.2022. 2. The assessee has raised following grounds of appeal:

1.

Incorrect rejection of TP Study by the Assessing Officer (`A0')/ Transfer Pricing Officer (`TPO') 1.1 The AO/ TPO erred on facts and in law in rejecting the Transfer Pricing documentation (TP Study) maintained by the Appellant stating that the filters applied by the Appellant for selection of comparable companies are inappropriate and basis which the TPO erred in determining that the data used in computation of the Arm's Length Price by the Appellant is not reliable or correct under section 92C(3)(c)

Page 2 of 6 2 Erroneous re-computation of Net Cost plus (`NCP') Mark-up earned by the Appellant 2.1 The AO/ TPO erred on facts in re-computing the Net Cost plus Mark-up earned by the Appellant by considering the entire revenue earned by the Appellant including domestic revenue instead of considering revenue exclusively earned from international transactions. 3 Determination of arm's length price by the AO/ TPO. 3.1 The AO/ TPO erred on facts and in law in conducting a fresh benchmarking analysis using non contemporaneous data and substituting the Appellant's analysis with fresh benchmarking analysis on his own conjectures and surmises. Thus the Appellant prays that the fresh benchmarking analysis conducted by the learned AO/ TPO is liable to be quashed. 3.2 The AO/ TPO erred on facts in rejecting the comparable companies arrived at in the Transfer Pricing Study without considering the functional and risk analysis of the Appellant. 3.3 The AO/ TPO grossly erred on facts in benchmarking the transactions of the captive software services of the Appellant with companies operating as full fledged entrepreneurs without considering the differences in the functions performed, assets employed and risk undertaken by the Appellant vis-a-vis comparable companies. 3.4 The AO/ TPO erred in law in applying arbitrary filters to arrive at a fresh set of compar4ts as comparables to the Appellant, without establishing functional comparability 3.5 The AO/ TPO erred in law in selecting the companies, only if the data pertaining to current year (i.e. FY 2017-18) is available in the public databases 3.6 The AO/ TPO grossly erred in law in deviating from the uncontrolled party transaction definition as per the Income-tax Rules and erred on facts in erroneously calculating related party transactions of comparable companies while applying the 25% criteria in accepting/rejecting comparables. 3.7 The AO/ TPO grossly erred on facts in arbitrarily rejecting companies having software development revenue less than 75% of total operating revenue and applying inconsistently such filter, without considering the specific segmental results.

Page 3 of 6 3.8 The AO/ TPO erred on facts in arbitrarily rejecting companies having export revenues less than 75% of total sales. 3.9 The AO/ TPO erred on facts in rejecting companies having employee cost less than 25% of total sales. 3.10 The AO/ TPO also erred on facts and in law in arbitrarily rejecting companies with different year ending (i.e. other than 31 March). 3.11 The AO/ TPO also erred on facts in wrongly computing the margins of certain comparable companies. 4 Erroneous data used by the AO/ TPO 4.1 The AO/ TPO has erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time.of conducting the transfer pricing study by the Appellant. 5 Interest on delayed trade receivables 5.1 The AO/ TPO erred in law and in facts in considering outstanding receivables of the Appellant from its AEs as separate international transaction and re-characterising the receivables as loan to the AE 5.2 The learned AO/ TPO has grossly erred in facts by charging notional interest on delayed receipt from associated enterprise 5.3 The AO/ TPO erred in facts in calculating the interest on receivables upto the date of realization instead of restricting the number of days to relevant financial year .i.e upto 31 Mar 2018. 6 Disallowance u/s. 36(1)(va) of the Act 6.1 The AO erred in law by disallowing Rs. 98,02,185 representing delay in remittance of employees contribution towards provident fund. 7 Initiation of penalty proceedings 7.1 The Appellant submits that based on the facts and circumstances of the case, there was no basis for the AO to propose to initiate proceedings under section 270A r.w.s 274 of the Act. 8 Directions issued by the Honourable Dispute Resolution Panel (`DRP') 8.1 The Honourable DRP has erred in law and on facts in not taking cognizance of the objections filed by the Appellant in relation to Page 4 of 6 the Draft Assessment Order issued by the AO/ TPO order and confirming the draft order of the AO. 9 Relief 9.1 The Appellant craves leave to add to or alter, by deletion, substitution or otherwise, any or all of the above grounds of appeal, at any time before or during the hearing of the appeal. 9.2 The Appellant submits that the above grounds are independent and without prejudice to one another.

3.

At the time of hearing, the ld. A.R. made a submission that all the issues raised by the assessee in this appeal except ground No.6 are already settled by Advance Price Adjustment (“APA”) and not interested to press these grounds. To this effect, he made an endorsement stating that these grounds are not pressed. Accordingly, all these grounds except ground No.6 are dismissed as not pressed.

4.

Now we are only left with ground No.6 with regard to disallowance u/s 36(1)(va) of the Income-tax Act,1961 ['the Act' for short] for non-payment of employees’ share of contribution of PF/ESI within the stipulated date as per respective Act though the payment has been made within due date of filing of return of income.

5.

After hearing both the parties, in our opinion, as per the decision of the Hon’ble Supreme Court rendered in the case of CHECKMATE SERVICES PVT LTD VS CIT-1 in CIVIL APPEAL 2833/2016 vide its judgment dated 12 October 2022 the issue on allowability/treatment of ‘delayed’ Employee PF Contribution payment in hands of assessee under provisions of Income Tax Act and held that Section 36(1)(va) and Section 43B(b) operate on totally different equilibriums and have different parameters for due dates, i.e., employee's contribution is linked to payment before the due Page 5 of 6 dates specified in the respective Acts and employer's contribution is linked to the payment before the prescribed due date for filing of return u/s. 139(1) of the Act. The result of any failure to pay within the prescribed dates also leads to different results. In the case of employee's contribution, any failure to pay within the prescribed due date under the respective PF Act or Scheme will result in negating employer's claim for deduction permanently forever u/s 36(1)(va) of the Act. On the other hand, delay in payment of employer's contribution is visited with deferment of deduction on payment basis u/s 43B of the Act and is therefore not lost totally. Therefore, as per the above decision, the disallowance made by the Revenue authorities, were fully justified.

5.1 In view of the above judgement of Hon’ble Supreme Court, we dismiss this ground no.6 of the assessee’s appeal.

6.

In the result, the appeal of the assessee is dismissed.

Order pronounced in the open court on 4th July, 2023

Sd/- Sd/- (Beena Pillai) (Chandra Poojari) Judicial Member Accountant Member

Bangalore, Dated 4th July, 2023. VG/SPS Copy to:

1.

The Applicant 2. The Respondent 3. The CIT 4. The CIT(Judicial) 5. The DR, ITAT, Bangalore. 6. Guard file By order

Asst. Registrar, ITAT, Bangalore.

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