ITAT Hyderabad Ruling: Cost-to-Cost Employee Secondment Recoveries Escape TP Mark-Up and Section 35DD Amalgamation Deductions Upheld

The Income Tax Appellate Tribunal (ITAT), Hyderabad Bench, recently delivered a significant ruling in the case of BA Continuum India Private Limited Vs DCIT, providing crucial clarity on two highly debated corporate tax issues. The tribunal addressed the transfer pricing implications of recovering seconded employee costs and the chronological commencement of amortization deductions for amalgamation expenses under Section 35DD of the Income Tax Act 1961.

This comprehensive analysis breaks down the factual matrix, the positions taken by the tax authorities, and the final judicial reasoning that led to the tribunal granting relief to the assessee on both substantive grounds.

Overview of the Dispute

The assessee, a non-banking subsidiary of Bank of America, operates primarily in the domain of Information Technology (IT) and IT-enabled services (ITeS). During the assessment proceedings for the Assessment Year (AY) 2016-17, the final assessment order incorporated a massive transfer pricing adjustment amounting to ₹169,05,55,131 and a corporate tax disallowance of ₹66,72,270 under Section 35DD.

While the assessee originally contested various additions—including the rejection of transfer pricing documentation, the use of modified filters, and the disallowance of education cess under Section 37(1)—it strategically withdrew several grounds during the appellate proceedings. The tribunal's adjudication, therefore, focused entirely on two surviving substantive issues:

  1. The imposition of a mark-up on the reimbursement of salary and travel costs for seconded employees.
  2. The denial of the fifth-year installment of amalgamation expenditure deduction based on the retrospective "appointed date" of the merger.

Issue 1: Transfer Pricing Mark-Up on Employee Secondment Reimbursements

Factual Matrix

During the Financial Year (FY) 2015-16, the assessee recovered an amount of ₹5,68,37,202 from its Associated Enterprises (AEs). This recovery pertained strictly to the salary and travel expenses of employees who had been temporarily seconded to the AEs. The assessee maintained that these cross-border recoveries were executed on a strict cost-to-cost basis without any profit element or mark-up. Furthermore, these transactions were routed directly through the balance sheet rather than being absorbed into the profit and loss account.