Income Tax Appellate Tribunal - Mumbai
Capgemini India P.Ltd, Mumbai vs Assessee on 21 November, 2014
1
Capgemini India Private Limited
IT(TP) A 540/Mum/2014
आयकरअपील यअ धकरण "K" यायपीठमब
ुं ईम।
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "K", MUMBAI
ी आर. सी. षमा, लेखा सद य एवं ी ववेक वमा, या यक सद य के सम ।
BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER
AND SHRI VIVEK VARMA, JUDICIAL MEMBER
IT(TP) A : 540/Mum/2014
(Assessment years: 2009-10)
Capgemini India Private Limited, Vs Income Tax Officer- Range-10(2),
Plant 2, Block A, Godrej IT Park, Room No. 432,
Godrej & Boyce Compound Aayakar Bhavan,
LBS Marg, Vikhroli (West), M K Road,
Mumbai -400 079 Mumbai -400 020
थयी लेखा सं.:PAN: AAACK 2632 B
अपीलाथ (Appellant) यथ (Respondent)
Appellant by : Shri M P Lohia
Shri Nikhil Tiwari
Respondent by : Shri Kishan Vyas
सन
ु वाईक तार ख /Date of Hearing : 20-10-2014
घोषणाक तार ख/Date of Pronouncement : 21-11-2014
आ दे श
ORDER
ववेकवमा, या स:
PER VIVEK VARMA, JM:
Instant appeal is filed by the assessee against the order of Dispute Resolution Panel-I, Mumbai (DRP), passed under section 144C(5), dated 31.10.2013.
2. The fact are that the assessee is company, which is substantially owned by Capgemini US LLc USA (CG US LLc) and it acts as captive delivery centre of Capgemini group, which delivers services to customers in North America, UK, Continental Europe and Asia Pacific. It provides services in the fields of • Software Technology Services • Outsourcing Services • Customised software development services to its following AEs 2 Capgemini India Private Limited IT(TP) A 540/Mum/2014 Sr. International transaction Total value of Total value of Method No transactions AY transactions AY selected 2009-10 2008-09 1 Licensing of Intellectual Property 15,854,302 8,783,405 CUP 2 Payment of Headquarters' Fees under the 7,797,910 2,825,500 TNMM Service Agreement 3 Receipts for providing software services 20,162,438,459 15,584,696,950 TNMM 4 Allocation of various costs to Assessee 347,374,901 298,131,795 - 5 Reimbursement of expenses incurred by 198,780,013 174,396,814 -
various Cap Gemini entities on behalf of Assessee 6 Reimbursement of out of pocket expenses 2,637,911,454 2,189,543,752 -
incurred by Assessee on behalf of Cap Gemini Group entities 7 Payment of training charges to Cap 20,621,736 18,538,031 TNMM Gemini group entities 8 Purchase of software and e-training 8,625,970 1,576,246 TNMM licenses from overseas third party vendors under globally negotiated contract 9 Bank guarantee charges paid 3,680,045 - TNMM 10 Professional fees paid to Group entities 2,547,130 - TNMM Total 18,285,109,074
3. The assessee submitted its TP Study report for the current year, wherein the assessee had entered into the following international transactions:
"
Sr. International transaction with its Total value of No Associated Enterprises (AEs) transactions AY 2009-10 1 Trademark License fees 15,854,302 2 Payment for Service fees to Capgemini 7,797,910 Service SAS (CG Service') 3 Software Programming Services 20,162,438,459 4 Bank guarantee charges to Capgemini 20,621,736 group entities 5 Purchase of software and e-training licenses 8,625,970 from overseas third party vendors under globally negotiated contract 6 Professional fees paid by CIPL to its group 2,547,130 entities 7 Allocation of various costs to CIPL 347,374,901 8 Purchase of software and e-training licenses 8,625,970 from overseas third party vendors under globally negotiated contract 9 Reimbursement of expenses incurred by 198,780,013 various Capgemini group entities on behalf of CIPL 10 Reimbursement of out of pocket expenses 2,637,911,454 incurred by CIPL on behalf of Capgemini Group entities
4. Accordingly, the assessee declared its margin as under, 3 Capgemini India Private Limited IT(TP) A 540/Mum/2014 Particulars Software development Operating Revenues 22,037,598 Operating Expenses 18,876,846 Operating Profit 3,160,75 OP/OC 16.74% Method used TNMM PLI OP/OC (%) No of Comparables 21 Mean Margin of Comparables 14.13%
5. While explaining the results, the assessee submitted "... which is stated to be the most appropriate method in the facts and circumstances d the case. The operating profit to total cost (OP/TC) ratio is taken as the profit level indicator (PLI) in the TNMM analysis. The PLI of the company is arrived at [16.74%] on cost whereas the unadjusted average PLI of the comp ar abl es is arrived at [ 1 4.1 3% ] as per the an al y sis in the T P documen t. In the TP study, the taxpayer has claimed risk adjustment of 6.75%. It is seen that the PLIs of the comparable companies have been worked out by adopting weighted averages for the current year and the immediately preceding two years. Thereafter, the arithmetical mean of these weighted averages has been taken for computing the ALP. As the price charged in its international transactions is more than the said arithmetical mean price, the price charged in the international transactions is treated as at arm's length. It is also noticed that the computations of the PLIs of the comparables has been arrived at by considering the data for the FYs 2006-07, 2007-08 and 2008-09".
6. While declaring its results service wise, the company declared operating profit margin of 17.74% in software programming service, taking into consideration 21 comparable under TNMM. Accordingly, average profit margin of the 21 comparables came to 14.31%, considering weighted average margin on three years data, from financial years 2006-07, 2007-08 & 2008-09.
7. This basis of bench making was rejected and the AO gave a fresh list of comparables.
8. The AO, while examining the comparables as provided by the assessee observed, that some of those were inadequate. The AO, therefore, observed that certain comparables, were taken as adequate and he added certain comparables according to him, would lead the results to functionally similar. The AO, therefore, excluded those 4 Capgemini India Private Limited IT(TP) A 540/Mum/2014 companies whose revenue from services activity was less than 75% of the total operating revenues:
• "Companies whose data is not available for the FY 2008-09 are excluded.
As per the Rule 106 (4), it is mandatory to use the current year data i.e. the data for the FY 2008-09. The proviso to Rule 1 O (4) says that data for earlier two year can also be used if it is shown that such earlier year's data had an influence in determining the transfer price. Further, the use of earlier year data is in addition to the current year data, provided the conditions are satisfied. This view is upheld by various ITAT decisions. Hence companies, for whom data for FY 2008-09 is not available, are excluded. • Companies whose software development income <Rs.1 Cr. are excluded.
By taking companies whose income is less than Rs.1 Crore, the analysis may not lead to a proper comparability as these companies may not be representing the industry trend. Moreover their low cost/sales base makes their results unreliable.
• Companies whose revenue from service activity is less than 75% of the total operating revenues are excluded. The companies whose revenues from Software development and related services are more than 75% of their operating revenues are selected as comparables. This is an appropriate filter as this is the stage which will determine the correct comparability. In respect of enterprises whose main source of income is from service segment, the companies whose income from Software development comes to more than 75% of the operating revenues have been considered for the ALP study as the other segment may not materially affect the financial results of the company.
• Companies having more than 25% related party transactions (RPT)(sales as well as expenditure combined) of the sales are excluded.
Companies having related party transactions of more than 25% are proposed to be excluded. A threshold of 25% is being applied following the provisions of Section 92A (2)(a) which provides a limit of 26% for treating an enterprise as Associated Enterprise. If the Limit is reduced further it would only result in eliminating more and more companies, on the other hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrolled transactions. Therefore, on a balancing note, 25% is a proper threshold limit for related party transactions. The companies having more than 25% related party transactions should therefore be rejected as comparables. • Companies who have export sales less than 75% of the sales from software -development are excluded.5
Capgemini India Private Limited IT(TP) A 540/Mum/2014 This has been done primarily to exclude predominantly domestic companies which cannot be compared with you having entire transactions with your AE. This is because economic circumstances of such companies are different. Rule 1OB(2) also supports this view.
• Companies who have diminishing revenues/persistent losses for the last "three years up to and including FY 2008-
09 are excluded.
Because these companies have peculiar economic circumstances which are not in line with industry trend. • Companies whose employee cost is less than 25 % of the revenues are excluded.
It has been held in judicial pronouncements that if the ratio of employee cost to sales is very low, it is an indicator that the company is not a software developer. Hence, it would be proper to apply a filter that rejects companies that have a ratio of employee cost to sales of less than 25%. • Companies having different financial year ending (i.e. not March 31, 2009) or data of the company does not fall within 12 month period i.e. 01-04-2008 to 31-03-2009, are rejected.
If a tested party ends its financial year in March, then taking companies whose financial year ends in March will be an appropriate filter and may lead to a proper comparability.
• Companies that are functionally different from the taxpayer are excluded.
Companies that are having peculiar economic circumstances are excluded. Any other peculiar circumstances of a company which is divergent from the taxpayer and the environment in which the taxpayer and the comparables are wo r k i n g mak es it incomparable. Thus peculiar economic c i r c u m s t a n c e s wh i c h are specific to the comparable enterprises are being looked into to check whether the enterprise is going along with the industry trend, if not whether suitable adjustments can be made to that effect. If suitable adjustments cannot be made, the same is rejected as a comparable".
9. The AO, therefore, finally selected the following companies whose comparables could be used, out of the total of 21 comparables listed by the assessee Sr. No. Name 1 Akshay Software Technologies Ltd.
2 Infosys Technologies Ltd.
3 Mindtree Consulting Ltd.(seg) 4 Persistent System Ltd.
5 R S Software (India) Ltd.
6 Sasken Communication Technologies Ltd. 7 Zylog System Ltd.
6Capgemini India Private Limited IT(TP) A 540/Mum/2014
10. The AO also rejected the comparables and their results, adopted by the assessee which were taken for the past two years, but he utilized the current year's results.
11. The AO also discussed his reasons for rejection of comparables given by the assessee and based on the comparables admitted, the AO computed, Sr. Name of the Co Updated Margins No. AY 2009-10 1 Akshay Software Technologies Ltd. 12.29% 2 Infosys Technologies Ltd. 42.03% 3 Mindtree Consulting Ltd.(seg) 5.54% 4 Persistent System Ltd. 38.33% 5 R S Software (India) Ltd. 9.89% 6 Sasken Communication Technologies Ltd. 27.88% 7 Zylog System Ltd. 14.29% 8 Acropetal Technologies Ltd 40.86% 9 Bodhtree Consulting Ltd 67.24% 10 KALS Information Systems Ltd 41.91% (Application Software Segment)* 11 Comp-U-Learn Tech India Ltd 27.69% 12 LGS Global Ltd 20.46% Arithmetic Mean 29.03% The PLI is computed as under:
Kals Information Systems Ltd. (Seg) Description Amt. Amt.
(Rs in Lacs) (Rs. in Lacs)
Segmental revenue 205.33
segmental Operating Revenue 205.33
segmental Operating Expenses 144.69
segmental Operating Profit 60.64
OP/TC(PLI) 41.91%
Persistent Systems Ltd
(Source: Annual Report 2008-09)
Description Amt. Amt.
(Rs in Lacs) (Rs. in Lacs)
Sale of software services 51969.1
Add: :misc Income 79.9
Operating revenue 52049
Total expenditure debited in P/L a/c. 43636.3
Add: Depreciation 2947.2
Less: Donation 154.3
Less: Exchange Loss 7174.6
Less: Exchange Loss on derivative 1627.2
contract
7
Capgemini India Private Limited
IT(TP) A 540/Mum/2014
Operating expenses 37627.4
Operating Profit 14421.6
OP/TC(PLI) 38.33%
Sasken Communication Technologies Ltd.
(Source: Annual Report 2008-09)
Description Amt. Amt.
(Rs in Lacs) (Rs. in Lacs)
Sale of software services 47974.68
Add: :misc Income 7.86
Operating revenue 47982.54
Total expenditure debited in P/L a/c. 43754.34
Less: Provision for doubtful deposits 36
Less: Exchange Loss 3845.08
Less: Provision in diminution in assets 831.39
Less: Exceptional items 1519.7
Operating expenses 37522.17
Operating Profit 10460.37
OP/TC(PLI) 27.88%
12. On this basis, the AO computed PLI at 27.88% as compared to 14.13% submitted by the assessee.
13. The issue was taken before the DRP.
14. Before the DRP, the assessee reiterated all his submissions made before the TPO/AO.
15. The DRP rejected the objections raised by the assessee, primarily on the ground of functional test. According to the DRP, turnover, profitability would not be a good ground to accept the comparable.
16. On these primary observations, the DRP rejected the objections made by the assessee and sustained the TP adjustment made by the AO.
17. On these facts the assessee is in appeal before the ITAT.
18. At the time of hearing, the AR submitted a chart describing the GOA raised, with remarks.
19. Ground no. 1 is general, does not need separate adjudication.
8Capgemini India Private Limited IT(TP) A 540/Mum/2014
20. Ground no. 2 is general, does not need separate adjudication.
21. Ground no. 3 is general and not pressed, hence rejected.
22. Ground no. 4 is general and not pressed, hence rejected.
23. Ground no. 22 is general and not pressed, hence rejected.
24. Ground no. 24 is general and not pressed, hence rejected.
25. Ground no. 25 is general and not pressed, hence rejected.
26. The chart, as submitted by the AR also mentioned that effective grounds for adjudication are grounds no. 5, 14 and 15. Accordingly grounds 6 to 13 would become academic if the relief is granted in grounds no. 5, 14 & 15. The AR, therefore, placed his arguments on these three grounds only and grounds no. 6 to 13 were technically not argued.
27. Ground no. 4 pertains to not following earlier years' order in the case of the assessee, while making the TP adjustment.
28. Before the DRP, the assessee placed the following "Application of lower limit turnover filter of Rs. 100 crores This contention of the Assessee is without prejudice to the other contentions detailed in the earlier slides • Without prejudice to the fact that the assessee being a captive software development centre believes that no turnover should be used, the assessee wishes to rely on the Mumbai Tribunal in Assessee's own case for AY 2007-08 • The Honorable Tribunal held that CG India, being an established player in the business of software development cannot be compared to companies with turnover of less than Rs. 100 crores.
• If one had to adopt this principle to the facts of the assessee for the subject AY, where comparables with turnover in excess of Rs. 100 Crores are considered for the purpose of benchmarking the software development transaction of the assessee, the arithmetic mean margins of the comparables identified by the TPO reduces from 29.03% to 22.63%. • Consequently, since the margin earned by CG India from the software development transaction (17.74%) would fall 9 Capgemini India Private Limited IT(TP) A 540/Mum/2014 within the +/-5 range as contemplated by the proviso to section 92C(2) of the Act, the total adjustment of Rs. 201,04,71,053/- would stand deleted".
29. Based on the above, the assessee pleaded before the DRP "the Mumbai Tribunal in Assessee's own case for AY 2007-08 (order enclosed as Annexure 5has held that CG India, being an established player in the business of software development cannot be compared to companies with turnover of less than Rs 100 crores. Without prejudice to the fact that CG India wishes to rely upon its search parameters as per its transfer pricing documentation, on applying the principles laid down by the Tribunal in the said order, the arithmetic mean margins of the comparables identified by TPO reduces from 29.03% to 22.63% (statement showing the computation of arithmetic mean enclosed as Annexure (6) Reasons for rejection of Infosys Limited ("Infosys") as a comparable to the Assessee are provided below:
- The learned TPO had considered Infosys to be comparable to the Assessee in complete disregard of the fact that Infosys owns significant amount of brand/ proprietary products vis-à-vis the Assessee which does not own any intangibles
- Moreover, it is an established position that a full risk bearing entrepreneurial entity like Infosys cannot be compared to a risk mitigated captive entity like CG India, which is fortified by the decision of Delhi High Court in the case of Agnity India Technologies private Limited [TS-189-HC-2013(DEL)-TP] (enclosed as Annexure 7). Further, Delhi High Court has reiterated its position on rejection of Infosys as a comparable in the case of Agnity India Technologies Private Limited itself for the subsequent Assessment Year (ITA No. 6485/Del/2012)(enclosed as Annexure
8).
- In light of the above, it is submitted that Infosys cannot be comparable to the Assessee and hence to be excluded from the final comparable set".
30. The AR, thereafter referred to the order of the ITAT in assessment year 2007-08, in assessee's own case, wherein in para 5.3, the issue had been brought to light and after elaborate discussion held,
5. 3.7 H o we v e r , we m ay m ak e i t c l e ar th a t f o r th e p u r p o s e of comparison, the turnover would be relevant only from the limited purpose to ensure that the comparable selected is an established player capable of executing all types of work relating to software development as the assessee is also an established company in the field. In other words, it must have a certain critical mass to compete successfully in the market, which can be decided by the minimum quantum of work it must have done. Therefore, the filter can be applied to select comparables having a minimum turnover and, there af ter, their m ar gi ns c an be compared provide d they mee t the comparability test and there are no other material differences, 10 Capgemini India Private Limited IT(TP) A 540/Mum/2014 which impair the comparability. It has been argued by the Id. Sr. Counsel that Infosys and Wipro have substantial income f rom sale of branded software but the argument based on volume as pointed out earlier is not relevant for the purpose of margin nor any material as been produced before us to show that the margin was very high in case of sale of branded software. The assessee, a multinational, is an established player in the f ield, capable of selling software developed by it as a branded product but instead of doing that, it is supplying the same to the parent company and that is the reason TP adjustments are required to be made. The Id. Sr. Counsel has also pointed out that Infosys and Wipro have substantial revenue, 51.7% in case of Infosys, and 45.3% in the case of Wipro from on-site work done overseas at the site of clients whereas the onsite work in the case of the assessee is just 5%. It has been pointed out that the employees if sent overseas have certain dead hours, which cannot be properly utilized as can be done in the home country. But this argument as rightly pointed out by the Id. CIT-DR does not support the case of higher margin in case of onsite work because dead hours would mean less output with the same employee cost, which would in fact reduce the margin. No material has also been placed before us to show that the margin in case of onsite work is higher".
and further observed, "Reve r ti n g b ac k to the ne w co mp ar abl e s sub m i tte d by th e assessee at the level of DRP, we find substance in the submissions by the Id. Sr. Counsel that TPO had not given sufficient opportunity for study and selection of new comparables as order was passed within a week of issue of show cause notice. Therefore, the new comparables selected at the level of DRP should have been considered. DPP has not considered the ne w comparables without giving any reason. In our view, it would be appropriate to take as many comparables as possible that the mean margin is closer to the correct margin because no two companies can be said to be exactly identical and small differences, if any, could be eliminated by increasing number of comparables. These new comparables, therefore, in our view have to be considered. We, however, note that one of the comparables, i.e. SIP Tech has only revenue of 3.6 crores. Obviously, the company has some problems as it is not able to procure enough orders and cannot be considered as established player in the f ield. It is, in our view, has to be excluded outright. The new comparables also include L&T Infotech and as has been pointed out by the Id. Sr. Counsel this is a subsidiary of L & T, which is against the filter applied by the assessee that the comparable should not be a subsidiary of another company. We f ind that, on this ground, we have already excluded Datamatics Ltd. Therefore, this company has to be excluded outright. We are thus left with only two new comparables submitted at the level of DRP i.e. Goldstone which has turnover of 41.03 crores and Lanco Infotech, which has 11 Capgemini India Private Limited IT(TP) A 540/Mum/2014 turnover of 45.56 crores. As we have held earlier, the comparables must have certain minimum size as these have to be compared with well established players in the field. In our view on the facts of the case, minimum turnover of Rs.100 crores has to be fixed and considering this, these two comparables have also to be rejected"
31. The ITAT, therefore, accepted the arguments of the assessee that comparables with minimum turnover of Rs. 100 crores has to be taken. In view of the above consistent finding by the ITAT, the AO is directed to compute the mean PLI of the comparables cited by the assessee to arrive at the rationale OP/TC and then, if required, make the TP adjustment.
32. Ground no. 15 pertains to working capital adjustment.
33. At the time of hearing, the AR pointed out that the ITAT in assessment year 2007-08 in assessee's own case has allowed the working capital adjustment, which was ignored both by the DRP.
34. In the proceedings before the AO/TPO, the assessee prayed for allowance of working capital adjustment, but the AO/TPO rejected the submissions by observing, "In case of the assessee, the relevant transactions are all foreign currency transactions. For working capital adjustment comparability can be established only when comprehensive data regarding relevant borrowing rates and quantum of foreign transactions are available. It is not know if the case of comparables, it was the foreign parties which delayed payments or the domestic buyers who delayed payments. Working capital adjustment therefore, is not allowable to the assessee".
The AO also placed reliance on the decision of ITAT Mumbai in the case of Symantec Software Solutions Pvt. Ltd. to deny the adjustment as asked for by the assessee.
35. The issue was taken before DRP before whom it was pointed out that the ITAT in its own case in 2007-08 has allowed the working capital 12 Capgemini India Private Limited IT(TP) A 540/Mum/2014 adjustment. The DRP simply sustained the order of the AO on the issue, without referring to the decision of the ITAT in its own case.
36. Before us, on the issue of working capital adjustment, the AR submitted that the ITAT in its order had observed, "The assessee has also requested for working capital adjustment. The case of the assessee is that working capital does have an impact on the profitability of the company and more accounts receivable in case of a company would mean relatively lower profit. Therefore, the companies could be considered as fully comparable if they hold the same level of account receivable and account payable. The TPO has, however, rejected the claim of working capital adjustment which has been upheld by the DRP. The reason given by the authorities below is that the assessee had not made any claim for working capital adjustment in its TP study and that it is not possible to make accurate adjustment on this account as it is difficult to find the account receivable/payable at different points of time during the year. The Id. Sr. C ounsel h as r ef erred OEC D gui del ines as per wh ich if the acco un t receivable/payable on the last date do not give a representative level of working capital for the whole year, average may be used if it reflects the better level of working capital over the year. In our view, working capital ad ju stme n ts are re qu ire d to be m ade because these do imp ac t the prof itabil ity of the comp any. R ul e 1O B (2)( d) al so provi des th at the comparability has to be Judged with respect to various factors including the market conditions, geographical conditions, cost of labour and capital in the market. Accounts receivable/payable effect the cost of working capital. A company which has a substantial amount blocked with the debtors for a long period cannot be fully comparable to the case which is able to recover the debt promptly. In our view, the average of opening and closing balance in the account receivable/payable for the relevant year may be adopted which may broadly give the representative level of working capital over the year. Even if there is some difference with respect to the representative level, it will not effect the comparability as the same method will be applied to all cases. Working capital adjustment cannot be denied to the assessee only on the ground that the assessee had not made any claim in the TP study if it is possible to make such adjustment. In our view, working capital adjustment"
37. We find that the issue has been restored to the AO/TPO, likewise, for the sake of consistency, we also restore the issue to the AO/TPO to make the working capital adjustment as being done in assessment year 2007-08.
ORP-1, Mumbai: Directions tlis 14405) 13 Capegemini India Private Limited Capgemini India Private Limited IT(TP) A 540/Mum/2014
38. Ground no. 15 is therefore, allowed for statistical purposes.
39. Ground no. 14 pertains to ignoring loss/gain arising on account of foreign exchange fluctuation as non operating expenditure/income while computing the margins of comparables.
40. The issue has been considered by the DRP, wherein it was observed, "As regards the treatment of f oreign exchange loss, this panel is of the view that Foreign exchange fluctuation (loss or gain) is the difference between the invoice amount booked at the time of accrual and the cash amount actually as a result of the prevailing exchange rates on the respective dates. Thus, foreign exchange fluctuation (loss or gain) does not impact the income from operations as recognized by these companies and accordingly is to be considered non-operating in nature. In addition to the above, foreign exchange fluctuations being a post facto outcome, the level of foreign exchange fluctuations is essentially dependent on the efficient functioning of a company's treasury team and not a ref lection of a comp any' s b usiness o per atio ns. Addi tion al l y, the tre atme n t of AE transactions when they were conducted would be on invoice value at the then conversion rate of foreign currency and not on a possible increase/decrease of conversion rate in future. Accordingly, the same being non-operating in nature is directed to be excluded while computing the operating margins of all comparables while carrying out the comparability analysis".
41. The issue became subject of appeal in S Narendra vs ACIT ITA No. 6839/Mum/2012 Rushab Diamonds vs ACIT ITA No. 7217/Mum/2012 Wills Processing Service(India) Ltd. vs. DCIT ITA No. 2152/Mum/2014
42. In the case of Rushab Diamonds (supra), it has been held, " It i s c l e ar t h a t i n c as e o f h e d g i n g o f f or e i g n c u r r e n c y e x p o s u r e o n the underlining trade receivable or payable the profit of loss will be treated in the same way in determining the net profit.
10.2 In vie w of the f acts that the assessee has entered into f or ward contracts for the purpose of hedging of foreign currency exposure on the export and import of diamond, the gain or loss arising of the said, will be t r e a t e d as p ar t a n d p ar c e l of th e o pe r a ti n g p r of i t" .
14Capgemini India Private Limited IT(TP) A 540/Mum/2014
43. On the basis of the above cases as decided by the coordinate Benches at Mumbai, we do not find any reason to deviate our attention and findings against the already existing ratios laid down by the Courts, which we follow and reject the order of the DRP and direct the AO to compute the OP.
44. Ground no. 14 is therefore allowed.
45. Grounds no. 18 & 19 pertain to reducing the loss of loss making unit from profit making units for the purposes of section 10A.
46. This issue has been in dispute and the revenue authorities have held the issue against the assessee.
47. The AR pointed out that the issue, though in dispute before various fora, but the issue has been laid to rest first in the case of Unilever Ltd. vs DCIT, reported in 325 ITR 102 by the Hon'ble Bombay High Court then by the ITAT in assessee's own case and that order has been sustained by the Hon'ble Bombay High Court in ITA No. 2501 of 2001 (APB 140 to 146) in assessment year 2006-07, wherein the Hon'ble Bombay High Court observed, "... the first ground relates to the adjustment contemplated by section 10A of the Income Tax Acts 1961. The Tribunal has directed that loss of one unit can be adjusted against the profit of another unit but after allowance of deduction under section 10A of such profitable units. The loss of one unit under section 10A of the Act shall be adjusted against the income liable for deduction under the same but in relation to the income from other unit. As far as that aspect is concerned the counsel agree that the same is answered in favour of the assessee and against the revenue. This controversy has been dealt with by a Division Bench of this Court in the case of Hindustan Uni Liver Ltd vs Deputy Commissioner of Income Tax & anr., reported in (2010) 325 ITR 102. The parties agree that the discussion of the Division Bench and particularly at paragraph 17 of the judgment covers the point".
15Capgemini India Private Limited IT(TP) A 540/Mum/2014
48. Respectfully following the order of the Bombay High Court, we direct the AO to recompute the exemption under section 10A in view of the decision of Hon'ble Bombay High Court in the case of the assessee.
49. Grounds are allowed for statistical purposes.
50. Ground no. 20 pertains to exclusion of telephone expenses from the computation of exemption under section 10A.
51. The AO/TPO disallowed the expense and the DRP observed, "The dispute in objection number 16 to 18 pertains to reduction of telecommunications expenses from export turnover of the units eligible for deduction under section 10A. Similarly, now 19 and 20 pertain to reduction of expenditure incurred in foreign currency from the export turnover of the units eligible for deduction under section 10A 11.1 The submissions have been considered carefully. The assessee has not explained or demonstrated before us the reasons and purpose of the telecommunication expenses and expenses incurred in foreign currency. Nothing has been bought on record this year to demonstrate that the telecommunication expenses were not attributable to the delivery of computer software in India and had been incurred in the business of software development at the software units of the assessee in India. Thus the decision of the honourable ITAT in assessment year 2006-07 is not applicable to the facts of this year. As regards the foreign currency expenditure, it may be stated that these expenses are nothing but the expenses incurred overseas for providing the software development services which are technical services. Be it as it may, these are the expenses incurred in foreign currency and, therefore, to be excluded while determining the export turnover as per express provision in the Act. We find that similar finding was also given by DRP in AY 2008-09 also. We, therefore, reject these objections"
52. The AR pointed out that the issue became the subject matter for consideration before the Hon'ble Bombay High Court in the case of the assessee in ITA No. 2501 of 2001 wherein the Hon'ble Court held, "The dispute was regarding deduction of data line costs from export turnover. The assessee incurred the data line costs and which have been worked out before the Assessing Officer. The figures are mentioned in paragraph 3 of the order of the Tribunal. The Assessing officer asked the assessee to explain why its expenditure should not be deducted from the export turnover in view of the above explanation of section 10A. The assessee explained that it was incurred in the business of development and 16 Capgemini India Private Limited IT(TP) A 540/Mum/2014 export of computer software. The software development work was carried out in India at its development centers in India and also in some cases on sites. The assessee was not engaged in any technical services outside India. It did not incur any freight expenses. It explained that the telecommunication charges were incurred in the business of software development at the software undertakings of the assessee in India. The alternate argument was that the exercise that the assessee had undertaken was justified in the light of the law laid down by the Tribunal and particularly the Special Bench in the case of Income Tax Officer v/s Sak Soft Ltd, reported in 313 ITR (AT) 353. Reliance was also placed upon a judgment of this Court in the case of Commissioner of Income Tax v/s Gem Plus Jewellery India Ltd, reported in (2011) 330 ITR 175 (Bom). The Tribunal may have discussed the alternate contention but what it has expressed on primary contention, according to us, does not raise any substantial question of law. The primary contention was that the expenses which the Assessing Officer desired to pick were not incurred in relation to export and, therefore, cannot be termed as deduction permissible from export turnover. These expenses have been incurred for the purposes of the business of software development at the software units in India. It is that finding which the Assessing Officer was unable to controvert or unable to bring any contrary material to disprove the same. It is in that light that the Tribunal found that the Assessing Officer could not have insisted on the deduction. It is that exercise undertaken by the Assessing Officer which has not been upheld but rather disapproved by the Tribunal. This is a finding purely on the facts and pertaining to the business of the assessee. The facts pertaining to the assessee's business of software development, the charges and which are claimed to have incurred, are in relation to the business of software development within India. They could not be said to be costs deductible from export turnover for the purposes of Section 10A of the Act. In such circumstances, we are of the opinion that any wider controversy or larger question does not require any answer. We can leave that aspect open for the decision in an appropriate case. In the facts and circumstances of the present case and in relation to the business of the assessee before us, it is not necessary to go into the other contentions raised before us by the revenue".
53. Respectfully, following the order of Hon'ble Bombay High Court, we set aside the orders of the revenue authorities and direct the AO to delete the disallowance and compute the exemption as per law and keeping in view the decision of the Hon'ble Bombay High Court in the case of the assessee.
54. Ground no. 20 is allowed.
17Capgemini India Private Limited IT(TP) A 540/Mum/2014
55. Ground no. 21 pertains to disallowance of foreign exchange expenditure for the computation of exemption under section 10A.
56. The decision on this issue is akin to ground no. 20.
57. We, therefore, set aside the orders of the revenue authorities and direct the AO to compute the exemption as per law, keeping in view the decision of Hon'ble Bombay High Court, in the case of the assessee and other decisions cited by the AR, which are Robert Boch Engineering & Business Solutions Ltd vs DCIT, in ITA No. 412/Bang/2011 and Infosys Technologies Ltd vs DCIT reported in 109 TTJ 6731 (Bang.)
58. Ground no. 21 is allowed.
59. Ground no. 23 pertains to treatment of grant received by the assessee from government, which the assessee declared was for capital outlay, whereas the revenue authorities treated the same as revenue.
60. It was pointed out by the assessee to the revenue authorities that the grant in the shape of allotment of land was allocated to the assessee with the condition to generate income and employment for 3,000 people.
61. However, the revenue authorities treated it as revenue receipt, though objected to by the assessee.
62. Before us, the AR submitted that the issue now is settled by the decision of the Hon'ble Supreme Court in the case of CIT vs Ponni Sugars & Chemicals Ltd reported in 306 ITR 332, wherein, the Hon'ble Supreme Court held that such grant is to be treated as capital in nature.
63. Respectfully following the decision of Hon'ble Supreme Court in Ponni Sugars (supra) we reverse the orders of the revenue authorities and direct the AO to treat the grant as capital in nature and delete the disallowance.
18Capgemini India Private Limited IT(TP) A 540/Mum/2014
64. The assessee has raised two additional grounds, which are as follows:
"Based on the facts and in the circumstances of the case and in law, the Appellant respectfully craves leave to prefer an appeal against the order passed by the Income-tax Officer, Range 10(2), Mumbai ('Learned AO'), under Section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 ('Act'), in pursuance of the directions issued by the Dispute Resolution Panel -I, Mumbai ('Hon'ble DRP'), on the following ground:
On facts and in the circumstances of the case and in law, the AO has:
1. Erred in not granting the foreign tax credit to the extent of Rs.
61,93,566, claimed by the Assessee while computing the income tax liability of the Assessee, even though the said claim was accepted by the AO, itself in the Assessment order;
2. erred in not granting credit for tax deducted at source to the extent of Rs. 10,93,70,202/- and advance tax to the extent of Rs. 1,60,00,000/- while computing the income tax liability of the Assessee".
65. The AR submitted that against both the issues, the assessee has filed rectification application under section 154 before the AO, which is still lying undisposed off.
66. We find that the issue is subject matter of assessment proceedings. We, therefore, direct the AO to dispose off the rectification as expeditiously as possible.
67. In the result, the appeal as filed by the assessee is treated as partly allowed.
Order pronounced in the open Court on 21st November, 2014.
Sd/- Sd/-
(आर. सी. षमा) ( ववेक वमा)
लेखा सद य याईक सद य
(R C SHARMA) (VIVEK VARMA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Date: 21st November, 2014
19
Capgemini India Private Limited
IT(TP) A 540/Mum/2014
त/Copy to:-
1) अपीलाथ /The Appellant.
2) यथ /The Respondent.
3) The CIT (A)-26/DRP-1, Mumbai.
4) आयकरआयु त -CIT-10/DRP-Concern _____, Mumbai/The CIT-10/DRP-___Concern, Mumbai.
5) वभागीय त न ध "GGK", आयकरअपील यअ धकरण,मुंबई/ The D.R. "K" Bench, Mumbai.
6) गाडफाईल Copy to Guard File.
आदे शानस ु ार/By Order / / True Copy / / [ उप/सहायकपंजीकार आयकरअपील यअ धकरण,मुंबई Dy./Asstt. Registrar I.T.A.T., Mumbai *च हानव. न.स *Chavan, Sr. PS 20 Capgemini India Private Limited IT(TP) A 540/Mum/2014