Income Tax Appellate Tribunal - Delhi
Agilent Technologies (International) ... vs Dcit, Gurgaon on 12 February, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "A" NEW DELHI
BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER
&
SHRI O. P. KANT, ACCOUNTANT MEMBER
I.T.As. No.1620/Del/2015, 477 & 6420/DEL/2016
Assessment Years: 2010-11, 2011-12 & 2012-13
Agilent Technologies vs. ITO, Ward-1(1),
(International) Pvt. Ltd., Gurgaon.
Plot No. CP-11, Sector-8,
IMT Manesar,
Gurgaon.
TAN/PAN: AADCA4115C
(Appellant) (Respondent)
Appellant by: Shri Kamal Sawhney, Adv.
Respondent by: Shri H. K. Chaudhary, CIT(DR)
Date of hearing: 14 11 2017
Date of pronouncement: 12 02 2018
ORDER
PER AMIT SHUKLA, J.M.:
The aforesaid appeals have been filed by the assessee against separate impugned final assessment orders dated 20.02.2015, passed in pursuance of direction given by DRP for the Assessment Year 2010-11; final assessment order 20.12.2015 passed u/s.143(3)/144C for the Assessment Year 2011-12; and order dated 30.11.2016 passed u/s.143/144C for the Assessment Year 2012-13.
2. Since, the issues involved in all the appeals are common arising out of identical set of facts, therefore, same were heard together and are being disposed of by way of this I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 2 consolidated order. We shall first take up the appeals for the Assessment Year 2010-11, ITA No.1620/Del/2015, wherein the assessee has challenged transfer pricing adjustment of international transactions made by the Transfer Pricing Officer/Assessing Officer on following provision of services:-
(i) On account of IT enable services (ITeS segment)-
Rs.16,67,89,267/-;
(ii) On account Information Technology services (IT segment)-
Rs. 2,62,12,557/-; and
(iii) On account of receivables- Rs.48,33,838/-
3. The brief facts and background of the case are that the assessee-company is a 100% subsidiary of 'Agilent Technologies International Europe, BV', which in turn is a wholly subsidiary of 'Agilent, Technologies, Inc. USA'. The assessee- company was set up under STPI scheme of the Government of India and had commenced its operation in the year 2002. It is mainly engaged in the providing software development services (IT) and information technology enabled services (ITeS) to its associated enterprises (AEs). In the transfer pricing study report the assessee has highlighted following broad services under both the segments:-
IT-enabled division: The services provided by this division include the following:-
Finance back office support: These services involve internal financial transaction processing including processing for sales accounting and vendors payables.
IT-support and network management: The scope of these I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 3 services includes providing knowledge management for engineering designs and network management for the wireless network solutions business of Agilent US. The IT-enabled services team of ATI comprises of 1,075 people.
Software development division:- The nature of services rendered by the software development division is as under:- Software development services - ATI is engaged in development of modules as well as parts of modules for software being used by its overseas group entities in their products. The Company also undertakes testing of modules developed by it; and Maintenance support services - This includes bug fixing, carrying on maintenance and support services on software used on products developed by group entities. The software development team of ATI comprises of over 174 employees. These employees are mostly engineers (B.Es/ B.Techs / M.Techs).
4. The parent company, Agilent US is a leading measurement company providing core bio-analytical and electronics measurement solutions to the communications, electronics, life science and chemical analysis industries. Since assessee was a 'captive service provider', therefore, it had a limited risk and was compensated on cost plus markup basis. Under the software segment development, the detail functions performed by the assessee as noted by the TPO were as under:-
5.1 Functions performed by Agilent Technologies (International) Private Limited:-
Strategic Management Functions:
AEs of ATI are responsible for determining the overall strategy for I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 4 the group while ATI manages the day to day business. Corporate Services Functions:
ATI is responsible for human resources, financial management and routine administration activities. However, for functions like personnel management and controllership both AE and ATI are involved.
Coding and documentation of software ATI undertakes the coding and documentation function with respect to the software modules that it develops. ATI receives technical assistance, if required from its AEs during the coding and documentation function. ATI is concerned with development of modules of the software for internal usage by AEs. The AEs supervise and manage the coding and documentation function being performed by ATI.
The design and development function is undertaken by ATI pertaining to a particular module based on the specifications provided by AEs. The ultimate responsibility for undertaking the coding and documentation function for the complete software product rests with its AEs."
And in the ITeS, the functions performed by the assessee was as under:-
5.4 Functions performed by the taxpayer w.r.t. the ITES Segment are:-
Strategic management functions:
Agilent US determines the overall strategy for the group. ATI is responsible for only day to day management activities. Corporate Services:
ATI is responsible for financial management and routine administration activities. However, for functions like personnel management and controllership, both Agilent US and ATI are involved.
Marketing and business development:
Being a captive unit for its AEs, ATI does not undertake any marketing or business development functions. It only renders I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 5 services to its group companies as per specifications provided by them. Further, services of ATI are not required to be sold to end customers, Hence, ATI is an in-house service provider and the services are purely in the nature of routine back office work.
Conceptualization of services:
Agilent US is responsible for conceptualization of services to be rendered by ATI.
Execution of services:
Pursuant to the assignment of agreed services, ATI is responsible for rendering such services according to pre- determined terms and conditions including maintenance of appropriate documentation with regard to the same. Performance/Quality assurance:
With respect to the services rendered, ATI is responsible for ensuring that the requisite quality/ performance standards prescribed by Agilent US are met while rendering services. In the event of a quality failure, ATI may be asked to rework the same. However, the costs related to any rework/replacement are also marked up and recovered from Agilent US. Human resources:
ATI undertakes the recruitment, hiring and training process and is responsible for day-to-day supervision and control of its employees."
5. The operating revenues, operating expenses and operating profit for the purpose of bench marking under both the segments were reported as under:-
Particulars Software development ITES
Rs. Rs.
Operating Revenues 34,71,18,799 166,69,66,444
Operating Expenses 30,47,10,542 143,76,75,979
Operating Profit 4,24,08,257 22,92,90,465
NCP (percent) 13.92 15.95
I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 6
6. The assessee adopted TNMM as the most appropriate method and using data for the financial year 2009-10, it has chosen 23 comparables for the software development segment and 11 comparables under an ITeS segment. The average margin of the comparables selected for the software development services was arrived at 11.52 %, whereas in the ITeS segment it was arrived at 12.17%. However, the TPO rejected the assessee's bench marking process and selected his own set of comparables and shortlisted 17 comparables for the software development segment, wherein the average arithmetic means was arrived at 22.74% and thereby made transfer pricing adjustment of Rs.2,68,82,920/-. Similarly in the ITeS segment, he selected 9 comparable companies with an average arithmetic mean of 27.94% and thereby making an adjustment of Rs.17,23,96,204/-.
7. Though assessee is aggrieved by various inclusion/exclusion of comparable companies, however, learned counsel for the assessee submitted that in the ITeS segment if two comparables; namely, TCS E-Serve Ltd. and Accentia Technologies Ltd. are excluded then assessee's margin will be within the arm's length range; and then adjudication of other comparables will become purely academic. As an alternative, he also submitted that TCS E-
Serve International Ltd. and Infosys BPO Ltd., should also be excluded and pleaded for exclusion of one comparable company, i.e., R Systems International Ltd. Regarding the I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 7 exclusion of aforesaid comparables and inclusion of R Systems International Ltd., learned counsel submitted that, all these comparables had come up for consideration before this Tribunal on numerous occasions in various cases, wherein these companies had been held to be incomparable with the companies which are captive services provider and providing simply IT enabled services. Now we shall take up the two comparables first under the ITeS segment, which assessee has pleaded for exclusion.
ITeS Segment:-
i) TCS E-Serve Ltd.
8. Learned counsel submitted that on FAR analysis, this company cannot be held to be comparable with the assessee due to incomparable scale of operations, payment for brand equity and presence of intangibles, etc. It was further pointed out that this company is engaged in services like, software testing, verification and validation and data centre management services which fall under software development services which are different from low end and low risk ITeS segment. In absence of availability of segmental accounts, it cannot be held to be functionally comparable to the ITeS segment of the assessee. In support of his contention, he strongly relied upon the decision of the Tribunal in the case of BC Management Services Pvt. Ltd. vs. DCIT, ITA Nos.5829 & 6134/Del/2015, wherein this Tribunal has analyzed TCS E-Serve Ltd. with those of captive services provider companies I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 8 on various counts. Apart from that in the following decisions also this comparable company has been considered and rejected for the purpose of comparability analysis with the ITeS companies providing back office support services:-
(i) Actis Global Service Pvt. Ltd. vs. Pr.CIT, New Delhi, ITA No.94/2017 Delhi High Court;
(ii) Equant Solutions India Pvt. Ltd. vs. DCIT, ITA No.1202/Del/2015.
(iii) Ameriprise India Pvt. Ltd., ITA No.7014/Del/2014
(iv) Techbook International Pvt. Ltd. vs. DCIT, (2015) 63 Taxmann.com 114.
(v) Bechtel India Pvt. Ltd. in ITA No. 1478/Del/2015.
Learned counsel brought to our notice that in the case of Ameriprise (supra), the decision of the Tribunal has been upheld by the Hon'ble Delhi High Court. Apart from the above, learned counsel further highlighted the incomparability of scale of operations, presence of intangibles and brand expenditure vis-a-vis the assessee and TCS E- Serve by way of following chart:-
AGILENT TCS E-SERVE
INTERNATIONAL
PARTICULARS
FY 2009-10/AY 2010-11 FY 2009-10/AY 2010-11
TURNOVER INR 201.81 crores INR 1440.71 crores
EMPLOYEE INR 100.80- crores INR 548.61 crores
COST
INTANGIBLES NIL INR 3.92 crores
BRAND NIL INR 4.20 crores
EXPENDITURE
I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 9 Thus he submitted that this comparable company should be directed to be excluded.
9. On the other hand, ld. CIT-DR submitted that turnover and size cannot be the basis for rejection of a comparable company which otherwise is functionally comparable, because assessee's turnover is Rs. 201 crores, whereas TCS turnover is at Rs.1440 crore. There cannot be any limit provided for turnover if filter is not applied, so as to determine the profit margin. As regards the brand value contribution by TCS E- Serve to Tata, he pointed out that it is merely at Rs.4.2 crore and it cannot be said to be huge contribution. What is required to be seen is the pricing negotiation when the contract was entered into with the City Group by the TCS E-Serve Ltd, because TCS E Serve Ltd. was mainly serving to City Group which is its largest single customer, and in such a situation brand Tata is not effecting the revenue or profitability. TCS E-Serve Ltd. is not owning any intangible in the form of any own software developed by it. Otherwise, the entire function of TCS E-Serve Ltd. is purely ITeS service only; and hence, same cannot be held to be incomparable.
10. We have heard the rival submissions and also perused the relevant findings given in the impugned order for exclusion of TCS E-Serve Ltd. As discussed above, the assessee is a captive service provider which is providing back I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 10 office support like, internal transaction processing including processing for sales, accounting and vendor payables; and IT support and network management like providing knowledge management for engineer designs and network management for the wireless network solution of Agilent US. The TCS E- Serve is too engaged in providing IT services primarily to City Group entities globally. Apart from that, TCS E- Serve provides technical services involving software testing, verification and validation of software at the time of implementation and data management activities which ostensibly cannot be held to be purely back office support services. There is no segmental bifurcation between the transaction processing and technical services. Further TCS E- Serve is a subsidiary of TCS Ltd., which is one of the foremost and eminent company of Tata group, which inherently has an element of huge brand value associate with it, which tends to influence the pricing policy and thereby directly impacting the margins earned by the company. Apart from the size of the company, huge turnover do reflect that the assets deployed by the TCS E-Serve is far more than the assessee. In the case of BC management Service Pvt. Ltd. (supra), this Tribunal has excluded TCS E-Serve with the similar ITeS companies after observing and holding as under:-
18. We have heard the rival submissions, perused the relevant finding giving in the impugned orders as well as the material placed on record. One of the main points of distinction which is quite ostensible is that the TCS E-Serve' is a subsidiary of Tata Consultancy Services Limited', which is one of the I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 11 leading and giant company in the world and has an inherent element of very high brand value associated with it. Such a high brand value definitely has an impact on the pricing policy, niche market, contractual terms, etc. and thereby affecting the profit margins. Annual report of this company reflects that huge payments have been made by TCS E-Serve to TCS Limited' for the use of the brand as a "royalty". This fact itself shows the effect of brand value in the pricing mechanism. On a further analysis it is seen that the employee cost base is more than 64 times than the assessee and even the turnover is also more than 67 times as compared to the assessee. This only goes to suggest that assets employed by TCS E-Serve" along with huge intangibles in the form of brand value definitely has a huge effect in PLI and vitiates the comparability under FAR analysis with a company like assessee which is a captive service provider without much intangibles and risks. Another important thing which has been pointed out by learned counsel is that, the operation of TCS E-Serve broadly comprise of transaction processing and technical services including software testing, verification and validation for which no segmental bifurcation is available. In absence of such vital information of the margins of such varied segments it becomes quite difficult to put such company in the comparability basket so as to bench mark the correct profit margin. All the aforesaid factors have been held so in various decisions of this Tribunal in several cases as relied upon by the Ld. Counsel, including the decision of Amriprise India Private Limited (supra). Thus, in our opinion TCS E-Serve' cannot be held to be a good comparable for the purpose of bench marking the assessee's PLI and accordingly, we direct the ld.
AP/TPO to exclude TCS E-Serve from the comparability list."
I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 12
11. Apart from that in other decisions relied upon by the learned counsel, including that Hon'ble Delhi High Court in Actis Global Service Pvt. Ltd. vs. Pr. CIT in ITA. 94/2017, we find that on similar point of distinction, TCS E-Serve has held to be incomparable. Thus, we hold that TCS E-Serve cannot be held to be comparable with that of the assessee for bench marking the profit margin.
ii) Accentia Technology Pvt. Ltd.
12. One of the main argument raised by the assessee before the TPO as well as before us is that, there was an amalgamation of 'Asscent Infoserve Pvt. Ltd. with Accentia Technology Pvt. Ltd. during the financial year 2010-11, which was sanctioned by the Hon'ble High Court on 21.08.2009. In the light of the extraordinary event during such relevant Assessment Year, this company cannot be held to be comparable, because it leads to distortion of the profit of the company. Learned counsel submitted that precisely on the same ground in the case of Ameriprise India Pvt. ltd. vs. DCIT, this company was directed to be excluded. He submitted that this decision of the Tribunal has been upheld by the Hon'ble Jurisdictional High Court. Similarly in the other Tribunal's decision like:
(i) Equant Solutions India Pvt. Ltd. vs. DCIT, (2016) 157 ITD 292 (Del. Trib);
I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 13
(ii) Techbook International Pvt. Ltd. vs. DCIT, Circle-3, (ITA No.240/Del/2015;
(iii) Flextronics Technologies India Pvt. Ltd. (ITA No.649/Bang/2015 & ITA No.98/Bang/2015)
13. Ld. Counsel further submitted that, the Accentia has been excluded for the reason that its key services are in the healthcare sector by way of software for service on SAAS model and there is no segmental details of software development division.
14. On the other hand, learned Department Representative relied upon the order of the TPO and submitted that the effect of the amalgamation on the profitability has not been shown, and therefore, this cannot be the factor for removing this company from the comparability list.
15. We have heard the rival submissions and also perused the relevant findings given in the impugned order as well as the material placed on record. It is an admitted fact that Accentia Technology Ltd. had an extraordinary event during the year as there was an amalgamation of Asscent Infoserve Pvt. Ltd. during the relevant financial year. Such an extra ordinary event of merger or amalgamation definitely has an impact on the profits which has been well settled by the various Tribunals that if there is any extraordinary event like merger, acquisition, etc. then said comparable company cannot be taken for the purpose of comparability analysis.
I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 14 Apart from this fact, Accentia renders key services in the healthcare sector from the software as SAAS Model which enables it for managing of healthcare documentation needs, receivable management needs, performance tracking and reporting etc. and it is also engaged in developing and design a cloud based posted application which are in the nature of software support services. All these functions definitely cannot be held to be similar with those of the functions carried out of back office support services by the assessee. In any case, on the ground of merger by way of amalgamation during the year of a company with Accentia, which factor has been the basis for exclusion by this Tribunal in series of judgment as referred by the ld. Counsel, we hold that this factor alone calls for exclusion for the purpose of comparability analysis. Thus, we direct the exclusion of Accentia Technologies Ltd. from the comparability list.
16. Since the learned counsel has submitted that, if TCS E- Serve Ltd. And Accentia Technology Ltd. are excluded then average margin of the comparables would come down to 21.15%, whereas assessee's margin 15.95% and accordingly it will fall within the range of +/- 5%, which comes to 21.74%. In view of this factor, we are not entering into the adjudication of other comparable companies as challenged by the assessee before us, because it will be purely academic exercise. Accordingly, under the ITeS segment, we direct the TPO to exclude these two comparables and if the profit margins are I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 15 within the arm's length range, vis-à-vis, the comparable, then no adjustment should be made.
IT Segment (Software Development Services)
17. Now coming to the IT segment, the learned counsel submitted that in this segment also, if two companies, viz. E- Info Chip Bangalore Ltd. and Infinite Data Solutions are excluded and one comparable company viz., R International Ltd. Company are included then assessee's margin would be within the arm's length range.
i) E-Info Chip Bangalore Ltd.
18. Learned counsel submitted that this comparable company is engaged in rendering of both the IT and IT enabled services and does not have any separate segmental accounts and this is an undisputed fact which is evident from page 63 of the annual report of E-Info Chips for the Assessment Year 2010-11. In support of his contention he strongly relied upon the following decision of the Tribunal in the case of Headstrong Services (India) Pvt. ltd., ITA No.714/Del/2015 wherein Tribunal has held as under:-
"12.2. After considering the rival submission and perused the relevant material on record, we find from the Annual Report of this company available on page 352 of the paper book that its P & L Account shows 'Income from software services ' as one unit at Rs. 43,04,66,481/-. Schedules 7 gives break up of this income with "Income from Software Services" at Rs. 37.13 crore and "Consultancy Charges" at Rs. 5.90 crore. Segmental I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 16 information of this company is available on page 66 of its Annual Report which states that: "The Company is primarily engaged in Software Development and I.T. enabled services which is considered the only reportable business segment".
This indicates that the revenue from Software Development and ITES has been clubbed by this company which also includes consultancy charges. No doubt Consultancy charges in relation to Software Development are part of overall Software Development, but the inclusion of ITES in the overall segment frustrates the comparability. We are currently dealing with the international transaction of Provision of Software Development services' and the international transaction of ITES is separate which has also been benchmarked distinctly. In our considered opinion, e-Infochips Bangalore Ltd. having a pool of both software developments and ITES segments into the overall segment designated as 'Software development', cannot be considered as comparable on entity level with the international transaction of 'Software development' of the assessee. We, therefore, order for the exclusion of this company from the list of comparables."
19. Further reliance was also placed on the following judgments:-
(i) Pegasystems worldwide India Pvt. ltd. (ITA No.1758/Hyd/2014).
(ii) Intoto Software India Pvt. Ltd. (1921/Hyd/2014 & 25/Hyd/2015).
(iii) Allscripts India Pvt. Ltd. (ITA No.771/Ahd/2014) Where in these cases, on this ground alone this company was directed to be excluded.
20. On the other hand, learned DR strongly relied upon the order of the TPO and pointed out that E-Infochip Bangalore Ltd. has only income from software services. Thus, I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 17 it cannot be held that on this ground this company should be excluded.
21. We have heard the rival submissions and also perused the relevant findings given in the impugned order. From the perusal of the director's report of E-Infochips Bangalore Ltd., it has seen that it has been reported that this company is primarily engaged in software development and IT enabled services which is considered as only reportable segment business as per accounting standard AS-17. This declaration itself goes to show that this company does not have separate segments for Software development and ITeS operations of the revenue even though it mentions income from software services, but it is not clear as to how much is revenue is from software development and how much is from ITeS. Once there is no segmental details available for both the segments, then it cannot be held that its profit margin should be bench mark with the profit of the assessee from the software division. This distinction for exclusion of the said company has been noted by the Tribunal in various cases as noted above, and therefore, we direct the TPO to exclude E- Infochips Bangalore. Learned counsel submitted that if this company alone is excluded then average arithmetic means of the companies would come down to 19.54% as selected by the TPO, whereas the assessee's margin is 13.92%, which would be at arm's length range of (+)/(-) 5%, which would be at 19.62%, then in that situation no adjustment would be required. In view of the aforesaid submission of the learned I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 18 counsel, we direct the TPO to work out the average meaning of other comparables after excluding E-Infochips Bangalore Ltd.
22. The next issue raised by the learned counsel before us is that working capital adjustment should be given as raised by the assessee vide ground no.5. He submitted that TPO has refused to give working capital adjustment on the ground that it is not relevant to the service industry. This proposition of TPO, he pleaded that, is not the correct proposition and now this issue that working capital adjustment is to allowed even for the service industry has been settled in favour of the assessee by the decision in the case of Sony Mobile Communications International AB (ITA No.769/Del/2014 wherein it has been observed and held as under:-
"9.3 We are not inclined to accept the view canvassed by the authorities that the working capital adjustment cannot be allowed as the assessee is in service industry. Such an adjustment is restricted to inventory, trade receivables and trade payables. If a company carries high trade receivables, it would mean that it is allowing its customers relatively longer period to pay their dues, which will result into higher interest cost and the resultant low net profit. Similarly, by carrying high trade payables, a company benefits from a relatively longer period available to it for paying back the dues to its suppliers, which reduces the interest cost and increases profits. In order to neutralize the differences on account of carrying high or low inventory, trade payables and trade I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 19 receivables, as the case may be, it becomes eminent to allow working capital adjustment so as to bring the case of the assessee at par with the other functionally comparable entities. We, therefore, agree in principle with the grant of working capital adjustment."
23. Similarly in the case of Mercer Consulting (India) Pvt. Ltd., the Tribunal has again rejected the revenue's contention that working capital adjustment can only be given in the case of manufactures and traders and not to the service providers. The Tribunal held that what is true for other categories of business, the same is also for the service provider. Likewise, similar view has been held in United Health Care Information Services Pvt. Ltd., ITA No.612/Del/2012, wherein it has been held as under:-
"13.2. Having heard the rival submissions and perused the relevant material on record, it is manifest that the working capital adjustment is required with reference to stock, trade receivable and trade payables. By carrying the high trade receivables, a company allows its customers a relatively longer period to pay their accounts, which results into higher interest cost and lower profit. By carrying high trade payables, a company benefits from a relatively longer period available to it for paying back its suppliers, which results into its lower interest cost and higher profit. Similarly, high stock means blockage of funds and the resultant lower profit. These three ingredients directly impact the working capital and resultant profit of comparables vis-a-vis the assessee. A working capital adjustment is required to be effected for I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 20 bringing the comparables and the assessee at the same pedestal. The Id. DRP upheld the denial of such adjustment by noticing that there were no means to ascertain the working capital deployed by the comparables throughout the year on daily basis. If the contention of the Id. DRP is taken to a logical conclusion, then there can never be a working capital adjustment, because in no case, the daily figures of comparables would come to the fore. Since, the authorities below have denied working capital adjustment to the assessee on flimsy ground, we vacate their action and hold in principle that the grant of working capital adjustment, if otherwise available, cannot be jeopardized. However, as regards the quantum of working capital adjustment, we direct the AO/TPO to vet the correctness of the amount of working capital adjustment claimed by the assessee and then decide its allowability as per law. "
24. On the other hand, learned Department Representative strongly relied upon the order of the TPO as well as DRP.
25. After considering the rival submissions and on perusal of the relevant findings given in the impugned orders, we find that the reasons given by the TPO to reject the working capital adjustment cannot be upheld, because working capital adjustment analysis seeks to adjust the profitability of each comparable company on the working capital position of the company to reflect the differences in working capital investment. The adjustment tries to isolate I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 21 the interest effect taking into account the time value of money that result from the opportunity costs of holding working capital. The interest effect in the comparable company's data are not completely eliminated albeit are adjusted to the company level of interest effect. The effect of receivables and payables in the working capital are there in service industries also. Now there are various guidelines and factors have been laid down to work out working capital adjustment and accordingly, we direct the assessee to provide the detail working of the capital adjustment to the TPO and he is directed to verify the correctness of the amount and working capital adjustment as given by the assessee and allow the same in accordance with settled principles. Thus, with this direction, this issue is treated as allowed for statistical purposes.
26. Lastly, coming to the issue of adjustment on account of receivables, at the outset learned counsel submitted that working capital adjustment itself takes into account the impact of outstanding receivables on the profitability and accordingly, no separate adjustment is warranted on account of outstanding receivables. He submitted that Delhi Tribunal in the case of Kusum Healthcare Pvt. Ltd. vs. ACIT, ITA No.6814/Del/2014 held that if the impact of credit period has been duly factored in working capital adjustment, while determining the ALP, then no separate or further adjustment of interest on the receivables, was warranted in the hands of the tested party. He submitted that the said rule of the I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 22 Tribunal has been upheld by the Hon'ble Delhi High Court vide judgment dated 25.04.2017 in ITA No.765/2016. Further this Tribunal in the case of BC Management Services Pvt. Ltd. (supra) had observed and held as under:-
"29. After considering the rival submissions and on perusal of the relevant material placed on record, we find that first of all, the assessee is a debt free company as it has neither received any interest from any creditors nor paid interest to any debtor. A perusal of profit and loss account show that interest and finance charges are only Rs. 73/-; and interest on corporate tax is Rs. 1,27,798/-. Apart from that there is no debt or loan with the assessee on which it has to pay any interest. Once it is an accepted fact that assessee does not have any interest bearing borrowed funds for extending any kind of loan to its AE, then it cannot be the reckoned that assessee has given any benefit to the AE by blocking its interest bearing funds to the AE by extending the credit period. This has been held so by this tribunal in the case of Bechtel India (P.) Ltd. (supra). Moreover as pointed out by the learned counsel, the assessee has also given similar credit period to the third parties which are extending up to 181 days. If a similar credit period is given to the AE as given to third parties, then under the arms length scenario and looking into the similar conditions prevailing between controlled transaction and comparable uncontrolled transaction, then there cannot be any adjustment, because in a situation like this, there is a direct CUP to analyse such transaction. Accordingly, the transfer pricing adjustment as made by the TPO by the imputing interest on delay in receipt of payment is uncalled for on the facts of the present case and same is directed to be deleted."
27. After hearing both the parties and on the perusal of the aforesaid decision of the Tribunal, we direct the TPO to consider the principle laid down in the judgment dated 25.04.2017 of Hon'ble Delhi High Court in the case of Kusum I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 23 Health Care, ITA No. 765/2016; and if already impact of receivables have been factored in the working capital adjustment and thereby on its pricing/profitability, vis-à-vis, the comparable, then no further adjustment is called for. The TPO will also see, whether assessee has any interest bearing borrowed funds and if it is not so then it cannot be reckoned that assessee has given any benefit to the AE by blocking its interest bearing funds to the AE by extending the credit period. Accordingly, the TPO will decide the issue in accordance with law in the light of the aforesaid decision.
28. So far as the grounds relating to chargeability of interest under various sections as raised in the grounds of appeal same admitted have been by the Ld. Counsel to be consequential, hence no adjudication is required. Accordingly, appeal of the assessee is treated as partly allowed for statistical purposes.
29. Now we shall take up the appeal for the Assessment Year 2011-12, wherein the assessee is aggrieved by the transfer pricing adjustment on the following transactions:-
(i) On account of ITeS: INR 24,02,79,893/- (ii) On account of IT: INR 2,35,71,118/- (iii) On account of Receivables: INR 19,35,134/-
Besides this, assessee has also taken following grounds for corporate tax disallowance:-
8. On the facts and in the circumstances of the case and in I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 24 law, the Ld. AO has grossly erred in restricting the deduction under section 10A of the Act at INR 11,41,61,675 as against INR 11,64,21,113 and making a disallowance of INR 3,285,418. The Ld. AO has erred in not giving meet to the binding direction issued by the Hon'ble DRP, New Delhi at page 37 of directions dated 3 November 2015 and available judicial precedents. The Ld. AO has erred in not excluding the loss on foreign exchange fluctuation of INR 3,864,205 and travel expense in foreign currency of INR 39,322,394 from total turnover while excluding the same from export turnover for the purpose of computing deduction under section 10A of the Act.
9. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in not allowing the adjustment of INR 54,299,000 towards compensation paid to landlord for early vacation of office premises for computing book profits under section 115JB of the Act for the subject year. The Ld. AO has failed to appreciate that such payment was made out of provision created in Financial Year 2008-09 that was debited to Profit and Loss Account and added back for computing book profits under section 115JB of the Act in such year."
30. So far as ITeS segment is concerned, the facts and material on record is by and large the same as set out in the A.Y. 2010-11. Under this segment, the learned counsel submitted that if E-clerx which has been selected by the TPO and TCS E-Serve Ltd. are excluded, then assessee would be within arm's length range.
I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 25
31. So far as the TCS E-Serve Ltd. is concerned, the ld. Counsel submitted that the facts as were prevalent in the earlier year remains the same, whereas for exclusion of E- clerx is concerned, he submitted that one of the most outstanding features for the functional dissimilarity is that, E-clerx follows outsourcing model, whereas assessee is a captive service provider which perform its back office support functions through its own human resource. The two business models have a significant impact on FAR and hence the companies following an outstanding model cannot be compared. He submitted that E-clerx had been outsourcing its services all throughout, which is evident from the fact that huge amount of Rs.43.71 crores out of total expenses at Rs.66.10 crore has been debited for outsourcing services. In support of his contention, he strongly relied upon the decision of this Tribunal in the case of BC Management Services Ltd. vs. DCIT (supra), wherein the Tribunal had observed and held as under:-
"2. However without entering into the semantics of arguments as to what kind of functions constitutes low-end ITeS service provider or high end ITeS or KPO service provider, we would like to confine our finding on FAR analysis. Because, at times when host of services are performed under ITeS, likes of assessees', there becomes very thin line distinction between functions performed by the low-end ITeS service provider and high-end ITeS service provider and it is quite difficult to analyse in such situations as to how much value additions are there in deliverables in rendering of such kind of host of I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 26 services. At the outset, on a perusal of the Financials and annual report of E-clerx for the relevant financial year as pointed out to us during the course of the hearing, we find that the E-clerx has outsourced most of its services to outsiders which is evident from the fact that the expenses under the head 'contract for the services' is more than Rs. 43.71 Crores during the year out of total expenses debited to profit & loss account of Rs. 91.29 Crores. The major operations appears to be based on outsource model, which is evident from the quantum of expenditure and notes to the financial account (the copy of which is appearing at page 840 of the assessee's paper book). In an outsourcing model, the assets deployed in the form of human resources, infrastructure and other intangibles differ from an entity which operates from its own resources. Whence, in the case of E-clerx, substantial work has been outsourced to various parties, as compared to the assessee, where the entire back office support services have been provided by the assessee itself, then on this ground alone, it would be very difficult to put E-clerx in the comparable basket. Another important fact which is borne out from the annual accounts is that, E-clerx is performing financial services as well as sales and marketing services for which there is no separate segmental information. It reflects only one primary segment which is data analytics and process outsourcing services. Sales and marketing activities again is a different function altogether which cannot be compared with the assessee which is performing purely back office support services. Under these circumstances also it would be very difficult to find out as to what is the profit margin from the sales and marketing services which is entirely a different from I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 27 the functions carried out by the assessee. Further before us, the learned counsel has relied upon catena of decisions of this Tribunal and also High Courts, wherein E-clerx has been held to be incomparable with the companies providing purely back office support services. In view of aforesaid cumulative factors, we hold that E- clerx cannot be held to be a good comparable for bench marking the assessee's margin to arrive at ALP and accordingly, we direct the AO/TPO to remove this comparable."
32. Besides this, he submitted that there are catena of other decisions on the same lines.
33. On the other hand, learned CIT-DR submitted that outsourcing model could not materially changed the functions as one has to see the overall functions. If bench marking is done under the TNMM then only broad parameters have to be seen and under this method such kind hair splitting distinction is not desirable. Thus, he strongly relied upon the order of the TPO.
34. We have heard the rival contentions and also perused the relevant findings given in the impugned order on the inclusion of E-clerx. On perusal of the financial statement as pointed out by the learned counsel, we find that E-clerx out of total expenses of Rs.66.01 crores has spent Rs.43.71 crore for outsourcing its contract for services, whereas in the case of the assessee, the entire expenditure has been done through its own human resources. The major operation of this I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 28 company seems to be based on outsourcing model and in an outsourcing model the assets deployed in the form of human resources, infrastructure and other intangibles differs from an entity which operates from its own human resources. In the case of the assessee, the entire back of its support have been provided by the assessee, and therefore, following the judicial precedents in the case of B.C. Management Services (supra), we hold that E-clerx should not be included for the comparability and analysis and accordingly same is directed to be excluded.
TCS E-Serve Limited
35. With regard to the TCS E-Serve Ltd., the TPO selected this comparable after rejecting the assessee's contention regarding functional incomparability, incomparable scale of operation, payment of brand equity and presence of intangibles. Apart from that it was submitted that this company is also providing services like software testing, verification and validation of the software and data management services. Reliance was placed on similar set of decisions as have been relied in the earlier years. The submission of the learned CIT-DR has been the same as argued in A.Y. 2010-11. As stated in the the earlier part of our order, it has been brought to our notice that decision of the Tribunal in the case of the ACTIS Global Services Pvt. Ltd. (supra), wherein the TCS E-Serve Ltd., has been excluded has been upheld by the Hon'ble Delhi High Court by the judgment I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 29 and order dated 15.05.2017. In any case, since the facts and material qua the comparability analysis remains the same as that of A.Y. 2010-11, therefore, following the same view taken in the earlier, we direct the TPO to exclude the TCS E-Serve Ltd. from the comparability list.
36. As admitted by the learned counsel if these two comparables are removed, then assessee would fall within the arm's length range of +/- 5%; and accordingly, the TPO is directed to compute the arithmetic mean of the comparables excluding these two companies and consequently grant relief to the assessee. In view of the aforesaid direction, the other comparables as contested by the learned counsel are treated as academic and no separate adjudication is required.
37. So far as the issue relating to adjustment on account of IT/Software services are concerned, the learned counsel submitted that if two comparable companies, namely, Infosys Ltd. and Wipro Technology Services Ltd., are excluded then assessee's margin will fall within (+) / (-) range of 5%.
i) Wipro Technologies Services Ltd.
38. So far as the exclusion of Wipro Technology Service is concern, one of the main argument taken by the learned counsel before us and also before the TPO was that, there was an extraordinary event during the relevant assessment year on the ground that this company was acquired by Wipro Ltd.
I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 30 in the Month of January, 2009 and as a part of overall business deal, Wipro Ltd. signed a Master Service Agreement with Citi Group for the delivery of services for a period of six years with a guaranteed revenue of US $500 million. When such transaction was entered then it was a related party transaction. In support, he relied upon the decision of the Tribunal in the case of Saxo India Pvt. ltd., ITA No.6148/Del/2015, which has been held by the Hon'ble Delhi High Court vide order dated 28.09.2016 in ITA No.682/2016.
39. On the other hand, learned CIT-DR, relied upon the order of the DRP and TPO.
40. We have heard the rival submissions and also perused the relevant findings given in the impugned order as well as the material placed on record before us. Wipro Ltd., had acquired a company known as 'Citi Technology Services Ltd.,' in the year 2009 as a part of overall business deal, which was carrying out the services for Citi Group, which then were related party transactions. Wipro Ltd. signed a Master Service Agreement with the Citi Group for the delivery of same service for a period of six years with guaranteed revenue of US $500 million. Wipro Technology Services Ltd., has been providing services to Citi Group out of India as a part of said agreement and thereby it falls within the deeming ambit of Section 92B (2), whereby it has to be treated as deemed AE as the service agreement earlier entered was between the related party and I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 31 same terms and agreement is continuing, hence has to be reckoned in the category of related party transactions. Clause (2) of Section 92B envisages that, if a transaction entered into by an enterprise with a person other than AE, shall for the purpose of subsection (1), be deemed to be an international transaction entered into between two AE, if there exists a prior agreement in relation to the relevant transaction between the other person and the AE, then the terms of the relevant transaction in substance remains the same when it was a related party transaction. Here in this case, when the agreement was entered and terms was agreed it was a related party transaction, because 'Citi Technology Service Ltd.' and Citi Group were related parties; and when Wipro Ltd., has acquired Citi Technology Service Ltd., then it is carrying out the transaction on the basis of prior agreement which was a controlled transaction and it ceases to be uncontrolled transaction. This precise issue has been noted and dealt by the Tribunal in the case of Saxo India Pvt. Ltd. in the following manner:-
"16.5. Adverting to the facts of the instant case, we find that Wipro Technology Services Ltd. earned a revenue from Master services agreement with Citigroup Inc. for the delivery of technology infrastructure services. This agreement was, in fact, executed between the assessee's AE, Wipro Ltd., and Citigroup Inc., a third person. This unfolds that the transaction of earning revenue from software development support and maintenance services by Wipro Technology Services Ltd., is an international transaction because of the application of section I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 32 92B(2) i.e., there exists a prior agreement in relation to such transaction between Citigroup Inc. (third person) and Wipro Ltd. (associated enterprise). In the light of this structure of transaction, it ceases to be uncontrolled transaction and, hence, Wipro Technology Services Ltd., disqualifies to become a comparable uncontrolled transaction for the purposes of inclusion in the final list of comparables under Rule l0B(1)(e)(ii). We, therefore, direct removal of this company from the list of comparables. "
41. This order of the Tribunal has been affirmed by the Hon'ble High Court also and accordingly, we hold that Wipro Technology Service Ltd. should be excluded on this count.
ii) Infosys Ltd.
42. So far as the exclusion of Infosys Ltd. is concerned, the learned counsel submitted that it is a very huge company with a very high turnover and great brand name is associated with it which impacts the profitability of the said company. Now the issue whether Infosys Ltd. can be compared with Captive Service Pvt. Ltd. has now been well settled by the Hon'ble Delhi High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd. in ITA No.1204/2011. Learned counsel has also relied upon the decision of this Tribunal in the case of Cadence Design System (India) Pvt. Ltd. vs. DCIT, ITA No.2074/Del/2014, wherein this comparable company has been dealt with in the following manner:
I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 33 "7. The assessee's main contention for exclusion of Infosys Technologies Limited had been that firstly, its services are incomparable with the assessee because Infosys is into technical consultancy design, development, re-engineering maintenance, system integration, package evaluation and implementation and infrastructure management services;
secondly, it has huge R&D work for its products, which are more than Rs.267 crores, whereas in the case of the assessee it is Nil; thirdly, Infosys has huge intangibles and brand value is also huge whereas in the case of the assessee it is nil; and lastly, Infosys is into large scale of operations which is evident from the fact that during the year it had turnover of Rs.20,265 crores, whereas in the case of the assessee, it is only 248.53 crores. Thus, the company having such a huge turnover cannot be held to be comparable under FAR. The TPO and DRP, held that revenue from software products of Infosys Technologies Limited is only Rs.848 crores out of its operating revenues of Rs.20,297 crores and its revenue from software services is Rs.19,416 crores. Thus, software development services of Infosys Technologies Limited can very well be compared with that of the assessee. Regarding expenditure on R&D expenses, the DRP observed that it is merely 1.3% of the revenue of Infosys, which cannot be said to be substantial.
7.1 Before us, the ld. Counsel for the assessee, Shri Nageshwar Rao, beside aforesaid contention strongly relied upon the decision of the Tribunal in the case of Fiserv India (P.) Ltd. (supra); and the judgment of Hon'ble Delhi High Court in the case of CIT vs. Agnity India technologies Pvt. Ltd. in ITA No.1204/2011 (Del).
I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 34 7.2 On the other hand, the ld. Sr. D.R., submitted that Infosys Technologies Limited has been assessee's own comparable in this year as well as in the earlier year also and the same was not challenged in the earlier year, therefore, the assessee cannot challenge the same comparable in this year once it has accepted this comparable in assessment year 2008-09. In support of his contention, the ld. Sr. DR strongly relied upon the decision of the Tribunal in the case of Capgemini India Pvt. Ltd. vs. ACIT 7861/MUM/2011 and the decision of E-valueserve.com Pvt. Ltd. vs. ITO in ITA No.4001/DEL/2013. Thus, Infosys Technologies Limited has rightly been taken as a comparable by the TPO.
7.3 We have heard the rival submissions and perused the relevant finding given in the impugned order as well as material referred to before us. First of all, Infosys Technologies Limited is a giant enterprise with turnover of more than Rs.20,264 crores. Its expenditure on R&D was Rs. 267 crores and it has huge brand value and significant intangible assets, which have been valued at approximately Rs.1,34,478 crores. If these assets are to be compared with those of the assessee, it can be seen that it has 'nil' expenditure on R&D and no significant intangible asset. On this ground alone, various Benches of the Tribunal have held that Infosys Technologies Limited cannot be compared with small software companies, who are into contract software development services. A company like Infosys with mega operations and having significant assets and brand value and full-fledged risk taking entrepreneur developing and selling proprietary products cannot be held to be comparable with the captive service and I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 35 contract software development companies as the comparability analysis fails on all the factors of FAR. The Hon'ble Delhi High Court in the case of CIT vs. Agnity India technologies Pvt. Ltd. (supra) made a comparative chart while dealing with similar comparative analysis, which for sake of ready reference is reproduced hereunder:-
Infosys Technologies Ltd. Assessee
Basic
Particular
Risk Profile: Operate as full-fledged risk taking Operate at minimal
entrepreneurs risks as the 100
percent services are
provided to AEs
Nature of Diversified-consulting, application
Contract software
services: design, development, re-
development services
engineering and maintenance
system integration, package
evaluation and implementation and
business process management, etc.
Turnover: 20,264 crores
209.83 crores
Ownership Develops/owns proprietary
branded/pr products like Finacle, Infosys
oprietary Actice Desk, Infosys iProwe,
products: Infosys m Connect. Also the
company derives substantial
portion of its proprietary products
(including its flagship banking
product suite 'Finacle')
I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 36
Onsite v. As much as half of the software The appellant
Offshore development services rendered by provides only
Infosys are onsite (i.e. services offshore services (i.e. performed at the customer's remotely from India) location overseas) and offshore (50,20 per cent) than half of its service, income from onsite services Expenditure Rs.80 crores. Rs. Nil (as the 1 on percent services are advertising provided to AEs) /sales promotion and brand building:
Expenditure Rs.236 crores Rs.Nil
on R&D
Other 100 per cent offshore
(from India)
7.4 If we apply the aforesaid comparative criteria as laid
down by Jurisdictional High Court, we find that the same would be applicable on the facts of the present case also and, therefore, respectfully following the judgment of the Hon'ble Delhi High Court (supra), we hold that Infosys Technologies Limited cannot be compared with the assessee-company, which is operating at minimal risk and is a contract software development service provider. Accordingly, we direct the TPO I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 37 to exclude Infosys Technologies Limited from the comparable list."
43. Here in this case also, the same principle will apply and accordingly, following the aforesaid judicial precedents, we hold that Infosys Ltd. should be excluded. As stated by the learned counsel if these two companies are removed then assessee would fall within tolerance range of (+)/(-) of 5% and accordingly we direct the TPO to bench mark the assessee's margin after excluding these two comparables and resultantly all the other comparables which are challenged before us have been rendered academic, therefore, the same are not adjudicated.
44. So far as the issue relating to working capital adjustment and interest receivable is concerned, our directions given in the Assessment Year 2010-11 to the TPO will apply mutatis mutandis and in the light of the direction given therein, we remand this issue to the file of the TPO who shall examine these issues in line of the earlier year order after giving due and effective opportunity to the assessee. Accordingly, the grounds relating to transfer pricing system are partly allowed for statistical purposes.
45. Now we will come to the corporate tax disallowance as raised in grounds no.8 and 9. As regards ground no. 8, the only grievance seems to be that the Assessing Officer has erred in excluding the expenditure incurred on loss of foreign I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 38 exchange fluctuation of Rs.38,64,205/- and travel expenses in foreign currency of Rs.3,93,22,494/- from the total turnover. Here, in this case, the DRP after referring to the various decisions including that of Hon'ble Delhi High Court in the case of CIT vs. Genpact India had given the following direction:-
"Placing reliance on the jurisdictional High Court decisions in CIT V Genpact India and drawing guidance from Supreme Court decisions in CIT Vs. Lakshmi Machine Works (2007) 290 ITR 667 and CIT Vs. Catapharma (India) (P) Ltd (2007) 292 ITR 641 wherein it has been held that excise duty and sales tax should not be included in the total turnover as the same are not includible in the export turnover, this objection is allowed. AO is directed to reduce expenditure reduced from the export turnover from the Total Turnover for computing deduction u/s 10A.
While re-computing the deduction under section 10A of the Act, the AO has erroneously taken the amount of deduction at Rs.11,41,61,675 instead of Rs. 11,41,63,569 which should be available to the Company after re-computation. AO is directed to verify and correct this for which a separate application for rectification has also been moved. These two grounds of objections are accordingly allowed."
46. Thus, the DRP has categorically directed the Assessing Officer to follow the principle laid down by the Hon'ble Jurisdictional High Court in the case of CIT vs. Genpact India and re-compute the deduction u/s.10A accordingly. Since it I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 39 is a categorical direction of the DRP, Assessing Officer is directed to comply with the same and give proper effect and grant consequential relief.
47. As regards the issue raised vide ground no.9, the brief facts qua this issue are that, in the computation of income u/s.115JB, assessee has reduced an amount of Rs.5,42,99,000/- from the net profit on account of 'provision for 'contingencies utilization'. In the return of income it was mentioned that assessee company created a provision of Rs.5,42,99,000/- during the Financial Year 2008-09 by way of debit to the P & L account; and as the said provision were contingent in nature, the same was added back u/s.115JB while computing the book profit for the Financial Year 2008-
09. Since it was disallowed by the assessee in the Financial Year 2008-09 suo-motu, therefore, the net profit as per P&L account for Financial Year 2010-11 has been adjusted by reducing the amount actually paid by way of utilization of the above provision in order to avoid double taxation of the said amount. In response to the show cause notice by the Assessing Officer, assessee submitted that during the Financial Year 2010-11, the assessee company has paid compensation of Rs.5.49 crore to the landlord for early vacation of its premises by way of utilization of provision created in Financial Year 2008-09. The said claim was made on the basis of clause (i) of Explanation I to Section 115JB. The said claim has been disallowed by the Assessing Officer I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 40 on the ground that, P&L account has to be prepared in accordance with Companies Act, wherein assessee had shown net profit of Rs.19,74,67,550/- and only adjustment which is allowed or permissible is as per Explanation 1 to 115JB and Assessing Officer has no discretion to make any adjustment under MAT. The amount of Rs.5,42,99,000/- paid to the landlord by withdrawing with the provision during the Year 2010-11 has not been found under clause (i) of Explanation I because such amount is not credited to the P&L account. It has been confirmed by the DRP Also.
48. After considering the rival submissions made by the parties before us and on perusal of the relevant findings given in the impugned orders as well as material referred to during the course of hearing, we find that the assessee had created the provision of contingency in the Assessment Year 2009-10 amounting to Rs.6,80,00,000/- on account of anticipation of early vacation of premises. The said provision for contingency was added back while computing the book profit for the Assessment Year 2009-10 which was in accordance with clause (c) of Explanation 1 to Section 115JB. In the Assessment Year 2010-11, an amount of Rs.1,37,01,000/- out of total sum was reversed to the P&L account, leaving an amount of Rs. 5,42,99,000/-. In the impugned Assessment Year 2011-12, the assessee actually paid the compensation amounting to Rs.5,42,99,000/- to the landlord out of provisions for contingencies for early vacation of office I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 41 premises. Since the assessee had added back the amount of compensation while computing the book profit for A.Y. 2009- 10, it was claimed that the same amount is allowable as deduction during the Assessment Year 2011-12 in view of the provision of clause (i) to Explanation 1 to Section 115JB.
50. Before us the learned counsel submitted that, provision for contingency amounting to Rs.6,80,00,000/- was made by way of following accounting entry in A.Y. 2009-10:-
Profit & Loss Account Dr. : INR 6,80,00,000/-
To Provision for Contingencies: INR 6,80,00,000/-
In this manner, the said provision was created in the books and was added back while computing the book profit for A.Y. 2009-10. Out of the said provision, reversal of Rs.1,37,01,000/- was made in A.Y. 2010-11 and thereby the balance of provision for contingency was reduced to Rs.5,42,99,000/-. He submitted that, since assessee has already disallowed and paid the taxes on entire amount of Rs.6.80 crore and already the amount of Rs.1,37,01,000/- was allowed for MAT foundation purpose in A.Y.2010-11, therefore, the actual payment made from the same provision has to be allowed. Once during the year, assessee had paid compensation of entire balance amount, which was earlier added back for computing the book profit has now been claimed. The nature of entry has been explained in this manner:-
Provision for Contingencies Dr. INR 5,42,99,000/- To Bank A/c / Landlords A/c INR 5,42,99,000/-
I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 42 The aforesaid accounting entry is a composite accounting entry which is in effect the combination of following two accounting entries:-
Provision for Contingencies Dr. INR 5,42,99,000/-
To Profit & Loss Account INR 5,42,99,000/-
And
Profit & Loss Account Dr. INR 5,42,99,000/-
To Bank A/c / Landlords A/c INR 5,42,99,000/-
Thus, he submitted that same cannot be added back for the purpose of computing the book profit.
51. On the other hand, learned DR, submitted that net profit shown in the book profit account cannot be changed and book profit needs to be taxed under the provision of law and there is no question of law any tinkering P&L account.
52. From the facts as narrated above, it is evidently clear that provision for contingency which was made in the Assessment Year 2009-10 was added back for the purpose of computing the book profit and calculation of MAT. A part of the sum was reversed which was allowed for the purpose of MAT computation by the assessee and also accepted by the Assessing Officer. From the accounting entries as explained by the learned counsel show that a composite accounting entry has been incorporated above. In substance, there is a withdrawal for provision of contingencies which was created to the P&L account and further there was a debit in P&L I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 43 account on account of payment of landlord. Otherwise also the withdrawal from provision of contingencies has to be reduced in terms of clause (i) of Explanation 1 to Section 115JB. It was only to give effect to the aforesaid adjustment, assessee by way of composite entry presented utilization of the provision for contingencies for compensation paid to landlord amounting to Rs.5,42,99,000/- while computing the book profit for adjustment u/s.11JB. The fact remains that expenditure has been incurred and even if the entries in the books of account have been made in a different manner, the same cannot be held to be a determinative factor for taxing or disallowing the amount or deprive the assessee from claiming the expenditure as deduction. There is no tinkering of the net profit as shown in the P&L account in the relevant previous year prepared in accordance with the provision of Part-II & III of Schedule VI of the Companies Act as alleged by the Assessing Officer, because from the above note of the accounting entries, we do not find that the net profit has not been computed in accordance with the provision of Companies Act and as such there is no impact arising on account of the above. Thus, we agree with the contention of the learned counsel and hold that the amount of Rs.5,42,99,000/- cannot be added back for computing the book profit u/s.11JB. Accordingly, the assessee's ground is allowed.
I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 44
53. Now we will come to the Assessment Year 2012-13, in this appeal assessee, is only aggrieved by transfer pricing adjustment on account of ITeS of Rs.22,48,12,743/- and on account of receivables of Rs.1,19,54,436/-.
54. So far as adjustment on account of ITeS is concern, the learned counsel has argued for the exclusion of Eclerx; TCS E-Serve Ltd. and inclusion of Infosys BPO Ltd. He further pointed out that even if Eclerx and TCS E-Serve Ltd. are removed the assessee's margin will fall within +/- range of 5%. In this year also as admitted by both the parties there is no change in the material facts either with regard to the functions carried out by the assessee in ITeS segment or in the functionality or other factors, vis-à-vis, the comparables during the Assessment Year 2012-13. Regarding E-clerx, the assessee's submission has been that it follows the outsourcing model of business and out Rs.128.38 crore an outsourcing contract for services has been 66.08 crore, whereas in the case of the assessee it has been Nil. We have already discussed this issue in detail in the earlier years, wherein following the various Tribunal decisions we have held that this factor alone is sufficient for exclusion of the comparable from the assessee. Accordingly, we hold that E- clerx should be excluded.
55. As regards TCS E-Serve Ltd., the following figures have been submitted by the assessee to show that there is a I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 45 difference in the scale of operations, presence of intangible and brand expenditure:-
AGILENT INTERNATIONAL TCS E-SERVE
PARTIC FY 2011-12/AY 2012-13 FY 2011-12/AY 2012-13
ULARS
TURNOVER INR 243.12 crores INR 1733.34 crores
EMPLOYEE INR 138.93 crores INR 697.91 crores
COST
INTANGIBLES NIL INR 2.83 crores
BRAND NIL INR 3.67 crores
EXPENDITURE
56. Since the comparability factors and other issues remains the same in this year also with regard to the TCS E- Serve Ltd., therefore, following the precedents of the earlier years as above, we hold that TCS E-Serve Ltd., cannot be taken for the purpose of comparability analysis. Accordingly, TPO is directed to exclude these two comparables and if the assessee's margin after exclusion of these comparables is found within the arm's length range then no adjustment should be made.
57. Lastly, on account of receivables on which adjustment of Rs.1,19,54,436/- has been made, again the contention of learned counsel before us that assessee has been allowed working capital adjustment by the learned DRP and accordingly, it will take into account the impact of outstanding receivables on the profitability and accordingly no separate adjustment is warranted. These pleadings of the I.T.A. No.1620/Del/2015, 477 & 6429/Del/2016 46 assessee has been accepted by us in the earlier years, following the various decisions of the Tribunal specifically in the case of Kusum Healthcare Pvt. Ltd. which has been upheld by the Hon'ble High Court also. Thus, we direct the TPO/AO that no separate adjustment on account of receivables are required after considering the working capital adjustment. Accordingly, the appeal for the Assessment Year 2012-13 is treated as allowed.
58. The other grounds are either general in nature or consequential; therefore, no separate adjudication is required.
59. In the result, all the appeals of the assessee is treated as partly allowed in the manner indicated above.
Order pronounced in the open Court on 12th February, 2018.
Sd/- Sd/-
[O.P. KANT] [AMIT SHUKLA]
ACCOUNTANT MEMBER JUDICIAL MEMBER
DATED: 12th February, 2018
PKK: