AGILENT TECHNOLOGIES (INTERNATIONAL) P.LTD,GURGAON V. ACIT, CIRCLE-1(1), GURGAON

ITA 1171/DEL/2022

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The case involves Agilent Technologies (International) P. Ltd., which appealed against the final assessment order by the Assistant Commissioner of Income Tax, Circle 1(1), Gurgaon, for the assessment year 2018-19. The primary issues in the appeal were related to transfer pricing adjustments and the rejection of a deduction claimed under section 80G of the Income Tax Act. The Tribunal found errors in the Transfer Pricing Officer's (TPO) application of working capital adjustments and the inclusion/exclusion of certain comparables in the transfer pricing analysis. Furthermore, the Tribunal reversed the disallowance of the deduction under section 80G, which was initially denied based on the interpretation that CSR contributions are voluntary and thus not deductible under the section.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 23816 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2018-2019
• Other Referred Cases: Nokia India Pvt. Ltd (ITA) 6502/Del/2017, Interglobe Technology Quotient Private Limited vs. ACIT [2024] 163 taxmann.com 542
• Laws Referred To: Income Tax Act, 1961, Income-tax Rules, 1962, Companies Act, 2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DHARAMVIR SINGH
• Assessee Lawyers: NISHANT SAINI; AKHIL GOEL
• Keywords: Transfer pricing; International transaction; Business expenditure; Charitable institution
• Section: 143(3); 13; 37; 37(1); 80G; 92D

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I : NEW DELHI BEFORE SHRI ANUBHAV SHARMA, JUDICIAL MEMBER AND SHRI BRAJESH KUMAR SINGH, ACCOUNTANT MEMBER ITA No.1171/Del/2022 Assessment Year: 2018-19 Agilent Technologies (International) P. Ltd., Plot No.CP-11, Sector-8, IMT Manesar, Gurgaon – 122051, Haryana. PAN: AADCA4115C Vs ACIT, Circle-1(1), Gurgaon. (Appellant) (Respondent) Assessee by : Shri Nishant Saini, AR & Shri Akhil Goel, AR Revenue by : Shri Dharamvir Singh, CIT-DR Date of Hearing : 21.01.2025 Date of Pronouncement : 26.03.2025 ORDER PER ANUBHAV SHARMA, JUDICIAL MEMBER: This appeal is preferred by the Assessee against the final assessment order dated 25.04.2022 passed by the Asstt. Commissioner of Income Tax, Circle 1(1), Gurgaon (hereinafter referred to as the Ld. AO) u/s 143(3) r.w.s. 144C(13) of the ITA No.1171/Del/2022 2 Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for assessment year 2018-19. 2. Heard and perused the records. At the time of hearing, the ld. AR for the assessee submitted that amongst all the grounds raised with regard to transfer pricing adjustments, the assessee is not pressing ground no 2.3 while ground no. 2.1 and 2.4 are general in nature. The grounds are accordingly reproduced below:- “2. That the Ld. AO/ Learned Transfer Pricing Officer (“Ld. TPO”) erred on facts and in law in enhancing the income of the Appellant by INR 6,97,29,898/- pertaining to provision of information technology enabled services (“ITeS”) and INR 54,08,684/- pertaining to provision of software development services (“SDS”), to associated enterprises (“AEs”) that do not satisfy the arm’s length principle envisaged under the Act and in doing so, have grossly erred in: 2.1. erroneously rejecting the economic analysis undertaken by the Appellant in the Transfer Pricing (“TP”) documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 (“Rules”); 2.2. conducting a fresh comparability analysis based on the application of erroneous additional/ revised filters in determining the arm’s length price for the Appellant and rejecting the filters applied by the Appellant in the TP documentation; 2.3. excluding certain comparable companies on arbitrary/frivolous grounds; 2.4. erroneously including certain functionally dissimilar companies that are full-fledged risk-taking entrepreneurs and high profit making companies; ITA No.1171/Del/2022 3 2.5. committing factual / computational errors while computing the Appellant’s operating margin and working capital adjusted operating margins of comparable companies selected in ITeS and SDS segment; 2.6. disregarding the judicial pronouncements in India and international guidance while undertaking TP adjustment.” 3. As with regard to the ground no. 2.5, arising out of Transfer pricing addition in ITeS Segment and SDS Segment ld.AR has questioned the incorrect computation of working capital adjusted margins by the TPO by alleging that the DRP via directions has agreed to the Appellant’s contentions and directed the TPO to follow the guidelines provided by OECD for the computation of working capital adjusted margin. We consider it appropriate to reproduce the relevant observations of DRP, here, as follows; “4.2.14 On the issue of working capital adjustment, the assessee submitted that working capital adjustment was not given by the TPO in respect of the benchmarked international transaction in the TP order. On this issue, the DRP has been of the consistent view that working capital adjustment should be given in respect of the assessee and its comparables in order to arrive at an accurate and reliable comparison in view of the Rule 10B(3) of the IT Rules, 1962 and for which reliable data has to be provided by the assessee. The TPO is directed to compute the working capital in accordance with OECD Guidelines as follows: i. Compute the average of opening and closing balances of inventories, trade debtors/receivables, ITA No.1171/Del/2022 4 trade creditors/payables of both the tested party and the comparables for the relevant year on revenue account only. ii. Compute the net working capital ratio (in percentage) after dividing the net working capital by operating cost/sales or such denominator (as is used in the PLI) both for the tested party and the comparables. iii. Determine the difference between the tested party's ratio with that of each comparable. iv. Multiply the above difference by the interest rate i.e., SBI Prime Lending Rate as on 30th June of the relevant financial year v. The above adjustments shall be added to the profit margin of comparable companies as finally determined in accordance with the directions of this Panel. vi. Credits received from various group concerns or loans etc., should not be taken into account” 4. Ld. AR contended that however, the TPO in the DRP appeal effect order dated April 13, 2022 has done a mechanical error while computing the working capital adjusted arm’s length range of comparables as he has erroneously subtracted working capital adjustment percentage (i.e. difference of working capital ratio of tested party and comparable) from the operating margins (as computed by TPO in order dated July 26, 2021, instead of adding ITA No.1171/Del/2022 5 working capital adjustment percentage in margins earned by comparables. 5. Then, without prejudice to the above, Ld. AR has tried to build a case that that the operating margin of Appellant i.e. 9.18% (as computed by TPO) and 9.70% (as computed by the Appellant), falls within the range, thereby requiring no adjustment in the ITeS segment of the Appellant. As with regard to addition in SDS Segment it was submitted by the ld. AR that even if the correct working capital adjustment is computed on the margins used by TPO in initial order dated July 26, 2021, the working capital adjusted arm’s length margin i.e median of the comparables (using margins computed by TPO for comparables) comes out to be 16.12% instead of 19.85% as computed by the TPO. It is also pleaded that there was erroneous computation of margin of comparables in SDS segments and that will lead to operating margin of appellant at 11.42%, which falls in the range requiring no adjustments. 6. We have considered the case as set up by ld. AR and are of considered view that as the ld.TPO has fallen in error in giving effect to the DRP directions in correct perspective and rather committing a mechanical error, the issue needs to be rested to ld. ITA No.1171/Del/2022 6 TPO, for removing the error and further give an opportunity of hearing to the assessee to show as to how after giving effect to the DRP orders the margin of computation of comparables in both segment shall fall within the range. In aforesaid terms the ground no. 2.5 is decided in favour of assessee. 7. Taking up ground no. 2.2 and 2.4 together, we like to observe that at the time of arguments ld. AR has submitted that it only in regard to the SDS segment the two comparables are questioned and as such for ITeS segment the assessee is not disputing the comparables as same do not affect the assessee much. In regard to the SDS segment we find the assessee has disputed two comparables and we discuss each one as follows; 7.1 Magnasoft Consulting India Pvt. Ltd. (\"Magnasoft\"). As per the ld. AR, this comparable fails RPT Filter applied by Ld. TPO, as in FY 2016-17 Magnasoft has RPT to sales of 28.05%. in FY 2016-17 (Please refer page 489 of paperbook). 7.2 Aptus Software Labs Pvt. Ltd. (\"Aptus\"). As per the ld. AR, this comparable fails Employee Cost to Sales Filter applied by Ld. TPO, as in FY 2015-16 Aptus has employee cost to sales ratio of 16.25%, whereas Ld. TPO has applied minimum threshold of 25%. Functionally Aptus is non comparable as Aptus is engaged ITA No.1171/Del/2022 7 in providing product engineering, infrastructure management and cloud computing services. Aptus is into diversified activities as mentioned above and does not prepare segmental accounts. The Appellant further relies on order of Delhi Bench of ITAT in the case of Nokia India Pvt. Ltd (ITA) 6502/Del/2017) wherein companies have been held functionally dissimilar on account of lack of segmental accounts and diversified activities: 8.3 Ld. DR could not dispute these factual aspects as corroborated by material on PB. Accordingly, we sustain the contention of assessee that these two comparables needs to be removed and accordingly ALP be determined. Thus these grounds are allowed partly infavour of the assessee. 9. Next, with regard to the corporate tax adjustment, the assessee has raised the following grounds:- “3. On facts and circumstances of the case and in law the Ld. AO/ Learned Dispute Resolution Panel (‘Ld. DRP’) erred in rejecting the deduction of INR 55,41,779 claimed under section 80G of the Act. The Ld. AO/ Ld. DRP has grossly erred in: 3.1. interpreting the provisions of section 80G of the Act in light of provisions of section 37 read with section 135 of the Companies Act, 2013, thereby, ignoring that the provisions of section 37 and section 80G of the Act are laid down on a different footing. ITA No.1171/Del/2022 8 3.2. travelling beyond the provision laid under the Act and wrongly interpreting the provisions of section 135 under Companies Act, 2013 as putting a restriction on the deduction available under section 80G of the Act. 3.3. facts and circumstances of the case and in law by holding that for the payment to constitute a donation it must satisfy the test of voluntariness by placing reliance on the Hon’ble Supreme Court decision in the case of Commissioner of Expenditure Tax, Andhra Pradesh v. PVG Raju, Rajah of Vizianagaram [1976 SCR (1)1017], 3.4. facts and circumstances of the case and in law by ignoring the manner in which the law has been laid under section 80G of the Act whereby express exclusions have been provided for specific donations from being considered for deduction. 3.5. in not appreciating that this issue is squarely covered in favour of the Appellant by the binding orders of Higher Appellate authorities” 8. As with regard to the rejecting of deduction claim under section 80G of the Act amounting to INR 55,41,779, the Ld. AR submitted that the Appellant as part of its Corporate Social Responsibility (‘CSR’) contributed INR 57,30,209 and disallowed the same in the computation of income under section 37 of the Act. Further, to arrive at the net taxable income, the Appellant claimed INR 55,41,779, pertaining to above contribution, as deduction under section 80G of the Act. The AO, upon directions of DRP, disallowed above deduction of INR 55,41,779 claimed under section 80G of the Act. It was submitted that there is no ITA No.1171/Del/2022 9 requirement under section 80G of the Act for the contribution to be voluntary. Even if that condition is read into the section, the term voluntary must be seen contextually. There are no compulsions to contribute to a particular charitable institution under the Company Act. The act of contributing to a particular institution/ cause cannot be said to be mandated by law, which merely requires the company to make a payment towards any of the prescribed activities/ institutions. The Appellant is given a choice to contribute towards any of the prescribed CSR activities, and hence, it cannot be said that the Appellant is doing it out of compulsion, without its free will or is being coerced to make the said contribution to any eligible institution. 9. It was submitted that the provisions of section 80G of the Act do not restrict the deduction in relation to the amount contributed towards CSR except for the contributions made under sub-clauses (iiihk) (Swachh Bharat Kosh) & (iiihl) [Clean Ganga Fund] of section 80G(2)(a) of the Act. Apart from amounts covered under sub-clauses (iiihk) & (iiihl) of section 80G(2)(a) of the Act, there is no restriction under section 80G of the Act on claiming eligible amounts as deduction under the Act from the taxable income, even though such amounts end up being ITA No.1171/Del/2022 10 compliant with CSR provisions under Cos. Act. Ld. AR has placed upon the decisions of Delhi Bench of ITAT in the case of Interglobe Technology Quotient Private Limited vs. ACIT [2024] 163 taxmann.com 542 and other few other judgments. 10. In regard to the ground no. 3 with its sub-grounds we find that this issue has been extensively dealt by co-ordinate bench in ITA No. 95/DEL/2024, case titled Interglobe Technology Quotient Private Limited (supra), where one of us, judicial member, was also in quorum, and relevant part is reproduced as below: “7.1 Further, we like to observe that as a matter of fact as per Section 135 of the Companies Act, 2013 (‘CA 2013), the qualifying Companies as mentioned therein are required to spend certain percentage of profits of last three years on activities pertaining to Corporate Social Responsibility (CSR). The expenditure on CSR, could be by way of expenditure on projects directly undertaken by said companies, such as setting up and running schools, social business projects, etc. Such expenditure would include expenditure otherwise falling for consideration under section 37(1) of the Act. On the other hand, companies, instead of undertaking or participating directly in a project, may choose to give donations to institutions that are engaged in undertaking such projects, which is also a recognized way of compliance of CSR obligation. 7.2 The assessing officer and CIT(A) have relied upon General Circular 14/2021 dated 25.08.2021 issued by MCA and “Explanatory Notes to the provisions of the Finance (No.2) Act, 2014” to hold that donations made as part of CSR expenditure are not allowable as deduction. The foundation of their reasoning being that the donation is voluntary in nature, while CSR expenditures are under statutory obligations. ITA No.1171/Del/2022 11 7.3 As we take notice of the fact that Parliament legislated that CSR expenses would not be eligible for deduction as business expenditure under section 37 of the Act by inserting Explanation 2 to section 37(1) vide the Finance (No.2) Act, 2014 (applicable from the assessment year 2015-16), which provided that any expenditure incurred by an assessee on the activities relating to CSR referred to in section 135 of the CA 2013, shall not be deemed to be an expenditure incurred by an assessee for the purpose of business or profession and shall not be allowed as deduction under section 37(1) of the IT Act. The intent of Parliament in bringing the aforesaid provision is given in the Explanatory Memorandum to the Finance (No.2) Bill, 2014 and is reproduced as under ; “CSR expenditure, being an application of income, is not incurred wholly and exclusively for the purposes of carrying on business, As the application of income is not allowed as deduction for the purposes of computing taxable income of a company, amount spent on CSR cannot be allowed as deduction for .computing the taxable income of the company, Moreover, the objective of CSR is to share burden of the Government in providing social services by companies having net worth/turnover/profit above a threshold. If such expenses are allowed as tax deduction, this would result in subsidizing of around one-third of such expenses by the Government by way of tax expenditure.” (emphasis supplied) 7.4 The aforesaid explanatory memorandum categorically expresses the legislative intent and the rationale of disallowance of CSR expenditure referred to in section 135 of the Companies Act, that such expenditure is application of income and not incurred for the purposes of business. We are of considered view that this in itself justifies the grant of deduction u/s 80G. As CSR expenditure is application of income of the assessee under the Income Tax Act, that means it continues to form part of the Total income of the assessee. Section 80G(1) of the Act provides that in computing the total income of an assessee, there shall be deducted, in accordance with the provisions of this section, such sum paid by the assessee in the previous year as a donation. Further, section 80G(2) lists down the sums on which deduction shall be allowed to the assessee. Section 80G falls in Chapter VIA, which comes into play only after the gross total income has been computed by applying the computation provisions under various heads of income, including the Explanation 2 to section ITA No.1171/Del/2022 12 37(1) of the Act. Thus, there is no correlation between suo-moto disallowance in section 37(1) and claim of deduction under section 80G of the Act. 7.5 As with regard to the reasoning that CSR expenditure are not voluntary but mandatory in nature due to penal consequences, we are of considered view that voluntary nature of donation is by nature of fact that it is not on the basis of any reciprocal promise of donee. The CSR expenditures are also without any reciprocal commitment from beneficiary being philanthropic in nature. The Act permits deduction of donations as per Section 80G of the Act, even though, assessee is not gaining any benefit out of any reciprocity from donee. Similar is the case of CSR expenditure. Thus the reasoning of learned Tax Authority, the CSR expenditure is mandatory, does not justify disallowance of these expenditures u/s 80G, if other conditions of section 80G are fulfilled. There is no allegation of Revenue that other conditions of Section 80G are not fulfilled. We, thus sustain the ground.” 11. Thus we are of considered view that ld. Tax authorities below have fallen in error to deny benefit of Section 80G to the assessee. The ground is sustained. 12. As a consequence of above the appeal is allowed with effects of the consequences to be given by ld. TPO/AO as per the determination of issues above. Order pronounced in the open court on 26.03.2025. Sd/- Sd/- (BRAJESH KUMAR SINGH) (ANUBHAV SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 26/03/2025. ITA No.1171/Del/2022 13 Dk/ML Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asstt. Registrar, ITAT, New Delhi "