CAPITA INDIA PRIVATE LIMITED,MUMBAI V. ASSESSMENT UNIT, NATIONAL FACELESS ASSESSMENT CENTRE (NFAC), MUMBAI

ITA 4954/MUM/2024

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Capita India Private Limited appealed against the Final Assessment Order for the Assessment Year 2020-2021, which included significant transfer pricing adjustments and other tax-related adjustments. The Tribunal examined the grounds of appeal, which included challenges to the transfer pricing adjustments, rejection of comparables, and incorrect computations related to Dividend Distribution Tax and interest under various sections of the Income Tax Act. The Tribunal found merit in some of the appellant's contentions, particularly regarding the selection of comparables for transfer pricing and the computation of certain tax credits and interests, leading to the partial allowance of the appeal.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 46911 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-04-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: misc
• Other Referred Cases: Roca Bathroom Products Pvt. Ltd. [445 ITR 537], CIT-II Vs. McKinsey Knowledge Centre India Pvt. Ltd [ITA No. 217/2014, Dated 27/03/2015]
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: ASSESSEE
• Keywords: Set aside; Transfer pricing; International transaction
• Section: 143(3); 143(1); 153; 13; 234B; 92C

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “K” BENCH, MUMBAI SHRI OM PRAKASH KANT, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER ITA No.4954/MUM/2024 (Assessment Year:2020-2021) Capita India Private Limited Plant No.6, Gate No.2, Godrej and Boyce Complex, LBS Marg, Pirojshah Nagar, Vikhroli West, Mumbai – 400079. Maharashtra [PAN:AABCE7046A] …………. Appellant National Faceless Assessment Centre (NFAC), Delhi Deputy Commissioner of Income Tax 1(2)(1), Mumbai, Aayakar Bhawan, Mumbai – 400020. Maharashtra. Vs …………. Respondent Appearance For the Appellant/Assessee For the Respondent/Department : : Shri Nikhil Tiwari Shri Kiran Unavekar Date Conclusion of hearing Pronouncement of order : : 09.01.2025 07.04.2025 O R D E R [ Per Rahul Chaudhary, Judicial Member: 1. The present appeal has been preferred by the Assessee against the Final Assessment Order, dated 29/07/2024, passed by the Assessing Officer under Section 143(3) read with Section 144C(13) read with Section 144B of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’], as per the directions issued by Commissioner of Income Tax (Dispute Resolution Panel (1)), Mumbai-2 [for short ‘DRP’] on 11/06/2024 under Section 144C(5) of the Act for the Assessment Year 2020-2021. 2. The Assessee has raised following grounds of appeal : “General Ground ITA No.4954/Mum/2024 Assessment Year 2020-2021 2 1. erred in assessing the total taxable income of the Appellant at Rs 83,11,88,790 as against a total income of Rs 63,15,46,850 as computed by the Appellant in its Return of Income ('ROI'); Time barred proceedings 2. erred in not passing the final assessment order within the time limit as provided under Section 153 of the Act ie., the outer limit for passing of the final assessment order which for AY 2020- 21 would be 30 September 2023, thus making the assessment proceedings time barred and bad in law and thereby it should be quashed; A Transfer Pricing grounds in relation to international transaction of Provision of IT enabled services Reference to the TPO 3. erred in making a reference of the Appellant's case to the TPO, without complying with the provisions of Section 92CA, and then making a transfer pricing adjustment of Rs 19,96,41,940 to the Appellant's income which is bad in law: Rejection of comparables selected by the Appellant in its TP documentation 4. erred in rejecting comparable companies selected by the Appellant i.e. Anderson Business Solutions Private Limited. Suprawin Technologies Ltd, Sundaram Business Services Limited, iSN Global Solutions Private Limited and Crystal Hues Limited by applying a turnover filter of less than 1/10 times and more than 10 times without appreciating that the said filter is not an appropriate filter and also disregarding the fact that the Appellant's remuneration is based on cost plus method and that its margins are not impacted by the quantum of its turnover; 5 erred in rejecting the comparable companies selected by the Appellant ie. R Systems International Limited on the basis that this company fails different financial year end filter applied by the TPO for selection of comparables, without appreciating that Appellant had submitted operating margins for April 2019 to March 2020 basis the quarterly audited financial statements available in the public domain; 6. erred in rejecting the comparable companies selected by the Appellant i.e. Suprawin Technologies Ltd, Allsec Technologies Limited and Ultramarine & Pigments Limited on the basis that the company has export revenues less than 75% of the total revenues (\"export earnings filter') without appreciating the fact that the Appellant had applied the export earnings filter of 25% of the total revenues, ITA No.4954/Mum/2024 Assessment Year 2020-2021 3 7. erred in rejecting Ultramarine & Pigments Limited considered to be comparable by the Appellant for benchmarking the international transaction of provision of IT enabled services on the basis that no separate segmental financials are available when separate segmental are available in the Annual report; Introduction of additional comparables by the learned TPO 8. erred in considering an additional company, which is functionally different, as comparable the Appellant for benchmarking the international transaction of provision of IT enabled services, viz MPS Ltd: Erroneous consideration of margins 9. erred in considering the incorrect margins of comparables, where correct computation of margins of the comparables were shared by the Appellant during the course of TP and DRP proceedings for computing the arm's length price; Adjustments required to be made to arm's length margin 10. erred in not allowing Appellant the benefit of the working capital adjustment which is required to be undertaken in its case to account for the difference in working capital levels between the comparable companies and the Appellant; 11. erred in not allowing Appellant the benefit of the risk adjustment to account for the difference between the risks assumed by the Appellant and the risks assumed by the comparable companies: Benefit of +/-3% 12. erred, in law and facts, by not considering that the adjustment to the arm's length price, if any. should be limited to the lower end of the 3 percent range as the Appellant has the right to exercise this option under the proviso to Section 92C of the Act; Incorrect calculation of the transfer pricing adjustment 13. the learned AO/ TPO erred in incorrectly computing the transfer pricing adjustment to Rs 19,96,41,940 whereas the correct calculation of the transfer pricing adjustment as per his own computation would be Rs 11,96,41,940, B. Corporate Tax grounds Incorrect computation of the Dividend Distribution Tax (DDT) demand ITA No.4954/Mum/2024 Assessment Year 2020-2021 4 14. erred in granting DDT credit of Rs 50,00,000 instead of DDT credit of Rs 57,00,917 claimed by the Appellant in the ROI, thus resulting in the short grant of DDT credit, 15. erred in incorrectly levying consequential interest amounting to Rs 4,89,027 under Section 115P of the Act; 16. erred in adjusting disputed DDT demand of Rs 71,261 from the total refund due to the Appellant. While making such adjustment, the learned AO has erred by disregarding the fact that such DDT demand was incorrectly levied in the intimation order passed under Section 143(1) of the Act against which the Appellant has already filed the rectification application before the office of learned AO; C. Other Common grounds Incorrect levy of interest 17. erred in levying consequential interest amounting to Rs 13,20,702 and Rs 2,28,92,168 under Section 234A and Section 234B respectively of the Act. The correct total of above such consequential interest calculated amounts to Rs 2,42,12,870, however, the same has been incorrectly considered as Rs 2,49,90,670 in the computation sheet enclosed with the Assessment Order.” 3. The relevant facts in brief are that Appellant/Assessee is a company engaged in providing Information Technology Services [for short ‘IT Services’] covering both voice and non-voice based services. The Appellant-Company has units at Mumbai, Bangalore and Pune registered under Software Technology Park (STP) Scheme. 3.1. For the Assessment Year 2020-2021, the Appellant filed return of income on 11/02/2021 declaring total income at INR.63,15,46,850/- which was processed under Section 143(1) of the Act. Subsequently, the case of the Appellant was selected for complete scrutiny. During the assessment proceedings reference under Section 92CA(1) of the Act was made to the Transfer Pricing Officer [for short ‘TPO’], since the Appellant had provided IT Enabled Services (ITES) to its Associated Enterprises (AE’s). Vide order, dated 25/01/2023, passed under Section 92CA(3) of the Act, TPO proposed, inter alia, the following transfer pricing adjustments: ITA No.4954/Mum/2024 Assessment Year 2020-2021 5 S.No. Transaction Amount (INR) Method Margin earned 1 Provision of ITES 4,26,48,22,818/- Transactional Net Margin Method (TNMM) 13.80 Percent 3.1. On 19/09/2023, the Assessing Officer passed Draft Assessment Order under Section 144C(1) of the Act proposing Transfer Pricing Adjustment of INR.34,60,14,787/-. The Appellant filed objections before the DRP against the aforesaid Draft Assessment Order. On 11/06/2024, the DRP disposed off the objections filed by the Appellant. As per the directions of the DRP, the Assessing Officer passed the Final Assessment Order, dated 29/07/2024, under Section 143(3) read with Section 144C(13) read with Section 144B of the Act, assessing total income of the Appellant at INR.83,11,88,790/- computed as under: SI. Description Amount (INR) 1 Income as per return of Income filed on 11/02/2021 63,15,46,850/- 2. Income as computed under Section.143(1)(a) on 30/11/2021 63,15,46,850/- 3 Variation in respect of issue of TP Adjustment 19,96,41,940/- Total Assessed Income 83,11,88,790/- 3.2. Being aggrieved, the Appellant has preferred the present appeal before the Tribunal against the Final Assessment Order, dated 29/07/2024, on the grounds reproduced in paragraph 2 above. 4. We have heard both the sides and have perused the material on record. 5. The Appellant has challenged the Transfer Pricing Adjustment of INR.19,96,41,940/- made by the Assessing Officer by way of Ground No. A1 to A 13 reproduced here in Paragraph 2 above. Ground No. 1 6. Ground No.1 raised by the Appellant pertains to assessing the total ITA No.4954/Mum/2024 Assessment Year 2020-2021 6 taxable income of the Appellant of INR.83,11,88,790/- as against a total income of INR.63,15,46,850/- as computed by the Appellant in its return of income. During the course of hearing the Learned Authorized Representative for the Appellant, stated that the Appellant does not wish to press this ground. Accordingly, Ground No.1 raised by the Appellant is dismissed as not pressed as being general in nature. Ground No. 2 7. Ground No.2 raised by the Appellant pertains to validity of the impugned assessment proceedings on account of the same being barred by limitation relying on, inter-alia, the decision of the Hon’ble Madras High Court in case of Roca Bathroom Products Pvt. Ltd. [445 ITR 537]. In this connection, vide letter dated 15.11.2024, Appellant has withdrawn the same ground stating that continuing with the aforesaid ground would prolong the appellate process, and therefore, the Appellant wishes to withdrawn Ground No.2. Accordingly, Ground No.2 raised by the Appellant is dismissed as withdrawn. Ground No. A3 to 13 8. We note that by way of Ground No. 13 the Appellant has challenged the incorrect computation of Transfer Pricing Adjustment. We note that as per the final Assessment Order, ALP was determined at INR.438,44,64,758/- as against the actual sales of INR.426,48,22,811/-. Thus, the difference between the aforesaid two amounts, which comes to INR.11,96,41,940/-, should have been added as APL Adjustment Whereas transfer pricing addition of INR.19,96,41,940/- has been made. Therefore, we find merit in the contention of the Assessee that the actual transfer pricing adjustment challenged by way of Ground No.A3 to A12 is INR.11,96,41,940/- (as against 19,96,41,940/-). ITA No.4954/Mum/2024 Assessment Year 2020-2021 7 9. In relation to Ground No. A3 to A12, at the outset it was submitted by the Learned Authorised Representative for the Appellant that the TPO had selected final list of comparables consisting of four comparables. In case MPS Limited, a comparable included by the TPO, is excluded from the aforesaid final list of comparables and R. Systems International Limited, a comparable selected by Appellant but excluded by the TPO, is included in the final list of comparables, no Transfer Pricing Adjustments would be required. Accordingly, keeping in view of the aforesaid submissions advanced by the Learned Authority Representative for the Appellant, we proceed to consider the submissions/contentions advanced by both sides in relation to (a) MPS Limited and (b) R. Systems International Limited. 10. Having considered the rival submissions and on perusal of record it emerges that issue of inclusion/exclusion of MPS Limited had also come up for consideration during the assessment proceedings for the Assessment Year 2022-2023. A copy of order, dated 06/01/2025, passed under Section 92CA(3) of the Act for the Assessment Year 2022-2023 has been placed on record by the Appellant. On perusal of the same we find that the TPO has excluded MPS Limited from the final list of comparables by placing reliance upon the decision of Tribunal in the case of the Appellant for the Assessment Year 2017-2018 [ITA No.732/Mum/2022, dated 18/08/2022]. On perusal of aforesaid decision, we find that the Tribunal had directed exclusion of MPS Limited from the list of comparables on the ground of functional dissimilarities. The relevant extract of the aforesaid decision of Tribunal reads as under: “9. The next company, which the assessee seeks exclusion is M/s MPS Ltd. The Ld A.R submitted that this company is engaged in rendering end to end services to its clients in publishing sector, which included content creation and production services. He submitted that this company is also engaged in software services and product development. In the annual report of this company, it is reported that it is engaged in five lines of businesses, viz., ITA No.4954/Mum/2024 Assessment Year 2020-2021 8 (a) Content creation and development, (b) Content production and transformation, (c) Learning media solutions and customer support, (d) Order management and (e) Platform development and technology services. However, it has not given any segmental details. The platforms developed by this company are named as Digicore, MPSTrak, Content Store, ScholarStor, MPSScholarlyStats. The Ld A.R submitted that this company has got in-house platform development and technology division for publishers powered by 300+ experienced developers. Thus this company undertakes R & D Activities. The Ld A.R further submitted that this company also outsources some of its activities. The outsourcing cost to total cost works out to about 7.50%. Accordingly, the Ld A.R submitted that this company is performing different functions and also adopt different business model. Further, it is involved in developing contents with the help of high skilled personnel. Accordingly, he submitted that this company cannot be considered as a comparable company. The Ld A.R placed his reliance on various case laws. 9.1 xx xx 9.2. xx xx 9.3 From the submissions made by Ld A.R, we notice that the functions performed by this company in the present year under consideration are identical in nature. The Ld A.R also pointed out that this company offers different types of services such as (a) Content creation and development, (b) Content production and transformation, (c) Learning media solutions and customer support, (d) Order management and (e) Platform development and technology services. Further it has developed different domain platforms involving specialized technologies. However, the assessee herein is a low end back officer support services provider. Accordingly, we are also of the view that this company cannot be taken as a comparable company for the assessee herein. Accordingly, we direct exclusion of this company.” (Emphasis Supplied) 11. On perusal of material on record, we find that there is no change in functional profile of the Appellant and MPS Limited for the Financial Year 2016-2017 relevant to Assessment Year 2017-2018 and Financial Year 2019-2020 relevant to Assessment Year 2020-2021. For the Financial Year 2019-2020, the business segments of the Appellant were (a) Content Solutions, (b) Platform Solutions and (b) eLearning Solutions1. As per the Annual Reports the focus of MPS 1 Page No. 520 of the Paper Book ITA No.4954/Mum/2024 Assessment Year 2020-2021 9 Limited was on Content Solutions with a strong emphasis on learning outcomes enabled by efficient yet immersive learning paths. It was stated that MPS Limited provided services across the entire author- to-reader value chain, from content authoring and development to distribution and delivery2. Further, the principle business activities of the Company were stated to be Content Solutions (82% of total turnover) and Platform Solutions (18% of total turnover)3. However, no further segmental details are available. Further, MPS Limited has also developed proprietary products/platform. On the other hand the Appellant continues to be a captive service provider providing support services to its AEs. Thus, MPS Limited is has functionally dissimilarities and in absence of segmental data, MPS cannot be taken as a comparable. Therefore, respectfully following the decision of the Tribunal in the case of the Appellant for the Assessment Year 2017-2018, we direct the Assessing Officer/TPO to exclude MPS Limited from the list of comparables 12. Next, we take the issue of inclusion/exclusion of R. Systems International Limited [for short ‘R Systems’]. After taking into consideration the rival submissions, we find that R Systems was rejected from the list of comparables by the TPO on account of different accounting year. Though the accounts of R Systems were prepared taking calendar year as the accounting years, the quarterly audited accounts were available. Therefore, the Appellant had used the quarterly financial statements and data available to extrapolate the account statements for the financial year. We find that while disposing appeal for the Assessment Year 2017-2018 [ITA No.732/Mum/2022, dated 18/08/2022], the Tribunal had directed for inclusion of R. Systems International Limited in the list of final comparables holding as under: 2 Page No. 523 of the Paper Book 3 Page No. 540 of the Paper Book ITA No.4954/Mum/2024 Assessment Year 2020-2021 10 “7. With regard to the plea of inclusion of M/s R systems International limited, the Ld A.R submitted that the TPO has rejected this company for two reasons, viz., (a) this company has got different accounting year and (b) this company was rejected by the TPO in AY 2015-16. The Ld DRP upheld the view of the TPO on the ground that this company fails in the filter, viz, \"Use of different accounting year filter for comparable analysis\". 7.1. xx xx 7.2. xx xx 7.3 We heard the parties and perused the record. With regard to the application of filter of different accounting year, the Hon'ble Delhi High Court in the above said case has expressed the following view:- “14. The Revenue is in appeal before this Court questioning the admissibility of the above mentioned comparables while computing Arm's Length Price regarding the IT Support services after the TPO and AO rejected the above mentioned companies but was later allowed by the CIT (A) and ITAT. While the AO had confirmed the findings of the TPO, the Ld. CIT(A) after considering the Assessee's submissions accepted all the four companies rejected by the TPO. The revenue submits that Fortune Infotech Ltd. was correctly rejected by TPO because the company had different financial year ending on December, 2006, whereas Assessee's financial year ended on March, 2006. There is nothing shown to the court that supports the revenue's argument that the ITAT fell into error in holding that if a comparable is following different financial year then the same cannot be included in the list of comparables selected for benchmarking the international transaction. Therefore, the ITAT has held that if the comparable is functionally same as that of tested party then same cannot be rejected merely on the ground that data for entire financial year is not available. If from the available data on record, the results for financial year can reasonably be extrapolated then the comparable cannot be excluded solely on the ground that the comparables have different financial year endings.\" In view of the above said decision rendered by Hon'ble Delhi High Court, we accept the contentions of Ld A.R that this company could not have been rejected by the TPO merely for the reason that it follows different accounting year, when the ITA No.4954/Mum/2024 Assessment Year 2020-2021 11 financial year results for the period matching with that of the assessee could be collated. However, as submitted by Ld D.R, it is required to be examined as to whether this company gets itself qualified in other filters applied by the TPO also. Accordingly, we are of the view that this comparable company needs to be examined afresh at the end of AO/TPO. Accordingly, we restore this comparable company to the file of AO/TPO for examining it afresh.” 13. On perusal of the above it becomes clear that the Tribunal had rejected the approach adopted by the TPO and directed for fresh examination of R Systems as a comparable by placing reliance on the judgment of the Hon’ble Delhi High Court in the case of CIT-II Vs. McKinsey Knowledge Centre India Pvt. Ltd [ITA No. 217/2014, Dated 27/03/2015] wherein it was held that a comparable cannot be rejected solely on the ground of different accounting/financial years provided the results of the relevant financial year can reasonably be extrapolated. 14. In view of above we direct the Assessing Officer/TPO to include R. Systems in the list of comparable after examining the functional comparability keeping in view that TNMM has been adopted as the most appropriate method. 15. Thus, the Transfer Pricing Adjustment is set aside with directions to the Assessing Officer/TPO to recomputed the Arms Length Price and Transfer Pricing Adjustment, if any, after taking into consideration our finding and adjudication hereinabove. In terms of the aforesaid, (a)Ground No.A5 and A8 are allowed; (b)Ground No.A3, A4, A6 and A7 are disposed off as having rendered infructuous; and (c) Ground No. A10, A11, A12 and A13 are dismissed as having been rendered infructuous with liberty to the Appellant to raise the same before the TPO. Ground No. B14 to B16 16. Ground No. B14 to B16 raised by the Appellant pertain to the short ITA No.4954/Mum/2024 Assessment Year 2020-2021 12 grant of credit for Dividend Distribution Tax (DDT) amounting to INR.7,00,917/- and the consequential levy of interest of INR.4,89,027/- under Section 115P of the Act and adjustment of demand so raised with the income tax refund of INR.71,261/-. It has been stated that the rectification application, dated 26/08/2024, filed by the Appellant in this regard is pending adjudication. On perusal of the said application we find that the Appellant has filed before the Assessing Officer copy of challans for deposit of DDT. Accordingly, the Assessing Officer is directed to grant credit of DDT after verification of the aforesaid challans as per law and re-compute consequential interest under Section 115P of Act, if any, and thus, dispose off the aforesaid rectification application. In terms of the aforesaid, Ground No. B14 to B16 raised by the Assessee is allowed for statistical purposes. Ground No. C17 17. Ground No.C17 related to computation of interest under Section 234A and 234B of the Act are consequential in nature. The Assessing Officer is directed to recomputed the interest under Section 234A and 234B of the Act as per law. In terms of aforesaid Ground No.C17 is treated as allowed for statistical purpose. 18. In result, the appeal preferred by the Assessee is partly allowed. Order pronounced on 07.04.2025. Sd/- Sd/- (Om Prakash Kant) Accountant Member (Rahul Chaudhary) Judicial Member मुंबई Mumbai; िदनांक Dated :07.04.2025 Milan,LDC ITA No.4954/Mum/2024 Assessment Year 2020-2021 13 आदेश की Ůितिलिप अŤेिषत/Copy of the Order forwarded to : 1. अपीलाथŎ / The Appellant 2. ŮȑथŎ / The Respondent. 3. आयकर आयुƅ/ The CIT 4. Ůधान आयकर आयुƅ / Pr.CIT 5. िवभागीय Ůितिनिध ,आयकर अपीलीय अिधकरण ,मुंबई / DR, ITAT, Mumbai 6. गाडŊ फाईल / Guard file. आदेशानुसार/ BY ORDER, सȑािपत Ůित //True Copy// उप/सहायक पंजीकार /(Dy./Asstt. Registrar) आयकर अपीलीय अिधकरण, मुंबई / ITAT, Mumbai "