CAPGEMINI INDIA P.LTD, MUMBAI V. DCIT CIR 14(1)(2), MUMBAI

ITA 1577/MUM/2016

AI Insights

The case involves cross appeals by M/s. Capgemini India Pvt. Ltd. and the Revenue against the order of the Assessing Officer (A.O.) passed under sections 143(3) read with section 144C(13) of the Income Tax Act, 1961, for the Assessment Year 2011-12. The primary issues revolved around transfer pricing adjustments made by the Transfer Pricing Officer (TPO) and the selection of comparable companies for benchmarking the arm's length price of international transactions. The Tribunal examined the inclusion of Wipro Technology Services Ltd. and Infosys Technologies Ltd. as comparables and found them unsuitable due to significant differences in functional and risk profiles, as well as the presence of intangible assets and brand value which the assessee did not possess.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 299691 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 11 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-02-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 08-02-2023
• Assessment Year: 2011-2012
• Appeal Filed On: 17-03-2016
• Other Referred Cases: Agilent Technologies (International) Pvt. Ltd. vs. ITO, Saxo India Pvt. Ltd. vs. CIT, CIT vs. Kodak India (P) Ltd., Barclays Bank PLC vs. ADIT (Intl. Taxn), CIT vs. Corrtech Energy (P) Ltd., CIT vs. Shivam Motors (P) Ltd., CIT vs. Delite Enterprises (Bom)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; International transaction; Question of law; Capital receipt
• Section: 6; 92C; 143(3); 92B; 234B; 14A; 191; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “K” BENCH, MUMBAI BEFORE SHRI OM PRAKASH KANT, ACCOUNTANT MEMBER AND MS. KAVITHA RAJAGOPAL, JUDICIAL MEMBER IT ( T P ) N o . 1 577 /M u m /2 01 6 ( A s s e ss me nt Y ea r: 20 1 1- 12 ) M/s. Capgemini India Pvt. Ltd. Plant 2, Block A, Godrej IT Park, Godrej & Boyce Compound, LBS Marg, Vikhroli (W), Mumbai-400 079 V s. Dy. CIT-14(1)(2) Room No. 470, 4 th Floor, Aayakar Bhavan, M. K. Road, Mumbai-400 020 P A N / G I R N o. AA A CK 263 2 B (Assessee) : (Revenue) & I TA N o. 191 7/ M u m / 20 16 ( A s s e ss me nt Y ea r: 20 1 1- 12 ) Dy. CIT-14(1)(2) Room No. 470, 4 th Floor, Aayakar Bhavan, M. K. Road, Mumbai-400 020 V s. M/s. Capgemini India Pvt. Ltd. Plant 2, Block A, Godrej IT Park, Godrej & Boyce Compound, LBS Marg, Vikhroli (W), Mumbai-400 079 P A N / G I R N o. AA A CK 263 2 B (Revenue) : (Assessee) Assessee by : Shri M. P. Lohia/Nikhil Tiwari Revenue by : Dr. Yogesh Kamat D a te o f H e a r i n g : 09.02.2023 D ate of P ro n ou n ce me n t : 23.02.2023 O R D E R Per Kavitha Rajagopal, J M: These are cross appeals filed by the assessee and the Revenue, challenging the order of the learned Assessing Officer (A.O. for short) passed u/s.143(3) r.w.s. 144C(13) Income Tax Act, 1961 (‘the Act'), pursuant to the direction issued by the Dispute Resolution Panel (DRP for short), pertaining to the Assessment Year (‘A.Y.’ for short) 2011-12. 2 ITA Nos. 1 9 1 7 / M / 2 0 1 6 & 1 5 7 7 / M / 2 0 1 6 ( A . Y . 2 0 1 1 - 1 2 ) M/s. Capgemini India Pvt. Ltd. 2. Both the assessee and the Revenue has challenged the appeal on various grounds. Since the facts in both the cases are similar, we hereby proceed to pass the consolidated order for both the captioned appeals. ITA No. 1577/Mum/2016 3. The grounds of appeal raised by the assessee reads as under: General Ground 1. erred in determining the total taxable income of the Appellant for AY 2011-12 at Rs.4,53,58,45,730 instead of the amount of Rs 1,29,87,1 1,835 as reported in the Return of Income filed by the Appellant A. Transfer Pricing Grounds Reference to Transfer Pricing Officer (TPO') 2. erred in making a reference of the Appellant' s case to the Learned TPO, which is not in accordance with Section 92CA, and then makinga transfer pricing adjustment of Rs.3,23,60,70,3 74 to the total income of the Appellant for AY 2011-12; Use of single year data 3. erred in law and in facts in rejecting the mechanism adopted by the Appellant for benchmarking its international transaction of provision of software development services using three year weighted average data of comparables; and determining the arm's length operating margin for such services using the operating margins earned by the companies for only financial year ('FY) 2010-11; Criteria/filter adopted by the TPO while selecting/rejecting comparable companies 4. erred in applying a filter of rejecting companies which followed a financial year other than April to March; 5. erred in rejecting R Systems International Limited on the basis that it fails the different financial year ending filter disregarding the fact that the Appellant had submitted the operating margin of R Systems International Limited for the period April - March basis publicly available data on a without prejudice basis; Rejection of comparables selected by the Appellant in its Transfer Pricing (TP) documentation 6. erred in disregarding the comparable companies selected by the Appellant in its transfer pricing study, without appreciating that the same are functionally comparable to the activities undertaken by the Appellant with respect to the subject international transaction; 7. erred in rejecting RS Software Limited despite of the fact that the company meets all the quantitative and qualitative filters applied by the TPO; 8. erred in rejecting R Systems International Limited on the basis that certain extraordinary events have occurred during the year under consideration when the standalone financial statements did not get affected by such extraordinary event/acquisition; Additional comparables introduced by the TPO 9. erred in considering certain additional companies for benchmarking the international transaction of provision of software development services, without appreciating that the same are functionally diferent to the Appellant with respect to the subject transaction; 3 ITA Nos. 1 9 1 7 / M / 2 0 1 6 & 1 5 7 7 / M / 2 0 1 6 ( A . Y . 2 0 1 1 - 1 2 ) M/s. Capgemini India Pvt. Ltd. 10. erred in considering Acropetal Techno logies Limited as a comparable to the Appellant disregarding the fact that the same provides a wide range of services in addition to software development services vis-à-vis the Appellant, which is engaged solely in the provision of software development service and for such other services separate segmental results are not available; 11. erred in considering Wipro Technologies Services Limited as a comparable to the Appellant disregarding the fact that the company operates under peculiar economic circumstances; 12. erred in considering Infosys Technologies Limited as a comparable to the Appellant disregarding the fact that the company has a different functional and risk profile vis-à-vis the Appellant and also owns significant brand, intangibles and proprietary products in contradiction to the Appellant, who does not own any intangible assets; Risk Adjustment 13. erred in not allowing the benefit of any adjustment to account for the difference between the functions undertaken, assets employed or risk profile of the Appellant and of the comparable companies; 14. erred in not granting the Appellant the benefit of risk adjustments which is required to be undertaken to account for the differences in level of risks assumed between the comparable companies and the Appellant in terms of Rule 10C(2)(e) of the Rules; Working Capital adjustment 15. erred in not granting the benefit of working capital adjustment to account for the difference in working capital levels between the Appellant and the comparable companies; Application of arm's length range 16. The learned TPO has 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 5 percent range as the Appellant has the right to exercise this option under the proviso to Section 92C of the Act; Adjustment in respect of recovery of out of pocket expenses 17. erred in levying a mark-up of 12% on the out of pocket expenses recovered by the Appellant from its Associated Enterprises, thereby making an adjustment of Rs 24,41,84,621 without appreciating that the same represent third party costs recovered on cost to cost basis and does not involve any service element; B. Corporate Tax Ground Addition due to erroneous entries in the Annual Information Report 18. erred in making an addition of Rs.5,82,143/- to the Total Income of the Appellant om the basis of transactions erroneously reported in the Annual Information Report as entered into by the Appellant. Short grant of Tax Deducted at Source 19. erred in granting short credit for tax deducted at source of Rs.10,55,678/-. Erroneous levy of Interest u/s 234B 20. erred in levying interest under section 234B amounting to Rs.54,43,94,894/- Each of the above grounds of appeal is without prejudice to and independent of one another. 4 ITA Nos. 1 9 1 7 / M / 2 0 1 6 & 1 5 7 7 / M / 2 0 1 6 ( A . Y . 2 0 1 1 - 1 2 ) M/s. Capgemini India Pvt. Ltd. 4. The facts of the case are that the assessee company is engaged in the business of development and export of computer software. The assessee filed its return of income for the impugned year dated 25.11.2011, declaring total income of Rs.129,87,11,835/-. The assessee’s case was selected for scrutiny and the draft assessment order dated 25.03.2015 was passed under section 143(3) r.ws. 144C(3) of the Act, determining the total income at Rs.456,49,68,116/-. The assessee filed its objection before the ld.DRP, challenging the order of the ld. Transfer Pricing Officer (TPO for short)/AO on various grounds. The ld.DRP disposed of the objections raised by the assessee and the final assessment order dated 29.01.2016 was passed u/s.143(3) r.w.s. 144C(13) of the Act, determining the total income at Rs.453,58,45,730/-. 5. Aggrieved by the said order, both the assessee as well as the Revenue are in appeal before us, challenging the order of the AO passed in pursuance of the direction issued by the ld.DRP. 6. It is observed that the AO has made a reference to the TPO and the assessment order was passed by making a transfer pricing adjustment of Rs.323,60,70,374/- to the total income of the assessee for the impugned year. 7. The AO had observed that during the impugned year, the assessee had transaction with its associate concerns as per verification of the audit report filed by the assessee in Form No. 3CEB. The A.O. made a reference u/s.92CA(1) of the Act to the TPO dated 28.11.2013 for computation of arms length price in relation to the international transaction evidenced in the audit report. The TPO vide order dated 22.01.2015 passed 5 ITA Nos. 1 9 1 7 / M / 2 0 1 6 & 1 5 7 7 / M / 2 0 1 6 ( A . Y . 2 0 1 1 - 1 2 ) M/s. Capgemini India Pvt. Ltd. u/s.92CA(3) made transfer pricing adjustment of Rs.323,60,70,374/-, pertaining to the international transactions entered into by the assessee company for software development and for recovery of out-of-pocket expenses. Pursuant to this, the AO made an addition of the impugned amount to the total income of the assessee, confirming the arms length price determined by the TPO. The assessee challenged the additions made by the AO/TPO by way of objections before the ld.DRP and based on the directions given by the ld. DRP, an upward adjustment of Rs.323,60,70,374/- was made to the total income of the assessee, consequent to the rejection of objection filed by the assessee before the ld.DRP. 8. The assessee has raised about 20 grounds of appeals, including corporate and non- corporate tax grounds. The learned Authorised Representative (ld. AR for short) for the assessee submitted that out of the ground raised by the assessee, ground No. 1, 6 and 9 were being general in nature, requires no adjudication and ground Nos. 2, 3, 4, 5, 7, 8, 10 & 18 were stated to be not pressed by the learned Authorised Representative (ld. AR for short) for the assessee. 9. The ld. AR presented his arguments on ground Nos. 11 and 12, challenging the inclusion of two comparables, namely Wipro Technology Services Ltd and Infosys Technologies Ltd. on the fact that the former operated under a particular economic circumstances and the latter had a different functional and risk profile vis-à-vis, the assessee’s and also owns significant brands, intangibles and proprietary products in contradiction to the assessee, which does not hold any intangible assets. On this ground, 6 ITA Nos. 1 9 1 7 / M / 2 0 1 6 & 1 5 7 7 / M / 2 0 1 6 ( A . Y . 2 0 1 1 - 1 2 ) M/s. Capgemini India Pvt. Ltd. the ld. AR commenced his arguments stating that the above-mentioned comparables are to be rejected for the following reasons: 10. The ld. AR stated that the assessee followed TNMM method for benchmarking and the same was not disputed by the lower authorities. The ld. AR brought our attention to page no. 22 of the TPO’s order, in which the TPO has considered Wipro Technologies Ltd as a comparable without making any detailed analysis as to why the said comparable is to be accepted. The ld. AR further stated that the only reason that the TPO has specified is that the said comparable has earned export income which is 94% of the service income. The ld. AR took us through the financials of Wipro Technologies Services Ltd. and pointed out the huge variation in the earned margin of 54.42% on cost and stated that the same should be excluded. 11. The learned Departmental Representative (ld. DR for short) for the Revenue, on the other hand, controverted the same and stated that the comparable cannot be excluded merely on the ground that it earned high profits. 12. Having heard the rival submissions and perused the materials on record. It is observed that the assessee has objected for the inclusion of Wipro Technologies Services Limited as its comparable for various reasons. The assessee has submitted that Citigroup was taken over by Wipro Technologies Services Ltd with effect from 21.01.2009 and assessee company was rendering services to Citigroup entities globally prior to as well as after taking over of the said company by Wipro Technologies Services Ltd. The assessee further stated that the said services have been provided to Citigroup for about 6 years at a 7 ITA Nos. 1 9 1 7 / M / 2 0 1 6 & 1 5 7 7 / M / 2 0 1 6 ( A . Y . 2 0 1 1 - 1 2 ) M/s. Capgemini India Pvt. Ltd. predetermined consideration. The assessee further contends that these two enterprises are deemed to be AE’s, where the goods or articles which are manufactured or processed by one enterprise are sold to other enterprises or to persons specified by other enterprise and the price and other conditions are influenced by such other enterprises. For this, the assessee relies on the provisions of section 92A(2)(i). This contention of the assessee was rejected by the lower authorities on the ground that the assessee company was offering services to more than one company and that the assessee has not proved by any documentary evidence that such enterprises was influencing the price or other conditions of the assessee and also for the reason that the takeover of the company by another company does not mean that the associated enterprises of the erstwhile company will continue to be AE for the successor company subsequent to the merger. The assessee’s contention that the said comparable had earned margin of 54.42% on cost was exorbitantly high, was also not considered by the lower authorities for the reason that the assessee has not proved the factors which was responsible for higher profits of the said comparable. The ld.DRP in disposing of the objections raised by the assessee held that the said comparable was included as it was functionally comparable. The ld. DRP further held that earning high profits was not the only criteria to reject the comparable as per assessee’s contention and held that Wipro Technology Service Ltd. was rightly included as a comparable for determining the ALP of the assessee’s transaction. The assessee has relied on the decision of the co-ordinate bench in the case of Agilent Technologies (International) Pvt. Ltd. vs. ITO in ITA Nos. 1620/Del/2015, 477 & 6420/Del/2016 vide order dated 12.02.2018, where on similar facts, the Tribunal has excluded Wipro Technology Services Ltd. as comparable, for the reason that since there was a prior 8 ITA Nos. 1 9 1 7 / M / 2 0 1 6 & 1 5 7 7 / M / 2 0 1 6 ( A . Y . 2 0 1 1 - 1 2 ) M/s. Capgemini India Pvt. Ltd. agreement in relation to the parties, the said transaction ceases to be uncontrolled transaction thereby disqualifying Wipro Technology Services Ltd. to be a comparable uncontrolled transaction. The relevant extract of the said decision is cited hereunder for ease of reference: 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. 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. Itd., 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 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, I a transaction entered into purpose of subsection (1), be deemed to be an international transaction entered into between two AE, if there exists a the relevant transaction 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 Technoloqy Services Ltd., is an international transaction because of the qapplication of section 92B(2), i.e., there exists a prior agreement in relation to such transaction between Citigroup Inc. (third person) and Wipro Ltd. 9 ITA Nos. 1 9 1 7 / M / 2 0 1 6 & 1 5 7 7 / M / 2 0 1 6 ( A . Y . 2 0 1 1 - 1 2 ) M/s. Capgemini India Pvt. 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 10B(1)(e)(i). We, therefore, direct removal of this company from the list of comparables. 13. From the above observation, we are of the considered view that the inclusion of the Wipro Technology Services Ltd as one of the comparable has been dealt with by the tribunal on identical fact and we are inclined to decide the issue of the assessee based on the said proposition. Therefore, we direct that Wipro Technologies Services Ltd should not be included as a comparable. 14. Ground No. 12 raised by the assessee challenges the inclusion of Infosys Ltd. as a comparable to the assessee by not considering the fact that the said comparable has a different functional and risk profile and owns a significant brand, intangibles and proprietary products, which is not the case of the assessee. It is observed that the TPO has rejected the contention of the assessee that the comparable has a significant brand value in the market and has incurred expenditure towards brand building by way of marketing expenses. The assessee contended that the brand ‘Infosys’ has a prominent intangible asset, which influenced the earning capacity of the said company. The assessee further stated that not only did the company holds significant intangibles, it had also incurred substantial expenditure on research and development, owned numerous patents and was one of the pioneer in software development. The assessee further stated that the assessee company had not incurred R & D expenses, and did not own any intangibles and that the assessee was a risk mitigated capital service provider. The assessee made the following comparison between the assessee and Infosys Ltd.: 10 ITA Nos. 1 9 1 7 / M / 2 0 1 6 & 1 5 7 7 / M / 2 0 1 6 ( A . Y . 2 0 1 1 - 1 2 ) M/s. Capgemini India Pvt. Ltd. Particulars Infosys Limited CG India Operating Revenues Rs.25,385 crores Rs.3,608 crores Operating Profites Rs.8,821 crores Rs.423 crores Head count 1,30,820 Employees 1,10,000 Employees (Approx.) Net block of assests Rs.4,056 crores Rs.135 crores Expenditure on R & D Rs.527 crores Nil Nature of services Software Development and Products Software Development Services Segmental Information Separate segmental information not available in the public domain Not applicable Brand value Rs.40,509 crores Not applicable Profits attributable to brand Rs.4,486 crores Not applicable 15. The assessee’s contention was not accepted by the lower authorities for the reason that the marketing expenses incurred was Rs.96 crores which was only 0.37% of the total revenue of Infosys Ltd., amounting to Rs.25,385 crores and the TPO has stated that the brand value is not due to the marketing expenses expended by Infosys Ltd., but was for superior services. The TPO further observed that the profit ratio of Infosys Ltd. since FY 1997 to 2010 remained constant over the years inspite of substantial increase in the turnover and held that the turnover does not affect the margin of the companies. The lower authorities contended that the tribunal in assessee’s case for A.Y. 2007-08 held that the turnover ratios was to be considered only in manufacturing business and does not apply to service oriented companies. The ld. DRP also relied on the decision of the co- ordinate bench in the case of S T Micro Electronics Pvt. Ltd. (TS) 243 ITAT 2011 (Del), wherein it was held that high total turnover does not impact the high margins thereby accepting Infosys Ltd as a comparable. The ld. DRP also stated that turnover filter was not applied in assessee’s case. The assessee’s contention that Infosys Ltd. earned Rs.1285 crores in software product was not accepted, for the reason that the same formed an insignificant part of the total revenue of Rs.25385 crores, which was earned out of software development services. The lower authorities included Infosys Ltd as a 11 ITA Nos. 1 9 1 7 / M / 2 0 1 6 & 1 5 7 7 / M / 2 0 1 6 ( A . Y . 2 0 1 1 - 1 2 ) M/s. Capgemini India Pvt. Ltd. comparable. The ld. DRP has stated that in assessee’s case for A.Y. 2007-08, the Tribunal has accepted Infosys Limited as comparable company even though the profit margin was about 40%. 16. The ld.AR for the assessee brought our attention to the annual report of Infosys Ltd at pg. no. 470 of the paper book, wherein it has specified that the Infosys brand is one of the most important intangible asset of the company, which was not so in the case of assessee. The ld. AR also took us through the brand valuation of Infosys Ltd., wherein it had specified that the brand related profits for the impugned year was Rs.6717 crores. The ld. AR further stated that that the TPO had specified in his order that for A.Y. 2007- 08, the tribunal in assessee’s case has held that the concept of economy of scale was relevant only to manufacturing concern and not to service oriented companies was subsequently reversed by the tribunal’s decision in subsequent decision. The ld. AR relied on the tribunal’s decision in assessee’s case for A.Y. 2008-09 and also the decision of the M/s. Fiserv India Pvt. Ltd. vs. ACIT (in ITA No. 700/Delhi/2016 for A.Y. 2011-12 vide order dated 31.08.2020). The ld. DR on the other hand controverted the same and relied on the orders of the lower authorities. 17. We have heard the rival submissions and perused the materials on record. From the above observation, it is evident that there is substantial difference in the financials of the assessee company and Infosys Ltd. The ld. TPO has rejected the contentions of the assessee and has held that Infoys Ltd. was to be included as one of the comparables of the assessee. It is also evident that on identical facts, the coordinate bench in ITA No. 12 ITA Nos. 1 9 1 7 / M / 2 0 1 6 & 1 5 7 7 / M / 2 0 1 6 ( A . Y . 2 0 1 1 - 1 2 ) M/s. Capgemini India Pvt. Ltd. 700/Del/2016 has decided this issue in favour of the assessee. It is relevant to cite the said decision for ease of reference: Infosys Ltd. 10. Before the learned TPO, the assessee objected inclusion of this company on the ground that the company was engaged in developing products, income from sale of the software products, sales being brand driven, and high scale of operations/turnover. The Learned TPO rejected all these arguments of the assessee. According to him, the company is primarily Software Development company, sale of products being miniscule (4.98%), no impact of the brand of the profitability, and no impact of the turnover on the profitability. According to him business model using software development sector in India, the operational size is not having any impact on the profit margin as for providing software development services, "teams of software employees" are formed, which remain same in all the companies and only difference is that in case of the giant companies the teams will be more than the taxpayer, for rendering the Software Development services. The learned DRP upheld the finding of the Learned TPO. 10.1 Before us, the Learned Counsel of the assessee submitted to exclude the company on the ground of segment result for the software services not available, different functional profile and different scale of the operations. The learned Counsel submitted that the company has been rejected by the Hon'ble Delhi High Court in the assessee's own case for assessment year 2009-10 and 2010-11. According to him, not being substantial change in the functioning of the assessee as well as the company in the year under consideration as compared to assessment year 2010-11, the company need to be rejected following the decision of the Hon'ble Delhi High Court in the case of assessee itself. 10.2 The learned DR, on the other hand, relied on the order of the lower authorities. 10.3 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. The Tribunal in ITA No.6737/Del./2014 for assessment year 2010-11 on the issue of the comparability of M/s. Infosys Ltd has observed as under: "11.4 We have considered rival submissions, perused the material on the record. In the case of Agnity Technologies, ITA No.3856/Del/2010, a coordinate Bench has held as under:- "It is argued that the case of the assessee is not comparable with Infosys Technologies Ltd., the reason being that the latter is giant in the area of development of software and it assumes all risks, leading to higher profit. On the other hand, the assessee is a captive unit of its parent company in the USA and it assumes only limited Currency risk. Having considered these points, we are of the view that the case of aforesaid Infosys and the assessee are not comparable at all as seen from the financial data etc. of the two companies mentioned earlier in this order. Therefore, we are of the view that this case is required to be excluded" 11.5 The aforesaid order was upheld by the Hon'ble Delhi High Court after taking note of the chart as given below: Basic Particular Infosys Technologies Ltd. Assessee Risk Profile Operate as full-fledged risk taking entrepreneurs Operate at minimal risks as the 100 percent services are provided to AEs Nature of services Diversified-consulting, application design, Contract software development services 13 ITA Nos. 1 9 1 7 / M / 2 0 1 6 & 1 5 7 7 / M / 2 0 1 6 ( A . Y . 2 0 1 1 - 1 2 ) M/s. Capgemini India Pvt. Ltd. development, reengineering and maintenance system integration, package evaluation and implementation and business process management, etc. (refer page 117 of the Paper Book) Turnover 20,264 crores 209.83 crores Ownership branded/prop Develops/owns proprietary products like Finacle, Infosys Actice Desk, rietary Infosys iProwe, Infosys mConnect. products Also the company derives substantial portion of its proprietary products (including its flagship banking product suite 'Finacle') Onsite vs. Offishore As much as half of the software development services rendered by Infosys are onsite (i.e. services performed at the customer's location overseas). And offshore (50.20 per cent) Refer p. 117 of the Paper Book) than half of its service, income from onsite services. The appellant provides only offshore services(i.e. remotely from India) Expenditure on advertising/sales promotion and brand building Rs. 80 crores Rs. Nil (as the 1-percent services are provided to AEs) Expenditure on Research and Development Rs. 236 crores Rs. Nil Other 100 per cent offshore (from India) 11.6 On the basis of the above chart, the Hon'ble High Court affirmed the conclusion that a captive unit of a comparable company which assumed only a limited risk, cannot be compared with a giant company in the area of development of software who assumes all types of risks leading to higher profits. The facts of the appellant are akin and therefore, do not warrant any different conclusion. The appellant is also captive service provider to its AE and as such, M/s. Infosys Ltd. is not a valid comparable with the appellant." 10.4 The Hon'ble Delhi High Court in ITA No. 602/2016 & CM No.30032/2016 in case of assessee, on the issue of the comparability of M/s. Infosys has observed as under: "Learned counsel appearing on the advance notice urges that the assessee is engaged in the business of software development. He supports the conclusions of the ITAT with respect to the exclusion of two comparables in question and highlights that M/s Infosys Ltd. is engaged not merely in software development both offsite and onsite and that it receives the substantial revenues on account of onsite software financial development - the activity which the assessee does not carry out. It is also submitted that besides this, the other distinguishing factor vis-a-vis that M/s Infosys Ltd. is that concern also owns brand intangibles- an advantage which the assessee does not possess. 14 ITA Nos. 1 9 1 7 / M / 2 0 1 6 & 1 5 7 7 / M / 2 0 1 6 ( A . Y . 2 0 1 1 - 1 2 ) M/s. Capgemini India Pvt. Ltd. Lastly, the assessee is captive as opposed to status of M/s Infosys Ltd. With respect to M/s Persistent Technologies, it is pointed out that in a previous order in ITA No. 279/2016 dated 04.05.2016 (Principle Commissioner of Income Tax vs. M/s Cashedge India Pvt. Ltd) held that having regard to the rules i.e. Rule 10 B to 10 E of Income Tax Rules, the data of M/s Persistent Systems Ltd- could not have been included. Here, it is urged that the assessee is also a member of the Cashedge India group and is engaged in same and identical business. The AY also coincides with that of assessee i.e. AY 2010-2011. For these reasons, we are of the opinion that no substantial question of law arises on the first issue urged." 10.5 We find that the Tribunal has rejected the company mainly on the ground of giant company vis-à-vis the assessee being a captive service provide. Since this ground of the rejection is valid in the year under consideration also, respectfully following the decision of the Tribunal (supra) and decision of Hon'ble Delhi High court (supra), we direct the Learned AO/TPO to exclude this company from the final set of the comparables. 18. From the above observation, we are of the considered view that the co-ordinate bench on identical fact has decided this issue by holding that Infosys Ltd.is a pioneer in development of software which assumes all risks leading to higher profit. It is also evident that the assessee does not own an intangible asset as that of the comparable company and in all aspects the assessee company and Infosys Ltd. are poles apart. In order to determine the ALP, it is pertinent to select comparables which are least complex with that of the assessee company. The TPO/A.O. has failed to do so. The tribunal has also differentiated the assessee as being a captive unit which only assumes limited currency risk, thereby rejecting Infosys Ltd. as a comparable. The facts of the present case are identical to that decided by the tribunal and hence we find no reason to deviate from the same. It is also pertinent to point out that the Tribunal in assessee’s case for A.Y. 2008-09 in ITA No. 7099/Mum/2012 has rejected Wipro Technology Services Ltd. and Infosys Technologies Ltd. to be a comparable company for the reason that the said companies have huge presence of brand value, intangible, R & D activities which cannot be taken as comparable of a capital service provider company similar to the assessee. Therefore, by respectfully following the above said decision, the ld. AO/TPO is directed 15 ITA Nos. 1 9 1 7 / M / 2 0 1 6 & 1 5 7 7 / M / 2 0 1 6 ( A . Y . 2 0 1 1 - 1 2 ) M/s. Capgemini India Pvt. Ltd. to exclude Wipro Technology Services Ltd. and Infosys Technologies Ltd. as a comparable of the assessee. 19. Ground No. 15 pertains to non granting of working capital adjustment. It is observed that the TPO has not allowed working capital for the reason that there is a difference in the working capital levels between the assessee company and the comparable companies. The ld. AR for the assessee contended that in subsequent and in the previous years, the TPO has granted the assessee benefit of working capital adjustment and the ld.AR brought our attention to previous decision in assessee’s case for A.Y. 2009-10, wherein the assessee was granted the working capital adjustment. The ld. AR also relied on the TPO’s order for A.Y. 2008-09, in which case the assessee was given the benefit of working capital adjustment. 20. The ld. DR relied on the order of the lower authorities. 21. Having heard the rival submissions and perused the materials on record. It is observed from the submission of the assessee that in assessee’s own case for earlier and in subsequent years, the assessee has been given the benefit of working capital adjustment. The Tribunal in assessee’s case for A.Y. 2009-10 has held that working capital adjustments are essential for the reason that it has a bearing on the profitability of the assessee company. The lower authorities have not specifically given a finding as to why working capital and risk adjustment cannot be granted merely for the reason that the difference should be material in nature and cannot be granted automatically when there is difference. It has failed to substantiate its view. On the other hand, it is evident that the 16 ITA Nos. 1 9 1 7 / M / 2 0 1 6 & 1 5 7 7 / M / 2 0 1 6 ( A . Y . 2 0 1 1 - 1 2 ) M/s. Capgemini India Pvt. Ltd. Tribunal in assessee’s case has given the claim for working capital adjustment. We do not find any justification to deviate from the reasons taken by the tribunal in earlier years in granting the benefit of working capital adjustment. Hence, this ground of appeal raised by the assessee is allowed. 22. Ground No. 17 pertains to adjustment in respect of recovery of out-of-pocket expenses. The Assessing Officer/TPO has levied a markup of 12% on out-of-pocket expenses recovered by the assessee from its associate enterprises, wherein the Assessing Officer/TPO made an adjustment of Rs.24,41,84,621/-. The assessee contended that the said expenses pertains to third-party cost, which are recovered on cost to cost basis and does not pertain to any service rendered by the assessee. The assessee further submitted that the said expenses were recovered later on from the AE’s which are in the nature of cost of travel, accommodation, visa, per diem and other day to day expenses incurred by the assessee’s Indian employees who render services, leased line charges and other expenses on specific request of the AE’s. The assessee further contended that these were standard practices in software companies while providing services on a cost or cost basis. The assessee also stated that the impugned expenses were for administrative convenience and no value addition cost were incurred for the same. The assessee reiterated that there was no service element involved in the said transactions. The ld.AR further stated that the TPO has not determined the said ALP by applying any of the method prescribed by the Act. The ld. AR further stated that the TPO and the DRP has relied on the master service agreement entered into by the assessee with its AE’s dated 01.04.2008 and as per Article 2 of the said agreement, in which it has specified that the assessee company is entitled to 17 ITA Nos. 1 9 1 7 / M / 2 0 1 6 & 1 5 7 7 / M / 2 0 1 6 ( A . Y . 2 0 1 1 - 1 2 ) M/s. Capgemini India Pvt. Ltd. charge 12% of the total amount of cost. The ld.AR relied on the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs. Kodak India (P) Ltd. [2016] 288 CTR 0046 (Bom), which had upheld the decision of co-ordinate bench and which held that the ALP for an international transaction shall be determined by any of the methods prescribed by law and in case of failure to do so, the TPO cannot be given another innings to rectify the mistake. The ld. AR also relied on the decision of the co-ordinate bench in the case of Barclays Bank PLC vs. ADIT (Intl. Taxn) [2018] 90 taxmann.com 378 (Mum-Trib) for the said proposition. 23. The ld. DR, on the other hand, controverted the same and prayed that the same may be remanded back to the Assessing Officer/TPO for determining the ALV by applying the most appropriate method. 24. We have heard the rival submissions and perused the materials on record. It is observed that the AO/TPO has relied on the master service agreement of the assessee with its AE’s which it has specified that as per Article 2, the total amount of cost shall exclude those cost incurred on projects performed by the assessee company directly for its clients outside the Capgemini group. The TPO held that the impugned expenses are part of the cost base and worked out markup at 12%. The assessee’s contention that only the expenses incurred in the course of provision of services ‘which are used’ are eligible for markup was not considered by the lower authorities. The assessee’s further contention that only other services which are passed on by the group companies in the original form can be considered as pass through costs entitled to be recovered without any markup, was also not considered. The TPO has relied on the guidelines issued by HM Revenue & 18 ITA Nos. 1 9 1 7 / M / 2 0 1 6 & 1 5 7 7 / M / 2 0 1 6 ( A . Y . 2 0 1 1 - 1 2 ) M/s. Capgemini India Pvt. Ltd. Customs of UK and held that employee related expenses cannot be treated as pass through costs and has to be considered in the cost base. The ld.AO/TPO worked out markup at 12% by rejecting the contentions of the assessee. It is pertinent to point out that the TPO has not followed any method prescribed by the Act to determine the arm’s length price of the impugned transaction. This fact has not been controverted by the ld.DR. On perusal of the decisions cited by the ld. AR in the case of Kodak India Pvt. Ltd. (supra) and in the case of Barclays Bank PLC (supra), it is evident that the methods prescribed by the Act are mandatory and not directory and when the said condition is not followed, the jurisdiction of the TPO is challengeable. The said decision has also specified that failure to follow any of the method prescribed by the law, does not entitle the TPO to rectify the mistake in the second innings. The relevant extract of the said decision is cited here under for ease of reference: “69. We also cannot agree with the DR that the issue be restored to the TPO because the methods, as prescribed by the legislature are mandatory, not directory. When mandatory provision is either superseded or ignored, it straightway affects the jurisdiction. In the instant case, we have to mention that it was a case of suo moto reference to the TPO and it is the case of the revenue authorities, to import the provisions of Chapter X. In this circumstance, since the ATPO did not adhere to the prescribed methods consciously, another innings to rectify the mistake cannot be allowed, as the TPO infringed the relevant provision of the Income tax act and Rules.” 25. By respectfully following the said decision, we are inclined to decide this issue in favour of the assessee and, hence, ground No. 17 raised by the assessee is allowed. 26. In the result, the appeal filed by the assessee in ITA No.1577/Mum/2016 is allowed. ITA No. 1917/Mum/2016 27. This appeal has been filed by the Revenue, on the following grounds: 19 ITA Nos. 1 9 1 7 / M / 2 0 1 6 & 1 5 7 7 / M / 2 0 1 6 ( A . Y . 2 0 1 1 - 1 2 ) M/s. Capgemini India Pvt. Ltd. 1. Whether on the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in directing not to deduct data line cost, insurance and 1oreign currency expenditure, from export turnover while computing the deduction u/s 10A on the presumption that these are incurred as expenditure attributable to delivery of computer software outside India 1gnoring primary fact that the main object and activity of the asssessee is export of software Outside India by incurring expenditure in India and therefore contrary to the main objects and activities of the assessee's business." 2. Whether on the facts and in the circumstances of the case and in law, the Hon"bble DRP erred in directing the AO to delete the disallowance u/s 14A though there are investments income from which does not or shall not form part of total income. 3 Whether on the facts and in the circumstances of the case and in law, the Hon'bble DRP erred in directing the AO to treat the Government Grant receipts as capital in nature. 28. Ground No. 1 pertains to the allowability of telecommunication expenses such as data line cost, insurance and foreign currency expenditure from export turnover while computing the deduction u/s.10A which according to the assessee are attributable to the delivery of the computer software. It is observed that the A.O. has disallowed the telecommunication expenditure, i.e., data line cost, aggregating to Rs.9,03,12,991/- from the export turnover of the units eligible for deduction u/s.10A while computing the deduction u/s.10A in respect of each of the eligible units. The assessee contended that the said expenses has not been charged separately from the clients and, therefore, the same is not included in the export turnover of the eligible units. The assessee relied on the decision of the Hon'ble Jurisdictional High Court decision and the coordinate bench decision for A.Y. 2009-10, which held that telecommunication expenditure incurred in the business of software development of assessee’s undertaking in India, is not attributable to delivery of computer software outside India. The ld. DRP in an objection raised by the assessee has relied on the said decision and has disposed off the objection in favour of the assessee. As the said issue has already been covered by the decision of Hon’ble Bombay High Court and the coordinate bench in assessee’s case, we find no 20 ITA Nos. 1 9 1 7 / M / 2 0 1 6 & 1 5 7 7 / M / 2 0 1 6 ( A . Y . 2 0 1 1 - 1 2 ) M/s. Capgemini India Pvt. Ltd. reason to deviate from the same. Hence, this ground of appeal raised by the revenue is dismissed. 29. Ground No. 2 pertains to the disallowance u/s.14A where the Revenue contends that though there are investment income from which it does not form part of the total income, the ld. DRP has erred in directing the AO to delete the said disallowance. 30. The ld. DR relied upon the decision of Special Bench in the case of Cheminvest Limited vs. CIT [2015] 378 ITR 33, wherein it was held that disallowance is warranted u/s. 14A even in case where the assessee has not earned exempt income. The ld. DR relied on the CBDT Circular No. 5/2014 dated 11.02.2014 and the amendment brought about in April 2022. The ld. AR for the assessee controverted the same by stating that the said amendment has been held to be prospective in nature. The ld. AR also contended that the decision of Cheminvest Ltd. (supra) was reversed by the Hon'ble High Court. The ld. DR relied on decision of Cheminvest Limited (supra), which was overruled by the decision of the Hon’ble High Court in CIT vs. Corrtech Energy (P) Ltd. [2014] 223 Taxmann 130 (Guj.) and the decision of Hon’ble Allahabad High Court in CIT, Kanpur v. Shivam Motors (P) Ltd. (decision dated 5th May 2014 in ITA No. 88/2014) and CIT vs. Delite Enterprises (Bom) in ITA No. 110 of 2009 dt. 26.02.2009, wherein it was held that when there is no exempt income and no claim for exemption, no disallowance u/s. 14A read with rule 8D is warranted. We are hereby inclined to dismiss this ground of appeal raised by the Revenue, considering the fact that the assessee has not earned any exempt income during the impugned year. Hence, this ground of appeal raised by the Revenue is dismissed. 21 ITA Nos. 1 9 1 7 / M / 2 0 1 6 & 1 5 7 7 / M / 2 0 1 6 ( A . Y . 2 0 1 1 - 1 2 ) M/s. Capgemini India Pvt. Ltd. 31. Ground No. 3 relates to the treatment of government grant receipt as ‘capital receipt’. It is observed that the assessee has received miscellaneous income in the form of capital subsidy received from the government of Andhra Pradesh, which was treated as ‘revenue receipt’ by the AO and subjected to tax. The assessee contended that the same was in the nature of ‘capital receipt’, as it was received as government grant and further stated that the coordinate bench in assessee’s case for A.Y. 2009-10 has decided this issue in favour of the assessee, by treating the same as ‘capital receipt’. The ld. DRP has followed the said decision in ITA No. 540 Mum/2014 dated 21.11.2014 and has held that the grant received from the government of Andhra Pradesh is to be treated as ‘capital receipt’. 32. From the above observation, we are of the considered view that the said receipt in the form of capital subsidy received from the government of Andhra Pradesh was to be treated as ‘capital receipt’ and we are not inclined to deviate from the view that was taken by the co-ordinate bench for A.Y.2009-10. Hence, this ground of appeal raised by the Revenue is dismissed. 33. Ground Nos. 4 & 5 are general in nature and requires no adjudication. 34. In the result, the appeal filed by the Revenue in ITA No.1917/Mum/2016 is dismissed. Order pronounced in the open court on 23.02.2023 Sd/- Sd/- (Om Prakash Kant) (Kavitha Rajagopal) Accountant Member Judicial Member Mumbai; Dated : 23.02.2023 22 ITA Nos. 1 9 1 7 / M / 2 0 1 6 & 1 5 7 7 / M / 2 0 1 6 ( A . Y . 2 0 1 1 - 1 2 ) M/s. Capgemini India Pvt. Ltd. Roshani, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT - concerned 5. DR, ITAT, Mumbai 6. Guard File BY ORDER, (Dy./Asstt. Registrar) ITAT, Mumbai