Agilent Technologies (International) Pvt. Ltd., Gurgaon V. ITO, Gurgaon

ITA 1620/DEL/2015

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3545 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-02-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 12-06-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 20-03-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: H K CHAUDHARY
• Keywords: Related party transaction; Transfer pricing; International transaction; Question of law; Wholly owned subsidiary
• Section: 92B; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH A NEW DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI O. P. KANT, ACCOUNTANT MEMBER I.T.AS. NO.1620/DEL/2015, 477 & 6420/DEL/2016 ASSESSMENT YEARS: 2010-11, 2011-12 & 2012-13 AGILENT TECHNOLOGIES (INTERNATIONAL) PVT. LTD., PLOT NO. CP-11, SECTOR-8, IMT MANESAR, GURGAON. VS. ITO, WARD-1(1), GURGAON. TAN/PAN: AADCA4115C (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI KAMAL SAWHNEY, ADV. RESPONDENT BY: SHRI H. K. CHAUDHARY, CIT(DR) DATE OF HEARING: 14 11 2017 DATE OF PRONOUNCEMENT: 12 02 2018 O R D E R PER AMIT SHUKLA, J.M.: THE AFORESAID APPEALS HAVE BEEN FILED BY THE ASSESS EE AGAINST SEPARATE IMPUGNED FINAL ASSESSMENT ORDERS D ATED 20.02.2015, PASSED IN PURSUANCE OF DIRECTION GIVEN BY DRP FOR THE ASSESSMENT YEAR 2010-11; FINAL ASSESSMENT O RDER 20.12.2015 PASSED U/S.143(3)/144C FOR THE ASSESSMEN T YEAR 2011-12; AND ORDER DATED 30.11.2016 PASSED U/S.143/ 144C FOR THE ASSESSMENT YEAR 2012-13. 2. SINCE, THE ISSUES INVOLVED IN ALL THE APPEALS AR E COMMON ARISING OUT OF IDENTICAL SET OF FACTS, THERE FORE, SAME WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY WA Y OF THIS I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 2 CONSOLIDATED ORDER. WE SHALL FIRST TAKE UP THE APPE ALS FOR THE ASSESSMENT YEAR 2010-11, ITA NO.1620/DEL/2015, WHER EIN THE ASSESSEE HAS CHALLENGED TRANSFER PRICING ADJUST MENT OF INTERNATIONAL TRANSACTIONS MADE BY THE TRANSFER PRI CING OFFICER/ASSESSING OFFICER ON FOLLOWING PROVISION OF SERVICES:- (I) ON ACCOUNT OF IT ENABLE SERVICES (ITES SEGMENT)- RS.16,67,89,267/-; (II) ON ACCOUNT INFORMATION TECHNOLOGY SERVICES (IT SEGMEN T)- RS. 2,62,12,557/-; AND (III) ON ACCOUNT OF RECEIVABLES- RS.48,33,838/- 3. THE BRIEF FACTS AND BACKGROUND OF THE CASE ARE T HAT THE ASSESSEE-COMPANY IS A 100% SUBSIDIARY OF AGILE NT TECHNOLOGIES INTERNATIONAL EUROPE, BV, WHICH IN TU RN IS A WHOLLY SUBSIDIARY OF AGILENT, TECHNOLOGIES, INC. U SA. THE ASSESSEE- COMPANY WAS SET UP UNDER STPI SCHEME OF T HE GOVERNMENT OF INDIA AND HAD COMMENCED ITS OPERATION IN THE YEAR 2002. IT IS MAINLY ENGAGED IN THE PROVIDING SO FTWARE DEVELOPMENT SERVICES (IT) AND INFORMATION TECHNOLOG Y ENABLED SERVICES (ITES) TO ITS ASSOCIATED ENTERPRISES (AES) . IN THE TRANSFER PRICING STUDY REPORT THE ASSESSEE HAS HIGH LIGHTED FOLLOWING BROAD SERVICES UNDER BOTH THE SEGMENTS:- IT-ENABLED DIVISION: THE SERVICES PROVIDED BY THIS DIVISION INCLUDE THE FOLLOWING:- FINANCE BACK OFFICE SUPPORT: THESE SERVICES INVOLVE INTERNAL FINANCIAL TRANSACTION PROCESSING INCLUDING PROCESSI NG FOR SALES ACCOUNTING AND VENDORS PAYABLES. IT-SUPPORT AND NETWORK MANAGEMENT: THE SCOPE OF TH ESE I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 3 SERVICES INCLUDES PROVIDING KNOWLEDGE MANAGEMENT FO R ENGINEERING DESIGNS AND NETWORK MANAGEMENT FOR THE WIRELESS NETWORK SOLUTIONS BUSINESS OF AGILENT US. THE IT-ENABLED SERVICES TEAM OF ATI COMPRISES OF 1, 075 PEOPLE. SOFTWARE DEVELOPMENT DIVISION:- THE NATURE OF SERVICES RENDERED BY THE SOFTWARE DEVELOPMENT DIVISION IS AS UNDER:- SOFTWARE DEVELOPMENT SERVICES - ATI IS ENGAGED IN DEVELOPMENT OF MODULES AS WELL AS PARTS OF MODULES FOR SOFTWARE BEING USED BY ITS OVERSEAS GROUP ENTITIES IN THEIR PRODUCTS. THE COMPANY ALSO UNDERTAKES TESTING OF MO DULES DEVELOPED BY IT; AND MAINTENANCE SUPPORT SERVICES - THIS INCLUDES BUG FI XING, CARRYING ON MAINTENANCE AND SUPPORT SERVICES ON SOF TWARE USED ON PRODUCTS DEVELOPED BY GROUP ENTITIES. THE SOFTWARE DEVELOPMENT TEAM OF ATI COMPRISES OF O VER 174 EMPLOYEES. THESE EMPLOYEES ARE MOSTLY ENGINEERS (B. ES/ B.TECHS / M.TECHS). 4. THE PARENT COMPANY, AGILENT US IS A LEADING MEASUREMENT COMPANY PROVIDING CORE BIO-ANALYTICAL A ND ELECTRONICS MEASUREMENT SOLUTIONS TO THE COMMUNICAT IONS, ELECTRONICS, LIFE SCIENCE AND CHEMICAL ANALYSIS IND USTRIES. SINCE ASSESSEE WAS A CAPTIVE SERVICE PROVIDER, TH EREFORE, IT HAD A LIMITED RISK AND WAS COMPENSATED ON COST PLUS MARKUP BASIS. UNDER THE SOFTWARE SEGMENT DEVELOPMENT, THE DETAIL FUNCTIONS PERFORMED BY THE ASSESSEE AS NOTED BY THE TPO WERE AS UNDER:- 5.1 FUNCTIONS PERFORMED BY AGILENT TECHNOLOGIES (IN TERNATIONAL) PRIVATE LIMITED:- STRATEGIC MANAGEMENT FUNCTIONS: AES OF ATI ARE RESPONSIBLE FOR DETERMINING THE OVER ALL STRATEGY FOR I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 4 THE GROUP WHILE ATI MANAGES THE DAY TO DAY BUSINESS . CORPORATE SERVICES FUNCTIONS: ATI IS RESPONSIBLE FOR HUMAN RESOURCES, FINANCIAL M ANAGEMENT AND ROUTINE ADMINISTRATION ACTIVITIES. HOWEVER, FOR FUN CTIONS LIKE PERSONNEL MANAGEMENT AND CONTROLLERSHIP BOTH AE AND ATI ARE INVOLVED. CODING AND DOCUMENTATION OF SOFTWARE ATI UNDERTAKES THE CODING AND DOCUMENTATION FUNCTIO N WITH RESPECT TO THE SOFTWARE MODULES THAT IT DEVELOPS. ATI RECEI VES TECHNICAL ASSISTANCE, IF REQUIRED FROM ITS AES DURING THE COD ING AND DOCUMENTATION FUNCTION. ATI IS CONCERNED WITH DEVEL OPMENT OF MODULES OF THE SOFTWARE FOR INTERNAL USAGE BY AES. THE AES SUPERVISE AND MANAGE THE CODING AND DOCUMENTATION F UNCTION BEING PERFORMED BY ATI. THE DESIGN AND DEVELOPMENT FUNCTION IS UNDERTAKEN B Y ATI PERTAINING TO A PARTICULAR MODULE BASED ON THE SPEC IFICATIONS PROVIDED BY AES. THE ULTIMATE RESPONSIBILITY FOR UN DERTAKING THE CODING AND DOCUMENTATION FUNCTION FOR THE COMPLETE SOFTWARE PRODUCT RESTS WITH ITS AES. AND IN THE ITES, THE FUNCTIONS PERFORMED BY THE AS SESSEE WAS AS UNDER:- 5.4 FUNCTIONS PERFORMED BY THE TAXPAYER W.R.T. THE ITES SEGMENT ARE:- STRATEGIC MANAGEMENT FUNCTIONS: AGILENT US DETERMINES THE OVERALL STRATEGY FOR THE GROUP. ATI IS RESPONSIBLE FOR ONLY DAY TO DAY MANAGEMENT ACTIVITI ES. CORPORATE SERVICES: ATI IS RESPONSIBLE FOR FINANCIAL MANAGEMENT AND ROU TINE ADMINISTRATION ACTIVITIES. HOWEVER, FOR FUNCTIONS L IKE PERSONNEL MANAGEMENT AND CONTROLLERSHIP, BOTH AGILENT US AND ATI ARE INVOLVED. MARKETING AND BUSINESS DEVELOPMENT: BEING A CAPTIVE UNIT FOR ITS AES, ATI DOES NOT UNDE RTAKE ANY MARKETING OR BUSINESS DEVELOPMENT FUNCTIONS. IT ONL Y RENDERS I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 5 SERVICES TO ITS GROUP COMPANIES AS PER SPECIFICATIO NS PROVIDED BY THEM. FURTHER, SERVICES OF ATI ARE NOT REQUIRED TO BE SOLD TO END CUSTOMERS, HENCE, ATI IS AN IN-HOUSE SERVICE PR OVIDER AND THE SERVICES ARE PURELY IN THE NATURE OF ROUTINE BA CK OFFICE WORK. CONCEPTUALIZATION OF SERVICES: AGILENT US IS RESPONSIBLE FOR CONCEPTUALIZATION OF SERVICES TO BE RENDERED BY ATI. EXECUTION OF SERVICES: PURSUANT TO THE ASSIGNMENT OF AGREED SERVICES, ATI IS RESPONSIBLE FOR RENDERING SUCH SERVICES ACCORDING T O PRE- DETERMINED TERMS AND CONDITIONS INCLUDING MAINTENAN CE OF APPROPRIATE DOCUMENTATION WITH REGARD TO THE SAME. PERFORMANCE/QUALITY ASSURANCE: WITH RESPECT TO THE SERVICES RENDERED, ATI IS RESPO NSIBLE FOR ENSURING THAT THE REQUISITE QUALITY/ PERFORMANCE ST ANDARDS PRESCRIBED BY AGILENT US ARE MET WHILE RENDERING SE RVICES. IN THE EVENT OF A QUALITY FAILURE, ATI MAY BE ASKED TO REWORK THE SAME. HOWEVER, THE COSTS RELATED TO ANY REWORK/REPL ACEMENT ARE ALSO MARKED UP AND RECOVERED FROM AGILENT US. HUMAN RESOURCES: ATI UNDERTAKES THE RECRUITMENT, HIRING AND TRAINING PROCESS AND IS RESPONSIBLE FOR DAY-TO-DAY SUPERVISION AND C ONTROL OF ITS EMPLOYEES. 5. THE OPERATING REVENUES, OPERATING EXPENSES AND OPERATING PROFIT FOR THE PURPOSE OF BENCH MARKING U NDER BOTH THE SEGMENTS WERE REPORTED AS UNDER:- PARTICULARS SOFTWARE DEVELOPMENT RS. ITES RS. OPERATING REVENUES 34,71,18,799 166,69,66,444 OPERATING EXPENSES 30,47,10,542 143,76,75,979 OPERATING PROFIT 4,24,08,257 22,92,90,465 NCP (PERCENT) 13.92 15.95 I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 6 6. THE ASSESSEE ADOPTED TNMM AS THE MOST APPROPRIAT E METHOD AND USING DATA FOR THE FINANCIAL YEAR 2009-1 0, IT HAS CHOSEN 23 COMPARABLES FOR THE SOFTWARE DEVELOPMENT SEGMENT AND 11 COMPARABLES UNDER AN ITES SEGMENT. THE AVERA GE MARGIN OF THE COMPARABLES SELECTED FOR THE SOFTWARE DEVELOPMENT SERVICES WAS ARRIVED AT 11.52 %, WHEREA S IN THE ITES SEGMENT IT WAS ARRIVED AT 12.17%. HOWEVER, THE TPO REJECTED THE ASSESSEES BENCH MARKING PROCESS AND S ELECTED HIS OWN SET OF COMPARABLES AND SHORTLISTED 17 COMPA RABLES FOR THE SOFTWARE DEVELOPMENT SEGMENT, WHEREIN THE A VERAGE ARITHMETIC MEANS WAS ARRIVED AT 22.74% AND THEREBY MADE TRANSFER PRICING ADJUSTMENT OF RS.2,68,82,920/-. SIM ILARLY IN THE ITES SEGMENT, HE SELECTED 9 COMPARABLE COMPANIE S WITH AN AVERAGE ARITHMETIC MEAN OF 27.94% AND THEREBY MA KING AN ADJUSTMENT OF RS.17,23,96,204/-. 7. THOUGH ASSESSEE IS AGGRIEVED BY VARIOUS INCLUSION/EXCLUSION OF COMPARABLE COMPANIES, HOWEVE R, LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN THE ITES SEGMENT IF TWO COMPARABLES; NAMELY, TCS E-SERVE LTD . AND ACCENTIA TECHNOLOGIES LTD. ARE EXCLUDED THEN ASSESSEES MARGIN WILL BE WITHIN THE ARMS LENGTH RANGE; AND T HEN ADJUDICATION OF OTHER COMPARABLES WILL BECOME PUREL Y ACADEMIC. AS AN ALTERNATIVE, HE ALSO SUBMITTED THAT TCS E- SERVE INTERNATIONAL LTD. AND INFOSYS BPO LTD., SHOULD ALSO BE EXCLUDED AND PLEADED FOR EXCLUSION OF ONE COMPARABL E COMPANY, I.E., R SYSTEMS INTERNATIONAL LTD. REGARDI NG THE I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 7 EXCLUSION OF AFORESAID COMPARABLES AND INCLUSION OF R SYSTEMS INTERNATIONAL LTD., LEARNED COUNSEL SUBMITT ED THAT, ALL THESE COMPARABLES HAD COME UP FOR CONSIDERATION BEFORE THIS TRIBUNAL ON NUMEROUS OCCASIONS IN VARIOUS CASE S, WHEREIN THESE COMPANIES HAD BEEN HELD TO BE INCOMPA RABLE WITH THE COMPANIES WHICH ARE CAPTIVE SERVICES PROVI DER AND PROVIDING SIMPLY IT ENABLED SERVICES. NOW WE SHALL TAKE UP THE TWO COMPARABLES FIRST UNDER THE ITES SEGMENT, W HICH ASSESSEE HAS PLEADED FOR EXCLUSION. ITES SEGMENT:- I) TCS E-SERVE LTD . 8. LEARNED COUNSEL SUBMITTED THAT ON FAR ANALYSIS, THIS COMPANY CANNOT BE HELD TO BE COMPARABLE WITH THE AS SESSEE DUE TO INCOMPARABLE SCALE OF OPERATIONS, PAYMENT FO R BRAND EQUITY AND PRESENCE OF INTANGIBLES, ETC. IT WAS FUR THER POINTED OUT THAT THIS COMPANY IS ENGAGED IN SERVICES LIKE, SOFTWARE TESTING, VERIFICATION AND VALIDATION AND DATA CENTR E MANAGEMENT SERVICES WHICH FALL UNDER SOFTWARE DEVEL OPMENT SERVICES WHICH ARE DIFFERENT FROM LOW END AND LOW R ISK ITES SEGMENT. IN ABSENCE OF AVAILABILITY OF SEGMENTAL AC COUNTS, IT CANNOT BE HELD TO BE FUNCTIONALLY COMPARABLE TO THE ITES SEGMENT OF THE ASSESSEE. IN SUPPORT OF HIS CONTENTI ON, HE STRONGLY RELIED UPON THE DECISION OF THE TRIBUNAL I N THE CASE OF BC MANAGEMENT SERVICES PVT. LTD. VS. DCIT, ITA NOS.5829 & 6134/DEL/2015, WHEREIN THIS TRIBUNAL HAS ANALYZED TCS E-SERVE LTD. WITH THOSE OF CAPTIVE SERVICES PROVIDE R COMPANIES I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 8 ON VARIOUS COUNTS. APART FROM THAT IN THE FOLLOWING DECISIONS ALSO THIS COMPARABLE COMPANY HAS BEEN CONSIDERED AN D REJECTED FOR THE PURPOSE OF COMPARABILITY ANALYSIS WITH THE ITES COMPANIES PROVIDING BACK OFFICE SUPPORT SERVIC ES:- (I) ACTIS GLOBAL SERVICE PVT. LTD. VS. PR.CIT, NEW DELH I, ITA NO.94/2017 DELHI HIGH COURT; (II) EQUANT SOLUTIONS INDIA PVT. LTD. VS. DCIT, ITA NO.1202/DEL/2015. (III) AMERIPRISE INDIA PVT. LTD., ITA NO.7014/DEL/2014 (IV) TECHBOOK INTERNATIONAL PVT. LTD. VS. DCIT, (2015) 6 3 TAXMANN.COM 114. (V) BECHTEL INDIA PVT. LTD. IN ITA NO. 1478/DEL/2015. LEARNED COUNSEL BROUGHT TO OUR NOTICE THAT IN THE C ASE OF AMERIPRISE (SUPRA), THE DECISION OF THE TRIBUNAL HA S BEEN UPHELD BY THE HON'BLE DELHI HIGH COURT. APART FROM THE ABOVE, LEARNED COUNSEL FURTHER HIGHLIGHTED THE INCOMPARABILITY OF SCALE OF OPERATIONS, PRESENCE OF INTANGIBLES AND BRAND EXPENDITURE VIS-A-VIS THE ASSESSEE AND TC S E- SERVE BY WAY OF FOLLOWING CHART:- PARTICULARS AGILENT INTERNATIONAL TCS E - SERVE FY 2009 - 10/AY 2010 - 11 FY 2009 - 10/AY 2010 - 11 TURNOVER INR 201.81 CRORES INR 1440.71 CRORES EMPLOYEE COST INR 100.80 - CRORES INR 548.61 CROR ES INTANGIBLES NIL INR 3.92 CRORES BRAND EXPENDITURE NIL INR 4.20 CRORES I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 9 THUS HE SUBMITTED THAT THIS COMPARABLE COMPANY SHOU LD BE DIRECTED TO BE EXCLUDED. 9. ON THE OTHER HAND, LD. CIT-DR SUBMITTED THAT TURNOVER AND SIZE CANNOT BE THE BASIS FOR REJECTION OF A COMPARABLE COMPANY WHICH OTHERWISE IS FUNCTIONALLY COMPARABLE, BECAUSE ASSESSEES TURNOVER IS RS. 201 CRORES, WHEREAS TCS TURNOVER IS AT RS.1440 CRORE. THERE CAN NOT BE ANY LIMIT PROVIDED FOR TURNOVER IF FILTER IS NOT AP PLIED, SO AS TO DETERMINE THE PROFIT MARGIN. AS REGARDS THE BRAND V ALUE CONTRIBUTION BY TCS E- SERVE TO TATA, HE POINTED OU T THAT IT IS MERELY AT RS.4.2 CRORE AND IT CANNOT BE SAID TO BE HUGE CONTRIBUTION. WHAT IS REQUIRED TO BE SEEN IS THE PR ICING NEGOTIATION WHEN THE CONTRACT WAS ENTERED INTO WITH THE CITY GROUP BY THE TCS E-SERVE LTD, BECAUSE TCS E SERVE L TD. WAS MAINLY SERVING TO CITY GROUP WHICH IS ITS LARGEST S INGLE CUSTOMER, AND IN SUCH A SITUATION BRAND TATA IS NOT EFFECTING THE REVENUE OR PROFITABILITY. TCS E-SERVE LTD. IS N OT OWNING ANY INTANGIBLE IN THE FORM OF ANY OWN SOFTWARE DEVE LOPED BY IT. OTHERWISE, THE ENTIRE FUNCTION OF TCS E-SERVE L TD. IS PURELY ITES SERVICE ONLY; AND HENCE, SAME CANNOT BE HELD T O BE INCOMPARABLE. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDER FOR EXCLUSION OF TCS E-SERVE LTD. AS DISCUSSED ABOVE, T HE ASSESSEE IS A CAPTIVE SERVICE PROVIDER WHICH IS PRO VIDING BACK I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 10 OFFICE SUPPORT LIKE, INTERNAL TRANSACTION PROCESSIN G INCLUDING PROCESSING FOR SALES, ACCOUNTING AND VENDOR PAYABLE S; AND IT SUPPORT AND NETWORK MANAGEMENT LIKE PROVIDING KNOWL EDGE MANAGEMENT FOR ENGINEER DESIGNS AND NETWORK MANAGEM ENT FOR THE WIRELESS NETWORK SOLUTION OF AGILENT US. TH E TCS E- SERVE IS TOO ENGAGED IN PROVIDING IT SERVICES PRIMA RILY TO CITY GROUP ENTITIES GLOBALLY. APART FROM THAT, TCS E- SE RVE PROVIDES TECHNICAL SERVICES INVOLVING SOFTWARE TEST ING, VERIFICATION AND VALIDATION OF SOFTWARE AT THE TIME OF IMPLEMENTATION AND DATA MANAGEMENT ACTIVITIES WHICH OSTENSIBLY CANNOT BE HELD TO BE PURELY BACK OFFICE SUPPORT SERVICES. THERE IS NO SEGMENTAL BIFURCATION BETWEEN THE TRANSACTION PROCESSING AND TECHNICAL SERVICES. FURT HER TCS E- SERVE IS A SUBSIDIARY OF TCS LTD., WHICH IS ONE OF THE FOREMOST AND EMINENT COMPANY OF TATA GROUP, WHICH INHERENTLY HAS AN ELEMENT OF HUGE BRAND VALUE ASSOCIATE WITH IT, WHIC H TENDS TO INFLUENCE THE PRICING POLICY AND THEREBY DIRECTLY I MPACTING THE MARGINS EARNED BY THE COMPANY. APART FROM THE SIZE OF THE COMPANY, HUGE TURNOVER DO REFLECT THAT THE ASSETS D EPLOYED BY THE TCS E-SERVE IS FAR MORE THAN THE ASSESSEE. IN T HE CASE OF BC MANAGEMENT SERVICE PVT. LTD. (SUPRA), THIS TRIBU NAL HAS EXCLUDED TCS E-SERVE WITH THE SIMILAR ITES COMPANIE S AFTER OBSERVING AND HOLDING AS UNDER:- 18. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE RELEVANT FINDING GIVING IN THE IMPUGNED ORDERS AS W ELL AS THE MATERIAL PLACED ON RECORD. ONE OF THE MAIN POINTS O F DISTINCTION WHICH IS QUITE OSTENSIBLE IS THAT THE TCS E-SERVE IS A SUBSIDIARY OF TATA CONSULTANCY SERVICES LIMITED, WHICH IS ONE OF THE I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 11 LEADING AND GIANT COMPANY IN THE WORLD AND HAS AN I NHERENT ELEMENT OF VERY HIGH BRAND VALUE ASSOCIATED WITH IT . SUCH A HIGH BRAND VALUE DEFINITELY HAS AN IMPACT ON THE PRICING POLICY, NICHE MARKET, CONTRACTUAL TERMS, ETC. AND THEREBY AFFECTI NG THE PROFIT MARGINS. ANNUAL REPORT OF THIS COMPANY REFLECTS THA T HUGE PAYMENTS HAVE BEEN MADE BY TCS E-SERVE TO TCS LIMIT ED FOR THE USE OF THE BRAND AS A ROYALTY. THIS FACT ITSE LF SHOWS THE EFFECT OF BRAND VALUE IN THE PRICING MECHANISM. ON A FURTHER ANALYSIS IT IS SEEN THAT THE EMPLOYEE COST BASE IS MORE THAN 64 TIMES THAN THE ASSESSEE AND EVEN THE TURNOVER IS AL SO MORE THAN 67 TIMES AS COMPARED TO THE ASSESSEE. THIS ONLY GOE S TO SUGGEST THAT ASSETS EMPLOYED BY TCS E-SERVE ALONG WITH HUG E INTANGIBLES IN THE FORM OF BRAND VALUE DEFINITELY H AS A HUGE EFFECT IN PLI AND VITIATES THE COMPARABILITY UNDER FAR ANALYSIS WITH A COMPANY LIKE ASSESSEE WHICH IS A CAPTIVE SER VICE PROVIDER WITHOUT MUCH INTANGIBLES AND RISKS. ANOTHER IMPORTA NT THING WHICH HAS BEEN POINTED OUT BY LEARNED COUNSEL IS TH AT, THE OPERATION OF TCS E-SERVE BROADLY COMPRISE OF TRANSA CTION PROCESSING AND TECHNICAL SERVICES INCLUDING SOFTWAR E TESTING, VERIFICATION AND VALIDATION FOR WHICH NO SEGMENTAL BIFURCATION IS AVAILABLE. IN ABSENCE OF SUCH VITAL INFORMATION OF THE MARGINS OF SUCH VARIED SEGMENTS IT BECOMES QUITE DIFFICULT TO PUT SUCH COMPANY IN THE COMPARABILITY BASKET SO AS TO BENCH MARK THE CORRECT PROFIT MARGIN. ALL THE AFORESAID FACTORS HA VE BEEN HELD SO IN VARIOUS DECISIONS OF THIS TRIBUNAL IN SEVERAL CA SES AS RELIED UPON BY THE LD. COUNSEL, INCLUDING THE DECISION OF AMRIPRISE INDIA PRIVATE LIMITED (SUPRA). THUS, IN OUR OPINION TCS E-SERVE CANNOT BE HELD TO BE A GOOD COMPARABLE FOR THE PURP OSE OF BENCH MARKING THE ASSESSEES PLI AND ACCORDINGLY, WE DIRE CT THE LD. AP/TPO TO EXCLUDE TCS E-SERVE FROM THE COMPARABILIT Y LIST. I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 12 11. APART FROM THAT IN OTHER DECISIONS RELIED UPON BY THE LEARNED COUNSEL, INCLUDING THAT HONBLE DELHI HIGH COURT IN ACTIS GLOBAL SERVICE PVT. LTD. VS. PR. CIT IN ITA. 94/2017, WE FIND THAT ON SIMILAR POINT OF DISTINCTION, TCS E-SE RVE HAS HELD TO BE INCOMPARABLE. THUS, WE HOLD THAT TCS E-SERVE CANNOT BE HELD TO BE COMPARABLE WITH THAT OF THE ASSESSEE FOR BENCH MARKING THE PROFIT MARGIN. II) ACCENTIA TECHNOLOGY PVT. LTD. 12. ONE OF THE MAIN ARGUMENT RAISED BY THE ASSESSEE BEFORE THE TPO AS WELL AS BEFORE US IS THAT, THERE WAS AN AMALGAMATION OF ASSCENT INFOSERVE PVT. LTD. WITH A CCENTIA TECHNOLOGY PVT. LTD. DURING THE FINANCIAL YEAR 2010 -11, WHICH WAS SANCTIONED BY THE HON'BLE HIGH COURT ON 21.08.2 009. IN THE LIGHT OF THE EXTRAORDINARY EVENT DURING SUCH RE LEVANT ASSESSMENT YEAR, THIS COMPANY CANNOT BE HELD TO BE COMPARABLE, BECAUSE IT LEADS TO DISTORTION OF THE P ROFIT OF THE COMPANY. LEARNED COUNSEL SUBMITTED THAT PRECISELY O N THE SAME GROUND IN THE CASE OF AMERIPRISE INDIA PVT. LT D. VS. DCIT, THIS COMPANY WAS DIRECTED TO BE EXCLUDED. HE SUBMITTED THAT THIS DECISION OF THE TRIBUNAL HAS BE EN UPHELD BY THE HON'BLE JURISDICTIONAL HIGH COURT. SIMILARLY IN THE OTHER TRIBUNALS DECISION LIKE: (I) EQUANT SOLUTIONS INDIA PVT. LTD. VS. DCIT, (2016) 1 57 ITD 292 (DEL. TRIB); I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 13 (II) TECHBOOK INTERNATIONAL PVT. LTD. VS. DCIT, CIRCLE-3 , (ITA NO.240/DEL/2015; (III) FLEXTRONICS TECHNOLOGIES INDIA PVT. LTD. (ITA NO.64 9/BANG/2015 & ITA NO.98/BANG/2015) 13. LD. COUNSEL FURTHER SUBMITTED THAT, THE ACCENTI A HAS BEEN EXCLUDED FOR THE REASON THAT ITS KEY SERVICES ARE IN THE HEALTHCARE SECTOR BY WAY OF SOFTWARE FOR SERVICE ON SAAS MODEL AND THERE IS NO SEGMENTAL DETAILS OF SOFTWARE DEVELOPMENT DIVISION. 14. ON THE OTHER HAND, LEARNED DEPARTMENT REPRESENTATIVE RELIED UPON THE ORDER OF THE TPO AND SUBMITTED THAT THE EFFECT OF THE AMALGAMATION ON TH E PROFITABILITY HAS NOT BEEN SHOWN, AND THEREFORE, TH IS CANNOT BE THE FACTOR FOR REMOVING THIS COMPANY FROM THE COMPARABILITY LIST. 15. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDER AS WELL AS THE MATERIAL PLACED ON RECORD. IT IS AN ADM ITTED FACT THAT ACCENTIA TECHNOLOGY LTD. HAD AN EXTRAORDINARY EVENT DURING THE YEAR AS THERE WAS AN AMALGAMATION OF ASS CENT INFOSERVE PVT. LTD. DURING THE RELEVANT FINANCIAL Y EAR. SUCH AN EXTRA ORDINARY EVENT OF MERGER OR AMALGAMATION DEFI NITELY HAS AN IMPACT ON THE PROFITS WHICH HAS BEEN WELL SETTLE D BY THE VARIOUS TRIBUNALS THAT IF THERE IS ANY EXTRAORDINAR Y EVENT LIKE MERGER, ACQUISITION, ETC. THEN SAID COMPARABLE COMP ANY CANNOT BE TAKEN FOR THE PURPOSE OF COMPARABILITY AN ALYSIS. I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 14 APART FROM THIS FACT, ACCENTIA RENDERS KEY SERVICES IN THE HEALTHCARE SECTOR FROM THE SOFTWARE AS SAAS MODEL W HICH ENABLES IT FOR MANAGING OF HEALTHCARE DOCUMENTATION NEEDS, RECEIVABLE MANAGEMENT NEEDS, PERFORMANCE TRACKING A ND REPORTING ETC. AND IT IS ALSO ENGAGED IN DEVELOPING AND DESIGN A CLOUD BASED POSTED APPLICATION WHICH ARE IN THE N ATURE OF SOFTWARE SUPPORT SERVICES. ALL THESE FUNCTIONS DEFI NITELY CANNOT BE HELD TO BE SIMILAR WITH THOSE OF THE FUNC TIONS CARRIED OUT OF BACK OFFICE SUPPORT SERVICES BY THE ASSESSEE. IN ANY CASE, ON THE GROUND OF MERGER BY WAY OF AMALGAM ATION DURING THE YEAR OF A COMPANY WITH ACCENTIA, WHICH F ACTOR HAS BEEN THE BASIS FOR EXCLUSION BY THIS TRIBUNAL IN SE RIES OF JUDGMENT AS REFERRED BY THE LD. COUNSEL, WE HOLD TH AT THIS FACTOR ALONE CALLS FOR EXCLUSION FOR THE PURPOSE OF COMPARABILITY ANALYSIS. THUS, WE DIRECT THE EXCLUSI ON OF ACCENTIA TECHNOLOGIES LTD. FROM THE COMPARABILITY L IST. 16. SINCE THE LEARNED COUNSEL HAS SUBMITTED THAT, I F TCS E- SERVE LTD. AND ACCENTIA TECHNOLOGY LTD. ARE EXCL UDED THEN AVERAGE MARGIN OF THE COMPARABLES WOULD COME DOWN T O 21.15%, WHEREAS ASSESSEES MARGIN 15.95% AND ACCORD INGLY IT WILL FALL WITHIN THE RANGE OF +/- 5%, WHICH COME S TO 21.74%. IN VIEW OF THIS FACTOR, WE ARE NOT ENTERING INTO TH E ADJUDICATION OF OTHER COMPARABLE COMPANIES AS CHALLENGED BY THE ASSESSEE BEFORE US, BECAUSE IT WILL BE PURELY ACADEMIC EXERC ISE. ACCORDINGLY, UNDER THE ITES SEGMENT, WE DIRECT THE TPO TO EXCLUDE THESE TWO COMPARABLES AND IF THE PROFIT MAR GINS ARE I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 15 WITHIN THE ARMS LENGTH RANGE, VIS--VIS, THE COMPA RABLE, THEN NO ADJUSTMENT SHOULD BE MADE. IT SEGMENT (SOFTWARE DEVELOPMENT SERVICES) 17. NOW COMING TO THE IT SEGMENT, THE LEARNED COUNS EL SUBMITTED THAT IN THIS SEGMENT ALSO, IF TWO COMPANI ES, VIZ. E- INFO CHIP BANGALORE LTD. AND INFINITE DATA SOLUTION S ARE EXCLUDED AND ONE COMPARABLE COMPANY VIZ., R INTERNA TIONAL LTD. COMPANY ARE INCLUDED THEN ASSESSEES MARGIN WO ULD BE WITHIN THE ARMS LENGTH RANGE. I) E-INFO CHIP BANGALORE LTD. 18. LEARNED COUNSEL SUBMITTED THAT THIS COMPARABLE COMPANY IS ENGAGED IN RENDERING OF BOTH THE IT AND IT ENABLED SERVICES AND DOES NOT HAVE ANY SEPARATE SEG MENTAL ACCOUNTS AND THIS IS AN UNDISPUTED FACT WHICH IS EV IDENT FROM PAGE 63 OF THE ANNUAL REPORT OF E-INFO CHIPS FOR TH E ASSESSMENT YEAR 2010-11. IN SUPPORT OF HIS CONTENTI ON HE STRONGLY RELIED UPON THE FOLLOWING DECISION OF THE TRIBUNAL IN THE CASE OF HEADSTRONG SERVICES (INDIA) PVT. LTD., ITA NO.714/DEL/2015 WHEREIN TRIBUNAL HAS HELD AS UNDER: - 12.2. AFTER CONSIDERING THE RIVAL SUBMISSION AND P ERUSED THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUA L REPORT OF THIS COMPANY AVAILABLE ON PAGE 352 OF THE PAPER BOO K THAT ITS P & L ACCOUNT SHOWS 'INCOME FROM SOFTWARE SERVICES AS ONE UNIT AT RS. 43,04,66,481/-. SCHEDULES 7 GIVES BREAK UP OF THIS INCOME WITH 'INCOME FROM SOFTWARE SERVICES AT RS. 37.13 CRORE AND CONSULTANCY CHARGES AT RS. 5.90 CRORE. SEGMENTAL I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 16 INFORMATION OF THIS COMPANY IS AVAILABLE ON PAGE 66 OF ITS ANNUAL REPORT WHICH STATES THAT: 'THE COMPANY IS PR IMARILY ENGAGED IN SOFTWARE DEVELOPMENT AND I.T. ENABLED SE RVICES WHICH IS CONSIDERED THE ONLY REPORTABLE BUSINESS SE GMENT. THIS INDICATES THAT THE REVENUE FROM SOFTWARE DEVEL OPMENT AND ITES HAS BEEN CLUBBED BY THIS COMPANY WHICH ALS O INCLUDES CONSULTANCY CHARGES. NO DOUBT CONSULTANCY CHARGES IN RELATION TO SOFTWARE DEVELOPMENT ARE PART OF OVE RALL SOFTWARE DEVELOPMENT, BUT THE INCLUSION OF ITES IN THE OVERALL SEGMENT FRUSTRATES THE COMPARABILITY. WE ARE CURREN TLY DEALING WITH THE INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES AND THE INTERNATIONAL TRANSAC TION OF ITES IS SEPARATE WHICH HAS ALSO BEEN BENCHMARKED DI STINCTLY. IN OUR CONSIDERED OPINION, E-INFOCHIPS BANGALORE LT D. HAVING A POOL OF BOTH SOFTWARE DEVELOPMENTS AND ITES SEGMENT S INTO THE OVERALL SEGMENT DESIGNATED AS 'SOFTWARE DEVELOP MENT, CANNOT BE CONSIDERED AS COMPARABLE ON ENTITY LEVEL WITH THE INTERNATIONAL TRANSACTION OF SOFTWARE DEVELOPMENT OF THE ASSESSEE. WE, THEREFORE, ORDER FOR THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. 19. FURTHER RELIANCE WAS ALSO PLACED ON THE FOLLOWI NG JUDGMENTS:- (I) PEGASYSTEMS WORLDWIDE INDIA PVT. LTD. (ITA NO.1758/HYD/2014). (II) INTOTO SOFTWARE INDIA PVT. LTD. (1921/HYD/2014 & 25/HYD/2015). (III) ALLSCRIPTS INDIA PVT. LTD. (ITA NO.771/AHD/20 14) WHERE IN THESE CASES, ON THIS GROUND ALONE THIS COM PANY WAS DIRECTED TO BE EXCLUDED. 20. ON THE OTHER HAND, LEARNED DR STRONGLY RELIED U PON THE ORDER OF THE TPO AND POINTED OUT THAT E-INFOCHI P BANGALORE LTD. HAS ONLY INCOME FROM SOFTWARE SERVIC ES. THUS, I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 17 IT CANNOT BE HELD THAT ON THIS GROUND THIS COMPANY SHOULD BE EXCLUDED. 21. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDER. FROM THE PERUSAL OF THE DIRECTORS REPORT OF E-INFO CHIPS BANGALORE LTD., IT HAS SEEN THAT IT HAS BEEN REPORT ED THAT THIS COMPANY IS PRIMARILY ENGAGED IN SOFTWARE DEVELOPMEN T AND IT ENABLED SERVICES WHICH IS CONSIDERED AS ONLY REPORT ABLE SEGMENT BUSINESS AS PER ACCOUNTING STANDARD AS-17. THIS DECLARATION ITSELF GOES TO SHOW THAT THIS COMPANY D OES NOT HAVE SEPARATE SEGMENTS FOR SOFTWARE DEVELOPMENT AND ITES OPERATIONS OF THE REVENUE EVEN THOUGH IT MENTIONS I NCOME FROM SOFTWARE SERVICES, BUT IT IS NOT CLEAR AS TO H OW MUCH IS REVENUE IS FROM SOFTWARE DEVELOPMENT AND HOW MUCH I S FROM ITES. ONCE THERE IS NO SEGMENTAL DETAILS AVAILABLE FOR BOTH THE SEGMENTS, THEN IT CANNOT BE HELD THAT ITS PROFIT MA RGIN SHOULD BE BENCH MARK WITH THE PROFIT OF THE ASSESSEE FROM THE SOFTWARE DIVISION. THIS DISTINCTION FOR EXCLUSION O F THE SAID COMPANY HAS BEEN NOTED BY THE TRIBUNAL IN VARIOUS C ASES AS NOTED ABOVE, AND THEREFORE, WE DIRECT THE TPO TO EX CLUDE E- INFOCHIPS BANGALORE. LEARNED COUNSEL SUBMITTED THAT IF THIS COMPANY ALONE IS EXCLUDED THEN AVERAGE ARITHMETIC M EANS OF THE COMPANIES WOULD COME DOWN TO 19.54% AS SELECTED BY THE TPO, WHEREAS THE ASSESSEES MARGIN IS 13.92%, WHICH WOULD BE AT ARMS LENGTH RANGE OF (+)/(-) 5%, WHICH WOULD BE AT 19.62%, THEN IN THAT SITUATION NO ADJUSTMENT WOULD BE REQUIRED. IN VIEW OF THE AFORESAID SUBMISSION OF TH E LEARNED I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 18 COUNSEL, WE DIRECT THE TPO TO WORK OUT THE AVERAGE MEANING OF OTHER COMPARABLES AFTER EXCLUDING E-INFOCHIPS BA NGALORE LTD. 22. THE NEXT ISSUE RAISED BY THE LEARNED COUNSEL BE FORE US IS THAT WORKING CAPITAL ADJUSTMENT SHOULD BE GIVEN AS RAISED BY THE ASSESSEE VIDE GROUND NO.5. HE SUBMITTED THAT TPO HAS REFUSED TO GIVE WORKING CAPITAL ADJUSTMENT ON THE G ROUND THAT IT IS NOT RELEVANT TO THE SERVICE INDUSTRY. THIS PR OPOSITION OF TPO, HE PLEADED THAT, IS NOT THE CORRECT PROPOSITIO N AND NOW THIS ISSUE THAT WORKING CAPITAL ADJUSTMENT IS TO AL LOWED EVEN FOR THE SERVICE INDUSTRY HAS BEEN SETTLED IN FAVOUR OF THE ASSESSEE BY THE DECISION IN THE CASE OF SONY MOBILE COMMUNICATIONS INTERNATIONAL AB (ITA NO.769/DEL/201 4 WHEREIN IT HAS BEEN OBSERVED AND HELD AS UNDER:- 9.3 WE ARE NOT INCLINED TO ACCEPT THE VIEW CANV ASSED BY THE AUTHORITIES THAT THE WORKING CAPITAL ADJUSTMENT CAN NOT BE ALLOWED AS THE ASSESSEE IS IN SERVICE INDUSTRY. SUCH AN ADJUSTMENT IS RESTRICTED TO INVENTORY, TRADE RECEIV ABLES AND TRADE PAYABLES. IF A COMPANY CARRIES HIGH TRADE REC EIVABLES, IT WOULD MEAN THAT IT IS ALLOWING ITS CUSTOMERS RELATI VELY LONGER PERIOD TO PAY THEIR DUES, WHICH WILL RESULT INTO HI GHER INTEREST COST AND THE RESULTANT LOW NET PROFIT. SIMILARLY, B Y CARRYING HIGH TRADE PAYABLES, A COMPANY BENEFITS FROM A RELA TIVELY LONGER PERIOD AVAILABLE TO IT FOR PAYING BACK THE D UES TO ITS SUPPLIERS, WHICH REDUCES THE INTEREST COST AND INCR EASES PROFITS. IN ORDER TO NEUTRALIZE THE DIFFERENCES ON ACCOUNT OF CARRYING HIGH OR LOW INVENTORY, TRADE PAYABLES AND TRADE I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 19 RECEIVABLES, AS THE CASE MAY BE, IT BECOMES EMINENT TO ALLOW WORKING CAPITAL ADJUSTMENT SO AS TO BRING THE CASE OF THE ASSESSEE AT PAR WITH THE OTHER FUNCTIONALLY COMPARA BLE ENTITIES. WE, THEREFORE, AGREE IN PRINCIPLE WITH TH E GRANT OF WORKING CAPITAL ADJUSTMENT. 23. SIMILARLY IN THE CASE OF MERCER CONSULTING (IND IA) PVT. LTD., THE TRIBUNAL HAS AGAIN REJECTED THE REVENUES CONTENTION THAT WORKING CAPITAL ADJUSTMENT CAN ONLY BE GIVEN I N THE CASE OF MANUFACTURES AND TRADERS AND NOT TO THE SERVICE PROVIDERS. THE TRIBUNAL HELD THAT WHAT IS TRUE FOR OTHER CATEG ORIES OF BUSINESS, THE SAME IS ALSO FOR THE SERVICE PROVIDER . LIKEWISE, SIMILAR VIEW HAS BEEN HELD IN UNITED HEALTH CARE IN FORMATION SERVICES PVT. LTD., ITA NO.612/DEL/2012, WHEREIN IT HAS BEEN HELD AS UNDER:- 13.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE RELEVANT MATERIAL ON RECORD, IT IS MANIFEST THAT TH E WORKING CAPITAL ADJUSTMENT IS REQUIRED WITH REFERENCE TO ST OCK, TRADE RECEIVABLE AND TRADE PAYABLES. BY CARRYING THE HIGH TRADE RECEIVABLES, A COMPANY ALLOWS ITS CUSTOMERS A RELAT IVELY LONGER PERIOD TO PAY THEIR ACCOUNTS, WHICH RESULTS INTO HIGHER INTEREST COST AND LOWER PROFIT. BY CARRYING HIGH TR ADE PAYABLES, A COMPANY BENEFITS FROM A RELATIVELY LONG ER PERIOD AVAILABLE TO IT FOR PAYING BACK ITS SUPPLIERS, WHIC H RESULTS INTO ITS LOWER INTEREST COST AND HIGHER PROFIT. SIMILARL Y, HIGH STOCK MEANS BLOCKAGE OF FUNDS AND THE RESULTANT LOWER PRO FIT. THESE THREE INGREDIENTS DIRECTLY IMPACT THE WORKING CAPIT AL AND RESULTANT PROFIT OF COMPARABLES VIS-A-VIS THE ASSES SEE. A WORKING CAPITAL ADJUSTMENT IS REQUIRED TO BE EFFECT ED FOR I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 20 BRINGING THE COMPARABLES AND THE ASSESSEE AT THE SA ME PEDESTAL. THE ID. DRP UPHELD THE DENIAL OF SUCH ADJ USTMENT BY NOTICING THAT THERE WERE NO MEANS TO ASCERTAIN THE WORKING CAPITAL DEPLOYED BY THE COMPARABLES THROUGHOUT THE YEAR ON DAILY BASIS. IF THE CONTENTION OF THE ID. DRP IS TAKEN TO A LOGI CAL CONCLUSION, THEN THERE CAN NEVER BE A WORKING CAPIT AL ADJUSTMENT, BECAUSE IN NO CASE, THE DAILY FIGURES O F COMPARABLES WOULD COME TO THE FORE. SINCE, THE AUTH ORITIES BELOW HAVE DENIED WORKING CAPITAL ADJUSTMENT TO THE ASSESSEE ON FLIMSY GROUND, WE VACATE THEIR ACTION A ND HOLD IN PRINCIPLE THAT THE GRANT OF WORKING CAPITAL ADJUSTM ENT, IF OTHERWISE AVAILABLE, CANNOT BE JEOPARDIZED. HOWEVER , AS REGARDS THE QUANTUM OF WORKING CAPITAL ADJUSTMENT, WE DIRECT THE AO/TPO TO VET THE CORRECTNESS OF THE AMOUNT OF WORKING CAPITAL ADJUSTMENT CLAIMED BY THE ASSESSEE AND THEN DECIDE ITS ALLOWABILITY AS PER LAW. 24. ON THE OTHER HAND, LEARNED DEPARTMENT REPRESENTATIVE STRONGLY RELIED UPON THE ORDER OF TH E TPO AS WELL AS DRP. 25. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND ON PERUSAL OF THE RELEVANT FINDINGS GIVEN IN THE IMPUG NED ORDERS, WE FIND THAT THE REASONS GIVEN BY THE TPO TO REJECT THE WORKING CAPITAL ADJUSTMENT CANNOT BE UPHELD, BECAUSE WORKING CAPITAL ADJUSTMENT ANALYSIS SEEKS TO ADJUST THE PROFITABILITY OF EACH COMPARABLE COMPANY ON THE WOR KING CAPITAL POSITION OF THE COMPANY TO REFLECT THE DIFF ERENCES IN WORKING CAPITAL INVESTMENT. THE ADJUSTMENT TRIES TO ISOLATE I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 21 THE INTEREST EFFECT TAKING INTO ACCOUNT THE TIME VA LUE OF MONEY THAT RESULT FROM THE OPPORTUNITY COSTS OF HOLDING W ORKING CAPITAL. THE INTEREST EFFECT IN THE COMPARABLE COMP ANYS DATA ARE NOT COMPLETELY ELIMINATED ALBEIT ARE ADJUSTED TO THE COMPANY LEVEL OF INTEREST EFFECT. THE EFFECT OF REC EIVABLES AND PAYABLES IN THE WORKING CAPITAL ARE THERE IN SERVIC E INDUSTRIES ALSO. NOW THERE ARE VARIOUS GUIDELINES AND FACTORS HAVE BEEN LAID DOWN TO WORK OUT WORKING CAPITAL ADJUSTMENT AN D ACCORDINGLY, WE DIRECT THE ASSESSEE TO PROVIDE THE DETAIL WORKING OF THE CAPITAL ADJUSTMENT TO THE TPO AND HE IS DIRECTED TO VERIFY THE CORRECTNESS OF THE AMOUNT AN D WORKING CAPITAL ADJUSTMENT AS GIVEN BY THE ASSESSEE AND ALLO W THE SAME IN ACCORDANCE WITH SETTLED PRINCIPLES. THUS, W ITH THIS DIRECTION, THIS ISSUE IS TREATED AS ALLOWED FOR STA TISTICAL PURPOSES. 26. LASTLY, COMING TO THE ISSUE OF ADJUSTMENT ON AC COUNT OF RECEIVABLES, AT THE OUTSET LEARNED COUNSEL SUBMI TTED THAT WORKING CAPITAL ADJUSTMENT ITSELF TAKES INTO ACCOUN T THE IMPACT OF OUTSTANDING RECEIVABLES ON THE PROFITABIL ITY AND ACCORDINGLY, NO SEPARATE ADJUSTMENT IS WARRANTED ON ACCOUNT OF OUTSTANDING RECEIVABLES. HE SUBMITTED THAT DELHI TRIBUNAL IN THE CASE OF KUSUM HEALTHCARE PVT. LTD. VS. ACIT, ITA NO.6814/DEL/2014 HELD THAT IF THE IMPACT OF CREDIT PERIOD HAS BEEN DULY FACTORED IN WORKING CAPITAL ADJUSTMENT, W HILE DETERMINING THE ALP, THEN NO SEPARATE OR FURTHER AD JUSTMENT OF INTEREST ON THE RECEIVABLES, WAS WARRANTED IN TH E HANDS OF THE TESTED PARTY. HE SUBMITTED THAT THE SAID RULE O F THE I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 22 TRIBUNAL HAS BEEN UPHELD BY THE HON'BLE DELHI HIGH COURT VIDE JUDGMENT DATED 25.04.2017 IN ITA NO.765/2016. FURTHER THIS TRIBUNAL IN THE CASE OF BC MANAGEMENT SERVICES PVT. LTD. (SUPRA) HAD OBSERVED AND HELD AS UNDER:- 29. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND ON PERU SAL OF THE RELEVANT MATERIAL PLACED ON RECORD, WE FIND THA T FIRST OF ALL, THE ASSESSEE IS A DEBT FREE COMPANY AS IT HAS NEITH ER RECEIVED ANY INTEREST FROM ANY CREDITORS NOR PAID INTEREST T O ANY DEBTOR. A PERUSAL OF PROFIT AND LOSS ACCOUNT SHOW THAT INTE REST AND FINANCE CHARGES ARE ONLY RS. 73/-; AND INTEREST ON CORPORATE TAX IS RS. 1,27,798/-. APART FROM THAT THERE IS NO DEBT OR LOAN WITH THE ASSESSEE ON WHICH IT HAS TO PAY ANY INTERE ST. ONCE IT IS AN ACCEPTED FACT THAT ASSESSEE DOES NOT HAVE ANY INTEREST BEARING BORROWED FUNDS FOR EXTENDING ANY KIND OF LO AN TO ITS AE, THEN IT CANNOT BE THE RECKONED THAT ASSESSEE HA S GIVEN ANY BENEFIT TO THE AE BY BLOCKING ITS INTEREST BEAR ING FUNDS TO THE AE BY EXTENDING THE CREDIT PERIOD. THIS HAS BEE N HELD SO BY THIS TRIBUNAL IN THE CASE OF BECHTEL INDIA (P.) LTD. (SUPRA). MOREOVER AS POINTED OUT BY THE LEARNED COUNSEL, THE ASSESSEE HAS ALSO GIVEN SIMILAR CREDIT PERIOD TO THE THIRD P ARTIES WHICH ARE EXTENDING UP TO 181 DAYS. IF A SIMILAR CREDIT P ERIOD IS GIVEN TO THE AE AS GIVEN TO THIRD PARTIES, THEN UND ER THE ARMS LENGTH SCENARIO AND LOOKING INTO THE SIMILAR CONDIT IONS PREVAILING BETWEEN CONTROLLED TRANSACTION AND COMPA RABLE UNCONTROLLED TRANSACTION, THEN THERE CANNOT BE ANY ADJUSTMENT, BECAUSE IN A SITUATION LIKE THIS, THERE IS A DIRECT CUP TO ANALYSE SUCH TRANSACTION. ACCORDINGLY, THE T RANSFER PRICING ADJUSTMENT AS MADE BY THE TPO BY THE IMPUTI NG INTEREST ON DELAY IN RECEIPT OF PAYMENT IS UNCALLED FOR ON THE FACTS OF THE PRESENT CASE AND SAME IS DIRECTED TO B E DELETED. 27. AFTER HEARING BOTH THE PARTIES AND ON THE PERUS AL OF THE AFORESAID DECISION OF THE TRIBUNAL, WE DIRECT T HE TPO TO CONSIDER THE PRINCIPLE LAID DOWN IN THE JUDGMENT DA TED 25.04.2017 OF HONBLE DELHI HIGH COURT IN THE CASE OF KUSUM I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 23 HEALTH CARE, ITA NO. 765/2016; AND IF ALREADY IMPAC T OF RECEIVABLES HAVE BEEN FACTORED IN THE WORKING CAPIT AL ADJUSTMENT AND THEREBY ON ITS PRICING/PROFITABILITY , VIS--VIS, THE COMPARABLE, THEN NO FURTHER ADJUSTMENT IS CALLED FOR. THE TPO WILL ALSO SEE, WHETHER ASSESSEE HAS ANY INTERES T BEARING BORROWED FUNDS AND IF IT IS NOT SO THEN IT CANNOT B E RECKONED THAT ASSESSEE HAS GIVEN ANY BENEFIT TO THE AE BY BL OCKING ITS INTEREST BEARING FUNDS TO THE AE BY EXTENDING THE C REDIT PERIOD. ACCORDINGLY, THE TPO WILL DECIDE THE ISSUE IN ACCORDANCE WITH LAW IN THE LIGHT OF THE AFORESAID D ECISION. 28. SO FAR AS THE GROUNDS RELATING TO CHARGEABILIT Y OF INTEREST UNDER VARIOUS SECTIONS AS RAISED IN THE GR OUNDS OF APPEAL SAME ADMITTED HAVE BEEN BY THE LD. COUNSEL T O BE CONSEQUENTIAL, HENCE NO ADJUDICATION IS REQUIRED. A CCORDINGLY, APPEAL OF THE ASSESSEE IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 29. NOW WE SHALL TAKE UP THE APPEAL FOR THE ASSESSM ENT YEAR 2011-12, WHEREIN THE ASSESSEE IS AGGRIEVED BY THE TRANSFER PRICING ADJUSTMENT ON THE FOLLOWING TRANSAC TIONS:- (I) ON ACCOUNT OF ITES: INR 24,02,79,893/- (II) ON ACCOUNT OF IT: INR 2,35,71,118/- (III) ON ACCOUNT OF RECEIVABLES: INR 19,35,13 4/- BESIDES THIS, ASSESSEE HAS ALSO TAKEN FOLLOWING GRO UNDS FOR CORPORATE TAX DISALLOWANCE:- 8. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 24 LAW, THE LD. AO HAS GROSSLY ERRED IN RESTRICTING TH E DEDUCTION UNDER SECTION 10A OF THE ACT AT INR 11,41,61,675 AS AGAINST INR 11,64,21,113 AND MAKING A DISALLOWANCE OF INR 3,285,418. THE LD. AO HAS ERRED IN NOT GIVING MEET TO THE BINDING DIRECTION ISSUED BY THE HONBLE DRP, NEW DE LHI AT PAGE 37 OF DIRECTIONS DATED 3 NOVEMBER 2015 AND AVA ILABLE JUDICIAL PRECEDENTS. THE LD. AO HAS ERRED IN NOT EX CLUDING THE LOSS ON FOREIGN EXCHANGE FLUCTUATION OF INR 3,864,2 05 AND TRAVEL EXPENSE IN FOREIGN CURRENCY OF INR 39,322,39 4 FROM TOTAL TURNOVER WHILE EXCLUDING THE SAME FROM EXPORT TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTIO N 10A OF THE ACT. 9. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO HAS ERRED IN NOT ALLOWING THE ADJUS TMENT OF INR 54,299,000 TOWARDS COMPENSATION PAID TO LANDLOR D FOR EARLY VACATION OF OFFICE PREMISES FOR COMPUTING BOO K PROFITS UNDER SECTION 115JB OF THE ACT FOR THE SUBJECT YEAR . THE LD. AO HAS FAILED TO APPRECIATE THAT SUCH PAYMENT WAS M ADE OUT OF PROVISION CREATED IN FINANCIAL YEAR 2008-09 THAT WAS DEBITED TO PROFIT AND LOSS ACCOUNT AND ADDED BACK F OR COMPUTING BOOK PROFITS UNDER SECTION 115JB OF THE A CT IN SUCH YEAR. 30. SO FAR AS ITES SEGMENT IS CONCERNED, THE FACTS AND MATERIAL ON RECORD IS BY AND LARGE THE SAME AS SET OUT IN THE A.Y. 2010-11. UNDER THIS SEGMENT, THE LEARNED COUNS EL SUBMITTED THAT IF E-CLERX WHICH HAS BEEN SELECTED B Y THE TPO AND TCS E-SERVE LTD. ARE EXCLUDED, THEN ASSESSEE WO ULD BE WITHIN ARMS LENGTH RANGE. I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 25 31. SO FAR AS THE TCS E-SERVE LTD. IS CONCERNED, THE LD. COUNSEL SUBMITTED THAT THE FACTS AS WERE PREVALENT IN THE EARLIER YEAR REMAINS THE SAME, WHEREAS FOR EXCLUSIO N OF E- CLERX IS CONCERNED, HE SUBMITTED THAT ONE OF THE MOST OUTSTANDING FEATURES FOR THE FUNCTIONAL DISSIMILARI TY IS THAT, E-CLERX FOLLOWS OUTSOURCING MODEL, WHEREAS ASSESSEE IS A CAPTIVE SERVICE PROVIDER WHICH PERFORM ITS BACK OFF ICE SUPPORT FUNCTIONS THROUGH ITS OWN HUMAN RESOURCE. THE TWO B USINESS MODELS HAVE A SIGNIFICANT IMPACT ON FAR AND HENCE T HE COMPANIES FOLLOWING AN OUTSTANDING MODEL CANNOT BE COMPARED. HE SUBMITTED THAT E-CLERX HAD BEEN OUTSOU RCING ITS SERVICES ALL THROUGHOUT, WHICH IS EVIDENT FROM THE FACT THAT HUGE AMOUNT OF RS.43.71 CRORES OUT OF TOTAL EXPENSE S AT RS.66.10 CRORE HAS BEEN DEBITED FOR OUTSOURCING SER VICES. IN SUPPORT OF HIS CONTENTION, HE STRONGLY RELIED UPON THE DECISION OF THIS TRIBUNAL IN THE CASE OF BC MANAGEMENT SERVI CES LTD. VS. DCIT (SUPRA), WHEREIN THE TRIBUNAL HAD OBSERVED AND HELD AS UNDER:- 2. HOWEVER WITHOUT ENTERING INTO THE SEMANTICS OF A RGUMENTS AS TO WHAT KIND OF FUNCTIONS CONSTITUTES LOW-END IT ES SERVICE PROVIDER OR HIGH END ITES OR KPO SERVICE PROVIDER, WE WOULD LIKE TO CONFINE OUR FINDING ON FAR ANALYSIS. BECAUS E, AT TIMES WHEN HOST OF SERVICES ARE PERFORMED UNDER ITES, LIK ES OF ASSESSEES', THERE BECOMES VERY THIN LINE DISTINCTIO N BETWEEN FUNCTIONS PERFORMED BY THE LOW-END ITES SERVICE PRO VIDER AND HIGH-END ITES SERVICE PROVIDER AND IT IS QUITE DIFF ICULT TO ANALYSE IN SUCH SITUATIONS AS TO HOW MUCH VALUE ADD ITIONS ARE THERE IN DELIVERABLES IN RENDERING OF SUCH KIND OF HOST OF I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 26 SERVICES. AT THE OUTSET, ON A PERUSAL OF THE FINANC IALS AND ANNUAL REPORT OF E-CLERX FOR THE RELEVANT FINANCIAL YEAR AS POINTED OUT TO US DURING THE COURSE OF THE HEARING, WE FIND THAT THE E-CLERX HAS OUTSOURCED MOST OF ITS SERVICES TO OUTSIDERS WHICH IS EVIDENT FROM THE FACT THAT THE EXPENSES UN DER THE HEAD 'CONTRACT FOR THE SERVICES' IS MORE THAN RS. 4 3.71 CRORES DURING THE YEAR OUT OF TOTAL EXPENSES DEBITED TO PR OFIT & LOSS ACCOUNT OF RS. 91.29 CRORES. THE MAJOR OPERATIONS A PPEARS TO BE BASED ON OUTSOURCE MODEL, WHICH IS EVIDENT FROM THE QUANTUM OF EXPENDITURE AND NOTES TO THE FINANCIAL A CCOUNT (THE COPY OF WHICH IS APPEARING AT PAGE 840 OF THE ASSES SEE'S PAPER BOOK). IN AN OUTSOURCING MODEL, THE ASSETS DE PLOYED IN THE FORM OF HUMAN RESOURCES, INFRASTRUCTURE AND OTH ER INTANGIBLES DIFFER FROM AN ENTITY WHICH OPERATES FR OM ITS OWN RESOURCES. WHENCE, IN THE CASE OF E-CLERX, SUBSTANT IAL WORK HAS BEEN OUTSOURCED TO VARIOUS PARTIES, AS COMPARED TO THE ASSESSEE, WHERE THE ENTIRE BACK OFFICE SUPPORT SERV ICES HAVE BEEN PROVIDED BY THE ASSESSEE ITSELF, THEN ON THIS GROUND ALONE, IT WOULD BE VERY DIFFICULT TO PUT E-CLERX IN THE COMPARABLE BASKET. ANOTHER IMPORTANT FACT WHICH IS BORNE OUT FROM THE ANNUAL ACCOUNTS IS THAT, E-CLERX IS PERFOR MING FINANCIAL SERVICES AS WELL AS SALES AND MARKETING S ERVICES FOR WHICH THERE IS NO SEPARATE SEGMENTAL INFORMATION. I T REFLECTS ONLY ONE PRIMARY SEGMENT WHICH IS DATA ANALYTICS AN D PROCESS OUTSOURCING SERVICES. SALES AND MARKETING ACTIVITIE S AGAIN IS A DIFFERENT FUNCTION ALTOGETHER WHICH CANNOT BE COMPA RED WITH THE ASSESSEE WHICH IS PERFORMING PURELY BACK OFFICE SUPPORT SERVICES. UNDER THESE CIRCUMSTANCES ALSO IT WOULD B E VERY DIFFICULT TO FIND OUT AS TO WHAT IS THE PROFIT MARG IN FROM THE SALES AND MARKETING SERVICES WHICH IS ENTIRELY A DI FFERENT FROM I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 27 THE FUNCTIONS CARRIED OUT BY THE ASSESSEE. FURTHER BEFORE US, THE LEARNED COUNSEL HAS RELIED UPON CATENA OF DECIS IONS OF THIS TRIBUNAL AND ALSO HIGH COURTS, WHEREIN E-CLERX HAS BEEN HELD TO BE INCOMPARABLE WITH THE COMPANIES PROVIDING PUR ELY BACK OFFICE SUPPORT SERVICES. IN VIEW OF AFORESAID CUMUL ATIVE FACTORS, WE HOLD THAT E- CLERX CANNOT BE HELD TO BE A GOOD C OMPARABLE FOR BENCH MARKING THE ASSESSEE'S MARGIN TO ARRIVE A T ALP AND ACCORDINGLY, WE DIRECT THE AO/TPO TO REMOVE THIS COMPARABLE. 32. BESIDES THIS, HE SUBMITTED THAT THERE ARE CATEN A OF OTHER DECISIONS ON THE SAME LINES. 33. ON THE OTHER HAND, LEARNED CIT-DR SUBMITTED THA T OUTSOURCING MODEL COULD NOT MATERIALLY CHANGED THE FUNCTIONS AS ONE HAS TO SEE THE OVERALL FUNCTIONS. IF BENCH M ARKING IS DONE UNDER THE TNMM THEN ONLY BROAD PARAMETERS HAVE TO BE SEEN AND UNDER THIS METHOD SUCH KIND HAIR SPLITTING DISTINCTION IS NOT DESIRABLE. THUS, HE STRONGLY REL IED UPON THE ORDER OF THE TPO. 34. WE HAVE HEARD THE RIVAL CONTENTIONS AND ALS O PERUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDER O N THE INCLUSION OF E-CLERX. ON PERUSAL OF THE FINANCIAL S TATEMENT AS POINTED OUT BY THE LEARNED COUNSEL, WE FIND THAT E- CLERX OUT OF TOTAL EXPENSES OF RS.66.01 CRORES HAS SPENT RS.43.7 1 CRORE FOR OUTSOURCING ITS CONTRACT FOR SERVICES, WHEREAS IN T HE CASE OF THE ASSESSEE, THE ENTIRE EXPENDITURE HAS BEEN DONE THROUGH ITS OWN HUMAN RESOURCES. THE MAJOR OPERATION OF THIS I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 28 COMPANY SEEMS TO BE BASED ON OUTSOURCING MODEL AND IN AN OUTSOURCING MODEL THE ASSETS DEPLOYED IN THE FORM O F HUMAN RESOURCES, INFRASTRUCTURE AND OTHER INTANGIBLES DIF FERS FROM AN ENTITY WHICH OPERATES FROM ITS OWN HUMAN RESOURCES. IN THE CASE OF THE ASSESSEE, THE ENTIRE BACK OF ITS SUPPOR T HAVE BEEN PROVIDED BY THE ASSESSEE, AND THEREFORE, FOLLOWING THE JUDICIAL PRECEDENTS IN THE CASE OF B.C. MANAGEMENT SERVICES (SUPRA), WE HOLD THAT E-CLERX SHOULD NOT BE INCLUDED FOR THE COMPARABILITY AND ANALYSIS AND ACCORDINGLY SAME IS DIRECTED TO BE EXCLUDED. TCS E-SERVE LIMITED 35. WITH REGARD TO THE TCS E-SERVE LTD., THE TPO SELECTED THIS COMPARABLE AFTER REJECTING THE ASSESSEES CONT ENTION REGARDING FUNCTIONAL INCOMPARABILITY, INCOMPARABLE SCALE OF OPERATION, PAYMENT OF BRAND EQUITY AND PRESENCE OF INTANGIBLES. APART FROM THAT IT WAS SUBMITTED THAT THIS COMPANY IS ALSO PROVIDING SERVICES LIKE SOFTWARE TE STING, VERIFICATION AND VALIDATION OF THE SOFTWARE AND DAT A MANAGEMENT SERVICES. RELIANCE WAS PLACED ON SIMILAR SET OF DECISIONS AS HAVE BEEN RELIED IN THE EARLIER YEARS. THE SUBMISSION OF THE LEARNED CIT-DR HAS BEEN THE SAME AS ARGUED IN A.Y. 2010-11. AS STATED IN THE THE EARLIE R PART OF OUR ORDER, IT HAS BEEN BROUGHT TO OUR NOTICE THAT D ECISION OF THE TRIBUNAL IN THE CASE OF THE ACTIS GLOBAL SERVIC ES PVT. LTD. (SUPRA), WHEREIN THE TCS E-SERVE LTD., HAS BEEN EXC LUDED HAS BEEN UPHELD BY THE HON'BLE DELHI HIGH COURT BY THE JUDGMENT I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 29 AND ORDER DATED 15.05.2017. IN ANY CASE, SINCE THE FACTS AND MATERIAL QUA THE COMPARABILITY ANALYSIS REMAINS THE SAME AS THAT OF A.Y. 2010-11, THEREFORE, FOLLOWING THE SAME VIEW TAKEN IN THE EARLIER, WE DIRECT THE TPO TO EXCLUDE THE TC S E-SERVE LTD. FROM THE COMPARABILITY LIST. 36. AS ADMITTED BY THE LEARNED COUNSEL IF THESE TWO COMPARABLES ARE REMOVED, THEN ASSESSEE WOULD FALL W ITHIN THE ARMS LENGTH RANGE OF +/- 5%; AND ACCORDINGLY, THE TPO IS DIRECTED TO COMPUTE THE ARITHMETIC MEAN OF THE COMP ARABLES EXCLUDING THESE TWO COMPANIES AND CONSEQUENTLY GRAN T RELIEF TO THE ASSESSEE. IN VIEW OF THE AFORESAID DIRECTION , THE OTHER COMPARABLES AS CONTESTED BY THE LEARNED COUNSEL ARE TREATED AS ACADEMIC AND NO SEPARATE ADJUDICATION IS REQUIRED . 37. SO FAR AS THE ISSUE RELATING TO ADJUSTMENT ON ACCOUNT OF IT/SOFTWARE SERVICES ARE CONCERNED, THE LEARNED COU NSEL SUBMITTED THAT IF TWO COMPARABLE COMPANIES, NAMELY, INFOSYS LTD. AND WIPRO TECHNOLOGY SERVICES LTD. , ARE EXCLUDED THEN ASSESSEES 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 LEAR NED COUNSEL BEFORE US AND ALSO BEFORE THE TPO WAS THAT, THERE WAS AN EXTRAORDINARY EVENT DURING THE RELEVANT ASSESSME NT YEAR ON THE GROUND THAT THIS COMPANY WAS ACQUIRED BY WIP RO LTD. I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 30 IN THE MONTH OF JANUARY, 2009 AND AS A PART OF OVER ALL BUSINESS DEAL, WIPRO LTD. SIGNED A MASTER SERVICE A GREEMENT 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 DECISIO N OF THE TRIBUNAL IN THE CASE OF SAXO INDIA PVT. LTD., ITA NO.6148/DEL/2015, WHICH HAS BEEN HELD BY THE HONBL E DELHI HIGH COURT VIDE ORDER DATED 28.09.2016 IN ITA NO.68 2/2016. 39. ON THE OTHER HAND, LEARNED CIT-DR, RELIED UPO N 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 A S WELL AS THE MATERIAL PLACED ON RECORD BEFORE US. WIPRO LTD. , HAD ACQUIRED A COMPANY KNOWN AS CITI TECHNOLOGY SERVIC ES LTD., IN THE YEAR 2009 AS A PART OF OVERALL BUSINESS DEAL , WHICH WAS CARRYING OUT THE SERVICES FOR CITI GROUP, WHICH THE N WERE RELATED PARTY TRANSACTIONS. WIPRO LTD. SIGNED A MAS TER SERVICE AGREEMENT WITH THE CITI GROUP FOR THE DELIVERY OF S AME SERVICE FOR A PERIOD OF SIX YEARS WITH GUARANTEED REVENUE O F US $500 MILLION. WIPRO TECHNOLOGY SERVICES LTD., HAS BEEN P ROVIDING SERVICES TO CITI GROUP OUT OF INDIA AS A PART OF SA ID AGREEMENT AND THEREBY IT FALLS WITHIN THE DEEMING AMBIT OF SE CTION 92B (2), WHEREBY IT HAS TO BE TREATED AS DEEMED AE AS T HE SERVICE AGREEMENT EARLIER ENTERED WAS BETWEEN THE RELATED P ARTY AND I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 31 SAME TERMS AND AGREEMENT IS CONTINUING, HENCE HAS T O BE RECKONED IN THE CATEGORY OF RELATED PARTY TRANSACTI ONS. CLAUSE (2) OF SECTION 92B ENVISAGES THAT, IF A TRANSACTION ENTERED INTO BY AN ENTERPRISE WITH A PERSON OTHER THAN AE, SHALL FOR THE PURPOSE OF SUBSECTION (1), BE DEEMED TO BE AN INTER NATIONAL TRANSACTION ENTERED INTO BETWEEN TWO AE, IF THERE E XISTS A PRIOR AGREEMENT IN RELATION TO THE RELEVANT TRANSAC TION 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 C ARRYING OUT THE TRANSACTION ON THE BASIS OF PRIOR AGREEMENT WHI CH WAS A CONTROLLED TRANSACTION AND IT CEASES TO BE UNCONTRO LLED 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 FRO M MASTER SERVICES AGREEMENT WITH CITIGROUP INC. FOR THE DELI VERY OF TECHNOLOGY INFRASTRUCTURE SERVICES. THIS AGREEMENT WAS, IN FACT, EXECUTED BETWEEN THE ASSESSEES AE, WIPRO LTD ., AND CITIGROUP INC., A THIRD PERSON. THIS UNFOLDS THAT T HE TRANSACTION OF EARNING REVENUE FROM SOFTWARE DEVELOPMENT SUPPOR T AND MAINTENANCE SERVICES BY WIPRO TECHNOLOGY SERVICES L TD., IS AN INTERNATIONAL TRANSACTION BECAUSE OF THE APPLICATIO N OF SECTION I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 32 92B(2) I.E., THERE EXISTS A PRIOR AGREEMENT IN RELA TION TO SUCH TRANSACTION BETWEEN CITIGROUP INC. (THIRD PERSON) A ND WIPRO LTD. (ASSOCIATED ENTERPRISE). IN THE LIGHT OF THIS STRUCTURE OF TRANSACTION, IT CEASES TO BE UNCONTROLLED TRANSACTI ON AND, HENCE, WIPRO TECHNOLOGY SERVICES LTD., DISQUALIFIES TO BECOME A COMPARABLE UNCONTROLLED TRANSACTION FOR THE PURPO SES OF INCLUSION IN THE FINAL LIST OF COMPARABLES UNDER RU LE L0B(1)(E)(II). WE, THEREFORE, DIRECT REMOVAL OF THI S COMPANY FROM THE LIST OF COMPARABLES. 41. THIS ORDER OF THE TRIBUNAL HAS BEEN AFFIRM ED BY THE HONBLE HIGH COURT ALSO AND ACCORDINGLY, WE HOLD TH AT WIPRO TECHNOLOGY SERVICE LTD. SHOULD BE EXCLUDED ON THIS COUNT. II) INFOSYS LTD. 42. SO FAR AS THE EXCLUSION OF INFOSYS LTD. IS C ONCERNED, THE LEARNED COUNSEL SUBMITTED THAT IT IS A VERY HUG E COMPANY WITH A VERY HIGH TURNOVER AND GREAT BRAND NAME IS A SSOCIATED WITH IT WHICH IMPACTS THE PROFITABILITY OF THE SAID COMPANY. NOW THE ISSUE WHETHER INFOSYS LTD. CAN BE COMPARED WITH CAPTIVE SERVICE PVT. LTD. HAS NOW BEEN WELL SETTLED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. IN ITA NO.1204/2011. LEARNED COUNSEL HAS ALSO RELIED UPON THE DECISION OF THIS T RIBUNAL IN THE CASE OF CADENCE DESIGN SYSTEM (INDIA) PVT. LTD. VS. DCIT, ITA NO.2074/DEL/2014 , WHEREIN THIS COMPARABLE COMPANY HAS BEEN DEALT WITH IN THE FOLLOWING MANNER : I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 33 7. THE ASSESSEES MAIN CONTENTION FOR EXCLUSIO N OF INFOSYS TECHNOLOGIES LIMITED HAD BEEN THAT FIRSTLY, ITS SER VICES ARE INCOMPARABLE WITH THE ASSESSEE BECAUSE INFOSYS IS I NTO TECHNICAL CONSULTANCY DESIGN, DEVELOPMENT, RE-ENGIN EERING MAINTENANCE, SYSTEM INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION AND INFRASTRUCTURE MANAGEMENT SERVIC ES; SECONDLY, IT HAS HUGE R&D WORK FOR ITS PRODUCTS, WH ICH ARE MORE THAN RS.267 CRORES, WHEREAS IN THE CASE OF THE ASSESSEE IT IS NIL; THIRDLY, INFOSYS HAS HUGE INTANGIBLES AN D BRAND VALUE IS ALSO HUGE WHEREAS IN THE CASE OF THE ASSESSEE IT IS NIL; AND LASTLY, INFOSYS IS INTO LARGE SCALE OF OPERATIONS W HICH IS EVIDENT FROM THE FACT THAT DURING THE YEAR IT HAD TURNOVER OF RS.20,265 CRORES, WHEREAS IN THE CASE OF THE ASSESSEE, IT IS ONLY 248.53 CRORES. THUS, THE COMPANY HAVING SUCH A HUGE TURNOV ER CANNOT BE HELD TO BE COMPARABLE UNDER FAR. THE TPO AND DRP, HELD THAT REVENUE FROM SOFTWARE PRODUCTS OF IN FOSYS TECHNOLOGIES LIMITED IS ONLY RS.848 CRORES OUT OF I TS OPERATING REVENUES OF RS.20,297 CRORES AND ITS REVENUE FROM S OFTWARE SERVICES IS RS.19,416 CRORES. THUS, SOFTWARE DEVELO PMENT SERVICES OF INFOSYS TECHNOLOGIES LIMITED CAN VERY W ELL BE COMPARED WITH THAT OF THE ASSESSEE. REGARDING EXPEN DITURE ON R&D EXPENSES, THE DRP OBSERVED THAT IT IS MERELY 1. 3% OF THE REVENUE OF INFOSYS, WHICH CANNOT BE SAID TO BE SUBS TANTIAL. 7.1 BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE , SHRI NAGESHWAR RAO, BESIDE AFORESAID CONTENTION STRONGLY RELIED UPON THE DECISION OF THE TRIBUNAL IN THE CASE OF FI SERV INDIA (P.) LTD. (SUPRA); AND THE JUDGMENT OF HON'BLE DELH I HIGH COURT IN THE CASE OF CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. IN ITA NO.1204/2011 (DEL). I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 34 7.2 ON THE OTHER HAND, THE LD. SR. D.R., SUBMI TTED THAT INFOSYS TECHNOLOGIES LIMITED HAS BEEN ASSESSEES OW N COMPARABLE IN THIS YEAR AS WELL AS IN THE EARLIER Y EAR ALSO AND THE SAME WAS NOT CHALLENGED IN THE EARLIER YEAR, TH EREFORE, THE ASSESSEE CANNOT CHALLENGE THE SAME COMPARABLE IN TH IS YEAR ONCE IT HAS ACCEPTED THIS COMPARABLE IN ASSESSMENT YEAR 2008-09. IN SUPPORT OF HIS CONTENTION, THE LD. SR. DR STRONGLY RELIED UPON THE DECISION OF THE TRIBUNAL IN THE CAS E OF CAPGEMINI INDIA PVT. LTD. VS. ACIT 7861/MUM/2011 AN D THE DECISION OF E-VALUESERVE.COM PVT. LTD. VS. ITO IN I TA NO.4001/DEL/2013. THUS, INFOSYS TECHNOLOGIES LIMITE D HAS RIGHTLY BEEN TAKEN AS A COMPARABLE BY THE TPO. 7.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PE RUSED THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDER AS WEL L AS MATERIAL REFERRED TO BEFORE US. FIRST OF ALL, INFOS YS TECHNOLOGIES LIMITED IS A GIANT ENTERPRISE WITH TURNOVER OF MORE THAN RS.20,264 CRORES. ITS EXPENDITURE ON R&D WAS RS. 26 7 CRORES AND IT HAS HUGE BRAND VALUE AND SIGNIFICANT INTANGI BLE ASSETS, WHICH HAVE BEEN VALUED AT APPROXIMATELY RS.1,34,478 CRORES. IF THESE ASSETS ARE TO BE COMPARED WITH THOSE OF TH E ASSESSEE, IT CAN BE SEEN THAT IT HAS NIL EXPENDITURE ON R&D AND NO SIGNIFICANT INTANGIBLE ASSET. ON THIS GROUND ALONE, VARIOUS BENCHES OF THE TRIBUNAL HAVE HELD THAT INFOSYS TECH NOLOGIES LIMITED CANNOT BE COMPARED WITH SMALL SOFTWARE COMP ANIES, WHO ARE INTO CONTRACT SOFTWARE DEVELOPMENT SERVICES . A COMPANY LIKE INFOSYS WITH MEGA OPERATIONS AND HAVIN G SIGNIFICANT ASSETS AND BRAND VALUE AND FULL-FLEDGED RISK TAKING ENTREPRENEUR DEVELOPING AND SELLING PROPRIETARY PRO DUCTS CANNOT BE HELD TO BE COMPARABLE WITH THE CAPTIVE SE RVICE AND I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 35 CONTRACT SOFTWARE DEVELOPMENT COMPANIES AS THE COMPARABILITY ANALYSIS FAILS ON ALL THE FACTORS OF FAR. THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. (SUPRA) MADE A COMPARATIVE CHART WHILE DEALING WITH SIMILAR COMPARATIVE ANALYSIS, WH ICH FOR SAKE OF READY REFERENCE IS REPRODUCED HEREUNDER:- 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, DEVELOPMENT, RE- ENGINEERING AND MAINTENANCE SYSTEM INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION AND BUSINESS PROCESS MANAGEMENT, ETC. CONTRACT SOFTWARE DEVELOPMENT SERVICES TURNOVER: 20,264 CRORES 209.83 CRORES OWNERSHIP BRANDED/PR OPRIETARY PRODUCTS: DEVELOPS/OWNS PROPRIETARY PRODUCTS LIKE FINACLE, INFOSYS ACTICE DESK, INFOSYS IPROWE, INFOSYS M CONNECT. ALSO THE COMPANY DERIVES SUBSTANTIAL PORTION OF ITS PROPRIETARY PRODUCTS (INCLUDING ITS FLAGSHIP BANKING PRODUCT SUITE 'FINACLE') I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 36 ONSITE V. OFFSHORE 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) 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 R&D RS.236 CRORES RS.NIL OTHER 100 PER CENT OFFSHORE (FROM INDIA) 7.4 IF WE APPLY THE AFORESAID COMPARATIVE CRITER IA AS LAID DOWN BY JURISDICTIONAL HIGH COURT, WE FIND THAT THE SAME WOULD BE APPLICABLE ON THE FACTS OF THE PRESENT CAS E ALSO AND, THEREFORE, RESPECTFULLY FOLLOWING THE JUDGMENT OF T HE HON'BLE DELHI HIGH COURT (SUPRA), WE HOLD THAT INFOSYS TECH NOLOGIES LIMITED CANNOT BE COMPARED WITH THE ASSESSEE-COMPAN Y, WHICH IS OPERATING AT MINIMAL RISK AND IS A CONTRAC T SOFTWARE DEVELOPMENT SERVICE PROVIDER. ACCORDINGLY, WE DIREC T THE TPO I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 37 TO EXCLUDE INFOSYS TECHNOLOGIES LIMITED FROM THE CO MPARABLE LIST. 43. HERE IN THIS CASE ALSO, THE SAME PRINCIPLE WILL APPLY AND ACCORDINGLY, FOLLOWING THE AFORESAID JUDICIAL PR ECEDENTS, WE HOLD THAT INFOSYS LTD. SHOULD BE EXCLUDED. AS ST ATED BY THE LEARNED COUNSEL IF THESE TWO COMPANIES ARE REMOVED THEN ASSESSEE WOULD FALL WITHIN TOLERANCE RANGE OF (+)/( -) OF 5% AND ACCORDINGLY WE DIRECT THE TPO TO BENCH MARK THE ASS ESSEES MARGIN AFTER EXCLUDING THESE TWO COMPARABLES AND RE SULTANTLY ALL THE OTHER COMPARABLES WHICH ARE CHALLENGED BEFO RE US HAVE BEEN RENDERED ACADEMIC, THEREFORE, THE SAME AR E NOT ADJUDICATED. 44. SO FAR AS THE ISSUE RELATING TO WORKING CAPI TAL ADJUSTMENT AND INTEREST RECEIVABLE IS CONCERNED, OU R DIRECTIONS GIVEN IN THE ASSESSMENT YEAR 2010-11 TO THE TPO WILL APPLY MUTATIS MUTANDIS AND IN THE LIGHT OF THE DIRECTION GIVEN THEREIN, WE REMAND THIS ISSUE TO THE FILE OF THE TPO WHO SHALL EXAMINE THESE ISSUES IN LINE OF THE EARLIER Y EAR ORDER AFTER GIVING DUE AND EFFECTIVE OPPORTUNITY TO THE A SSESSEE. ACCORDINGLY, THE GROUNDS RELATING TO TRANSFER PRICI NG SYSTEM ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. 45. NOW WE WILL COME TO THE CORPORATE TAX DISAL LOWANCE AS RAISED IN GROUNDS NO.8 AND 9. AS REGARDS GROUND NO. 8, THE ONLY GRIEVANCE SEEMS TO BE THAT THE ASSESSING OFFIC ER HAS ERRED IN EXCLUDING THE EXPENDITURE INCURRED ON LOSS OF FOREIGN I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 38 EXCHANGE FLUCTUATION OF RS.38,64,205/- AND TRAVEL E XPENSES IN FOREIGN CURRENCY OF RS.3,93,22,494/- FROM THE TO TAL TURNOVER. HERE, IN THIS CASE, THE DRP AFTER REFERRI NG TO THE VARIOUS DECISIONS INCLUDING THAT OF HONBLE DELHI H IGH COURT IN THE CASE OF CIT VS. GENPACT INDIA HAD GIVEN THE FOLLOWING DIRECTION:- PLACING RELIANCE ON THE JURISDICTIONAL HIGH COURT D ECISIONS IN CIT V GENPACT INDIA AND DRAWING GUIDANCE FROM SUPRE ME COURT DECISIONS IN CIT VS. LAKSHMI MACHINE WORKS (2 007) 290 ITR 667 AND CIT VS. CATAPHARMA (INDIA) (P) LTD (200 7) 292 ITR 641 WHEREIN IT HAS BEEN HELD THAT EXCISE DUTY A ND SALES TAX SHOULD NOT BE INCLUDED IN THE TOTAL TURNOVER AS THE SAME ARE NOT INCLUDIBLE IN THE EXPORT TURNOVER, THIS OBJ ECTION IS ALLOWED. AO IS DIRECTED TO REDUCE EXPENDITURE REDUC ED FROM THE EXPORT TURNOVER FROM THE TOTAL TURNOVER FOR COM PUTING DEDUCTION U/S 10A. WHILE RE-COMPUTING THE DEDUCTION UNDER SECTION 10A OF THE ACT, THE AO HAS ERRONEOUSLY TAKEN THE AMOUNT OF DEDUCTIO N AT RS.11,41,61,675 INSTEAD OF RS. 11,41,63,569 WHICH S HOULD BE AVAILABLE TO THE COMPANY AFTER RE-COMPUTATION. AO I S DIRECTED TO VERIFY AND CORRECT THIS FOR WHICH A SEPARATE APP LICATION FOR RECTIFICATION HAS ALSO BEEN MOVED. THESE TWO GROUND S OF OBJECTIONS ARE ACCORDINGLY ALLOWED. 46. THUS, THE DRP HAS CATEGORICALLY DIRECTED THE ASSESSING OFFICER TO FOLLOW THE PRINCIPLE LAID DOWN BY THE HO NBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. GE NPACT INDIA AND RE-COMPUTE THE DEDUCTION U/S.10A ACCORDINGLY. S INCE IT I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 39 IS A CATEGORICAL DIRECTION OF THE DRP, ASSESSING OF FICER IS DIRECTED TO COMPLY WITH THE SAME AND GIVE PROPER EF FECT AND GRANT CONSEQUENTIAL RELIEF. 47. AS REGARDS THE ISSUE RAISED VIDE GROUND NO .9, THE BRIEF FACTS QUA THIS ISSUE ARE THAT, IN THE COMPUTA TION OF INCOME U/S.115JB, ASSESSEE HAS REDUCED AN AMOUNT OF RS.5,42,99,000/- FROM THE NET PROFIT ON ACCOUNT OF PROVISION FOR CONTINGENCIES UTILIZATION. IN THE RETURN OF I NCOME IT WAS MENTIONED THAT ASSESSEE COMPANY CREATED A PROVISION OF RS.5,42,99,000/- DURING THE FINANCIAL YEAR 2008-09 BY WAY OF DEBIT TO THE P & L ACCOUNT; AND AS THE SAID PROV ISION WERE CONTINGENT IN NATURE, THE SAME WAS ADDED BACK U/S.1 15JB WHILE COMPUTING THE BOOK PROFIT FOR THE FINANCIAL Y EAR 2008- 09. SINCE IT WAS DISALLOWED BY THE ASSESSEE IN THE FINANCIAL YEAR 2008-09 SUO-MOTU , THEREFORE, THE NET PROFIT AS PER P&L ACCOUNT FOR FINANCIAL YEAR 2010-11 HAS BEEN ADJUSTE D BY REDUCING THE AMOUNT ACTUALLY PAID BY WAY OF UTILIZA TION OF THE ABOVE PROVISION IN ORDER TO AVOID DOUBLE TAXATION O F THE SAID AMOUNT. IN RESPONSE TO THE SHOW CAUSE NOTICE BY THE ASSESSING OFFICER, ASSESSEE SUBMITTED THAT DURING T HE FINANCIAL YEAR 2010-11, THE ASSESSEE COMPANY HAS PA ID COMPENSATION OF RS.5.49 CRORE TO THE LANDLORD FOR E ARLY VACATION OF ITS PREMISES BY WAY OF UTILIZATION OF P ROVISION CREATED IN FINANCIAL YEAR 2008-09. THE SAID CLAIM W AS MADE ON THE BASIS OF CLAUSE (I) OF EXPLANATION I TO SECTION 115JB. THE SAID CLAIM HAS BEEN DISALLOWED BY THE ASSESSING OFFICER I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 40 ON THE GROUND THAT, P&L ACCOUNT HAS TO BE PREPARED IN ACCORDANCE WITH COMPANIES ACT, WHEREIN ASSESSEE HAD SHOWN NET PROFIT OF RS.19,74,67,550/- AND ONLY ADJUSTMENT WHICH IS ALLOWED OR PERMISSIBLE IS AS PER EXPLANATION 1 TO 115JB AND ASSESSING OFFICER HAS NO DISCRETION TO MAKE ANY ADJU STMENT UNDER MAT. THE AMOUNT OF RS.5,42,99,000/- PAID TO T HE LANDLORD BY WITHDRAWING WITH THE PROVISION DURING T HE YEAR 2010-11 HAS NOT BEEN FOUND UNDER CLAUSE (I) OF EXPL ANATION I BECAUSE SUCH AMOUNT IS NOT CREDITED TO THE P&L ACCO UNT. IT HAS BEEN CONFIRMED BY THE DRP ALSO. 48. AFTER CONSIDERING THE RIVAL SUBMISSIONS MA DE BY THE PARTIES BEFORE US AND ON PERUSAL OF THE RELEVANT FI NDINGS GIVEN IN THE IMPUGNED ORDERS AS WELL AS MATERIAL REFERRED TO DURING THE COURSE OF HEARING, WE FIND THAT THE ASSESSEE HA D CREATED THE PROVISION OF CONTINGENCY IN THE ASSESSMENT YEAR 2009-10 AMOUNTING TO RS.6,80,00,000/- ON ACCOUNT OF ANTICIP ATION OF EARLY VACATION OF PREMISES. THE SAID PROVISION FOR CONTINGENCY WAS ADDED BACK WHILE COMPUTING THE BOOK PROFIT FOR THE ASSESSMENT YEAR 2009-10 WHICH WAS IN ACCORDANCE WIT H CLAUSE (C) OF EXPLANATION 1 TO SECTION 115JB. IN THE ASSESSMENT YEAR 2010-11, AN AMOUNT OF RS.1,37,01,00 0/- OUT OF TOTAL SUM WAS REVERSED TO THE P&L ACCOUNT, L EAVING AN AMOUNT OF RS. 5,42,99,000/-. IN THE IMPUGNED ASSESS MENT YEAR 2011-12, THE ASSESSEE ACTUALLY PAID THE COMPEN SATION AMOUNTING TO RS.5,42,99,000/- TO THE LANDLORD OUT O F PROVISIONS FOR CONTINGENCIES FOR EARLY VACATION OF OFFICE I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 41 PREMISES. SINCE THE ASSESSEE HAD ADDED BACK THE AMO UNT OF COMPENSATION WHILE COMPUTING THE BOOK PROFIT FOR A. Y. 2009- 10, IT WAS CLAIMED THAT THE SAME AMOUNT IS ALLOWABL E AS DEDUCTION DURING THE ASSESSMENT YEAR 2011-12 IN VIE W OF THE PROVISION OF CLAUSE (I) TO EXPLANATION 1 TO SECTION 115JB. 50. BEFORE US THE LEARNED COUNSEL SUBMITTED THA T, PROVISION FOR CONTINGENCY AMOUNTING TO RS.6,80,00,000/- WAS M ADE BY WAY OF FOLLOWING ACCOUNTING ENTRY IN A.Y. 2009-10:- PROFIT & LOSS ACCOUNT DR. : INR 6,80,00,000/- TO PROVISION FOR CONTINGENCIES: INR 6,80 ,00,000/- IN THIS MANNER, THE SAID PROVISION WAS CREATED IN T HE BOOKS AND WAS ADDED BACK WHILE COMPUTING THE BOOK PROFIT FOR A.Y. 2009-10. OUT OF THE SAID PROVISION, REVERSAL OF RS.1,37,01,000/- WAS MADE IN A.Y. 2010-11 AND THERE BY THE BALANCE OF PROVISION FOR CONTINGENCY WAS REDUCED TO RS.5,42,99,000/-. HE SUBMITTED THAT, SINCE ASSESSEE HAS ALREADY DISALLOWED AND PAID THE TAXES ON ENTIRE AMO UNT OF RS.6.80 CRORE AND ALREADY THE AMOUNT OF RS.1,37,01, 000/- WAS ALLOWED FOR MAT FOUNDATION PURPOSE IN A.Y.2010- 11, THEREFORE, THE ACTUAL PAYMENT MADE FROM THE SAME PR OVISION HAS TO BE ALLOWED. ONCE DURING THE YEAR, ASSESSEE H AD PAID COMPENSATION OF ENTIRE BALANCE AMOUNT, WHICH WAS EA RLIER ADDED BACK FOR COMPUTING THE BOOK PROFIT HAS NOW BE EN CLAIMED. THE NATURE OF ENTRY HAS BEEN EXPLAINED IN THIS MANNER:- PROVISION FOR CONTINGENCIES DR. INR 5,42,99,000/- TO BANK A/C / LANDLORDS A/C INR 5,42 ,99,000/- I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 42 THE AFORESAID ACCOUNTING ENTRY IS A COMPOSITE ACCOUNTING ENTRY WHICH IS IN EFFECT THE COMBINATION OF FOLLOWING TWO A CCOUNTING ENTRIES:- PROVISION FOR CONTINGENCIES DR. INR 5,42,99,000/- TO PROFIT & LOSS ACCOUNT INR 5,42,99,000/- AND PROFIT & LOSS ACCOUNT DR. INR 5,42,99,000/- TO BANK A/C / LANDLORDS A/C INR 5,42,99,000/- THUS, HE SUBMITTED THAT SAME CANNOT BE ADDED BACK F OR THE PURPOSE OF COMPUTING THE BOOK PROFIT. 51. ON THE OTHER HAND, LEARNED DR, SUBMITTED THAT NET PROFIT SHOWN IN THE BOOK PROFIT ACCOUNT CANNOT BE C HANGED AND BOOK PROFIT NEEDS TO BE TAXED UNDER THE PROVISI ON OF LAW AND THERE IS NO QUESTION OF LAW ANY TINKERING P&L A CCOUNT. 52. FROM THE FACTS AS NARRATED ABOVE, IT IS EVIDE NTLY CLEAR THAT PROVISION FOR CONTINGENCY WHICH WAS MADE IN TH E ASSESSMENT YEAR 2009-10 WAS ADDED BACK FOR THE PURP OSE OF COMPUTING THE BOOK PROFIT AND CALCULATION OF MAT. A PART OF THE SUM WAS REVERSED WHICH WAS ALLOWED FOR THE PURP OSE OF MAT COMPUTATION BY THE ASSESSEE AND ALSO ACCEPTED B Y THE ASSESSING OFFICER. FROM THE ACCOUNTING ENTRIES AS E XPLAINED BY THE LEARNED COUNSEL SHOW THAT A COMPOSITE ACCOUN TING ENTRY HAS BEEN INCORPORATED ABOVE. IN SUBSTANCE, TH ERE IS A WITHDRAWAL FOR PROVISION OF CONTINGENCIES WHICH WAS CREATED TO THE P&L ACCOUNT AND FURTHER THERE WAS A DEBIT IN P&L I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 43 ACCOUNT ON ACCOUNT OF PAYMENT OF LANDLORD. OTHERWIS E ALSO THE WITHDRAWAL FROM PROVISION OF CONTINGENCIES HAS TO BE REDUCED IN TERMS OF CLAUSE (I) OF EXPLANATION 1 TO SECTION 115JB. IT WAS ONLY TO GIVE EFFECT TO THE AFORESAID ADJUSTMENT, ASSESSEE BY WAY OF COMPOSITE ENTRY PRESENTED UTILIZ ATION OF THE PROVISION FOR CONTINGENCIES FOR COMPENSATION PA ID TO LANDLORD AMOUNTING TO RS.5,42,99,000/- WHILE COMPUT ING THE BOOK PROFIT FOR ADJUSTMENT U/S.11JB. THE FACT REMAIN S THAT EXPENDITURE HAS BEEN INCURRED AND EVEN IF THE ENTRI ES IN THE BOOKS OF ACCOUNT HAVE BEEN MADE IN A DIFFERENT MANN ER, THE SAME CANNOT BE HELD TO BE A DETERMINATIVE FACTOR FO R TAXING OR DISALLOWING THE AMOUNT OR DEPRIVE THE ASSESSEE FROM CLAIMING THE EXPENDITURE AS DEDUCTION. THERE IS NO TINKERING OF THE NET PROFIT AS SHOWN IN THE P&L ACCOUNT IN THE RELEVANT PREVIOUS YEAR PREPARED IN ACCORDANCE WITH THE PROVISION OF P ART-II & III OF SCHEDULE VI OF THE COMPANIES ACT AS ALLEGED BY T HE ASSESSING OFFICER, BECAUSE FROM THE ABOVE NOTE OF T HE ACCOUNTING ENTRIES, WE DO NOT FIND THAT THE NET PRO FIT HAS NOT BEEN COMPUTED IN ACCORDANCE WITH THE PROVISION OF COMPANIES ACT AND AS SUCH THERE IS NO IMPACT ARISIN G ON ACCOUNT OF THE ABOVE. THUS, WE AGREE WITH THE CONTE NTION OF THE LEARNED COUNSEL AND HOLD THAT THE AMOUNT OF RS.5,42,99,000/- CANNOT BE ADDED BACK FOR COMPUTING THE BOOK PROFIT U/S.11JB. ACCORDINGLY, THE ASSESSEES G ROUND IS ALLOWED. I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 44 53. NOW WE WILL COME TO THE ASSESSMENT YEAR 201 2-13, IN THIS APPEAL ASSESSEE, IS ONLY AGGRIEVED BY TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF ITES OF RS.22,48,12,743/- AND ON ACCOUNT OF RECEIVABLES OF RS.1,19,54,436/-. 54. SO FAR AS ADJUSTMENT ON ACCOUNT OF ITES IS CON CERN, THE LEARNED COUNSEL HAS ARGUED FOR THE EXCLUSION OF ECL ERX; TCS E-SERVE LTD. AND INCLUSION OF INFOSYS BPO LTD. HE F URTHER POINTED OUT THAT EVEN IF ECLERX AND TCS E-SERVE LTD . ARE REMOVED THE ASSESSEES MARGIN WILL FALL WITHIN +/- RANGE OF 5%. IN THIS YEAR ALSO AS ADMITTED BY BOTH THE PARTI ES THERE IS NO CHANGE IN THE MATERIAL FACTS EITHER WITH REGARD TO THE FUNCTIONS CARRIED OUT BY THE ASSESSEE IN ITES SEGME NT OR IN THE FUNCTIONALITY OR OTHER FACTORS, VIS--VIS, THE COMPARABLES DURING THE ASSESSMENT YEAR 2012-13. REGARDING E-CLE RX, THE ASSESSEES SUBMISSION HAS BEEN THAT IT FOLLOWS THE OUTSOURCING MODEL OF BUSINESS AND OUT RS.128.38 CRO RE AN OUTSOURCING CONTRACT FOR SERVICES HAS BEEN 66.08 CR ORE, WHEREAS IN THE CASE OF THE ASSESSEE IT HAS BEEN NIL . WE HAVE ALREADY DISCUSSED THIS ISSUE IN DETAIL IN THE EARLI ER YEARS, WHEREIN FOLLOWING THE VARIOUS TRIBUNAL DECISIONS WE HAVE HELD THAT THIS FACTOR ALONE IS SUFFICIENT FOR EXCLUSION OF THE COMPARABLE FROM THE ASSESSEE. ACCORDINGLY, WE HOLD THAT E- CLERX SHOULD BE EXCLUDED. 55. AS REGARDS TCS E-SERVE LTD., THE FOLLOWING FI GURES HAVE BEEN SUBMITTED BY THE ASSESSEE TO SHOW THAT THERE I S A I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 45 DIFFERENCE IN THE SCALE OF OPERATIONS, PRESENCE OF INTANGIBLE AND BRAND EXPENDITURE:- PARTIC ULARS AGILENT INTERNATIONAL TCS E - SERVE FY 2011 - 12/AY 2012 - 13 FY 2011 - 12/AY 2012 - 13 TURNOVER INR 243.12 CRORES INR 1733.34 CRORES EMPLOYEE COST INR 138.93 CRORES INR 697.91 CRORES INTANGIBLES NIL INR 2.83 CRORES BRAND EXPENDITURE NIL INR 3.67 CRORES 56. SINCE THE COMPARABILITY FACTORS AND OTHER I SSUES REMAINS THE SAME IN THIS YEAR ALSO WITH REGARD TO T HE TCS E- SERVE LTD., THEREFORE, FOLLOWING THE PRECEDENTS OF THE EARLIER YEARS AS ABOVE, WE HOLD THAT TCS E-SERVE LTD., CANN OT BE TAKEN FOR THE PURPOSE OF COMPARABILITY ANALYSIS. AC CORDINGLY, TPO IS DIRECTED TO EXCLUDE THESE TWO COMPARABLES AN D IF THE ASSESSEES MARGIN AFTER EXCLUSION OF THESE COMPARAB LES IS FOUND WITHIN THE ARMS LENGTH RANGE THEN NO ADJUSTM ENT SHOULD BE MADE. 57. LASTLY, ON ACCOUNT OF RECEIVABLES ON WHICH AD JUSTMENT OF RS.1,19,54,436/- HAS BEEN MADE, AGAIN THE CONTEN TION OF LEARNED COUNSEL BEFORE US THAT ASSESSEE HAS BEEN AL LOWED WORKING CAPITAL ADJUSTMENT BY THE LEARNED DRP AND ACCORDINGLY, IT WILL TAKE INTO ACCOUNT THE IMPACT O F OUTSTANDING RECEIVABLES ON THE PROFITABILITY AND AC CORDINGLY NO SEPARATE ADJUSTMENT IS WARRANTED. THESE PLEADINGS OF THE I.T.A. NO.1620/DEL/2015, 477 & 6429/DEL/2016 46 ASSESSEE HAS BEEN ACCEPTED BY US IN THE EARLIER YEA RS, FOLLOWING THE VARIOUS DECISIONS OF THE TRIBUNAL SPE CIFICALLY IN THE CASE OF KUSUM HEALTHCARE PVT. LTD. WHICH HAS BE EN UPHELD BY THE HONBLE HIGH COURT ALSO. THUS, WE DIR ECT THE TPO/AO THAT NO SEPARATE ADJUSTMENT ON ACCOUNT OF RECEIVABLES ARE REQUIRED AFTER CONSIDERING THE WORK ING CAPITAL ADJUSTMENT. ACCORDINGLY, THE APPEAL FOR THE ASSESSM ENT YEAR 2012-13 IS TREATED AS ALLOWED. 58. THE OTHER GROUNDS ARE EITHER GENERAL IN NATUR E OR CONSEQUENTIAL; THEREFORE, NO SEPARATE ADJUDICATION I S REQUIRED. 59. IN THE RESULT, ALL THE APPEALS OF THE ASSESSEE IS TREATED AS PARTLY ALLOWED IN THE MANNER INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH FEBRUARY, 2018. SD/- SD/- [O.P. KANT] [AMIT SHUKLA] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 12 TH FEBRUARY, 2018 PKK: