M/S. DELL INTERNATIONAL SERVICES INDIA PRIVATE LIMITED ( FORMERLY KNOWN AS DELL COMPUTER INDIA PRIVATE LIMITED),BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2(1)(1), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT BEENA PILLAI, JUDICIAL MEMBER

IT(TP)A No. 226/Bang/2023 Assessment Year : 2008-09

M/s. Dell International Services India Pvt. Ltd. (Formerly known as Dell Computer India Pvt. Ltd.), The Deputy Divyasree Greens, Sy Nos. Commissioner 12/1, 12/2A & 13/1A of Income Tax, Challaghatta Village, Circle – 2(1)(1), Varthur Hobli, Bangalore. Vs. Bangalore – 560 071. PAN: AAACH1925Q (Old PAN : AAACV9201H) APPELLANT RESPONDENT : Ms. Tanmayee Rajkumar, Assessee by Advocate Revenue by : Shri G. Manoj Kumar, CIT - DR

Date of Hearing : 23-01-2024 Date of Pronouncement : 22-04-2024

ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal arises out of order dated 30.01.2023 passed by the Ld.DCIT, Circle – 2(1)(1), Bangalore for A.Y. 2008-09 on following grounds of appeal:

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2.2 The international transactions that took place between the assessee and its AEs during the assessment year 2008-09 was for the provision of SWD services amounting to Rs. 481,13,89,224/- and ITE services amounting to Rs. 893,24,13,539/-, for which TP adjustment of Rs. 266,43,69,160/- (SWD services – INR 32,58,63,296/- and ITE

Page 5 of 19 IT(TP)A No. 226/Bang/2023 services – INR 233,85,05,864) was made by the TPO, vide order dated 31.10.2011.

2.3 Draft assessment order was passed by the Ld.AO on 20.12.2011 incorporating the aforesaid TP adjustment. The Ld.AO further disallowed the claim made under Section 10A of the Act and disallowed the claim made towards provision for doubtful advances and gratuity.

2.4 As the assessee did not choose to file objections before the DRP, the Ld.AO passed the final assessment order on 25.01.2012. Subsequently, a rectification order dated 25.05.2015 was passed by the TPO, wherein the TP adjustment was reworked at Rs. 179,02,98,850/-.

2.5 Aggrieved by the final assessment order, the assessee preferred appeal before the Ld.CIT(A). During the pendency of the appeal before the Ld.CIT(A), the assessee filed an application under Mutual Agreement Procedure (MAP) with respect to the ITE services rendered by the assessee to its AE situated in the US. The said MAP proceedings was concluded vide resolution dated 28/10/2015. On 17/11/2015, the assessee filed its acceptance to the MAP resolution. Order dated 25/01/2016 was passed by the Ld.AO wherein the TP adjustment for the ITES services with US AE segment stood reduced to Rs. 79,18,74,331/-. The assessee withdrew its appeal before the CIT(A) to the extent of the TP adjustment made towards ITES services with US AE and filed

Page 6 of 19 IT(TP)A No. 226/Bang/2023 revised grounds of appeal against the sustained TP adjustment amounting to Rs. 48,06,27,749/-.

2.5.1 The Ld.CIT(A) accepted the application of the MAP resolution to the Non-US transactions for ITE services and that resulted in a TP adjustment of Rs. 29,13,58,924/-.

2.5.2 With respect to the adjustment made towards the SWD services segment and the corporate tax front, the CIT(A) granted partial relief.

2.6 Aggrieved by the order of the CIT(A) to the extent it did not grant relief to the assessee regarding ITES service to non-AEs, an appeal was filed before this Tribunal. To the extent of relief to the assessee, the Revenue preferred appeal before this Tribunal.

2.7 Upon hearing both the parties, this Tribunal, vide order dated 23.10.2019, partly allowed the appeals preferred by the assessee and the Revenue. On the issue of application of the margin agreed under the MAP resolution to the Non-US transactions for ITE services, this Tribunal held that, in the event it is found that factors influencing price are similar to that of US transactions, the same margin may be adopted.

2.8 Thereafter, the Ld.TPO passed order dated 24.01.2022 determining a TP adjustment with respect of ITE services segment at Rs. 89,38,90,119/- (Rs. 31,12,46,582/- towards

Page 7 of 19 IT(TP)A No. 226/Bang/2023 transactions with US AEs and Rs. 58,26,85,747/- towards transactions with Non-US AEs). The Ld.TPO held that, the margin arrived under the MAP resolution for ITE services is based on negotiation with the US competent authorities and accordingly, the same cannot be adopted for the Non-US transactions. Further, the TP adjustment towards SWD services segment were deleted pursuant to the order of this Tribunal.

2.9 The Ld.AO passed a draft assessment order dated 30.03.2022 in which the aforesaid TP adjustment and the disallowance made towards the provision for gratuity was also incorporated. Aggrieved by the draft assessment order, the assessee filed its objections before the DRP. The DRP vide its directions dated 19.12.2022, granted marginal relief to the assessee by granting exclusion of one company, M/s Acropetal Technologies Ltd. (Seg).

2.10 On receipt of the directions of the DRP, the Ld.AO passed the final assessment order dated 30.01.2023 in which the TP adjustment was reduced to Rs. 87,82,93,271/- (Rs. 31,12,46,582/- towards transactions with US AEs and Rs. 56,70,46,689/- towards transactions with Non-US AEs) and disallowance of provision of gratuity was sustained.

2.11 Aggrieved by the final assessment order, the assessee preferred the present appeal before this Tribunal.

Page 8 of 19 IT(TP)A No. 226/Bang/2023 3. At the outset, the Ld.AR submitted that assessee wish to press the following issues.

3.1 Ground No. 2 - That the TPO erred arbitrarily bifurcating the ITES segment US and non-US segments without taking into account the adjustments made by the competent authorities of US and India to the operating revenue and operating cost;

3.2 Ground No. 4.3 - That the DRP erred in not excluding Infosys BPO Ltd., Cosmic Global Ltd., Crossdomain Solutions Ltd., Wipro Ltd., Accentia Technologies Ltd., Genesys International Corporation Ltd., Coral Hubs Ltd., Eclerx Services Ltd. and, Mold-Tek Technologies Ltd., from the final list of comparables as being functionally incomparable.

3.3 Ground No. 5 - That an adjustment on account of negative working capital ought not to have made since the Appellant is a captive service provider and does not bear any working capital risk.

3.4 Ground No. 6 - Without prejudice to the above, the arm’s length mark-up on cost arrived under the Mutual Agreement Procedure Resolution to be applied for transactions with Non-US based entities for the ITE services segment.

Page 9 of 19 IT(TP)A No. 226/Bang/2023 pricing adjustment is regarding the non-US transactions under ITES segment.

4.1 On perusal of the transfer pricing order, we note that the net markup earned by the assessee as computed by the Ld.TPO as per order dated 31.10.2011 in the original order u/s. 92CA is as under: Particulars Total Operating Revenue Rs. 893,24,13,539/- Operating Cost Rs. 823,96,96,539/- Operating Profit (Op. Rs. 69,27,17,000/- Revenue – Op. Cost) Operating/Net mark-up 8.41% (OP/OC)

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Sl. OP/TC No. Name of the Company (WC–unadj) (in %) 1. Accentia Technologies ltd. 41.77 2. Acropetal Technologies Lts. (seg.) 35.30 3. Aditya Birla Minacs Worldwide Ltd. (Earlier -4.00 known as Transworks Information Services Ltd.) 4. Asit Mehta Financial Services Ltd. (seg.) 9.42 5. Caliber Point Business Solutions Ltd. 10.97 6. Coral Hubs Ltd. (Earlier known as Vishal 50.68 Information Technologies Ltd.) 7. Cosmic Global Ltd. 23.30 8. Crossdomain Solutions Ltd. 27.03 9. Datamatics Financial Services Ltd. (Seg.) 29.11 10. e4e Healthcare Solutions Ltd. (Formerly known 18.54 as Nittany Outsourcing Services Pvt Ltd.) 11. Eclerx Services Ltd. 58.80 12. Genesys International Corporation Ltd. 47.40 13. Infosys BPO Ltd. 19.66 14. IServices India Pvt Ltd 10.77 15. Jindal Intellicom Pvt. Ltd. -10.29 16. Mold-Tek Technologies Ltd. 96.66 17. R Systems International Ltd. (Seg.) 4.30 18. Spanco Ltd. (Earlier known as Spanco 8.81 Telesystems & Solutions Ltd.) 19. Wipro Ltd 30.05 20. Allsec Technologies Ltd. -13.29 AVERAGE MARK-UP 24.75

Thereafter the Ld.TPO computed an adjustment of Rs.154,56,23,611/- under ITeS segment.

Page 11 of 19 IT(TP)A No. 226/Bang/2023 Particulars USA (As per MAP Non-USA @ Total order @ 15.72%) 26.18% Operating Rs. Rs.2,78,51,51,268/ Rs. Cost 5,45,45,45,271/- - 823,96,96,539/- Arm’s length Rs. Rs. price 6,31,19,99,788/- 197,75,92,582/- Actual Rs. Rs. revenue 600,07,95,416/- 293,16,18,123/- received Amount of Rs. Rs. Rs. revised 31,12,04,372/- 58,26,85,747/- 89,38,90,119/- adjustment

Page 12 of 19 IT(TP)A No. 226/Bang/2023 Particulars Ref US (As per Non-US Total MAP order) Operating A 6,000,795,416 2,931,618,123 8,9 Revenue 32,413,539 Operating B 5,454,545,271 2,785,151,268 8,239,696,539 Cost (OC) Operating C=A-B 546,250,145 146,466,855 692,717,000 Profit (OP) OP/OC D=C/B 10.01% 5.26% 8.41% TP E=As per MAP 983,807,805 480,627,748 1,464,435,553 Adjustment letter in the original TP order ALP F=(C+E)/B NA 26.18% 26.18% determined in the original TP order TP G=((B*(126.18%))- NA 582,685,747 582,685,747 Adjustment A as per OGE TP Order Increase in H=E-G NA (102,057,999) TP Adjustment due to incorrect bifurcation

Page 13 of 19 IT(TP)A No. 226/Bang/2023 12. The Ld.AR submitted that, the Ld.TPO did not find any dissimilarities in the Functions, Assets and Risks analysis of the US and Non-US ITE services transactions and therefore, in light of the Tribunal’s order dated 23.10.2019, the MAP margin ought to be adopted.

Page 14 of 19 IT(TP)A No. 226/Bang/2023 16. The Ld.AR placed reliance on the decision of this Tribunal in the Assessee’s own case for the assessment year 2010-11 (Order dated 03.08.2021 passed in IT(TP)A No. 637/Bang/2016) at paras 41-43 and Assessee’s own case for the assessment year 2011-12 (Order dated 01.09.2021 passed in IT(TP)A Nos. 593/Bang/2016) at paras 10-12. We accordingly direct the Ld.AO/TPO to adopt the margin for ITeS segment agreed under the MAP with the AE to the non-AE transaction also. Accordingly, Ground no. 2 raised by the assessee stands allowed.

18.1 The assessee is challenging the action of the Ld.TPO in determining a negative working capital adjustment, which came to be upheld by the DRP.

18.2 It is submitted that, working capital adjustment is made for the time value of money lost when credit time is given to the customers. The assessee is not an entrepreneur but a captive

Page 15 of 19 IT(TP)A No. 226/Bang/2023 service provider which is entirely funded by the AEs. This being so, the assessee is compensated on a cost plus basis. It is submitted that, the assessee is running the business without any working capital risk as compared to the comparables. Therefore, requirement for adjustment of negative working capital does not arise.

18.3 The Ld.AR relied on the decisions of this Tribunal in the cases of (i) Lam Research (India) Pvt. Ltd. v. DCIT (Order dated 30.04.2015 in ITA No. 1473 and 1385/Bang/2014); (ii) DCIT v. Software AG Bangalore Technologies Pvt. Ltd. (Order dated 31.03.2016 passed in ITA No. 1628/Bang/2014) and (iii) Tivo Tech Private Limited [Formerly Veveo (India) Pvt. Ltd.] v. DCIT (Order dated 12.06.2020 in IT(TP)A No.1619/Bang/2017), where it has been held that negative working capital adjustment shall not be made in case of a captive service provider as there is no risk and it is compensated on a total cost plus basis.

18.4 We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are of the opinion that this issue came for consideration before this Tribunal in the case of Lam Research (India) (P.) Ltd. (supra) wherein held as under: “25. We have perused the orders and considered the rival contentions. In the case of Adaptec (India) (P.) Ltd., (supra), for A. Y. 2009-10, this Tribunal held as under at para 10 and 11 of its order: “10. Ground No. 8 pertains to the issue of negative working capital. As briefly stated above, after arriving at the arithmetic mean of all comparables at 22.03%,

Page 16 of 19 IT(TP)A No. 226/Bang/2023 the A.O. worked out negative working capital adjustment of 3.22% thereby, making arms' length price at 25.25%. Even though, DRP refused to interfere with the objections of the assessee in its order, we were informed that DRP has directed the TPO/A.O. not to make any negative working capital adjustment in some of the cases in the next assessment year, in the cases of Market Tools Research P. Ltd., and Mega Systems Worldwide India P. Ltd., assessee placed on record copies of orders of DRP, In that DRP considered the issue and directed the TPO as under: “14. Ground No. 11 : Negative Working Capital adjustment Making a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks. On this issue, the assessee submitted as under: "The learned TPO determined the ALP for the international transactions with A.Es by making a negative working capital adjustment for the differences in working capital between the assessee and the companies considered as comparables. The assessee does not agree with the learned TPO as the company does not bear any working capital risk since it is been fully funded by it's A.E. from its inception and has no working capital contingencies. The company has never taken any loans till date from the date of incorporation nor has incurred any expense for meeting the working capital requirement." We have gone through the submissions and the order of the TPO. The assessee pleaded that the DRP has acceded such a plea in some other case. On examination, we find that the DRP, Hyderabad in-the case of Cordys Software India P. ltd., for A.Y. 2008-09 in its directions dated 3-8-2012 has given a finding as under: “7.7.4 Thus, working capital adjustment is made for the time value of money lost when credit time is provided to the customers. The applicant is not an entrepreneur but a captive service provider. Its entire funding needs are provided by the A.E. This being so, the applicant does not stand to lose anything as it is compensated on a total cost plus basis. The TPO probably was carried away by the large amount of receivables appearing in the books of the applicant. But the applicant is running its business without any working capital risk while comparable companies have such a risk for them. If at all

Page 17 of 19 IT(TP)A No. 226/Bang/2023 any working capital adjustment is to be made to t his situation, only a positive adjustment has to be made to the comparables so that they are brought on par with the applicant. In view of the same, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made." In view of the above, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made." 11. In view of the above, we are of the opinion that assessee's case being similar, there is no need for making any negative working capital adjustment when assessee does not carry any working capital risk. In fact, TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the ITA.No.206/Hyd/20 Adaptec (India) P. Ltd., Hyderabad. In view of this, we direct the TPO not to make negative working capital adjustment." 26. This Tribunal had held that negative working capital adjustment cannot be carried out, where the assessee was a captive service provider. Here also it is an admitted position that assessee was a captive service provider and its services are entirely rendered to its AE abroad. Its share capital was entirely sourced from its AE abroad. Therefore, in our opinion, the view taken by this Tribunal in the case of Adaptec (India) P. Ltd., will squarely apply here. We, therefore, direct that no negative working capital adjustment shall be carried out on the average PLI of the final set of comparables." 15.1 In view of the above order, we direct the AO that no negative working capital adjustment shall be carried out in the light of above order of the Tribunal. Ordered accordingly.” Accordingly, this ground raised by assessee stands allowed.

Page 18 of 19 IT(TP)A No. 226/Bang/2023 computed u/s. 234B and D and not granting of interest u/s. 244A of the act.

19.1 It is submitted by the Ld.AR that regarding the disallowance of provision for guarantee, this Tribunal had remanded the issue to the Ld.AO to carry out necessary verification on the basis of actuarial valuers report. Such documents were never verified by the Ld.AO and the directions of the Tribunal has not been followed in its letter and spirit.

19.2 In respect of inappropriate consideration taxes paid, it is submitted that the Ld.AO erred in computing the tax liability by considering the taxes paid by the assessee in March 2012 at Rs.182,056,598/- as against Rs.330,000,000/-, credit for which was duly granted in the previous orders. It is thus submitted that the above two issues requires verification and necessary correction while computing the taxable income in the hands of the assessee. In respect of interest levied u/s. 234B & D, the Ld.AR submitted that the assessing officer erred in computing the interest u/s. 234B of the act for 48 months instead of 46 months. It is submitted that similar mistake has crept in while computing interest u/s. 234D which was computed for 33 months instead of 31 months.

19.3 The Ld.AR further submitted that the Ld.AO erred in not granting interest u/s. 234A of the act on the refund that was determined in the earlier orders. In the interest of justice, we deem it necessary to remand all the above four issues raised by

Page 19 of 19 IT(TP)A No. 226/Bang/2023 the assessee in Ground nos. 7-10 to the Ld.AO for necessary verification as per the directions of this Tribunal in the previous order as well as in accordance with law. Accordingly, ground nos. 7-10 raised by the assessee stands partly allowed for statistical purposes. In the result, the appeal filed by the assessee stands partly allowed. Order pronounced in the open court on 22nd April, 2024.

Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 22nd April, 2024. /MS / Copy to: 1. Appellant 2. Respondent 3. CIT 4. DR, ITAT, Bangalore 5. Guard file 6. CIT(A) By order

Assistant Registrar, ITAT, Bangalore