FLEXTRONICS TECHNOLOGIES (INDIA) PRIVATE LIMITED,KANCHEEPURAM vs. DCIT CORPORATE CIRCLE 2(1), CHENNAI

आयकर अपीलीय अिधकरण “डी”�ायपीठ चे�ईम�। IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, CHENNAI माननीय �ी वी.दुगा� राव, �ाियक सद! एवं माननीय �ी मनोज कुमार अ&वाल ,लेखा सद! के सम)। BEFORE HON’BLE SHRI V. DURGA RAO, JMAND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM आयकरअपीलसं./ IT(TP)A No.104/Chny/2018 (िनधा�रणवष� / Assessment Year: 2014-15) M/s.Flextronics Technologies (India) Pvt. Ltd. DCIT बनाम/ Plot No.3, Phase-II SIPCOT Industrial Park Corporate Circle-2(1) Sadavellure C Village, Sriperumbudur Taluk Coimbatore Vs. Kanchipuram Dist.-602 106. �थायीलेखासं./जीआइआरसं./PAN/GIR No.AAACE-5248-E (अपीलाथ�/Appellant) (!"थ� / : Respondent) अपीलाथ�कीओरसे/ Appellant by : Shri Ajit Kumar Jain (CA)-Ld.AR !"थ�कीओरसे/Respondent by : Shri A.Sasikumar (CIT)-Ld. DR सुनवाईकीतारीख/Date of Hearing : 11-01-2024 घोषणाकीतारीख /Date of Pronouncement : 23-01-2024 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member)

IT(TP) A No.104/Chny/2018 to determination of Arm’s Length Price (ALP) before Ld. Transfer Pricing Officer-3, Chennai (TPO) vide order dated 30-10-2017. Aggrieved by confirmation of certain Corporate Tax Adjustments as well as Transfer Pricing (TP) adjustments in the final assessment order, the assessee is in further appeal before us. The grounds raised by the assessee read as under: l(a) The Order passed by the Learned ('Ld.') Deputy Commissioner of Income Tax, Corporate Circle 1(2), ('DCIT' or 'AO') in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel ('Ld. Panel') under section 143(3) r.w.s. 144C(13) r.w.s 92CA of the Income-tax Act, 1961 ('the Act'), is bad in law and on facts. l(b) The Ld. Panel grossly erred in law and on facts by not considering the objections raised by the Appellant and in passing directions on the basis of factually incorrect statements. 2 The Ld AO on the facts and circumstances of the case and in law erred in initiating penalty proceedings under Section 271(1)(c) of the Act on the premise that the appellant has concealed/ furnished inaccurate particulars of income. Transfer Pricing Grounds with regard to the ITeS Segment The Ld. TPO and Ld. AO, under the directions issued by the Ld. Panel 3(a) Erred in law and on facts in rejecting the TP documentation maintained by the Appellant in accordance with Section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962 ('the Rules'), complying with the provisions of sub section (1) and (2) of Section 92C, with regard to the most appropriate method and its application, without any cogent reasons. 3(b)Erred in law and on facts in disregarding the application of multiple-year data while computing the margins of alleged comparable companies as such data had an influence in determining the arm's length price of the international transaction of the Appellant 3 (c) Erred in facts and in law in rejecting the search process conducted by the Appellant the TP Study without any basis. Erred in law and on facts in rejecting the comparable companies selected by the Appellant without appreciating that the companies satisfy the filters adopted by the Ld. TPO himself. 3(d) Erred in law and on facts in applying the following arbitrary filters as criterion for rejection of companies identified by the Appellant in the TP Study: (i) Different Financial Year-end Filter (ii) Export Filter of 75% 3(e)Erred in law and on facts in rejecting two companies namely Sundaram Business Services Ltd and Allsec Technologies Ltd on account of persistent losses even though they were functionally comparable and the companies had earned profits in one out of the three years. 3(f) [Erred in law and on facts in selecting the following functionally different companies, including very large companies and those performing R&D and building IPs, as comparables: (i) Infosys BPO Limited ; (ii) Microgenetic Systems Ltd ; (iii) Microland Limited ; and

IT(TP) A No.104/Chny/2018 (iv) Crossdomain Solutions Private Limited

3(g) Erred in law and on facts in selecting Infosys BPO Limited as a comparable without appreciating that the same was rejected by the Income tax Appellate Tribunal in the Appellant's own case in the earlier assessment years on the grounds of functional comparability. 3(h) Erred in law and on facts in rejecting the following functionally comparable companies selected by the Appellant i) Allsec Technologies Ltd; ii) Jindal Intellicom Ltd ; iii) Sundaram Business Services Ltd ; iv) Caliber Point Business Solutions Ltd ; v) Informed Technologies Ltd; vi) R System International Limited ; vii) Crystal Voxx Ltd ; and viii) Ace BPO Services Ltd. 3(i) Erred in law and on facts in not allowing appropriate adjustments under Rule l0B to account for, inter alia, differences in the Functions, Assets and Risks ('FAR') between the Appellant and the comparables. Erred in law and on facts in not granting working capital adjustment by stating that the Appellant has failed to demonstrate the material working capital differences warrant an adjustment, despite the submissions filed by the Appellant in this regard. Erred in not granting risk adjustment by not appreciating that the Appellant, being a captive services provider operates at lower risk levels as compared to comparable companies carrying high risks 3(j)Erred in law and on facts in computation of margins of the Appellant by considering foreign exchange fluctuation gain, provision for doubtful debts written back and miscellaneous income as non-operating. 3(k)Erred in law and on facts in computation of margins of comparable companies by considering provision for doubtful debts as non- operating, without appreciating that these are interlinked to the operations of the company. 3(l)Erred in not recording an opinion that any of the conditions in section 92C(3) of the Act were satisfied in the instant case. Accordingly, the Order passed by the Ld. TPO is without jurisdiction. The Ld. Panel erred in upholding the actions of the Ld. TPO Erred in law and on facts in failing to establish that the Appellant shifted profits outside India. 4(a) Erred in law and on facts in imputing notional interest on the outstanding receivables from the AEs, thereby making an adjustment. 4(b) Erred in not appreciating that the Appellant is a zero debt company and there are no interest costs which require compensation from the AEs. 4(c) Erred in law and on facts in failing to appreciate that such outstanding receivables are a result/ consequence of the Appellant's international transactions with its AEs and is not a separate international transaction per se, as per provisions of section 92B of the Act 4(d) Erred in law and on facts in failing to appreciate that the Appellant has similar credit terms with respect to the sales made to third parties. 4(e) Erred in law in treating overdue receivables as Capital Financing, under the definition of International transaction under Section 92B of the Act. Erred in law and on facts by disregarding the actual transaction of receivables arising in the normal course of business and re-characterizing the same as capital financing.

IT(TP) A No.104/Chny/2018 4(f) Erred in law by not following any of the prescribed Transfer Pricing methods as required under Section 92C of the Act read with Rule 10B of the Rules, while determining the Arm's Length Price(' ALP') for the alleged overdue receivables. 4(g) Erred on facts and circumstances by not appreciating that a working capital adjustment takes into account the impact of overdue receivables. 4(h) Without prejudice to the above, the Ld. TPO/Panel erred in law and on facts in considering outstanding receivables from associated enterprises beyond 30 days as a base for computing notional interest, instead of benchmarking with third party comparable data. 4(i) Without prejudice to the above, the Ld. Panel grossly erred on facts and circumstances in arbitrarily enhancing and imputing interest as per the prevailing deposit interest rates of State bank of India, as against applying LIBOR based interest rates since the receivables were denominated in foreign currency. Further, the Ld. Panel grossly erred on facts and in law in not providing an opportunity to the Assessee of being heard before enhancing the value of the adjustment. 5(a) The Ld. AO under the facts and circumstances of the case, has erred in disallowing an amount of INR 7,36,14,287 under section 40(a)(i) of the Act for not with holding the taxes at source without appreciating the applicability of withholding tax provisions on such payments. 5(b) The Ld. AO under the facts and circumstances of the case, has erred in not appreciating the tax audit report of the Appellant, wherein the tax auditor had verified and confirmed a disallowance of INR 8,78,054 under section 40(a)(i) of the Act which the Appellant had disallowed suo-moto in its tax computation. 5(c) The Ld. Panel under the facts and circumstances of the case has erred in not appreciating the information submitted by the Appellant on 18 July 2018. Ground with regard to disallowance of travel cost 6(a) The Ld. AO under the facts and circumstances of the case has erred in disallowing an amount of INR 3,25,61,385 being 25 per cent of foreign travel cost incurred by the Appellant in foreign currency. 6(b) The Ld. AO under the facts and circumstances of the case failed to appreciate the fact that the travel in foreign currency was incurred in relation to the business of the Appellant. 6(c) The Ld. Panel under the facts and circumstances of the case has erred in not appreciating the information submitted by the Appellant on 18 July 2018. Ground with regard to disallowance of advance written off 7(a) The Ld. AO under the facts and circumstances of the case has erred in concluding that the rental deposits forfeited by the landlord are capital in nature, without appreciating the fact that the same is incidental to the business of the Appellant. 7(b) The Ld. AO under the facts and circumstances of the case has erred in concluding that the rental deposits written off is not directly / indirectly related to the business activities of the Appellant, without appreciating the fact that the premises were occupied by the Appellant for its own business purposes. 7 (c) The Ld. AO under the facts and circumstances of the case has erred in disallowing an amount of INR 6,23,583 being the ineligible CENVAT credit written off as a deductible business expenditure. 7(d) The Ld. Panel under the facts and circumstances of the case has erred in not appreciating the information submitted by the Appellant on 18 July 2018.

5 IT(TP) A No.104/Chny/2018 2. The Ld. AR appearing for assessee, Shri Ajit Kumar Jain, submitted that ground no. 1 & 2 is general in nature. Regarding Transfer Pricing grounds, Ld. AR submitted that the assessee is only pressing for ground nos. 3 (e) to (h) assailing selection of comparable entities and also pressing for ground no. 3(i) wherein the assessee seeks working capital adjustment. The Ld. AR argued on imputing notional interest on outstanding receivables. For Ground Nos.5 & 6, Ld. AR placed on record additional evidences with a prayer to remand back these grounds to lower authorities. The Ld. AR pressed for allowance of Ground no.7. The Ld. CIT-DR supported the findings of lower authorities. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. Proceedings before lower authorities 3.1 The assessee being resident corporate assessee is subsidiary of a Mauritius entity and stated to be engaged as an EMS provider and also engaged in manufacturing of various electronic products which has application in telecom, industrial and consumer products segments. It also operated a shared service division for providing back office services relating to accounts payable processing and human resource record maintenance. These services are classified as IT enabled services (ITeS) and the assessee earned revenue of Rs.285.92 Crores under this segment. 3.2 The assessee benchmarked these services using Transactional Net Margin Method (TNMM) and chose 7 comparable entities after applying certain filters. The Profit Level indicator (PLI) was taken to be Operating Profit to Total Cost. However, Ld. TPO did not concur with the

6 IT(TP) A No.104/Chny/2018 filters applied by the assessee and proceeded to undertake fresh comparable study on the basis of new filters. The Ld. TPO arrived at 6 comparable entities having mean margin of 30.29%. The assessee objected to the selection of comparable entities on the ground of functional differences, presence of intangibles, computation of correct margins etc. At the same time, the assessee requested for inclusion of 6 comparable entities. The assessee also demanded working capital adjustment which was rejected by Ld. TPO since the assessee was not able to demonstrate the impact of the same on profits. Further, segmental working capital was not disclosed in the annual reports of various entities. Finally, Ld. TPO retained 5 comparable entities having mean margin of 22.34% which are given in para 14.1 of the order of Ld. TPO. These include (i) Infosys BPO Ltd.; (ii) Microgenetic Systems Ltd.; (iii) Microland Ltd.; (iv) BNR Udyog Ltd. (seg.) (v) Crossdomain Solutions Pvt. Ltd. The assessee’s margins fell short of mean margin and accordingly, Ld. TPO proposed adjustment of Rs.3960.83 Lacs under this segment. 3.3 Another issue of TP study was interest on overdue receivables. This transaction was not reported by the assessee. However, Ld. TPO, applying the provisions of explanation 1(c) to Sec.92B, held that the same would be an international transaction. After considering various judicial decisions, Ld. TPO adopted 6 month’s LIBOR plus 400 points as benchmarking rate which translated into effective benchmarking rate of 4.4%. The same resulted into another TP adjustment of Rs.82.71 Lacs in the hands of the assessee. Both these adjustments were incorporated in

7 IT(TP) A No.104/Chny/2018 the draft assessment order which was subjected to assessee’s objection before Ld. DRP. 3.4 The Ld. DRP upheld the application of new filters by Ld. TPO. The assessee’s objections with respect to comparable entities were also rejected. The assessee raised another objection that TPO erroneously computed assessee’s PLI by excluding the exchange difference and misc. income as non-operating and provision for doubtful debts written- back as operating in nature. On the other hand, Ld. TPO treated exchange difference and miscellaneous income as operating in computation of PLI of comparables. The Ld. DRP directed Ld. TPO to adopt parity in the treatment of misc. income and foreign exchange. The provision for doubtful debts written back could not be considered as operating in nature since it was an unascertained liability. The assessee’s plea to allow working capital adjustment was rejected since the assessee failed to demonstrate such material differences so as to warrant such an adjustment. On the issue of notional interest on overdue receivables, Ld. DRP relied on the decision of Delhi Tribunal in Bechtel India Ltd. (ITA No.6530/Del/2016) holding this to be an international transaction. The plea that the working capital adjustment would take into account the impact of outstanding receivables was also rejected. On the issue of benchmarking rate, Ld. DRP erroneously observed that Ld. TPO adopted rate of 10.25%. Disregarding the same, Ld. DRP directed Ld. TPO for application of short term deposit rates of State Bank of India after allowing credit period of 30 days. The directions of Ld. DRP revised aggregate TP adjustments to Rs.4005.53 Lacs. Aggrieved, the assessee is in further appeal before us.

8 IT(TP) A No.104/Chny/2018

Our findings and Adjudication 4. So far as the treatment of foreign exchange fluctuation and misc. income is concerned, we are of the considered opinion that the same could be treated as operating in nature only if the same had direct nexus with the rendering of ITeS services by the assessee. There is nothing on record to suggest such a nexus. The Ld. DRP has directed Ld. TPO to adopt parity in the treatment of misc. income and foreign exchange. However, we modify the directions of Ld. DRP by directing Ld. TPO to ascertain whether these components had direct nexus with the revenue of ITeS segment. If so, the same shall be treated as operating in nature while computing PLI under this segment and assessee’s PLI be computed accordingly. Of course, the parity shall be maintained while computing the margins of the assessee as well as margins of comparable entities. The assessee is directed to provide the requisite data. The provision for doubtful debts written-back has rightly been held to be non-operating in nature since the same is merely an unascertained liability and would not be considered while computing PLI of the assessee as well as PLI of comparable entities. 5. The issue of working capital adjustment and interest on overdue receivables is inter-connected. We find that the assessee could not demonstrate that working capital differential was adequate enough so as to warrant such an adjustment. The interest on overdue receivables, as rightly held by Ld. DRP, would be an international transaction. However, the observations of Ld. DRP run contrary to the adjustment proposed by

9 IT(TP) A No.104/Chny/2018 Ld. TPO. Therefore, keeping in mind the principle of natural justice, we remand back both these issues back to the file of Ld. TPO for fresh adjudication with a direction to the assessee to substantiate its case. All the issues are kept open. 6. On the issue of comparable entities, the assessee seeks exclusion of 4 comparable entities. Our adjudication thereto would be as under: - (i) M/s Infosys BPO Ltd. The assessee sought exclusion of this entity on functional difference, presence of brands and scale of operations etc. However, Ld. TPO as well as Ld. DRP rejected the same and included this entity to be a comparable entity. We find that this entity has been excluded by the Tribunal in assessee’s own case for earlier years in ITA No.1559/Bang/2012 for AY 2008-09, ITA No.143/Bang/2014 for AY 2009-10 & ITA No. 649/Bang/2015 for AY 2010-11. Taking consistent stand, we direct lower authorities to exclude this entity. (ii) Microland Limited The assessee sought exclusion of the same on the ground of functional differences. However, the same was rejected by lower authorities. We find that this entity has been excluded by of Bangalore Tribunal in Ocwen Financial Solutions P. Ltd. (IT (TP) No.3068/Bang/2018 dated 17.07.2019) for same AY in case of similarly placed assessee. The bench, in para 8.4.3, upon appraisal, observed that this entity rendered services under infrastructure management, server management, database management, storage management etc. which are different from back office processing services. Further, annual report of this entity

10 IT(TP) A No.104/Chny/2018 would show that the revenue from ITeS segment was barely 5.68% and therefore, this entity could not be held to be comparable entity. Following the same, we direct lower authorities to exclude this entity. (iii) Crossdomain Solutions Pvt. Ltd. The assessee sought exclusion of this entity on the ground that this entity was providing high end KPO services and segmental data was not available. The assessee also objected to inclusion of this entity on the ground of high investment and abnormal profit margin. However, Ld. DRP rejected the same against which the assessee is in further appeal before us. We find that this entity has been excluded by the Tribunal in assessee’s own case in IT (TP) No.1559/Bang/2012 for AY 2008-09. The bench observed that the business of this entity was rendering of high end KPO services, development of product suites, and routine low end ITeS services. However, no bifurcation was available for such vertical of services. Therefore, this entity was directed to be excluded. Following this decision, we direct lower authorities to exclude this entity. 7. At the same time, the assessee seeks inclusion of 4 comparable entities. Our adjudication thereto would be as under: - (i) M/s Informed Technologies India Ltd. This entity was rejected since it failed filter of service revenue of more than 75%. Further, the details of non-operating incomes were not available. Aggrieved, the assessee is before us. We find that this entity has been included by of Bangalore Tribunal in Ocwen Financial Solutions P. Ltd. (IT (TP) No.3068/Bang/2018 dated 17.07.2019) for same AY in case of similarly placed assessee. The

11 IT(TP) A No.104/Chny/2018 bench, in para 10.4.1, observed that this entity passed service income filter of 75% and therefore, this entity was to be included. Following the same, we direct lower authorities to include this entity. (ii) Jindal Intellicom Ltd. The lower authorities rejected the same on the ground of functional differences. This entity was stated to be engaged in software development and rendering ITeS services and its segmental were not available. The Ld. AR seeks inclusion of this entity by relying on certain decisions of Tribunal which has been enumerated in the chart. However, upon study, we find that this entity has been included on the ground that it was accepted in earlier and subsequent years. No such fact is available before us for present assessee. We are of the opinion that if segmental data is not available, this entity could not be chosen as comparable entity. Therefore, the issue of selection of this entity is restored back to the file of Ld. TPO for fresh adjudication with a direction to the assessee to provide requisite data. (iii) Sundaram Business Services Ltd. This entity was rejected on the ground that this entity made losses in AYs 2013-14 and 2014-15. It was a case of diminishing revenue as well. The losses were there because of high marketing expenditure which did not yield commensurate result. Aggrieved, the assessee is in further appeal before us wherein Ld. AR relies on various decisions supporting inclusion of this entity. However, before us, the factual matrix that this entity made losses in earlier two years and it had high marketing

12 IT(TP) A No.104/Chny/2018 expenditure remain undisturbed. In such a case, this entity has rightly been excluded. (iv) Crystal Voxx Ltd. The Ld. DRP rejected inclusion of this entity since it did not figure in the search matrix of Ld. TPO. Aggrieved, the assessee is in further appeal before us. It could be seen that Ld. TPO has carried out fresh comparable analysis after applying certain filters. This entity has not crossed the filters applied by Ld. TPO and this entity does not figure in the search matrix of Ld. TPO. Therefore, this entity, in our considered opinion, has rightly been excluded. 8. The Ld. TPO is directed to re-compute the ALP of the transactions by considering above adjudication. The corresponding grounds as urged before us stand partly allowed. 9. Disallowance of foreign currency expenses 9.1 The assessee claimed foreign currency expenses which were in the nature of professional and legal expenses, personnel cost, travel cost etc. The same aggregated to Rs.736.14 Lacs, The assessee could not furnish documentary evidence to show compliance of TDS provisions. Accordingly, the same were disallowed u/s 40(a)(i) of the Act. The assessee claimed another travel cost of Rs.1302.45 Lacs. Since the assessee could not furnish satisfactory documentary evidences, Ld. AO disallowed 25% of the same u/s 37 of the Act. The position remained the same before Ld. DRP which resulted into confirmation of stand of Ld. AO. Aggrieved, the assessee is in further appeal before us.

13 IT(TP) A No.104/Chny/2018 9.2 The Ld. AR placed on record additional evidences and submitted that impugned disallowances have been made for want of sufficient documentary evidences. The Ld. AR prayed for admission of additional evidences and pleaded for remand back of the issue. Accepting the same, both these issues stand restored back to the file of Ld. AO for fresh adjudication in the light of additional evidences. The assessee is directed to substantiate the same. The corresponding grounds stand allowed for statistical purposes. 10. Disallowance of Advances written-off 10.1 The assessee claimed expenditure of Rs.63.60 Lacs under this head. The same represent forfeiture of rental advances and ineligible CENVAT credit claimed by the assessee. The Ld. AO held that the same could not be allowed to the assessee. The Ld. DRP confirmed the stand of Ld. AO against which the assessee is in further appeal before us. 10.2 We find that these expenses have been tabulated in para 7.1 of final assessment order. The amount of Rs.63.60 Lacs primarily consists of forfeiture of rental advances. It could be observed that the assessee has paid rental advances for certain properties taken on rent. On vacating these properties, the landlord has claimed damages and withheld these advances which have been written-off in the Profit & Loss Account. These advances, in our considered opinion, have been given in regular course of business and therefore, the loss of the same would be an allowable business deduction. The Ld. AO is directed to allow the loss of rental advances to the assessee. The reversal of ineligible CENVAT credit could not be allowed to the assessee since the same has not been offered to tax at earlier point of time. The same has rightly been

14 IT(TP) A No.104/Chny/2018 disallowed. The corresponding ground raised by the assessee stand partly allowed. Conclusion 11. The appeal stand partly allowed to the extent indicated in the order. Order pronounced on 23rd January, 2024 Sd/- Sd/- (V. DURGA RAO) (MANOJ KUMAR AGGARWAL) �ाियक सद!/JUDICIAL MEMBER लेखासद! / ACCOUNTANT MEMBER चे5ईChennai; िदनांकDated :23-01-2024 DS आदेशकीUितिलिपअ&ेिषत/Copy of the Order forwarded to : 1. अपीलाथ�/Appellant 2. !"थ�/Respondent 3. आयकरआयु>/CIT 4. िवभागीय!ितिनिध/DR 5. गाडCफाईल/GF