GLOBAL E-BUSINESS OPERATIONS PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3(1)(1), BANGALORE

Per Laxmi Prasad Sahu, AM :

This is an appeal filed by the assessee against the final assessment order passed by the AO order dated 31.07.2022 DIN No. ITBA/AST/S/143(3)/2022-23/1044383420(1) for the Assessment Year 2018-19 with the following grounds of appeal :-

A. Transfer Pricing The grounds mentioned hereinafter are without prejudice to one another. 1.1. The learned Assessing Officer (learned AO'), learned Transfer Pricing Officer ('learned TPO') and the Honorable Dispute Resolution Panel ("Honorable DRP') grossly erred in adjusting the Transfer Price ("TP") by INR 54,45,00,000, with respect to the international transactions undertaken by the Appellant, under section 92CA of the Income Tax Act, 1961 ("the Act").

2 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. 1.2. The learned AO/ learned TPO/ Honorable DRP erred in rejecting the TP documentation maintained by the Appellant by invoking provisions of subsection (3) of section 92C of the Act. 1.3. The learned AO/ learned TPO/ Honorable DRP erred in rejecting the economic and comparability analysis undertaken in the TP documentation and in conducting a fresh comparability analysis by introducing various filters for the purpose of determining the Arm's Length Price ('ALP') of the international transaction. 1.4. The learned AO/ learned TPO/ Honorable DRP erred in selecting the companies only- if the data pertaining to FY 2017-18 is available in the public databases. : 1.5. The learned AO/ learned TPO/ Honorable DRP erred in applying different financial year ending filter while selecting the comparable companies thereby not considering the fact that the relevant data for the concerned financial year could be deduced from the corresponding financials to the extent data is available in the public domain.

1.6. The learned AO/learned TPO/Honorable DRP erred in applying export earning filter of 75% of the total sales, leading to a narrower set of comparable companies. 1.7. The learned AO/learned TPO/Honorable DRP erred in law and facts by not applying the upper limit for the sales turnover filter. The learned TPO/ Honorable DRP erred in law and facts by not appreciating the fact that since lower limit on the turnover filter has been accepted by both Appellant and learned TPO, similar filter should also be applied on the upper limit on turnover while carrying out the comparability analysis. 1.8. The learned AO/learned TPO/Honorable DRP have erred in law and facts in modifying the application of the persistent loss filter by the Appellant in TP documentation by adopting an approach of rejecting comparable companies having losses in 2 out of 3 years as against 3 out of 3 years. 1.9. The learned AO/learned TPO/Honorable DRP have erred in laws and in facts in the computation of Related Party Transaction ("RPT") filter by taking only RPT Income/Total Income or RPT Expenditure/Total Expenditure instead of taking the total value of RPT transactions (RPT income + RPT Expenditure) in the numerator and sales in the denominator. 1.10. The learned AO/learned TPO/Honorable DRP have erred in laws and in facts by adopting employee cost of greater than 25% of sales as a comparability criterion. 1.11. The learned AO/learned TPO/Honorable DRP have erred in computing the operating profit to operating cost of the Appellant at 5.89% by not considering 'service tax refund' and 'provision no longer required written back' as part of "Operating Revenue" without appreciating the fact that 'service tax refund' and

3 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. 'provision no longer required written back' arises in the normal course of business operations and the same has been considered as part of "Operating cost" in previous FYs.

1.12. Notwithstanding and without prejudice to our primary contention that the Employee Stock Option Plan ("ESOP") expenditure should not be disallowed under section 37 of the Act, the Honorable DRP having upheld the said disallowance, have erred in not providing corresponding adjustment of such disallowed expenditure from the operating expenses of the Appellant for the purpose of computing its revised mark-up.

1.13. The learned AO/ learned TPO/ Honorable DRP have erred in not allowing appropriate adjustments towards working capital differential existing between the Appellant vis-a-vis independent-comparable companies.

1.14. The learned AO/ learned TPO/ Honorable DRP erred in not allowing appropriate adjustment towards the risk difference between the Appellant vis-a-vis the comparable companies.

Comparable Companies - Information Technology Enabled Services 1.15. The learned AO/ learned TPO/ Honorable DRP have grossly erred in not rejecting the following companies: Fuzen Software Private Limited; Infosys B P M Services Private Limited; Manipal Digital Systems Private Limited; Dornex E Data Private Limited; Vitae International Accounting Services Private Limited; Inteq BPO Services Private Limited Motif India Infotech Private Limited; eClerx Services Limited; MPS.Limited; and CES Limited.

1.16. The learned AO/ learned TPO/ Hon'ble DRP have grossly erred in rejecting following companies that ought to have been accepted as comparable: - Allsec Technologies Limited; - R Systems International Limited; and - Crystal Hues Limited. 1.17. The learned AO/ learned TPO erred in computing the operating margins of the following comparable companies: Jindal Intellicorn Limited; Fuzen Software Private Limited; Sundaram Business Services Limited; and - iSN Global Solutions Private Limited.

B. Corporate Tax

4 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

2.2. The Learned AO and Hon'ble DRP have erred in law, in disregarding the decision of 3urisdictional Karnataka High Court in the case of Biocon Limited, [2020] 121 taxmann.com 351 (Kar.), Bangalore Tribunal in the case of Novo Nordisk, [2014] 42 taxmann.com 168, and Northern Operating Services Pvt. Ltd., IT(TP)A No. 759/Bang/2017 wherein it was held that discount on issuance of ESOP is an allowable business expenditure under section 37 of the Act.

2.3. The learned AO and Hon'ble DRP have erred in law and on facts by stating that there is no outflow of money resulting in an expense whereas the fact is that there is a clear outflow of economic resources/cash in the hands of the appellant, which is wholly and exclusively used for the purpose of business in India. 2.4. The learned AO and Hon'ble DRP have erred in law and on facts by not appreciating that the difference between the market value and the purchase price of shares is being taxed as perquisite in the hands of the employees.

2.5. The Learned AO and Hon'ble DRP have erred in law and on facts, in disregarding the sample debit notes/invoices, full employee listing, and sample Form 16 copies submitted during the assessment and DRP proceedings by the Appellant.

2.6. The Learned AO and Hon'ble DRP have erred in law and on facts, in considering the ESOP expenditure as fictitious expenditure and making false allegation that the ESOP expenditure is a colorable device adopted for avoidance of tax which is totally inappropriate and misdirected. Further, Learned AO/ Hon'ble DRP have considered the ESOP cross charge by the Ultimate holding company as fictional and notional in nature which is totally misplaced.

2.7. The Hon'ble DRP has erred in law and on facts by placing reliance on the case laws decided in different context and not applicable to the facts of the Appellant.

2.8. The Hon'ble DRP has erred in law and on facts by stating that the ESOP is uncertain by not appreciating the fact that the ESOP expenses are actual expenses claimed by the Appellant, based on actual invoices issued and actual payments made.

Non-Applicability of section 195 of the Act 2.9. The learned AO has erred in law and on facts by disregarding that the ESOP expense is liable to TDS under section 192 of the Act as perquisite in hands of the

5 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. employees and appropriate taxes are deducted and remitted by the Appellant, which is evidenced by sample Form 16 copies furnished before the NFAC and DRP. 2.10. The learned AO has erred in law and on facts by stating that the provisions of section 195 of the Act shall be applicable on the remittance of reimbursement towards ESOP without taking cognizance of the fact that there was no income element arising to the recipient of such remittances.

2.11. The learned AO has erred in law and on facts by stating that the provisions of section 195 of the Act has not been complied with and consequently reimbursement towards ESOP shall suffer disallowance under section 40(a)(i) of the Act without evaluating the fact that the provision of section 195 of the Act is not applicable on such remittances.

2.12. The learned AO has erred in law and on facts by relying on decision of Danfoss Industries P Ltd (2004) 268 ITR 1 pronounced by the Hon'ble Authority for Advance Ruling ("AAR") as the same is very specific to the given transaction of that Assessee. The transaction covered by the said decision is very different on facts as compared to the Appellant and the same cannot be applied here. 2.13. The learned AO has erred in law and on facts, in disregarding that the remittance towards recovery of ESOP charges is not taxable under the provisions of India-USA Double Taxation Avoidance Agreement.

2.14. The learned AO has erred in law and on facts by contending that the said ESOP cross charge is liable to TDS under section 192 of the Act as perquisite in the hands of the employees and same is also liable to TDS under section 195 of the Act on the reimbursement to the Ultimate Holding Company thereby resulting in double taxation of same amount. 2.15. The learned AO has erred in law and on facts by contradicting his own statement by stating that in one hand there is an element of income included in the reimbursement made to the Ultimate Holding Company for the expenditure on ESOP whereas on the other hand the learned AO states that the said expenditure is notional / fictitious in nature.

3.2. The learned AO and Hon'ble DRP have also erred in law and on facts by not considering the responses filed by the Appellant against the adjustment made under section 143(1) of the Act.

6 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. 3.3. The Learned AO and Hon'ble DRP have erred in law and in facts by not appreciating that adjustment made by the CPC in relation to gratuity and leave encashment under section 43B of the Act was merely due to difference in manner of disclosure in Tax Audit Report and Return of Income and there was no excess allowance or lower disallowance claimed by the Appellant. 3.4. Hon'ble DRP has erred in disregarding the detailed submission made by the Appellant during DRP proceedings and asserting that the Appellant has not submitted the details with regard to additions made by the CPC.

The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds, at any time before or at the time of hearing of the appeal. Each of the above objections is independent and without prejudice to the other grounds preferred by the appellant.

7 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. international transaction after obtaining approval from the competent authority. After receipt of reference from the TPO, the assessee was called for the documents maintained as per section 92D of the Act and which was submitted by the assessee. From the documents, it was observed that there were following international transactions done and method applied by the assessee for bench marking is as under:- International Amount in Method Transactions (INR in Lakhs)

Provision of ITeS 51,139 TNMM

Reimbursement of 866 TNMM Expenses Deemed international 359 TNMM transactions

2.1 From the TP study report, the assessee computed OP/OC @ 15.86% for PLI , whereas the TPO calculated OP/OC at 5.89% PLI. On perusal of the TP study report by the TPO, it was noticed from the TP document that 16 comparables for Information Technology enable Services (ITeS) were selected by the taxpayer by applying certain filters and also TNMM as the most appropriate method. The taxpayer selected comparable engaged in the same industry vertical as the taxpayer.

2.2 On 14.07.2021, a show-cause notice was issued to the assessee by stating as under:-

5.2 On 14.07.2021, the Taxpayer was issued a detailed show-cause notice in respect of the ITES segment. This notice contained the TPO remarks on the filters adopted by the Taxpayer, filters applied by the TPO, the search process adopted by the TPO, the accept/reject matrix of companies considered by the TPO. The Annual Reports of

8 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. the comparables have been provided to the Taxpayer to file objections, if any. The Taxpayer was also informed of the reasons for rejection of the original TP study. The final list of comparables considered by the TPO was also furnished to the Taxpayer.

a. Use of current year data wherever available.

b. Companies having different financial year ending (i.e. not March 31,2018) or data of the company which does not fall within 12-month period i.e 01.04.2017 to 31.03.2018 were rejected.

c. Companies whose income was less than Rs. 1 crore were excluded

d. Companies whose ITEs and related services is less than 75% of its total operating revenues were excluded.

e. Companies who have more than 25% Related Party Transactions were excluded

f. Companies who have export service income less than 75% of the sales were excluded.

g. Companies with employees cost less than 25% of turnover were excluded.

3.1. The TPO applying the above filters on the 16 comparables selected by the assessee, accepted only three companies. From the fresh search, the TPO selected 18 comparables and calculated median at 26.84%. The assessee filed objections before the TPO. The assessee also filed additional comparables for the inclusions in

9 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

ITeS segments, which were rejected by the TPO. Finally, the TPO selected the following 17 companies as comparables and computed median at 26.34% and calculated adjustment as under:-

SI. No Name of the Comparable F.Year wise OP/OC (%)

2017- 2016- 2015- Wt.Av 18 17 16 g

1 Jindal Intellicom Ltd. -5.35 8.66 2.78 7.41

2 Microland Ltd 9.83 5.85 10.17 8.58

3 Datamatics Business Solutions 3.19 8.88 34.85 13.41 Ltd.

4 Fuzen Software Pvt. Ltd 16.1 15.07 16.06 15.75

5 Tech Mahindra Business 18.95 18.51 19.09 18.85 Services Ltd.

6 Infosys B P M Services Pvt. Ltd. 16.65 22.35 24.41 20.95

7 CES Ltd. (seg) 12.50 26.48 31.90 21.77

8 Manipal Digital Systems Pvt. 20.93 28.91 21.04 23.54 Ltd.

9 Domex. E Data Pvt Ltd 35.61 35.97 13.77 26.34

10 Vitae International Accounting 26.35 26.63 28.75 27.35 Services Pvt Ltd

11 AG S Health Pvt. Ltd. 30.19 36.06 14.7 27.64

12 Ultramarine & Pigment Ltd. 24.61 46.63 30.27 33.28 (Seg.)

13 Access Healthcare Services Pvt. 37.37 41.27 Fails 39.03 Ltd RPT filter

10 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

14 Inteq B P O Services Pvt. Ltd. 31.68 36.64 48.47 39.15

15 Motif India Infotech Pvt. Ltd. 47.89 48.99 38.8 45.72

16 Eclerx Services Limited 39.94 49,55 55.38 46.85

17 MRS Ltd 56.89 62.2 66.53 61.83

35th 20.95

Median 26.34

65th 33.28

22.4.1 The median of the weighted average Profit Level Indicators is taken as the Arm's Length margin. Please see Annexure 4 for details of computation of PLl of the comparables. Based on this, the Arm's Length Price of the services rendered by the Taxpayer to its AE(s) is computed as under.

ITeS SEGMENT

Particulars Formula Amount (in Rs. In Lakhs)

Taxpayers operating revenue OR 51,144

Taxpayers operating cost OC 48,301

Taxpayers operating profit OP 2.843

Taxpayers PLl PLI=OP/ 5.89% OC

35th Percentile Margin of 20.95% comparable set

Adjustment Required (if PLl< Yes 35th Percentile)

11 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

Median Margin of comparable M 26.34% set

Arm's Length Price ALP=(1+ 61,023 M) *OC

Price Received OR 51,144

Shortfall being adjustment ALP-OR 9,879

3.2. During the course of TP proceedings, the working capital adjustment was also not granted to the assessee. Accordingly, the TPO passed order u/s. 92CA(3) of the Act on 30.07.2021.

12 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. Accordingly, the AO passed final assessment order on 31.07.2022 and assessed the income at Rs. 231,05,62,429/-.

III. Other Transfer Pricing Grounds 1.10 The learned AO/learned TPO/Hon'ble DRP erred in computing the operating profit to operating cost of the Appellant at 5.98% by not considering 'service tax refund' as part of "Operating Revenue". In doing so, the learned TPO and Hon'ble DRP have erred in not appreciating the fact that service tax arises

13 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. in the normal course of business operations. Further the Hon'ble DRP have erred in rejecting the Appellant's submission that, in the previous FYs, service tax expense was treated as operating in nature (i.e., as part of operating cost base of the Appellant) while calculating the operating profit mark-up earned in relation to the provision of Information Technology Enabled Services ("ITES") to the Associated Enterprises. Hence when the services tax refund is credited in the Profit & Loss statement as 'other income' then for the purposes of TP, the same requires to be considered as part of 'Operating Revenue' as a matter of maintaining parity.

Our Submission At the outset we wish to apprise your Honors that, Bangalore Tribunal in the Appellant's own case for the AY 2017-18 has held that principally, "Service tax refund" income should be considered as operating in nature if service tax cost is considered as part of operating cost. In this regard, the Honorable Tribunal has remanded the matter back to the learned TPO to verify the same, (refer Page no. 781 and 782 of the Case law compendium) The Appellant wishes to confirm that, it has accounted Service Tax cost as part of its operating cost / expenditure and therefore, service tax refund should be considered as part of "Operating income" and therefore should be included as part of income in the margin computation of the Appellant for the AY 2018-19.

Further, we wish to present as under: i. Accounting of Service Tax cost by the Appellant- The Appellant used to do the accounting for expenses inclusive of Service Tax. Thus, the Service Tax amount used to get accounted as regular operating expenses. Example of accounting is as below:

Rental Invoice amount XYZ as below: Monthly Rent Payable = INR 100,000 Service Tax @12.36% = INR 12,360 Total Rental Invoice = INR 112,360

Accounting in Books of Appellant as below: Entry 1 Debit - Rent Expenses INR 112,360 Credit - Payable to XYZ INR 112,360 Entry 2 Debit -Payable to XYZ INR 112,360 Credit - Bank Account INR 112,360 In order to substantiate this further please find attached invoice wise break up and details of the actual Rent expenses for FY 2013-14. We request your Honors attention to the following documents enclosed as part of Appendix 1:

14 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. Vendor wise / invoice wise detail of the total rent expenses as per the Statement of Profit and Loss for FY 2013-14 of INK 7,991 lakhs as matching with the audited financial statement of the Appellant for the said year;

It may be noted that the total rent expense is comprised of the Base Rent plus the service tax components (Service tax + Education Cess+ Secondary and Higher Education Cess) included in each of the invoices. Property tax if applicable is also included; Sample copies of invoice have also been provided for few vendors to substantiate that the total amount as per invoice (inclusive of service tax) is the amount of rent expense accounted in books of account; and Detailed break-up of Training expenses for FY 2013-14 along with sample copies of invoices;And Sample back-ups for Legal and Professional expenses.

The above constitute substantial back-up in support of the Appellant claim that Service tax cost was forming part of the profit and loss expenses account and treated as operating in nature. ii. Treatment of Service Tax cost in the billing by the Appellant- The Appellant is a captive service provider entity which provide services to its group affiliates outside India on cost plus basis. For the purposes of billing to service recipient group affiliates all costs accounted in books are considered. As the Service Tax is being accounted as expenditure (as explained in the example above and substantiated with evidence of actual invoice) the same is included as operating cost in billing by the Appellant to its group affiliates. If we go with above example in point 1 the rental expenses included in cost base by the Appellant would be INR 112,360 (inclusive of Service Tax). Accordingly for the evidence sample given for Rent expense, for the year FY 2013-14, the total rent expense of INR 7,991 lakhs is included in operating cost base. iii. Service Tax Refund receipt by the Appellant-The Appellant being an Export service provider filed claims for Service Tax refund on input services for multiple earlier years. The Appellant accounted for Service Tax Refund only upon actual receipt thereof. The said amount was credited to P&L by debiting the Bank. As can be inferred from the Financial Statements (FS) that on April 1, 2017 (at the beginning of FY 2017-18) there was no assets in the books of the Appellant towards Service Tax Refund receivable.

The Service Tax refund received during FY 2017-18 was directly credited to the P&L. iv. Treatment of Service Tax Refund receipt by the Appellant in billing - As explained in point 2 above, the Appellant used to bill the Service Tax amount along-with relevant expenses to its affiliates on cost plus basis. On receipt of refund, the cost base for billing had to be reduced by crediting the relevant

15 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. expenses. As the refund receipts were for specific period and not for individual input services, the receipt was credited to P&L as "Other Income". In essence, the effect was to reverse the service tax amount debited to relevant expense accounts in earlier periods which was already billed to affiliates on cost plus basis.

As the Service Tax amount when debited to P&L as part of relevant expenses was considered as "Operating Expenses" while determining the cost base for cost plus billing by the Appellant, the receipt of same being credited to P&L has to be considered "Operating Income" to ensure consistency in treatment for transfer pricing purposes.

The Appellant has followed a consistent approach of adding the service tax cost as incurred in the cost base for cost plus billing. The Transfer Pricing Officer (TPO) had consistently accepted the treatment in earlier years' transfer pricing assessment. Accordingly, the TPO should not change the approach in current year when the same cost has been reversed due to receipt of service tax refund.

Further, the service tax refund receivable is arising in the normal course of business operations and has a direct nexus to the export of services undertaken by the Appellant. In the TP order, learned TPO has adopted export service filter to identify the companies comparable to the business of the Appellant. The application of such filter would result in set of companies which are also exporter of services, such companies would also be similarly claiming a refund of the service tax on such input services. v. Several judicial precedents have held that any expenses or provision for expenses if those are related to business activity would be considered "Operating Expenses". Further, if there is any reversal of any expenses (debit to P&L) which was considered "Operating Expenses" in nature earlier, the reversal thereof has to be considered "Operating Income" in nature.

Reliance is being placed by the Appellant among others on the following decisions.

IT(TP)A No.ll3/Bang/2018- AMD India Private Limited Relying on other jurisprudences in the matter Hon'ble ITAT held that provision written back should be regarded as part of the operating revenue of the Appellant while determining PLI.

IT No.2016 and 1972/Bang/2018- Toyota Kirloskar Motors Private Limited Relying on other jurisprudences in the matter Hon'ble ITAT held that when in the year of creating the provision the same was treated as operating expense in nature, reversal of the same should also be treated as operating revenue in nature.

16 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

6.1. The ld.DR relied on the order of the lower authorities and he submitted that the assessee itself has not claimed it as a operating profit in his return of income and he further submitted that since the service tax was allowed in the previous year and refund claimed is received in this year cannot be considered as a ‘Operating Revenue’. He further stated that the income received as refund on account of excess taxes paid in previous years cannot be a part of operating income of the current year and such amount paid back can be considered as ‘income from other sources’. Accordingly, he submitted that the ld.TPO has rightly not considered as “Operating Revenue while calculating the PLI.

6.2. After hearing both the sides and perused the material available on record and orders of the authorities below, we observed that the similar issue has been raised in the preceding Assessment Year (AY) in IT(TP)A No.174/Bang/2022 vide order dated 16.11.2022. The co-ordinate bench observed in assessee’s own case as under:

3.2 Accounting of Service Tax cost by the Assessee upto 31st March 2016 – The ld. A.R. submitted that the Assessee used to do the accounting for expenses inclusive of Service Tax. Thus, the Service Tax amount used to get accounted as regular operating expenses. He stated an example of accounting as below: Rental Invoice amount XYZ as below: Monthly Rent Payable =INR 100,000 Service Tax ©12.36% = INR 1,236 INR101,236 Accounting in Books of Appellant as below: Entry 1 Debit – Rent Expenses INR 101,236 Credit – Payable to XYZ INR 101,236 Entry 2 Debit – Payable to XYZ INR 101,236 Credit – Bank Account INR 101,236 3.2 Treatment of Service Tax cost in the billing by the Assessee- The ld. A.R. submitted that the Assessee is a captive service provider entity which provide services to its group affiliates outside India on cost plus basis. For the purposes of billing all costs accounted in books are considered.

17 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. As the Service Tax is being accounted as expenditure (as explained in the example above) the same is included as operating cost in billing by the assessee to its group affiliates. He stated that if we go with above example in point 1 the rental expenses included in cost base by the assessee would be INR 101,236 (inclusive of Service Tax). 3.3 Service Tax Refund receipt by the Appellant – The ld. A.R. further submitted that the Assessee being an Export service provider filed claims for Service Tax refund on input services for multiple earlier years. The Appellant accounted for Service Tax Refund only upon actual receipt thereof. The said amount was credited to P&L by debiting the Bank. As can be inferred from the Financial Statements (FS) that on April 1, 2016 (at the beginning of FY 2016-17) there was no assets in the books of the assessee towards Service Tax Refund receivable. 3.4 The ld. A.R. submitted that during FY 2016-17 the assessee received multiple Service tax Refunds for earlier periods totalling to INR 201,899,422. Further, some more Service Tax refund amounting to INR 276,491,677 (Refund application amount INR 282,417,014) for earlier periods were received beyond March 2017 but before finalising the statutory financials of FY 2016-17. 3.5 The above amounts of Service Tax Refunds received were accounted in the Financial Statements (FS) of year ended March 2017 as below: 3.6 Service tax Refund Amount Received during FY 2016-17 (upto March 2017) Debit GL 10710160 - Bank Account (BS) - INR 201,899,422 Credit GL 37090000 - Other Income (P&L)- INR 201,899,422 Service tax Refund Amount Received in June 2017 (before signing of audited FS of FY 2016-17) Debit GL 12900000 - Balances with statutory/government authorities - INR 282,417,014 Credit GL 37090000 - Other Income (P&L)-INR 282,417,014 3.7 The ld. A.R. further submitted that the Service Tax refund received during FY 2016-17 was directly credited to the P&L (as there was no receivable against the same). For the Service Tax Refund received post March 2017 but before signing of the audited financials for FY 2016-17 a Journal Entry was posted to record accrual of Service Tax Refund. This was done in accordance with generally accepted accounting practices wherein significant events occurring after Balance Sheet date are to be reported in the Financial Statement if the same come to notice before signing of the audited FS. This is mandated as per Accounting Standard 10 "Events occurring post Balance Sheet Date". Thus, there was a total credit of INR 484,316,435 in the FY 2016-17 P&L of the assessee towards receipt of Service Tax refund which was disclosed in FS as "Other Income". 3.8 Treatment of Service Tax Refund receipt by the assessee in billing – The ld. A.R. stated that as explained in para 3.2 above, the assessee used to bill the Service Tax amount alongwith relevant expenses to its affiliates on cost plus basis. On receipt of refund, the cost base for billing had to be reduced by crediting the relevant expenses. As these refund receipts

18 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. were for specific period and not for individual input services, the receipt was credited to P&L as "Other Income". In essence, the effect was to reverse the service tax amount debited to relevant expense accounts in earlier periods which was already billed to affiliates on cost plus basis.

3.9 He stated that as the Service Tax amount when debited to P&L as part of relevant expenses was considered as "Operating Expenses" while determining the cost base for cost plus billing by the assessee, the receipt of same being credited to P&L has to be considered "Operating Income" to ensure consistency in treatment for transfer pricing purposes.

3.10 The ld. A.R. submitted that the assessee has followed a consistent approach of adding the service tax cost as incurred in the cost base for cost plus billing. The Transfer Pricing Officer (TPO) had consistently accepted the treatment in earlier years' transfer pricing assessment. Accordingly, the TPO should not change the approach in current year when the same cost has been reversed due to receipt of service tax refund. 3.11 Further, he submitted that the service tax refund receivable is arising in the normal course of business operations and has a direct nexus to the export of services undertaken by the Assessee. In the TP order, learned TPO has adopted export service filter to identify the companies comparable to the business of the Assessee. The application of such filter would result in set of companies which are also exporter of services, such companies would also be similarly claiming a refund of the service tax on such input services. 3.12 The ld. A.R. submitted that several judicial precedents have held that any expenses or provision for expenses if those are related to business activity would be considered "Operating Expenses". Further, he submitted that if there is any reversal of any expenses (debit to P&L) which was considered "Operating Expenses" in nature earlier, the reversal thereof has to be considered "Operating Income" in nature. 3.13 In this regard, he placed reliance on the following decisions: (a) IT(TP)A No.113/Bang/2018- AMD India Private Limited Relying on other jurisprudences in the matter the Tribunal held that provision written back should be regarded as part of the operating revenue of the Assessee while determining PLI. (b) ITA No.2016 and 1972/Bang/2018- Toyota Kirloskar Motors Private Limited. Relying on other jurisprudences in the matter the Tribunal held that when in the year of creating the provision the same was treated as operating expense in nature, reversal of the same should also be treated as operating revenue in nature. 4. The Ld. D.R. submitted that it is admitted by the assessee that the service tax refund pertains to the service tax amounts of earlier years. The assessee also admitted that these service tax amounts were expensed off along with the operating costs in the respective years. The assessee contended that since such service tax forms part of the operating cost of

19 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. the previous year's refund has to be considered as part of operating income in the current year. The income received as refund on account of excess taxes paid in previous years cannot be part of operating income of the current year. Such amount paid back can be considered as income from other sources. Further, Ld. D.R. stated that the assessee has disclosed the main revenue from IT enabled services at Rs.99,217 lakhs from exports and Rs.8168 lakhs as other income. The Ld. D.R. further submitted that the assessee in its submissions stated that the service tax refund of Rs.4736 lakhs has been shown under other income in the audited financial statements for the F.Y. 2016-17. Therefore, the service tax refund content has not been disclosed as operating revenue by the assessee itself in its financials. This shows that such income is not operating income of the current year as the income has no direct relation with the current year earning machinery of the assessee. Therefore, Ld. D.R. stated that the TPO has correctly treated service tax refund as non- operating income. Accordingly, objection is disposed of. 4.1 The ld. D.R. further submitted that the other item of remeasurement loss on defined benefit plans has been disclosed below the profit line in its profit and loss account for the F.Y. 2016- 17. This item has been specifically classified under the head other comprehensive income that will not be classified to profit and loss in subsequent periods. This itself explains that this item of laws will not be part of profit and loss account of the assessee. Therefore, the nature of this item is not directly related to the operating part of the assessee and hence TPO has correctly treated service tax refund as non-operating income. 4.2 The ld. D.R. submitted that in the Transfer Pricing (TP) study done by the Transfer Pricing Officer (TPO), he has excluded the other income of the assessee as well as all the comparables while working out the operating margins. This action is uniform and as such the assessee and the comparables are on the same footing. The assessee has itself shown 'service tax refund' as non-operating income in its financials and so the same has been excluded by the TPO. 4.3 The ld DR further submitted that now in this case assessee is arguing that the income, which it shown as non-operating, is actually operating income. Accepting this contention of the assessee would lead to a lopsided result as similar information is not available from the other comparables. The other comparables might also be having similar income which they might have declared as 'other income' or non- operating income. So after excluding the same the TPO has adopted their operating margins at lower level. So allowing this amount to be included in the operating margins of the assessee alone would not give the correct state of affairs as the comparison with the comparables would become lopsided i.e at one end the income is not being considered for computing margins of comparables but it is being considered for computing margins of the assessee. As such the assessee gets double benefit leading to its operating margin being increased and that of comparables remaining at reduced level due to non-consideration of such income in their cases. In view of above the ld DR stated that the arguments of the assessee need to be rejected.

20 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. 4.4 The ld DR further stated that alternatively, the TPO should be allowed to collect information regarding breakup of 'other income from the selected comparables and give same treatment of such income for the assessee as well as the comparables. This aspect that the other comparables would also be having similar service tax refund is also admitted by the assessee in para 2.4 of its written submissions filed during hearing on 10.11.2022. 4.5 He stated that the operating income/revenue of the assessee is only that which it receives from its AE on cost plus basis and not anything else. Service tax refund is not the operating income for the year under consideration but relates to some other years. Merely because it has been received during the year, it does not become operating income of the year under consideration as it is neither connected with any revenue of the year under consideration nor is it related to any expenditure of the year under consideration. So the same needs to be treated as non-operating in nature. 4.6 He further stated that the assessee has itself claimed that it is charging the AE on cost plus basis. This service tax was treated as cost in earlier years and profit margin on the same was earned by the assessee in such year. So its profits got enhanced during that year and it got the benefit of such enhanced profit in its TP study for that year. Now in the year under consideration, it has received the refund and thus its cost is effectively reduced and to that extent its profit received on cost plus basis gets reduced if such refund has been taken into account by the assessee while reporting its cost to the AE (as argued in written submission by the assessee). So naturally in one year it has already benefitted by showing higher profit and in the year under consideration (in year of refund) it has received lesser profits from AE so the same only can be considered. The actual operating income is what it has received and the same cannot be artificially inflated now by adding service tax refund to its operating income. 4.7 He stated that the reliance of the assessee on the decisions in the cases of AMD India Private Ltd and. Toyota Kirloskar Motors Pvt Ltd is misplaced as the issue of treatment of 'service tax refund' was never under consideration in either of those cases. The issue adjudicated was the treatment of provisions. In AMD India too, the TPO had never commented specifically that the provision was being disallowed the same related to service tax refund. The issue was that of a mere provision as the same cannot be treated as same as the dispute in the appeal under consideration. 4.8 The assessee is claiming that it is accounting service tax refund in the year of actual receipt (para 2.3 of the written submissions). But at the same time, it is accounting for the service tax refund (Rs 2,76,491,677/-) received in the FY 2017-18 also in the year under consideration by relying on the accounting practices. This is self-contradictory as the assessee is just trying various means in order to show higher profit margins. 4.9 The ld DR stated that the assessee is well aware that it is eligible for service tax refund. So, in actual it is not a cost for it and as such it should

21 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. not have claimed it as expenditure while getting remunerated from AE on cost plus basis. So, by doing so neither it would have had higher profit in one year nor lower in another year i.e. on receipt of refund. However, it has planned its ways to have the advantage twice i.e. able to show more profits from the AE by charging cost plus on the service tax and then again showing higher profit in the year of tax refund by treating it as operating income. The operating income of the assessee is only that which it receives from its AE on cost plus basis and not anything else. If such income gets enhanced due to service tax payment or gets reduced due to service tax refund (as corresponding expenditure gets increased or reduced), that only is its operating income on cost plus basis. 5. We have heard the rival submissions and perused the materials available on record. The main contention of the ld. A.R. is that the payment of service tax has been considered as a part of operating expenses and on refund of the same by the authorities to be considered as operating income. In this regard, the ld. A.R. placed reliance on the following two judgements: a) Order of the Delhi Bench of Tribunal in the case of Sony India (P) Ltd. v. Deputy Commissioner of Income-tax (114 ITD 448) (Delhi) b) Order of the Bangalore Bench of the Tribunal in the case of Logical Private Limited v. ACIT (36 taxmann.com 374)(Blr.) 5.1 On the other hand, ld. D.R. made a contention that the payment of service tax is not relating to the ITES segment and that part of the cost cannot be considered as a part of the Operating expenses. Similarly, refund of the service tax cannot be considered as part of the Operating income of the assessee. The reliance placed by the assessee on various judgements misplaced. In our opinion, if service tax payment or provisions considered as an operating expenditure related to ITES segment on same analogy the refund of service tax relating to the ITES segment to be considered as operating income. In other words, if the service tax payment/provisions relate to the ITES segment and that has gone into the computation of income in any assessment year, refund of same relating to the ITES segment is to be considered as operating profit. With this observation, we remit this issue to the file of AO/TPO for fresh consideration.

6.3. In the above judgment, it has been observed that if service tax payment or provisions considered as an operating expenditure related to ITES segment on same analogy, the refund of service tax relating to the ITeS segment to be considered as operating income. Respectfully following the above judgment in assessee’s own case, we are allowing this ground raised by the assessee in the above terms.

22 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

A. Infosys BPO Services Private Limited ("Infosvs BPO") Excluded in Appellant's own case AY 2017-18 and AY 2016-17 in the case of Global E-Business Operations Private Limited [IT(TP)A No,174/Bang/2022 - AY 2017-18] and [TS-663~ITAT-2022(Bang)-TP - AY 2016-17] [Refer Case Law Paper Book No. 822 (AY 2017-18) and Page No. 864 (AY 2016-17] 1. The Appellant relying on coordinate bench ruling in Appellant's own case for AY 2017-18, which relies onSwissRe Global Business Solutions India (P.) Ltd. v. Dy. CIT [2020] 116 taxmann.com 716 seeks exclusion of Infosys BPO on the grounds of functional dissimilarity as it was engaged in diversified activities like sourcing and procurement, customer services, finance and accounting legal process outsourcing, sales and fulfilment, analytics, business platforms, business transformation services, human resource outsourcing and technology solution optimization. In our own case also for AY 2016-17, for the same reason, this comparable was excluded by the Hon'ble 1TAT. Refer Page 938 -1093 of the Annual report paper book for the annual report of Infosys BPO for the FY 2017-18. Accordingly, we request your Honors to exclude Infosys BPO from the final set of comparable companies. B. Manipal Digital Systems Private Limited ("Manipal Digital") 1. As per the annual report of the company, is it engaged in providing pre-press services, including pre-media work and e-distribution services. As per the website of the company, it is also in end-to-end content services across the value chain; (refer page 1,118 of the Annual Report Paper book) 2. From the website and annual report, it is evident that the company is also engaged in variety of services including CGI, packaging prepress, image retouching, creative and branding, etc. Accordingly, it is also observed that the company's functions include high end activities such as conceptualization,

23 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. designing, analytics etc., which could not be compared with the low end ITeS provided by the Appellant.

The Appellant relies on Appellant's own case for the AY 2017-18, which has rejected Manipal Digital relying on the Bangalore Tribunal in the case of Iron Mountain Services Ltd. in IT(TP)A No.307/Bang/2022 which held that in the absence of segmental information pertaining to ITES and in the absence of specific findings from TPO / DRP to prove its functional characteristics with that of the Appellant, Manipal Digital ought to be excluded, (refer page 800 of the Case law compendium)

For the FY 2017-18, as per the Annual report (refer Page 1,412 of Annual report compendium), it is confirmed that the company does not provide segmental information for FY 2017-18 as well. We have provided below the screenshot extract of the annual report for your Honors quick verification. For the AR of Manipal Digital please refer to the Annual Report compilation page 1,094 to 1,425. ……………………………………….

E. Eclerx Services Limited ("Eclerx") EClerx is a specialist Knowledge and Business Process Outsourcing company providing critical business operations services to 30+ Global Fortune 500 clients including many of world's leading financial services firms, online retail and distributors, interactive media, luxury brands and entertainment, high tech and industrial manufacturing, travel and leisure and software vendors through operational support, data management and analytics solutions. It is predominantly engaged in the provision of KPO services and is hence not functionally comparable to the low-end services provided by the Appellant.

Further, in the Appellant's own case, the Tribunal has rejected eClerx as functionally different categorised as KPO (Global e- Business Operations Pvt Ltd [TS-35-ITAT-2017(Bang)-TP], [TS-426-ITAT-2015(Bang)-TP] and [TS-256- ITAT-2017(Bang)-TP]) for the AY 2016-17 (Please refer 864 of the case law compendium). For the Annual report of Eclerx please refer to Page no. 1562 -1797 of the Annual Report Compilation. Accordingly, we please before your Honors to exclude Eclerx from the final set of comparable companies.

7.1. The ld. DR relied on the order of the lower authorities.

24 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

7.2. Considering the rival submissions, we noted that in assessee’s own case for the previous assessment year 2017-18 in IT(TP)A No.174/Bang/2022, the Co-ordinate Bench of the Tribunal has excluded that these companies are not a comparable companies with the assessee company. Further, the co-ordinate bench at para No. 12.1.20 also considered the judgment in assessee’s own case for the assessment year 2016-17 in IT(TP)A No.212/Bang/2021 vide order dated 27.09.2022. The Infosys BPO Ltd & Eclerx Services Ltd. has also been excluded by observing as under:-

Manipal Digital Systems Private Limited 12.1.3 The contention of the Ld. A.R. is that it is not functionally similar to the assessee’s case as no segmental details are available and advertisement & sales promotion expenses works out at 6.5% in assessment year under consideration, 7.19% in assessment year 2016-17 & 8.78% in assessment year 2015-16. Hence, he argued that this company be excluded from the list of comparables. 12.1.4 The ld. D.R. submitted that it is crystal clear from the annual report that the principal business activity of the company is given as IT enabled services which contributes 100% turnover of the company. On perusal of the breakup of the revenue given at page 41 of annual report, the revenue earned from IT enabled services is Rs. 23.63 out of total revenue of Rs.24.34 crores, which comes to around 97.08%. He submitted that the other activities like pre-media work, e-distribution contributes around Rs.0.70 crores, which is a minor revenue. The assessee, based on the website information, argued that the company is into diversified activities that can be classified as KPO services as per the definition of safe harbour rules. At the outset, he noted that the information put in Website cannot be given complete credence, as they are mere forward-looking information and statements with the motive of advertisement and other promotional gains. The functional aspect has to be determined by the information in the annual report, which is based on audited financial statements and management reports, for qualitative analysis of comparability. The fact that the company is into ITES segment is corroborated by the corporate. information given at page 45 of the annual report, where it is lucidly stated that "the main business of the company is to provide information technology enabled services that means pre-press activities mainly to overseas as well as domestic customers". Therefore, the ld. D.R. stated that the pleas raised based on information said to be available in the website are liable to be rejected is in limine in view of the information given in the annual report on the functional aspect.

25 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

12.1.5 Further, the ld. D.R. stated that this company operates under a single primary segment. The profit margins of various comparables will be averaged and a variation of 3% is also permitted. These aspects take care of some differences which are bound to be there between various comparables. In view of the above, he argued that ITeS services cannot be further. classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM, functional similarity is more relevant than product similarity. It is a fact that this company falls in the category of ITeS. Hence, he stated that the objection on the functional dissimilarity of the company is to be rejected. 12.1.6 As regards lack of segmental information, the ld. D.R. stated that the comparable company derives the whole revenue from sale of services and hence, there is no need of segmental reporting as per AS 17. As stated above while discussing the functional profile the company derives its total revenue from the RTES activities only. This is further supported by the clarificatory note No. 27 at page 52 of the annual report that "the company was operating under one reportable geographical segment and one business segment. Therefore, disclosure as prescribed under AS 17- segment reporting is not applicable. Hence, he argued that the objection on lack of segmental information is not valid and not acceptable. 12.1.7 The ld. D.R. further stated that the assessee contended that this comparable has incurred significant selling, marketing expenses. From the perusal of the annual report, ld. DR noted that the expenses on this count is only 5.05% of the total sales and which is not at all significant to affect the profitability of the comparable. Accordingly, ld. D.R. stated that that this plea is rejected by the ld. DRP and selection of this company is upheld by ld DRP. 12.1.8 We have heard the rival submissions and perused the materials available on record. As per the annual report of the company, it is also in end-to-end content services across the value chain. From the website and annual report, it is clearly evident that the company is also engaged in web development, mobile application development. The company also provides publishing editorial & composition services, which includes creating layout & artwork for advertisements and brochures, typesetting services and proof reading. As per revenue from operations, it includes “Revenue from web development and other services” (INR 2.18 Cr) and “income from e-book Distribution” (INR 69 lakhs), without providing the segmental revenue and profitability with respect to ITES segment. Advertising and sales promotion expenses at 6.50%, 7.19% & 8.78% of total expenditure in FY 2016-17, FY 2015-16 & FY 2014-15 respectively. 12.1.9 Further, the Tribunal in the case of Iron Mountain Services Ltd. in IT(TP)A No.307/Bang/2022 dated 20.9.2022 has held as under:- 16. “The next company the assessee seeks to exclude is Manipal Digital Systems Pvt. Ltd. In this regard, it was submitted that this company is engaged in provision of multiple high-end services including KPO activity like Design Services, Animation. It was submitted that no segmental details were available in the financial statements

26 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. on the variety of services provided by this company like Design Services, Animation. Reliance was placed on the decision of the ITAT, Pune Bench in the case of Credence Resource Management Pvt. Ltd., (supra) wherein this company was excluded by the Pune Bench with the following observations:

“8. The assessee submits that the Manipal Digital Systems Private Limited is functionally different from the assessee which is involved in provision of ITes services. As per the annual report of the company, the activity undertaken by the company is in the nature of pre-press activities which is not comparable to the assessee. That further in the website of the company, it is engaged in the diversified set of activities which involves graphic solutions, packaging brand management, digital publishing and digital content solutions. Therefore, the assessee submits that this company should be rejected from the final set of comparables companies. 9. The TPO was of the opinion that in this company i.e. Manipal Digital Systems Private Limited, 90% of the revenue is earned from ITes which is similar to that of the assessee company. The TPO further observed that most of the information provided by the assessee was from website and it cannot be said reliable source of information as any company while projecting itself in public domain tries to shows its diverse functioning and range of products so as to create a brand image of itself. With these observations, the contention of the assessee was rejected and the company was taken as comparable company. 10. That before the Ld. DRP, objections have been raised by the assessee which are at running Page No.34 of the appeal memo and therein, apart from reiterating the submissions made before the TPO, the assessee has stated that as per the online advertising laws and guidelines provided by the Advertising Standard Council of India, advertisements are based on principle of truthfulness and honesty of representation and there cannot be any misleading advertisement. That further, since the audited financial statements do not provide detailed description of operations/products in which the company deals, the website can be referred to for the analysis of functions performed by the company. The Ld. DRP vide Para (c) of Page No.67 to 70 of its order and as per reasoning therein, had upheld the findings of the TPO and included Manipal Digital Systems Private Limited in the final set of comparables companies. That again the prime observation of the Ld. DRP in this regard was that more than 90% of the total revenue of the operation of the company comes from ITes. 11. At the time of hearing, the Ld. Counsel for the assessee took us through the annual report of the company at Volume –II, Page 1279 onwards, Page 1302 having notes of accounts. The Ld. Counsel vehemently submitted that on perusal of the annual report, notes of accounts, nothing can be stated whether at all this company i.e. Manipal Digital Systems Private Limited is engaged in the business of call center or not. The realm of ITes involves various activities and on general principle the Revenue cannot say that since majority of the earning of the said company comes from ITes, it is comparable company with that of the assessee company.

27 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

28 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. be bifurcated as BPO and KPO Services for the purpose of comparability analysis in the first instance. The Tribunal proceeded to hold that a relatively equal degree of comparability can be achieved by selecting potential comparables on a broad functional analysis at ITeS level and that the comparables so selected could be put to further test by comparing specific functions performed in the international transactions with uncontrolled transactions to attain relatively equal degree of comparability.

29 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

30 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. (supra.) we direct the AO/TPO to exclude this company i.e. Manipal Digital Systems Private Limited from the final set of comparables with that of the assessee company.” 17. Learned DR submitted that the aforesaid decision was in relation to Assessment Year 2016-17 whereas the case of the assessee in this appeal is in reference to Assessment Year 2017-18. Learned Counsel for the assessee submitted that the functional profile of the comparable company as well as the assessee remains the same for both Assessment Years 2016-17 and 2017-18 and therefore the decisions cited above are applicable to Assessment Year 2017-18 also. 18. We have given a careful consideration to the rival submissions and are of the view that it would be just and appropriate to set aside the question of comparability of Manipal Digital Systems Pvt. Ltd., to the TPO/AO to examine as to whether the functional profile of the assessee and the assessees in the decisions cited by the learned AR remains the same in Assessment Year 2017-18 as it was in Assessment Year 2016-17.”

12.1.10 Accordingly, the above comparable i.e. Manipal Digital Systems Pvt. Ltd. is directed to be excluded from the list of comparables. ………………………………………… Infosys BPO Limited: 12.1.18 The ld AR submitted that in assessee’s own case in earlier assessment year, it was not considered as comparable and he relied on the order of the Tribunal in the assessee’s own case in ITA No.212/Bang/2021 dated 27.9.2022 in the assessment year 2016-17. 12.1.19 The ld. D.R. submitted that on perusal of the annual report, it was noted that this company offers business process outsourcing solutions to its global clients by leveraging process, domain and people management expertise. Further, at Page 31 and 32 under Note 11 Segment Reporting, it is clearly stated that the company's operations primarily relate to providing business process management services, and accordingly revenues represented along with industry classes comprise the primary basis of segmental information. Thus, primary business activity of this company is business process management services, in various verticals such as FSI, MFG, RCL, ECS. The ld DR further submitted that at page 81 of annual report, Note 2.24, the report clearly states that as per function wise classification it has income from business process management services. The company's catering to a variety of industries does not change the nature of functions carried out as it is committed to provide best in class services to both horizontal and vertical focus areas. In view of the above information in the annual report, ld. D.R. stated that there is no merit in the plea that this company is functionally different, and that it has diversified activities, and hence stated that this plea be rejected. 12.1.20 We have heard the rival submissions and perused the materials available on record. We have considered the arguments of both parties. In the assessment year 2016-17, in the assessee’s own case in IT(TP)A No.212/Bang/2021 dated

31 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. 27.9.2022, the Tribunal has considered this company as not comparable wherein held as under:

“10. As mentioned earlier, the limited submission of the assessee before the Tribunal as per ground 1.12 is seeking exclusion of three companies from the list of comparable companies, namely, (i) Infosys BPO Limited, (ii) SPI Technologies India Private Limited, and (iii) Eclerx Services Limited. We find in the case of assessee’s group company namely EIT Services India Pvt. Ltd. v. DCIT (supra), the above three companies were excluded from the list of comparables on account of functional dissimilarities. We find that profile of the assessee in the instant case and that of the assessee in case of EIT services India Pvt. Ltd. are identical. Moreover, the assessment year is the same. The relevant finding of the Tribunal in the case of EIT Services India Pvt. Ltd. v. DCIT (supra) reads as follows (For exclusion of (i) Infosys BPO Limited, (ii) SPI Technologies India Pvt. Ltd. and (iii) Eclerx Services Limited) :-

“13. Further, the assessee wants exclusion of following comparables in IT enabled services. i. Infosys BPO Ltd. ii. SPI Technologies Pvt. Ltd. iii. Eclerx Services Ltd. i. Infosys BPO Ltd. 13.1 The Ld. A.R. submitted that that Infosys BPO offers business process outsourcing solutions to its global clients by leveraging process, domain and people management expertise. The nomenclature in the profit and loss account indicates that the income is earned from ‘Revenue from business process management services’ which suggests that the company is engaged in consultancy and management services unlike the Appellant which is involved only in providing ITES as a captive service provider entity. 13.2 Further, Infosys BPO Limited has been excluded in the case of Swiss Re Global Business Solutions India (P.) Ltd. [2022] 137 taxmann.com 417 (Bangalore - Trib.) AY 2016-2017 (He referred Page 162-163 of the Case Law Compilation, Para 11 - 21). Below is the relevant extract from the order for ready reference: 11. The ld. AR submitted that Infosys BPM Ltd. should be rejected as a comparable because it is functionally not comparable, has diversified activities and lack of segmental data, different business model, brand profits, various revenue models, presence of intangibles, outsourcing costs, marketing expenses and turnover. It offers business outsourcing solutions to several clients and span across multiple industry segments. The company's catering to a variety of industries does not change the nature of functions carried out as it is committed to provide best in class services to both horizontal and vertical focus areas.

32 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. 12. The DRP was of the view that just because the company is providing cloud based services over various mainframe computers, the company would not be functionally different as claimed by the assessee and rejected this plea of the assessee. 13. Regarding the plea of the assessee that this company is into high end ITES service provider, and hence not comparable, the DRP held that under TNMM, there is no requirement that the comparables should render the same or identical services. It would be sufficient, if the services fall under the broad industry segment ITES. In this regard the DRP relied on the Bangalore Tribunal decision in the case of GE India Technology Centre (P.) Ltd. v. Dy. DIT [2013] 30 taxmann.com 249/141 ITD 245 and other decisions wherein it was observed that TNMM requires only broad comparability. 14. The contention of the assessee that Infosys BPO has various Revenue Models and its revenues are generated principally on time and material basis, transaction basis and fixed price contracts and therefore, it should not be compared with the assessee, the DRP observed that as the assessed failed to demonstrate as to how the different methods of billing would affect the Functional comparability or impact the profitability. Unless the same is demonstrated with credible evidence, it remains a theoretical argument without any backing with facts and figures and hence rejected it. 15. The assessee pointed out that this company has reported an amount of Rs. 136 crore as 'cost of Technical sub-contractors' which constitutes about 4.45% of total revenue of the company during the year. The DRP observed that the annual report mentions that these sub-contractors are used for operational activities. This is a common practice in almost all the companies to give a small portion of the work to some other subcontractors for a variety of reasons. This may allow the company to focus on its core activities. Sometimes it may be to meet the mismatch in certain skill-sets that are required in various projects. These expenses are incurred in the routine course of business. This cannot be held to be a criteria to affect the functional comparability of a company and more so in the facts of this case, wherein the sub-contracting expenses are about 4.45% only. This objection was accordingly rejected. 16. Regarding the lack of segment data to reject it as a comparable, the DRP was of the view that when it has been held that all the services being done by this company falls in the category of ITeS, then the absence of segmental information remains a theoretical argument. 17. The assessee has also argued that this company has significant intangibles and brand and hence not functionally comparable. The DRP noted that the expenditure incurred towards brand was just Rs. 19 crore which is meagre considering its operating revenue of Rs. 3050 crores. Further, the assessee could not point to any information from the annual report to indicate brand has contributed to the revenue growth or profitability. Therefore, the presence of brand, as such, has not affected comparability. Further, there is no information in the annual report to indicate that the company has undertaken any major R&D initiatives & own intangibles. Therefore, the presence of intangible

33 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. in the form of goodwill, which is also insignificant, as the value is only Rs. 19 crore compared to the revenue from operations of Rs. 3050 crores do not have any impact on the profits of the company. Hence, these pleas were rejected by the DRP. 18. The assessee's contention that this comparable has incurred significant selling and marketing expense was also not accepted by the DRP, since from the perusal of the annual report, the DRP noted that the expenses on this count is only 4.56% of the total expenditure and which is not at all significant to affect the profitability of the comparable. 19. Thus, in view of the discussions held above, all the grounds raised by the assessee were rejected and the action of the AO/TPO was upheld by the DRP. 20. We have heard both the parties and perused the material on record. This comparable has been considered as not comparable in SwissRe Global Business Solutions India (P.) Ltd. v. Dy. CIT [2020] 116 taxmann.com 716 (Bang. - Trib.) wherein it was observed as under :—

"We have perused submissions advanced by both sides in light of records placed before us. We note that this company is providing services in various areas of sourcing and procurement, customer services, finance and accounting legal process outsourcing, sales and fulfilment, analytics, business platforms, business transformation services, human resource outsourcing and technology solution optimisation. It is noted that this comparable also provides services in financial services and insurance, manufacturing, energy utilities communications and services and retail, consumer packaged foods, logistics and life services. Further in the annual report it has been mentioned that this comparable provides services that are different from routine back-office services. This noting itself makes this comparable not functionally similar with that of assessee. Accordingly we direct this comparable to be excluded from finalist." 21. In view of the above order of the Tribunal, we are inclined to hold that this company should be excluded from the list of comparables.

13.3 The company has also been excluded in the case of ADP (P.) Ltd. [2022] 135 taxmann.com 44 (Hyderabad - Trib.) AY 2016-2017 by the Hyderabad Tribunal.

13.4 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to exclude this comparable from the final list of ITeS Segment. 13.5 Ld. D.R. relied on the order of Ld. DRP.

13.6 We have heard the rival submissions and perused the materials available on record. This company has been considered as in the

34 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. case of ADP Pvt. Ltd. cited (supra and held that this company cannot be included by observing as under:- “16.1 Infosys BPO Ltd.: The ld. AR submitted that this company may be excluded from the final set of comparables for the reason that this company has incurred outsourcing costs for FY 2013-14, FY 2014-15 and FY 2015-16 and the outsourcing cost incurred by this company reflects a different operating model and hence cannot be compared with the assessee company. Further, he submitted that while this company operates under various revenue model as per the assignments i.e., proportional completion method on rendering services, whereas the assessee charges a mark-up on the cost incurred to provide the services. Further, he submitted that since the cost structure and revenue model of this company is different with that of the assessee, this company ought to be rejected as a comparable company. He relied on the decision of the co-ordinate bench in assessee's own case ADP (P.) Ltd. (supra) wherein the coordinate bench excluded this company as comparable. 16.2 The ld. DR, on the other hand, submitted that presence of outsourcing cost/subcontracting cost does not affect functional comparability. Further, it reduces the operating margin of the company, which is beneficial to the assessee. He, therefore, submitted that the TPO/DRP has rightly included this company as comparable. 16.3 We have considered the rival submissions and perused the material on record as well as the orders of TPO/DRP. We find that the co-ordinate bench in assessee's own case ADP (P.) Ltd. (supra) has excluded this company as comparable by observing as under: '38. Having regard to the rival contentions and the material on record, we find we find that the Co-ordinate Bench of this Tribunal in the assessee's own case not only for the A.Ys 2009-10 for the A.Y 201011 has also considered this issue at Paras 6 to 9 in ITA No. 221/Hyd/2015 which reads as under:

"6. The TPO has selected many comparables and among them M/s. Infosys BPO Ltd., TCS E-serve Ltd., and Eclerx Services Ltd., were objected to on the reason of high turnover and functionally different. With reference to Infosys BPO, the objection was that the said company renders vide array of services and has high brand value and turnover is also very high. With reference to TCS E- serve Ltd., there was exceptional event as the company was taken over by Tata Consultancy Services in the year 2008-09 and heavy turnover is due to its takeover. Further, it was submitted that the company was functionally different as it has three different services and segmental information was not arrived. As far as E- clerx Services Ltd., it was submitted that this company caters to high end KPO services and cannot be compared to routine BPO services provided by assessee. The DRP vide para 3.10 has accepted the assessee's objections and accordingly, directed the TPO to exclude the above three companies. There are other

35 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. directions of the DRP on TP adjustments on which neither party has raised grounds, except the Revenue on the above exclusion of three companies. 7. Referring to the order of the TPO, it was the contention of Ld.DR that DRP was not correct in excluding them on the basis of the turnover, whereas Ld. Counsel submitted that DRP has followed the decisions of the Co-ordinate Benches in excluding the above three comparables. 8. We have considered the rival submissions and perused the order of the DRP and Co-ordinate Benches. As far as M/s. TCS E-Serve Ltd., is concerned, the Co-ordinate Bench of ITAT in the case of M/s Hyundai Motors India Engineering P. ltd in ITA Nos. 1743/Hyd/2014 (AY.2010-11) & ITA No. 1917/Hyd/2014 (AY.2010-11) dt. 13-11-2015, has decided the issue as under:

ITA No 2233 of 2018 ADP Private Ltd Hyderabad "TCS e- SERVE LIMITED 11.2.1. As regards TCS e-Serve Limited is concerned, we find that it possesses brand value as is evident from the Schedule-N (Operation and Other expenses) to the P & L A/c of the annual report for the financial year 2009-10 of Rs. 46,065 thousands and also that it possesses intangibles in the form of software licenses which have not been taken note of by the authorities below while adopting its margin. It is also the case of the assessee that this company has a turnover of Rs. 1405.10 crores which is 25 times of the turnover of the assessee and hence, is not comparable to the assessee. The Ld. Counsel for the assessee had also placed reliance upon the TPO's order in the case of M/s. IGS Imaging Services India Ltd., to hold that there are exceptional circumstances during the relevant financial year due to which this company is not comparable to the assessee. The Ld. Counsel for the assessee also submitted that the segmental details of this company are not available and hence, has to be excluded on this count also.

11.2.2 We find that the assessee's contentions about the presence of 'brand value' and owning of 'intangibles' is supported by the evidence on record. However, as regards the extraordinary event or exceptional circumstance there is no material placed before us by the Ld. Counsel for the assessee. Therefore, merely because the TPO in another case has held that there is an extraordinary event for which this company has to be excluded from the list of comparables, it cannot be excluded. Such claim has to be supported by evidence on record. As regards the functional dissimilarity and huge turnover and brand value is concerned, we find that this

36 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. Tribunal in assessee's own case for A.Y.2009-10 while considering the comparability of the assessee with Infosys BPO Ltd., has taken note of the possession of the brand value and intangibles which influenced the financial results of this company. The Hon'ble Delhi High Court in the case of CIT v. Agnity India Technologies (P.) Ltd., [2013] 219 Taxman 26 (Del.), held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee therein. In the case before the Hon'ble High Court (supra), the turnover of the assessee was about Rs. 15.79 crores as against the turnover of Rs. 1016 crores of the Infosys. Considering these facts, the Hon'ble High Court had directed for exclusion of Infosys BPO because of its brand value and also on the grounds of functional dissimilarity and huge turnover. Though, the company before us is TCS e-Service Ltd., and not Infosys BPO, we find that the turnover of the assessee company for this assessment year is around Rs. 50 crores as against the turnover of TCS EServe Limited of Rs. 1405.10 crores. Therefore, following the turnover filter as well as taking note of the fact that it owns and possesses brand value and intangibles as compared to the assessee which does not own such assets, we direct that this company be excluded from the list of final comparables. Accordingly, assessee's grounds of appeal No. 6 is partly allowed. 8.1 Respectfully following the above decision of the Coordinate Bench, we confirm the order of DRP excluding the above company from the list of comparables.' We observe from the financial statements of this company, that this company is functionally dissimilar and use robotics automation and diversified activities. Therefore, following the decision of the co- ordinate bench, we direct the AO/TPO to exclude this company as comparable for determining ALP. 13.7 In view of the above order of the coordinate bench of Hyderabad, we direct the AO/TPO to exclude this company viz. Infosys BPO Ltd. from the list of comparables from the final list of ITeS segment.

Eclerx Services Ltd

37 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

15.1 Further, Eclerx Services Limited has been excluded in the case of Swiss Re Global Business Solutions India (P.) Ltd. [2022] 137 taxmann.com 417 (Bangalore - Trib.) AY 2016-2017 (Refer Page 163 of the Case Law Compilation, Para 22-30). Below is the relevant extract from the order for ready reference: 22. Regarding exclusion of Eclerx Services Ltd., the assessee argued that this company is a KPO company and hence, it is not a good comparable. The DRP observed that there is a thin line of difference between BPO and KPO services. KPO is termed as an upward shift of the BPO industry in the value. chain. Thus, BPO trying to upgrade itself as KPO is likely to render both BPO as well as KPO services in the process of evolution and therefore, such an entity cannot be considered strictly as either BPO or KPO. In view of the above, ITeS service's cannot be further classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM, functional similarity is more relevant than product similarity. The DRP noted that the functional profile of this company was similar to the assessee. 23. Regarding the amalgamation of wholly owned subsidiary Agilyst Consulting Pvt. Limited has taken place with effect from 1-4-2015, the DR observed that the assessee has not demonstrated any increase in profits due to this amalgamation. Therefore, this amalgamation has no impact on comparability. Accordingly, the plea was rejected. 24. With regard to acquisition resulting in inorganic growth, the DRP noted that the company has acquired entire shareholding of CLX Europe SPA, Italy, as on 22nd April 2015 and this acquisition was made by the company's overseas subsidiary e-Clerx Investments (UK) Ltd. Therefore, there is no merit of the objection, as the standalone financials of this company are considered for comparability. 25. The assessee also raised the objection that there is increase in revenue, but according to the DRP, it has failed to bring on record any evidence to suggest that this abnormal inorganic growth has impacted the profit margin of the company. It is observed that the profit margin of this company has been consistently at the same level during the last few years. The ALP margin is determined with reference the average profit margin of a comparable for three years and also taking into account the defined median value of the PLIs of the comparable. These will even out such differences. The DRP was of the opinion that it will not be proper to reject a comparable only on account of inorganic growth of top line, which otherwise is functionally comparable.

38 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. 27. The Assessee submitted that Eclerx suffers business concentration risk unlike the Assessee, who operates as a risk-free entity. The DRP observed that as far as the limited risk in the case of captive service providers is concerned, if this argument is accepted then it cannot be compared to any company as most of the companies will be independent companies. Rather it should be compared to independent companies only as the price received for the services by them will be determined by market forces, which is not the case of the assessee. The assessee itself can be characterized as a contract service provider, which means that it operates on a cost plus model. Therefore, this argument was also rejected. 28. Thus, the DRP upheld the rejection of this company as a comparable. 29. We have heard both the parties on the issue. This company has also been considered as not comparable in assessee's own case for A.Y. 2014-15 in IT(TP)A No. 3181/Bang/2018 dated 21-5-2020 wherein it was observed as under :— "It is noted that this company is involved in high-end KPO services whereas assessee is providing IT enabled services by rendering remote data processing in the field of reinsurance. In our opinion functions performed by this company is not similar to that of assessee even though assessee before us also carries out certain services on contract basis. Ld. AR has placed reliance upon decision of Hon'ble Delhi High Court in case of Rampgreen Solutions (P.) Ltd. v. CIT [2015] 60 taxmann.com 355/234 Taxman 573/377 ITR 533 Hon'ble Court had held that once a company falls into the category of high-end KPO, it cannot be functionally comparable with a BPO service provider like that of assessee. Applying this reissue in the present case, we direct Ld.AO to eliminate this comparable from final list." 30. In view of the above order of the Tribunal, we are inclined to direct that Eclerx Services Ltd. be excluded from the list of comparables.

15.2 The company has also been excluded in the case of ADP (P.) Ltd. [2022] 135 taxmann.com 44 (Hyderabad - Trib.) AY 2016-2017 by the Hyderabad Tribunal. 15.3 In view of the above-mentioned reasons, the Ld. A.R. requested to direct the TPO to exclude this comparable from the final list of ITeS Segment.

15.4. Ld. D.R. relied on the order of Ld. DRP 15.5 We have heard the rival submissions and perused the materials available on record. This company is not considered as comparable in the case of ADP Pvt. Ltd. cited (supra) in assessment year 2016-

39 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. 17, wherein they excluded the comparable ground No.7 of that order vide para 17 to 17.4 wherein held as under:- “17. Eclerx Services Ltd.: The ld. AR of the assessee submitted that this company may be excluded as comparable from the final set of comparables as this company is engaged in providing KPO services, different to low end BPO services provided by the assessee. He submitted that Safe Harbor Rules recognizes ITeS activities under tow distinct categories i.e., BPO and KPO and activities of this company falls under KPO services. He submitted that the services provided by this company of following: (a) Contract Risk Review, (b) Margin Exposure Management, (c) Online Operations and web analytics, (d) CRM and business intelligence, (e) Content creation, (f) business process consulting. 17.1 He further submitted that as per NIC code provided in the annual report, this company has been classified as KPO and has been awarded as leading KPO's in India, basis award and accolades received. He submitted that this company has undertaken the following extraordinary transactions thereby impacting the operating margins: (a) Acquisition of CLX Europe (b) Amalgamation of Agilest consulting (P.) ltd. 17.2 He relied on the decision of the co-ordinate bench in assessee's own case ADP (P.) Ltd. (supra) wherein the co-ordinate bench excluded this company as comparable. 17.3 The ld. DR, on the other hand submitted that this company is engaged in rendering ITeS, therefore, functionally comparable to assessee. He submitted that amalgamation has no impact on the profits of the company. He, therefore, submitted that TPO/DRP has rightly included this company as comparable to assessee company. 17.4 We have considered the rival submissions and perused the material on record as well as the orders of TPO/DRP. We find that the coordinate bench in assessee's own case for AY 2014-15 cited supra has excluded this company as comparable by observing as under: 38. Having regard to the rival contentions and the material on record, we find we find that the Co-ordinate Bench of this Tribunal in the assessee's own case not only for the A.Ys 2009-10 for the A.Y 201011 has also considered this issue at Paras 6 to 9 in ITA No. 221/Hyd/2015 which reads as under: "6. The TPO has selected many comparables and among them M/s. Infosys BPO Ltd., TCS e-serve Ltd., and Eclerx Services Ltd., were objected to on the reason of high turnover and functionally different. With reference to Infosys BPO, the objection was that the said company renders vide array of services and has high

40 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. brand value and turnover is also very high. With reference to TCS E-serve Ltd., there was exceptional event as the company was taken over by Tata Consultancy Services in the year 2008-09 and heavy turnover is due to its takeover. Further, it was submitted that the company was functionally different as it has three different services and segmental information was not arrived. As far as E-clerx Services Ltd., it was submitted that this company caters to high end KPO services and cannot be compared to routine BPO services provided by assessee. The DRP vide para 3.10 has accepted the assessee's objections and accordingly, directed the TPO to exclude the above three companies. There are other directions of the DRP on TP adjustments on which neither party has raised grounds, except the Revenue on the above exclusion of three companies. 7. Referring to the order of the TPO, it was the contention of Ld.DR that DRP was not correct in excluding them on the basis of the turnover, whereas Ld. Counsel submitted that DRP has followed the decisions of the Co-ordinate Benches in excluding the above three comparables. 8. We have considered the rival submissions and perused the order of the DRP and Co-ordinate Benches. As far as M/s. TCS e-Serve Ltd., is concerned, the Co-ordinate Bench of ITAT in the case of M/s Hyundai Motors India Engineering P. ltd in ITA Nos. 1743/Hyd/2014 (AY.2010-11) & ITA No. 1917/Hyd/2014 (AY.2010-11) dt. 13-11-2015, has decided the issue as under:

ITA No 2233 of 2018 ADP Private Ltd Hyderabad "TCS eSERVE LIMITED 11.2.1. As regards TCS e-Serve Limited is concerned, we find that it possesses brand value as is evident from the Schedule-N (Operation and Other expenses) to the P & L A/c of the annual report for the financial year 2009-10 of Rs. 46,065 thousands and also that it possesses intangibles in the form of software licenses which have not been taken note of by the authorities below while adopting its margin. It is also the case of the assessee that this company has a turnover of Rs. 1405.10 crores which is 25 times of the turnover of the assessee and hence, is not comparable to the assessee. The Ld. Counsel for the assessee had also placed reliance upon the TPO's order in the case of M/s. IGS Imaging Services India Ltd., to hold that there are exceptional circumstances during the relevant financial year due to which this company is not comparable to the assessee. The Ld. Counsel for the assessee also submitted that the segmental details of this company are not available and hence, has to be excluded on this count also. 11.2.2 We find that the assessee's contentions about the presence of 'brand value' and owning of 'intangibles' is supported by the evidence on record. However, as regards the extraordinary event or exceptional circumstance there is no material placed before us by the Ld. Counsel for the assessee. Therefore, merely because the TPO in another case has held that there is an extraordinary event for which this company has to be excluded from the list of comparables, it cannot be excluded. Such claim has to be supported by evidence on record. As regards the functional dissimilarity and huge turnover and brand value is concerned, we find that this Tribunal in assessee's own case for A.Y.2009-10 while considering the comparability of the assessee with Infosys BPO Ltd., has taken note of the

41 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. possession of the brand value and intangibles which influenced the financial results of this company. The Hon'ble Delhi High Court in the case of CIT vs. Agnity India Technologies P. Ltd., (2013) 219 Taxman 26 (Del.), held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee therein. In the case before the Hon'ble High Court (supra), the turnover of the assessee was about Rs. 15.79 crores as against the turnover of Rs. 1016 crores of the Infosys. Considering these facts, the Hon'ble High Court had directed for exclusion of Infosys BPO because of its brand value and also on the grounds of functional dissimilarity and huge turnover. Though, the company before us is TCS E-Service Ltd., and not Infosys BPO, we find that the turnover of the assessee company for this assessment year is around Rs. 50 crores as against the turnover of TCS e-Serve Limited of Rs. 1405.10 crores. Therefore, following the turnover filter as well as taking note of the fact that it owns and possesses brand value and intangibles as compared to the assessee which does not own such assets, we direct that this company be excluded from the list of final comparables. Accordingly, assessee's grounds of appeal No. 6 is partly allowed. 8.1 Respectfully following the above decision of the Co-ordinate Bench, we confirm the order of DRP excluding the above company from the list of comparables. We observe from the financial statements that this company is functionally dissimilar and engaged in KPO and BPO services and amalgamation of Agilest Consulting Pvt. Ltd., vide page No. 23 of paper book volume -1 para 8 and acquisition of CLX Europe which impacts on the profits of the company. From the financial statements of the Chairman's message placed at page No. 18 of paper book volume - 1, it has been categorically stated that after acquisition of CLX Europe, the revenue has grown by 30%, which clearly shows that it impacts on the profitability of the company. These are extraordinary events. Therefore, If an extraordinary event has taken place by way of amalgamation in a company, that company cannot be considered as a comparable as held by the co-ordinate bench of ITAT, Pune, in the case of Entercoms Solutions (P.) Ltd. (supra). Accordingly, we direct the AO/TPO to exclude this company as comparable from the list of comparables.”

15.6 In view of the above order of the Tribunal, we direct the AO/TPO to exclude this company viz. Eclerx Services Ltd. from the list of comparables.”

11 In view of the above order of the Tribunal, which is a group company of the assessee, and having same profile of the assessee, we direct the TPO to exclude (i) Infosys BPO Limited, (ii) SPI Technologies India Private Limited, and (iii) Eclerx Services Limited from the list of comparables and recompute the ALP of the international transaction.”

42 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. 12.1.21 In view of the above order of the Tribunal in assessee’s own case and having same profile of the assessee, we direct the AO/TPO to exclude Infosys BPO Ltd. from the list of comparables.

7.3. Respectfully following the above judgments of the co-ordinate Bench of the Tribunal in assessee’s own case for the preceding assessment years cited (supra), we also direct to Ld.AO/TPO for exclusion of these three companies named Infosys BPM Services Pvt. Ltd., Manipal Digital Systems Private Ltd., and Eclerx Services Ltd., in above terms. Accordingly, this ground of appeal is partly allowed.

Our Submissions regarding ESOP cost being actual business expenditure for the assessee and taxed in hand of employees as "Perquisite" with appropriate TDS: At the outset it is to be noted that the Grounds related to ESOP expenses to be allowed as business expenditure is covered in the case of the Appellant for immediately preceding year as well in case of its affiliates having same issue in other appeals. Reference of these favorable orders are as below:

43 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

Detailed submission: ESOP related expenses are deductible under Section 37(1) of the Act The ESOP related expenses represent the actual expenditure incurred by the Company in respect of its employees, who form part of the Company's business and are involved in carrying out day-to-day business operations/management. The said expenses are incurred wholly and exclusively for the business of the Company and therefore, eligible for deduction under section 37 of the Act.

These expenses are nothing but compensation paid to employees of Appellant and accordingly, taxed in the hands of employees as 'Perquisites'. The disallowance of these expenses under section 37 of the Act would imply that the AO believes that the compensation paid to its employees is not allowable under section 37 of the Act.

Provision of section 37(1) of the Act inter alia provides that "any_expenditure laid out or expended wholly and exclusively for the purposes of the business or profession, not being in the nature of capita] expenditure or personal expenses, shall be eligible for deduction in computation of total income".

Accordingly to elaborate, we wish to submit as under:

• The ESOP schemes for stock options enables in attracting and retaining the employees of the Company, resulting in better performance of the Company's business operations. The scheme is designed primarily to incentivize and for retaining the employees and thereby earn more revenue by securing consistent and concentrated efforts of dedicated employees. • Further, the share based compensation under the ESOP scheme is construed both by the employees and the Company as a part of employment remuneration package, which is an expenditure inextricably linked to the business of the Company.

• On similar facts, Honourable Income-tax Appellate Tribunal ("Tribunal"), Bangalore in the case of Nova Nordisk India Private Limited (ITA NO 1275/Bang/2011) has held that ESOP expenditure incurred is deductible under Section 37(1) of the Act. In the cited case, the Tribunal was dealing with the expenditure incurred on ESOP schemes (managed by the Holding Company) and expenditure was in respect of employees of Indian Company. The Tribunal held that the ESOP expenditure was wholly and exclusively for the purpose of the business of the Indian Company and had to be allowed as deduction as a revenue expenditure. Relevant extract of the decision is provided below –

'"We fail to see any basis for the observation of the CIT(A) that the obligation to issue shares at a discounted price to the employees of the Assessee was that of the foreign parent company and not that of the Assessee. Admittedly, the shares

44 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. were issued to employees of the Assessee and it is the Assessee who has to bear the difference in cost of the shares. The expenditure is necessary for the Assessee to retain a healthy work force. Business expediency required that the Assessee incur such costs. The parent company will be benefited indirectly by such a motivated work force. This will be no ground to deny the deduction of a legitimate business expenditure to the Assessee as laid down by the Hon'ble Supreme Court in the case of Bassoon J.David (supra) • In addition, we wish to place reliance on the decision of the jurisdictional Honourable Karnataka High Court in the case CIT, LTU Vs Biocon Limited (121 taxmann.com 351} (Karnataka HC), wherein the Honorable High Court has upheld the deductibility of ESOP charges. Relevant extract of the decision is as under –

"10. From perusal of section 37(1), which has been referred to supra, it is evident that an assessee is entitled to claim deduction under the aforesaid provision if the expenditure has been incurred. The expression 'expenditure' will also include a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which it is issued and the market value of the shares would also be expenditure incurred for the purposes of section 37(1) of the Act. The primary object of the aforesaid exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, the same cannot be construed as short receipt of capital. The tribunal, therefore, in paragraphs 9.2.7 and 9.2.8 has rightly held that incurring of the expenditure by the assessee entitles him for deduction under section 37(1) of the Act subject to fulfilment of the condition....... We are in respectful agreement with the view taken in PVP Ventures Ltd. And Lemon Tree Hotels Ltd.'case (supra). 13. It is also pertinent to mention here that for Assessment Year 2009-10 onwards the Assessing Officer has permitted the deduction of ESOP expenses and in view of law laid down by Supreme Court in Radhasoami Satsang v. CIT, [1992] 60 Taxman 248/193 ITR 321, the revenue cannot be permitted to take a different stand with regard to the Assessment Year in question. In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed" In view of the above, we wish to submit that the incurrence of expenditure towards ESOP for ' employees is a clear and explicit expenditure incurred for the employees and directly affects the performance of employees, which in-turn is critical for the Company's business and its long-term growth. Accordingly, we would submit that the expenditure incurred is deductible under section 37(1) of the Act.

Expenditure incurred is not notional expense As explained in the earlier paragraphs, the expenditure incurred on ESOP cross- charges represents actual expenses incurred by the Company.

45 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. In fact, the Company has deducted appropriate IDS under section 192 of the Act on the ESOPs granted to the employees. Therefore, the question of the said expenditure being notional in nature does not arise; • Given the expenditure incurred in the subject case is towards employees of the Company, the question of the same being 'personal' in nature, does not arise. • Expenditure is not capital in nature ESOP schemes designed are primarily to incentivize better performing employees and thereby earn more revenue by securing consistent and concentrated efforts of dedicated employees. The schemes designed are not with an intention to increase the capital needs of the Company. The shares granted to employees are the shares listed and traded in stock exchange at USA. The compensation paid to the employees in the form of ESOPs is revenue in nature and no asset of enduring nature is coming into existence. The decisions referred above also emphasize the said fact that expenditure incurred is in the nature of revenue expenditure. Accordingly, we wish to submit that said expense should be deductible in the hands of the employer. Additionally, we wish to submit that the treatment cannot be different in the hands of the employee and in the hands of employer. Share based compensation under ESOP schemes is taxable in the hands of employees as "perquisite" under Salary income and IDS provisions are applied on such payment. In view of the above, we wish to submit that the incurrence of expenditure towards ESOP for employees is a clear and explicit expenditure incurred for the employees and directly affects the performance of employees, which in-turn is critical for the Company's business and its long-term growth. Accordingly, we wish to submit that the expenditure incurred is deductible under section 37(1) of the Act.

9.1. In this regard, he submitted that in assessee own case in the preceding assessment years in ITA No.174/Bang/2022 for the AY 2017-18 and in IT(TP)A No.212/Bang/2021 for the AY 2016-17 in assessee’s own case, this issue has been decided in favour of the assessee by the co-ordinate bench of the Tribunal .

9.2. The learned DR relied on the order of the lower authorities.

9.3. After hearing both the sides and perused the entire materials available on record and also the orders of the authorities

46 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

below, we noted that the issue involved in these grounds are similar to the assessee’s own case for the preceding assessment years, which has been decided by the co-ordinate Bench of the Tribunal in assessee’s own case in favour of the assessee. The relevant part of the order is as under;-

47 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

“20.27 We have heard the rival submissions and perused the materials available on record. This issue came up for consideration before the Hon’ble Karnataka High Court in the case of CIT Vs. Biocon Ltd. cited (supra) wherein it was held as under:-

“From a perusal of section 37(1) of the Income-tax Act, 1961 it is evident that the provision permits deduction of expenditure laid out or expended and does not contain a requirement that there has to be a payout. If an expenditure has been incurred, section 37(1) of the Act would be attracted. Section 37 does not envisage incurrence of expenditure in cash.

An assessee is entitled to claim deduction under the provision if the expenditure has been incurred. It is well settled in law that if a business liability has arisen in the accounting year, it is permissible as deduction, even though, the liability may have to be quantified and discharged at a future date.

Section 2(15A) of the Companies Act, 1956, defines "employees stock option" to mean option given to whole time directors, officers or the employees of the company, which gives such directors, officers or employees, the benefit or right to purchase or subscribe at a future rate to securities offered by the company at a pre-determined price. In an employees stock option plan a company undertakes to issue shares to its employees at a future date at a price lower than the current market price. The employees are given stock options at a discount and the same amount of discount represents the difference between market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vests with the employees.

The expression "expenditure" also includes a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which they are issued and the market value of the shares would be expenditure incurred for the purposes of section 37(1). The primary object of the exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, it cannot be construed as short receipt of capital.

48 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

Held, dismissing the appeal, that the deduction of the discount on the employees stock option plan over the vesting period was in accordance with the accounting in the books of account, which had been prepared in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. For assessment year 2009-10 onwards the Assessing Officer had permitted the deduction of the employees stock option plan expenses. The Revenue could not be permitted to take a different stand with regard to the assessment year 200405. The expenses were deductible.”

15.1 This issue further came for consideration before this Tribunal in the case of Hewlett Packard (India) Software Operation Pvt. Ltd. in ITA No.413/Bang/2022 dated 3.10.2022 wherein held as under:

“3. We have heard the rival submissions and perused the materials available on record. Similar issue came for consideration before this Tribunal in the case of Novo Nordisk Inia Pvt. Ltd. in ITA No.1275/Bang/2011 dated 30.9.2013, wherein it was held as under:-

18.“We have considered the rival submissions. It is clear from the facts on record that there was an actual issue of shares of the parent company by the assessee to its employees. The difference, between the fair market value of the shares of the parent company on the date of issue of shares and the price at which those shares were issued by the assessee to its employees, was reimbursed by the assessee to its parent company. This sum so reimbursed was claimed as expenditure in the profit & loss account of the assessee as an employee cost. The law by now is well settled by the decision of the Special Bench of the ITAT Bangalore in the case of Biocon Ltd. in ITA No.248/Bang/2010, A.Y. 2004-05 and other connected appeals, by order dated 16.07.2013, wherein it was held that expenditure on account of ESOP is a revenue expenditure and had to be

49 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

allowed as deduction while computing income. The Special Bench held that the sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity of their services to the company.

By no stretch of imagination, we can describe such discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. The substance of this transaction is disbursing compensation to the employees for their services, for which the form of issuing shares at a discounted premium is adopted.

50 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

51 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

conditions referred to in section 37(1) of the Act. The decision of the Hon’ble Supreme Court in the case of Sassoon J. David & Co. (P) Ltd. (supra) and the Hon’ble Karnataka High Court decision in the case of Mysore Kirloskar Ltd. (supra) clearly support the plea of the assessee in this regard. 24. We are of the view that in the facts and circumstances of the present case, the expenditure in question was wholly and exclusively for the purpose of the business of the assessee and had to be allowed as deduction as a revenue expenditure. 25. For the reasons given above, we direct the expenditure be allowed as deduction.” 4.1. Further, the Tribunal in the case of Global e-Business Operations (P) Ltd. in IT(TP)A No.212/Bang/2021 dated 27.09.2022 has held as under:-

“20. We have heard rival submissions and perused the material on record. In assessee’s group case, namely, EIT Services India Pvt. Ltd. v. DCIT (supra), had held that the ESOP expenditure is to be allowed as a deduction u/s 37 of the I.T.Act. The Tribunal had followed the judgment of the Hon’ble jurisdictional High Court in the case of CIT v. Biocon Limited (supra). The relevant finding of the Tribunal in assessee’s group case, reads as follows:-

“20.27 We have heard the rival submissions and perused the materials available on record. This issue came up for consideration before the Hon’ble Karnataka High Court in the case of CIT Vs. Biocon Ltd. cited (supra) wherein it was held as under:-

“From a perusal of section 37(1) of the Income-tax Act, 1961 it is evident that the provision permits deduction of expenditure laid out or expended and does not contain a requirement that there has to be a payout. If an expenditure has been incurred, section 37(1) of the Act would be attracted. Section 37 does not envisage incurrence of expenditure in cash.

An assessee is entitled to claim deduction under the provision if the expenditure has been incurred. It is well settled in law that if a business liability has arisen in the accounting year, it is permissible as deduction, even though, the liability may have to be quantified and discharged at a future date.

Section 2(15A) of the Companies Act, 1956, defines "employees stock option" to mean option given to whole time directors, officers or the employees of the company, which gives such directors, officers or employees, the benefit or right to purchase or subscribe at a future rate to securities offered by the company at a pre-determined price. In an employees

52 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

stock option plan a company undertakes to issue shares to its employees at a future date at a price lower than the current market price. The employees are given stock options at a discount and the same amount of discount represents the difference between market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vests with the employees.

The expression "expenditure" also includes a loss and therefore, issuance of shares at a discount where the assessee absorbs the difference between the price at which they are issued and the market value of the shares would be expenditure incurred for the purposes of section 37(1). The primary object of the exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, it cannot be construed as short receipt of capital.

Held, dismissing the appeal, that the deduction of the discount on the employees stock option plan over the vesting period was in accordance with the accounting in the books of account, which had been prepared in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. For assessment year 2009-10 onwards the Assessing Officer had permitted the deduction of the employees stock option plan expenses. The Revenue could not be permitted to take a different stand with regard to the assessment year 200405. The expenses were deductible.”

53 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. u/s 40(a)(i) of the I.T.Act). Therefore, grounds 2.1 to 2.8 are allowed and ground 2.9 to 2.15 is not adjudicated.” 4.2. In view of the above order of the Tribunal, we are inclined to allow both the above grounds taken by the assessee.” 15.2 In view of the above, taking a consistent view, the above issue is decided in favour of the assessee and against the department.

9.4. Respectfully following the above judgment, we also allow ground No.1.12, 2.1 to 2.15 in the above terms.

The assessee claimed working capital adjustment, which has not been granted by the ld.TPO as well as by the ld.DRP and the ld.AR submitted that it has been granted in assessees own case for the AY 2017-18. The working capital adjustment has been granted by the Bangalore bench of Tribunal relying on the case of Huwai Technology India Pvt.Ltd. IT.TP.A No.1940/Bang/2017 in assessees own case for the AY 2017-18 in IT(TP)A No. 174/Bang/2022. Accordingly, the assessee should be granted working capital adjustment with the comparable companies.

10.1. The ld.DR relied on the order of the lower authorities and submitted that the taxpayer was unable to demonstrate the difference in its working capital vis-à-vis the comparable companies had effected its profit margin and the adjustment should be computed in a reasonable accurate manner.

10.2. After considering the rival submissions and perused the entire material available on record and also the order of authorities below & relying on the facts of the case, we note that in

54 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

assesssee’s own case for AY 2017-18 cited supra, the co-ordinate Bench has granted the working capital adjustment by observing as under:-

8.1 Facts of the case are that the assessee claimed working capital adjustment while computing the net profit margin, which constitutes difference if any, between the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in open market as per 10B(3) of the Rules. 9. The ld. DRP observed that Rule 10B provides for making reasonably accurate adjustment to the uncontrolled comparable transaction to eliminate the material effects of differences on the price, cost or profits. The assessee has argued for working capital adjustment contending that there exist differences in the payable and receivable position between the assessee and the comparables. However, it was not demonstrated with any data or information as to the impact of such difference on the price, cost or profits, and as to whether such difference materially affect the price, cost or profits. The 'Accounts payables' and 'Receivables' shown in the balance sheet only reflects the position as at the end of the financial year, and as such it would not enable to measure the impact of working capital on the costs, price or profits. The working capital requirements and impact depends on various factors such as business cycle, the nature of business activity with its correlation on the general economic trends, the fund and capital position of the company, its marketing strategies, its market share etc. all of which cannot be captured in the year end Receivable or Payable position. Besides, the 'Payable' and 'Receivable' position stated in the Balance Sheet may not exactly reflect as to whether it arises from transaction relating to Revenue Account or Capital Account as there is no uniformity in the accounting or reporting requirements, and an intermixing is generally possible. The cost ascribable to the working capital would be different to different enterprises depending on the cost of fund to the enterprise, the cost of money in the economy it operates etc. In view of these, a reasonable accurate adjustment is not possible, as the differences in working capital requirements itself is based on various assumptions. Besides, ld. DRP noted that the assessee had failed to demonstrate such material differences so as to warrant an adjustment. In these circumstances, he argued that revenue is inclined to uphold the TPO's reasoning and reject the assessee's claim for working capital adjustment. Against this assessee is in appeal before us with this ground of appeal. 10. We have heard the rival submissions and perused the material available on record. The Tribunal consistently granting working capital adjustment to the assessee while computing ALP of international transactions and this view was fortified by the order of the Tribunal in the case of Huawei Technologies India Pvt. Ltd. in IT(TP)A No.1940/Bang/2017 dated 4.8.2021 wherein held as under: “15.The learned counsel for the Assessee brought to our notice the decision of

55 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. the Tribunal in Assessee’s own case for AY 2012-13 wherein on an identical issue, the Tribunal held that working capital adjustment cannot be denied to the Assessee, in IT (TP) A.No. 1939/Bang/2017 Huawei Technologies India Pvt. Ltd. v. JCIT [2019] 101 taxmann.com 313 (Bang. Trib.).

“10. The next grievance projected by the Assessee in its appeal is with regard to the action of the CIT(A) in not allowing any adjustment towards working capital differences. On this issue we have heard the rival submissions. The relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows:

Determination of arm's length price under section 92C . 10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :—

(a) to (d)

(e)transactional net margin method, by which,— (i)the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base;

(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction];

(f) ....

56 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

(2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:— (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if— (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.

Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the “TPG”) contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.473.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm’s length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: • None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or

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• Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called “comparability adjustments.

“13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory)

58 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures. (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT(A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results.

59 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO Vs. E Value Serve.com (2016) 75 taxmann.com 195(Del-Trib) has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opeing and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an excact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT(A)’s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT(A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT(A) is also not sustainable.

“(3) An uncontrolled transaction shall be comparable to an international transaction if— (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are

60 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited. likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.” 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly.” 16. Respectfully following the aforesaid decision, we hold that the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly.” 10.1 In view of above order of the Tribunal, we direct the AO/TPO to grant working capital adjustment. Ordered accordingly.

10.3. Respectfully following the above judgment, we also direct the AO/TPO to grant working capital adjustment in the above terms.

61 IT(TP)A No.966/Bang/2022. Global E-Business Operations Private Limited.

Order pronounced on this 23rd day of March, 2023.

Sd/- Sd/- (George George K.) (Laxmi Prasad Sahu) JUDICIAL MEMBER ACCOUNTANT MEMBER

Bangalore; Dated : 23rd March, 2023. Thirumalesh/Vms Copy to : 1. The Appellant. 2. The Respondent. 3. The DRP-1, Bangalore. 4. The Pr.CIT-2, Bengaluru. 5. The DR, ITAT, Bengaluru. 6. Guard File. Asst.Registrar/ITAT, Bangalore

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Initial Date 1. Draft dictated on 14.03.2023 Sr.PS 2. Draft placed before author Sr.PS 3. Draft proposed & placed before JM/AM the second member 4. Draft discussed/approved by JM/AM Second Member. 5. Approved Draft comes to the Sr.PS/PS Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading the order on website 8. If not uploaded, furnish the reason 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the AR 10. Date on which file goes to the Head Clerk. 11. Date of dispatch of Order. 12. Draft dictation sheets are Sr.PS attached