ZENSAR TECHNOLOGIES LIMITED,MUMBAI vs. DCIT, CIRCLE-2(3)(1), MUMBAI

Per: BENCH: The present appeals arises out of order dated 06/03/2017 and 03/08/2022passed by Ld.CIT(A)-58, Mumbai for assessment year 2011-12 and 2012-13 respectively. The Ld.AR submitted that main issue raised by the assessee for the assessment years under consideration are identical on similar facts. Grounds raised by the assessee for assessment year 2011-12are as under :

1. Based on the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) ['CIT(A)'], erred in excluding telecommunication/link charges amounting to Rs.11,99,697 incurred in foreign exchange from the export turnover for the purpose of computing deduction under Section 10A of the Act.

2. Based on the facts and circumstances of the case and in law, the learned CIT (A), erred in holding that the loss of Rs.2,91,67,677 incurred on write off of investments in a subsidiary company is not in the nature of business loss.

3. Based on the facts and circumstances of the case and in law, the learned CIT (A), erred in not granting deduction for expenditure amounting to Rs.12,71,973 incurred prior to commencement of commercial operations of the new Pune unit located in a Special Economic Zone.

& 2445, 2915/Mum/2022, A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd 4. Based on the facts and circumstances of the case and in law, the learned CIT (A), erred in not granting deduction for expenditure amounting to Rs.63,56,129 incurred prior to commencement of commercial operations of the new Hyderabad unit located in a Special Economic Zone.

6. Based on the facts and circumstances of the case and in law, the learned CIT(A) erred in not directing the Assessing Officer to delete the interest of Rs. 1,20,959 under section 234C of the Act since no interest was chargeable on the returned income.”

in support of the captioned Appeal against the Impugned Final Assessment Order dated 13 May 2015 ('Impugned Order') passed by the Deputy Commissioner of Income-tax -2(3)(1), Mumbai ('Ld. AO') all of which are raised without prejudice and in the alternative to each other:

1. Based on facts and circumstances of the case and in law. The Ld. AO failed to appreciate that expenses of Rs 12.71,973 incurred prior to commencement of new Pune Unit in a Special Economic Zone ought to be added to block of assets and depreciation under Section 32 ought to be granted to the appellant.

2. Based on facts and circumstances of the case and in law. The Ld. AO failed to appreciate that expenses of Rs 63.56.129 incurred prior to commencement of new Hyderabad Unit in a Special Economic Zone ought to be added to block of assets and depreciation under Section 32 ought to be granted to the appellant.

& 2445, 2915/Mum/2022, A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd 3. Based on facts and circumstances of the case and in law, expenses of Rs 2.94.62.317 incurred prior to commencement of new Pune Unit in a Special Economic Zone in Assessment Year 2010-11 if added to block of assets and depreciation under Section 32 has been granted to the appellant for Assessment Year 2010-11, consequent tax depreciation be granted under Section 32 on the same for Assessment Year 2011-12.” Based on the submissions of the Ld.AR, the above additional grounds are dismissed as not pressed.

Brief facts of the case are as under:

Profit/(Loss) before Tax (Rs. In lacs) Kharadi STPI 10A 6,572.18 IT Tower STPI 10A 676.54 Hyderabad STPI 10A 886.19 EON SEZ 10AA (45.52) SEZ Units (expenses prior to (76.28) commencement of SEZ business) Others 424.87 Middle East 195.70 South Africa 546.15 Poland (140.29) Australia (88.82) Japan (333.65) Finland 6.39 Company as whole before tax 8,623.46 3.3 It was noted that, the assessee worked on gross total income of Rs.16,38,89,226/- in the revised return after claiming deduction of Rs.17,50,000/- u/s.80G. Thus declared total income of Rs.16,21,39,226/-.

Sr. No. Transactions Amount(in Rs.) Amount(in Rs.) Method adopted by Assessee AY 2011-12 AY 2010-11 1. Provision of 3,53,24,57,138 3,15,19,92,924 TNMM software development services 2. Guarantee 90,74,268 50,94,776 TNMM Commission 3. Allocation of 7,93,04,405 8,59,71,238 TNMM corporate expenses 4. Interest on 42,81,344 32,95,228 CUP Working capital loan given (@5%) 5. Availing of 9,31,221 - TNMM software development services 6. Receipt of 4,42,87,390 3,46,66,380 TNMM finder fees 7. Recovery of 26,52,56,580 23,41,89,146 TNMM expenses 8. Reimbursement 61,86,161 - TNMM of expenses 9. Subscription of 1,15,34,300 - Refer Note Equity shares & 2445, 2915/Mum/2022, A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd 4.1.The Ld.TPO was not satisfied with the bench marking by the assessee in respect of following transaction: “1.Commisionon guaranteegiven to AE” 2.Interest on working capital loan has giveby 5% 3.Recovery of expenses 4.2. The Ld.TPO rejected the submissions advance by the assessee and proposed and adjustment as under:

Sr.No. Transactions Adjustment(Rs.) 1. Commission on guarantee given to AE 1,11,99,337 (Para 8.2) 2. Interest on working capital loan (Para 8.4) 17,12,537 3. Recovery of expenses 2,65,25,658 Total Adjustment 3,94,37,532 4.3. On receipt of the order passed by the Ld.TPO, the Ld.AO passed draft assessment order on 23/02/2015 proposing following disallowance in the hands of the assessee: (1) Disallowance of foreign exchange amounting to Rs.11,99,697/- towards telecommunication /linked charged (2) Expenditure incurred in relation to buy back of shares was disallowed to amounting to Rs.88,000/- (3) Disallowance of expenditure towards issue of bonus share amounting to Rs.70,923/- (4) Disallowance of expenditure towards increased in authorities share capital amounting to Rs. 14,00,000/- & 2445, 2915/Mum/2022, A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd (5) Disallowance of depreciation on capital expense Rs.1039/- and disallowance of brought forward loss and unabsorbed depreciation before giving effect to deduction u/s. 10A. 4.4 On receipt of the draft assessment order the assessee intimated its intention to filed appeal before the Ld.CIT(A). Accordingly the Ld.AO passed the final assessment order on 13/05/2015. Aggrieved by the order of the Ld.AO assessee preferred the appeal before the Ld. CIT(A)-58.

5. The Ld.CIT(A) after considering the submissions of the assessee restricted the disallowance to following issues.

& 2445, 2915/Mum/2022, A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd We accordingly direct the Ld.AO to follow the direction as per the decision therein and to considered the claim of assessee in accordance with law. 6.1 Accordingly ground no.1 raised by the assessee stands allowed. 7.Grounds no.2 raised by the assessee is argued before this Tribunalat the time of hearing, accordingly the same is dismissed as not pressed.

8. Ground no.3 - 4 is raised by the assessee against the disallowance of expenditure incurred towards prior period of commencement of commercial operations of new Pune Unit and new Hyderabad unit locatedin SEZ zone. 8.1. The Ld.AR submitted that, during the year under consideration assessee incurred expenditure amounting to Rs.12,71,973/- for its new Pune unit and sum of Rs.63,56,129/- towards new Hyderabad unit located under the SEZ, prior to commencement of its commercial operations. He submitted that these expenditure was not been claimed as deduction in the return of income. 7.1 During the course of assessment proceedings the Ld.AO after considering the submissions of the assessee vide its letter dated 28/01/2015 observed that, expenditure incurred by the assessee in respect of the units at Pune and Hyderabad would be exempt u/s.10A/10AA after the commencement of its operations. 7.2. The Ld.AO disallowed prior to commencement expenses by holding that such expenses amounts to claim of deduction of exempt unit which is not allowable u/s.14A of the Act. He & 2445, 2915/Mum/2022, A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd observed that, anyexpenditure incurred prior to commencement of commercial operationswould thus be the capital in nature. 7.3 The Ld.AR submitted that,assessee’s business is already set up during the financial year 2009-10 relevant to assessment year 2010-11 and the assessee already had necessary infrastructure, employees etc. to commence its business. He thus submitted that, assessee thus had already set up its business in the previous year prior to the year under consideration and hence no disallowance could be made in respect of the expenditure incurred by the assessee during the year under consideration in respect of Pune and Hyderabad unit. The Ld.AR thus submitted that, admittedly the expenditures incurred are revenue in nature, but the Ld.AO disallowed the claim of assessee by observing that the provision of section 14A are applicable. 7.4. The Ld.AR in support placed reliance on the decision of coordinate bench of this Tribunal in case of World net work services Pvt. Ltd. Vs. DCIT in for A.Y.1999-2000 vide letter date 25/08/2006. He also placed reliance on details of the expenditure incurred that was subject to disallowance in respect of 2 units at the time of the hearing. The Ld.AR submitted that, from the details furnished, it is clear that the expenditure pertains towards travelling/convenience, salary expenditure, electricity repairs and maintenance, professional charges, rent paid etc. He thus submitted that, these were not new units but expansion of existing business. 7.5. The Ld.AR emphasised that, in any event 14A will not be applicable to expenditure claimedu/s.10Abecause section 10A grants deduction of the eligible unit, whereas section 14A deals & 2445, 2915/Mum/2022, A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd with the income that is exempt at the threshold. He submitted that, provisions of section 14A are applicable only to such receipts that does not fall within the definition of income.Whereas, the deduction claimed u/s.10A/10AA is against receipts that falls within the definition of income, however by virtue of satisfying variousconditions under the relevant section, the deduction is granted to an assessee while computing the total income of under taking. In support, he placed reliance on the decision Hon’ble Supreme Court in case of CIT vs. Yokogawa India ltd. Reported in (2017) 77 taxmann.com 41. 7.6. On the contrary, the Ld.DR placed reliance on the observation of the Ld.AO/CIT(A). He also placed reliance on Circular no.7 dated 16/07/2013 and Circular no.1 dated 17/01/2013 which are conflicting and contradictory to each other. The Ld.DR submitted that, in Circular no. 7 section 10A is referred toas providing for deduction, whereas Circular no.17/01/2013 uses the phrase “exemption” while referring to provision section 10A and 10B.

We have perused the submissions advance by both sides in the light of record placed before us.

“12. We have considered the submissions advanced and the provisions of Section 10A as it stood prior to the amendment made by Finance Act, 2000 with effect from 1.4.2001; the amended Section 10A thereafter and also the amendment made by Finance Act, 2003 with retrospective effect from 1.4.2001.

"The export turnover and the total turnover for the purposes of sections 10A and 108 shall be of the undertaking located in specified zones or 100% Export Oriented Undertakings, as the case may be, and this shall not have any material relationship with the other business of the assessee outside these zones or units for the purposes of this provision."

& 2445, 2915/Mum/2022, A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd 9.1.3. The Ld.AR submitted that, the assessee added back the said difference to the computation of income difference as well as to the book profit for A.Y. 2011-12 and did not claim the deduction during A.Y.2011-12. 9.3. Before the authorities below for the year under consideration assessee contended that as the entire interest of Rs.18,95,817/- was already offered tax during the assessment year 2009-10 at the time when the intimation was issued, the same shouldnot be added back to the total income under normal provisions as well as book profits u/s. 115JB of the Act, for assessment year 2011-12.The Ld.AR at the outset submitted that, the Ld. CIT(A) while considering the issue, observed as under:

“10.5 I have perused the written submissions furnished by the appellant and the arguments put forth by the AR of the appellant. This issue has been decided by the Special Bench of the Mumbai Tribunal in the case of Avada Trading Co. (P.) Ltd. (104 TTJ 83). In the said case, the Tribunal has held that interest on refund under Section 244A(1) granted to the assessee in the proceedings under Section 143(1)(a) would be assessable in the year in which it is granted and not in the year in which proceedings under Section 143(1)(a) attain finality.” 9.4. He further submitted that, the appeal for assessment year 2009-10 is pending before the Ld.CIT(A). It is further submitted that, the assessing office in any event cannot change the figures to the book profit under 115JB for assessment year 2011-12. He placed reliance on the decision of Apollo tyres by Hon’ble Supreme Court reported in 255 ITA 73 in support of this claim. 9.5. The Ld.DR on the contrary, relied on the orders passed by the authoritiesbelow. He submitted that the issue may be remanded to the Ld.CIT(A), for proper appreciation of facts.

4. This the peculiar case wherein based on the intimation received by the assessee for assessment year 2006-07 the interest granted u/s.244A was entirely offer in tax by the assessee during the assessment year 2009-10 the reason being that the intimation for A.Y 2006-07 was received during the A.Y. 2009-10 subsequently, upon passing of the assessment orderfor A.Y 2006-07 interest granted u/s. 244A stood reduced and the said Assessment year was passed during the assessment year 2011-12 being the year under consideration.The assessing officer however, while the passing the assessment order for the year under consideration. The assessing officer for the year under consideration adjusted the said interest by disallowing the same. In our considered opinion computation to the extent become enormous and amount that has been account disallowed of the assessing officer become deeply taxed in the hands of the assessee.As per the submissions of the Ld.AR that appeal for the assessment year 2009-10 is pending before the Ld. CIT(A) if it all any adjustment is tobe made is to be during the assessment year 2009-10.We also note that the book profitoffered by the assessee for the year under consideration is less thenthe normal profit and therefore the taxability during the year under consideration will depend based on the normal profit computed under the provisions of the Act. Thus no impact would be dealt for the book profit computed for the year under consideration.We thus direct the Ld.CIT(A) to considerthe claim of assessee to the extent of interest being restricted u/s.244A of the Act pertaining to & 2445, 2915/Mum/2022, A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd assessment year 2006-07. Accordinglythe grounds raised by the assessee stands partly allowed for statistical purposes.

by the assessee for assessmentyear 2011-12 stands partly allowed. Assessment year:2012-13

12. The Ld.AR submitted that for assessment year 2012-13 grounds are identical that with of 2011-12 on similar facts. He submitted that,Ground no.1 raised in the A.Y. 2012- 13 is identical with Ground No. 4 for A.Y.2011-12. 12.1. The Ld.DRdid not object to the submissions. 12.2. We are therefore of the opinionthat,the view taken in Ground no.4 for A.Y. 2011-12 shall apply mutatis mutandis for Ground no.1 raised in A.Y. 2012-13. Accordingly ground no.1 raised by the assessee stands allowed.

13. Ground no.2-3 raised by the assessee is not pressed at the instruction of the assessee. AccordinglyGrounds 2-3 are dismissed as not pressed.

& 2445, 2915/Mum/2022, A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd 14. Ground no. 4 raised by the assessee is submitted to be against by the decision of Hon’ble Mumbai Special Bench in case of Deputy Commissioner of Income-tax vs. Total Oil India (P.) Ltd, reportedin [2023] 149 taxmann.com 332. Accordingly Ground no.4 raised by the assessee stands dismissed. Accordingly the grounds raised by the assessee for A.Y. 2012- 13 stands partly allowed.

15. Revenue appeal for assessment year 2012-13 is only on the issue pertaining to intra group services. The Ld.DR submitted that,cost needs to be recovered on such servicesbutLd.CIT(A) allowed the claim of assessee without considering the provisions section 92 of the Act. 15.1 At the outset the Ld.AR submitted that, identical was considered by the first appellate authority for assessment year 2011-12 on similar facts. He submitted that, the revenue hasnot alleged the issue for assessment year 2011-12 and has accepted the view taken therein. He placed reliance on following observation of the Ld.CIT(A) while considering this issues.

“Ground No. 9; Adjustment of Rs. 1,70,40,890/- to International Transaction of Recovery of Expenses Background During the course of business and in order to facilitate its operations, Zensar India incurs expenditure on behalf of AEs / it's client. The actual costs incurred such as travelling allowances, travel expenses etc., have been recovered on cost to cost from AEs. These expenses were paid on behalf of AEs and to be borne by the respective AEs and have beenrecovered from AEs at cost. Since, there is no element of services rendered involved in it, these expenses have been recovered at cost without any mark up.

However, in the impugned order, the Transfer Pricing Officer considering such reimbursement to be in the nature of provision of services, imputed 10% mark-up on the total recovery made by the Appellant from the AEs.

Judicial Precedents.

In appellant's own case for assessment year 2011-12, Hon'ble CIT(Appeals) in para 11.5 based on the similar facts of the case, has decided that for recovery in relation to the amount towards travel, visa, salary and travelling expenses of employees sent on secondment and temporary deputation, Appellant has charged finder fees from AEs. Hence, no further charges are due from the AEs with respect to these recovery amount.

Similarly, for AY 2012-13, we submit that the Appellant has already charged finder fees from AEs with respect to such activity, Hence, no further charges are due from the AEs.

As regards customer paid expenses in appellant's own case for assessment year 2011-12, Hon'ble CIT(Appeals) in para 11.6 and 11.7 based on the similar facts of the case, decided that for recovery in relation to the amount towards transport, travel, shift allowance, incentive, link charges, hardware, software procurement, broadband, mobile and internet expenses etc. has directed to the TPO to include the expenses in the cost base and TNMM to be reworked.

As the facts remains same for the AY 2012-13, and even if the said amount of recovery of Rs. 92.36 lacs is added to the cost, the margin of the Appellant would still be significantly higher than the margins of the comparable companies. Thus, no further adjustment is warranted on account of recovery of expenses.

As regards common expenses, in appellant's own case for assessment year 2011-12, Hon'ble CIT(Appeals) in para 11.8 based on the similar facts of the case, has decided that for recovery in relation to the amount for certain common expenses, has held that these are pure reimbursements without any service element and do not call for any adjustment.

Similarly, for AY 2012-13, we submit that the Appellant has recovered common expense in relation to the insurance premium for global liability insurance policies without markup, hence there is no service element and do not call for any adjustment.

We would also like to submit that the Appellant has recovered the overhead cost of the support functions who are involved in obtaining these services from the third parties onbehalf of the AEs. Hence the Appellant submits that no further charges are due from the AEs.

Submission of the appellant Net Cost Plus Margin Earned by Appellant has been accepted by the TPΟ The Appellant is offering end-to-end solutions across diverse technology platforms and industry domains through a Global Delivery Model. During the course of business and in order to facilitate its operations, Zensar India incurred expenditure on behalf of AEs and the actual costs incurred such as travelling allowances, travel expenses etc., have been recovered on cost to cost from AEs.

The total revenue from software and allied services earned by the Appellant from the AE in FY 2011-12 aggregated to Rs.43,478.66 lacs.

The margin earned by the Appellant on the software services provide to the AEs has been accepted by the TPO. The only bone of contention of the TPO is regarding incurrence of cost of Rs. 17.04 crs on behalf of the AEs / its client which as per TPO should be treated as a component of service and involving mark-up of 10%.

Without prejudice to the contention that there is no service element in the recovery of expenses, even if it is assumed to be a service, it should be aggregated along with the software services provided to the AE. In such case, the expenses should be included in the operating cost of provision of software and allied services to the AEs and the revenue to be increased correspondingly. The margin of the Appellant would still be significantly higher than the margins of the comparable companies. The TPO has further ignored in appreciating the fact that the profit margin under TNMM would still be higher than the margins of the comparable companies and not get impacted on inclusion of such expenses as an operating cost. Thus, no further adjustment is warranted on account of recovery of expenses.

(Rs.in lacs)

Particulars Without Considering Considering considering recovery of Rs. recovery of Rs. recovery of 17.04 ers as a 92.36 lakhs as expenses service a service Software 43,478.66 43,478.66 43.478.66 development and allied services Operating other 1,692.68 1,692.68 1,692.68 income Recovery of - 1704.09 92.36 expenses Total Income 45,171.34 46,875.34 45,263.70 Operating 33,149.54 33,149.54 33,149.54 expenses Expenses on - 1704.09 92.36 behalf of AE/client of AE Total operating 33,149.54 34,853.63 33,241.90 expenses Operating Profit 12,021.81 12,021.81 12,021.81 Net Cost Plus 36.27 34.49 36.16 Margin (%) On perusal of above chart, your Honour would appreciate that the recovery of expenses even if considered as a service and included in the computation of Appellant's Net Cost Plus Margin from the international transaction with its AE's, the revised margin would be reduced insignificantly. Thus, no further adjustment is warranted on account of recovery of expenses. Expenses incurred on behalf of AE/client of AE to be recovered at cost without any mark-up In this context, reliance has been placed on the following_ • Hyderabad ITAT decision in case of DQ Entertainment vs Asst. Commissioner of Income-tax (I.T.A. No.151/Hyd/2015) Assessment Year: 2010-11) (attached in case law paper book), in which it was held that: "..the assessee has raised the bill for reimbursement on cost to cost basis, it is normal in the case of group companies. There is no element of service in these transactions. These transactions are not in any way connected to the nature of business of assessee." • Chennai ITAT decision in case of Cognizant Technology Solutions India Pvt Ltd vs Asst.Commissioner of Income-tax (1.T.Α. Νο. 114 & 2100 (Mds)/2011) (attached in case law paper book) has held as under: "6.10 The Transfer Pricing Officer has made a markup of 5 per cent on certain travel cost incurred by the assessee and reimbursed by its associate enterprise and treated as additional income to be taxed as part of transfer pricing adjustment. But the fact was that the reimbursement was made on cost to cost basis and there is no rendering of any service and it does not involve service element. What is incurred is reimbursed. So, therefore, there is no profit element in the reimbursement. In such situation there is no justification in making a markup of 5 per cent. This addition was deleted. This issue is decided in favour of the assessee. • Reliance is placed in the case of CPA Global Services Private Limited (ITA 266/2017) (attached in case law paper book) wherein the Hon'ble Delhi High Court has held that the reimbursement cost should be excluded while calculating the operating cost for determining the Arm's Length Price on provision of IT enabled services. Adhoc rate applied by the TPO/A0 The AO/TPO erred in not appreciating the fact that the recovery of expenses is on account of travel, visa related expenses, salary and travelling allowance, shift allowance, incentives, link charges, hardware, software procurement, broadband, mobile and Internet expenses, legal and professional charges etc. paid for and on behalf of AEs by appellant. The commercial and business expediency necessitated the payment of these expenses to third parties by the appellant on behalf of AEs, hence does not warrant anymark up. No application of any method by the TPO while considering a markup of 10% on recovery of expenses that are recovered by the assessee on cost to cost basis. It is to be noted that the TPO has also not applied any methodology or mechanism prescribed under the Income Tax Act, 1961/Income Tax Rules, 1962 for determining the mark up of 10% on expenses recovered from AEs. The TPO has not applied any method but simply charged an ad hoc markup of 10% The TPO without considering the contentions of the assessee has come to the conclusion that a markup should be charged on the recovery of expenses. Charging of such adhocmarkup by the TPO without application of any method is not acceptable. Hence, this act of the TPO is not in the spirit of law and on this ground alone the adjustment recommended by the TPO should be deleted. Recently, in the case of Ness Technologies (India) Private Limited [TS- 980-ITAT-2019(Mum)-TP (attached in case law paper book), the TPO had raised objections and have warranted a mark-up @10% on the reimbursement received by the taxpayer on account of delay in receiving payments and also questioned the service element in the transaction. In the instant case, the assessee contended to the ITAT that these expenses were incurred only for administrative convenience and does not involve any service element. Besides accepting the relevant debit notes raised by assessee on its AE, and subsequent debit notes raised by AE on final customers, the ITAT also rejected the ground of the Revenue holding as under: "Ostensibly, the income arising from an international transaction is liable to be computed, having regard to the arm's length price as mandated in section 92(1) of the Act. Section 92C prescribes the manner of determination of the arm's length price and sub-section (1) thereof specifically lays down various methods by which the determination of arm's length price has to be made. It is quite clear that there is no adhocism permissible in the manner of computation of arm's length price of an international transaction, whereas the action of the Transfer Pricing Officer in considering the arm's length price @10% of the expenses recovered is not only adhoc but it also does notconform to any of the methods prescribed in section 92C(1) of the Act. On this count itself, the action of the TPO is suspect, even if, it is to be understood that the impugned transaction was an international transaction requiring computation of income having regard to its arm's length price." As the above recovery is a third-party pass through cost and there is no element of services, the adhoc 10% markup charged by the AO/ TPO should be deleted. Decision:- This issue is covered by my predecessor's findings in A.Y.2011-12. For ready reference, the relevant portion is reproduced below: 11.4 The submission made by the appellant and the order of the DRP for the preceding year has been examined. Prima facie, if a reimbursement comprises of expenses of routine nature which do not require any element of service on the part of the appellant, such expenses would not require any markup for rendering of service. Typically, such expenses would be in the nature of travel charges, hotel charges, statutory liabilities of deputed employees etc. However, if the amounts comprise of distinct items which forn a part of the activity being carried out by the appellant, then the appellant is not allowed to segregate such activity and categorise part of the receipt as reimbursement.

11.5 It is noticed that the amount reimbursed from the AEs comprise of three distinct segments. The first segment relates to Rs 2189.48 lakh towards travel, visa, salary and travelling expenses of employees sent on secondment and temporary deputation. The appellant has already charged finder fees from AEs with respect to such activity. In my view, no further charges are due from the AEs with respect to service element, if any, in this reimbursement amount 11.6 The second segment relates to customer paid expenses of Rs 230.90 lakh was incurred towards transport, travel, shift allowance, incentive, link charges, hardware, software procurement, broadband, mobile and internut expenses which was reimbursed by the ABs. In my view, these items are not mere items of relimbursement but comprise part of the business activity of the appellant, Hence, the appellant was indeed liable to charge a markup on these items which, admittedly, have been received from customers.

11.7In this regard, the submission made by the appellant that even if this amount is included in the total value of turnover, its margina remain higher than the arithmetic mean margin of the comparables. In its TP study, the appellant itself has arrived at an arm's length arithmetic mean mark up of 9,85% in respect of its activity. The TPO is directed to include the above amount for the purpose of computing the margins of the appellant and then compare the revised cost plus margin with the arm's length margin while conducting TNMM analysis.

11.8 The third segment relates to expenses of Rs 105.74 lakh relating to valuation, advice, acquisition etc. of AEs and Rs 108.49 lakh relate to recovery of certain common expenses between branch and subsidiary in Japan. In my view these amounts are pure reimbursements without any service element and do not call for any adjustment.

11.9 It is also seen that the appellant has allowed some of these outstanding amounts to remain with the AEs for considerable time, In the precoding year, a reasonable limit of 150 days has been fixed by the TPO which has been upheld by the DRP in their decision. The TPO is right in concluding that this results in passing off distinct benefit to the AEs and a suitable interest needs to be charged on this amount. The & 2445, 2915/Mum/2022, A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd reliance placed by the appellant on various decisions above is not found acceptable. It is seen that the decisions relate to cases where there has been a delay in recovery of outstandings connected with sales. Some of the Tribunals have held that the cost of sale generally includes the cost of delay in recovery and hence, a separate benchmarking of such amounts cannot be done. It is seen that in the present case the facts are different as these do not relate to sales made by the appellant. In addition, even if the outstandings relate to sales, any sale price would include cost of funds only for the credit period allowed to the other party, In this case, the TPO has already granted a credit period of 150 days. Hence, the reliance placed by the appellant on these decisions is not found tenable.

11.10 The AO has used SBI PLR in the preceding year while the DRP has mandated Libor rate. Admittedly, the amounts have been recovered in foreign exchange and hence, we need to follow the Libor linked rate. However, the rate will not be pure Libor rate. It is seen that the appellant itself has charged a rate of 5% from the AEs with reference to loans granted to the AEs. This rate is found to be a reasonable rate for charging interest on these outstandings also. It is held accordingly. The AO/TPO Is directed to charge interest of 5% on the amounts which have remained outstanding with the Alis for over 150 days.,

As the facts in the current year are similar to A.Y.2011-12, the A.O. / TPO are directed to recompute the adjustment/disallowance following the directions given in the above sited order for AY 2011-12.

This ground of appeal is partly allowed.”

15.2 The Ld.DR could not controvert the above observations of the first appellate authority for assessment year 2011-12. It is further noted that the Ld.TPO for the year under consideration followed the view taken for assessment year 2011-12 to propose addition in the hands of the assessee. It is further noted for the agreement based on the which the services were rendered are same for both the years under consideration.Admittedly, the issue was not raised by the revenue for assessment year 2011- 12. As the view taken for assessment year 2011-12 is accepted by the revenue, we do not find any infirmity in following the same & 2445, 2915/Mum/2022, A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd view to to consider the issue in favour of assessee. In any event, the Ld.DR has not brought any distinguishing feature in order to deviate for the same. We thus uphold the view taken by the Ld.CIT(A). Accordingly grounds raised by the revenue stands dismissed.

In the result the appeals filed by the assessee for assessment year 2011-12 and 2012-13 stands partly allowed and the appeal filed by the revenue for the assessment year 2012-13 stands dismissed. Order pronounced in the open court on 23/05/2025