CAPITA INDIA PRIVATE LIMITED,MUMBAI vs. ASSESSMENT UNIT, NATIONAL FACELESS ASSESSMENT CENTRE (NFAC), MUMBAI

order \n07.04.2025\nORDER\nPer Rahul Chaudhary, Judicial Member:\n1.\nThe present appeal has been preferred by the Assessee against the\nFinal Assessment Order, dated 29/07/2024, passed by the Assessing\nOfficer under Section 143(3) read with Section 144C(13) read with\nSection 144B of the Income Tax Act, 1961 [hereinafter referred to\nas 'the Act'], as per the directions issued by Commissioner of\nIncome Tax (Dispute Resolution Panel (1)), Mumbai-2 [for short\n`DRP'] on 11/06/2024 under Section 144C(5) of the Act for the\n Assessment Year 2020-2021.\n2.\nThe Assessee has raised following grounds of appeal :\n\"General Ground\n1.\nerred in assessing the total taxable income of the Appellant at\nRs 83,11,88,790 as against a total income of Rs 63,15,46,850\nas computed by the Appellant in its Return of Income ('ROI');\nTime barred proceedings\n2.\nerred in not passing the final assessment order within the\ntime limit as provided under Section 153 of the Act ie., the\nouter limit for passing of the final assessment order which for\nAY 2020-21 would be

30. September 2023, thus making the\nassessment proceedings time barred and bad in law and\nthereby it should be quashed;\nA Transfer Pricing grounds in relation to international\ntransaction of Provision of IT enabled services\nReference to the TPO\n3.\nerred in making a reference of the Appellant's case to the\nTPO, without complying with the provisions of Section 92CA,\nand then making a transfer pricing adjustment of Rs\n19,96,41,940 to the Appellant's income which is bad in law:\nRejection of comparables selected by the Appellant in its TP\ndocumentation\n4.\nerred in rejecting comparable companies selected by the\nAppellant i.e. Anderson Business Solutions Private Limited.\nSuprawin Technologies Ltd, Sundaram Business Services\nLimited, iSN Global Solutions Private Limited and Crystal Hues\nLimited by applying a turnover filter of less than 1/10 times\nand more than 10 times without appreciating that the said\nfilter is not an appropriate filter and also disregarding the fact\nthat the Appellant's remuneration is based on cost plus method\nand that its margins are not impacted by the quantum of its\nturnover;\n5.\nerred in rejecting the comparable companies selected by the\nAppellant i.e. R Systems International Limited on the basis that\nthis company fails different financial year end filter applied by\nthe TPO for selection of comparables, without appreciating that\nAppellant had submitted operating margins for April 2019 to\nMarch 2020 basis the quarterly audited financial statements\navailable in the public domain;\n6.\nerred in rejecting the comparable companies selected by the\nAppellant i.e. Suprawin Technologies Ltd, Allsec Technologies\nLimited and Ultramarine & Pigments Limited on the basis that\nthe company has export revenues less than 75% of the total\nrevenues ('export earnings filter') without appreciating the fact\nthat the Appellant had applied the export earnings filter of 25%\nof the total revenues,\n7.\nerred in rejecting Ultramarine & Pigments Limited considered\nto be comparable by the Appellant for benchmarking the\ninternational transaction of provision of IT enabled services on\nthe basis that no separate segmental financials are available\nwhen separate segmental are available in the Annual report;\nIntroduction of additional comparables by the learned TPO\n8.\nerred in considering an additional company, which is\nfunctionally different, as comparable the Appellant for\nbenchmarking the international transaction of provision of IT\nenabled services, viz MPS Ltd:\nErroneous consideration of margins\n9.\nerred in considering the incorrect margins of comparables,\nwhere correct computation of margins of the comparables were\nshared by the Appellant during the course of TP and DRP\nproceedings for computing the arm's length price;\nAdjustments required to be made to arm's length margin\n10.\nerred in not allowing Appellant the benefit of the working\ncapital adjustment which is required to be undertaken in its\ncase to account for the difference in working capital levels\nbetween the comparable companies and the Appellant;\n11.\nerred in not allowing Appellant the benefit of the risk\nadjustment to account for the difference between the risks\nassumed by the Appellant and the risks assumed by the\ncomparable companies:\n12.\nBenefit of +/-3%\nerred, in law and facts, by not considering that the adjustment\nto the arm's length price, if any. should be limited to the lower\nend of the 3 percent range as the Appellant has the right to\nexercise this option under the proviso to Section 92C of the\nAct;\nIncorrect calculation of the transfer pricing adjustment\n13.\nthe learned AO/ TPO erred in incorrectly computing the transfer\npricing adjustment to Rs 19,96,41,940 whereas the correct\ncalculation of the transfer pricing adjustment as per his own\ncomputation would be Rs 11,96,41,940,\nB. Corporate Tax grounds\nIncorrect computation of the Dividend Distribution Tax (DDT)\ndemand\n14.\nerred in granting DDT credit of Rs 50,00,000 instead of DDT\ncredit of Rs 57,00,917 claimed by the Appellant in the ROI,\nthus resulting in the short grant of DDT credit,\n15.\nerred in incorrectly levying consequential interest amounting to\nRs 4,89,027 under Section 115P of the Act;\n16.\nerred in adjusting disputed DDT demand of Rs 71,261 from the\ntotal refund due to the Appellant. While making such\nadjustment, the learned AO has erred by disregarding the fact\nthat such DDT demand was incorrectly levied in the intimation\norder passed under Section 143(1) of the Act against which the\nAppellant has already filed the rectification application before\nthe office of learned AO;\nC. Other Common grounds\nIncorrect levy of interest\n17.\nerred in levying consequential interest amounting to Rs\n13,20,702 and Rs 2,28,92,168 under Section 234A and Section\n234B respectively of the Act. The correct total of above such\nconsequential interest calculated amounts to Rs 2,42,12,870,\nhowever, the same has been incorrectly considered as Rs\n2,49,90,670 in the computation sheet enclosed with the\nAssessment Order.\"\n3.\nThe relevant facts in brief are that Appellant/Assessee is a company\nengaged in providing Information Technology Services [for short 'IT\nServices'] covering both voice and non-voice based services. The\nAppellant-Company has units at Mumbai, Bangalore and Pune\nregistered under Software Technology Park (STP) Scheme.\n3.1.\nFor the Assessment Year 2020-2021, the Appellant filed return of\nincome on 11/02/2021 declaring total income at INR.63,15,46,850/-\nwhich was processed under Section 143(1) of the Act. Subsequently,\nthe case of the Appellant was selected for complete scrutiny. During\nthe assessment proceedings reference under Section 92CA(1) of the\nAct was made to the Transfer Pricing Officer [for short 'TPO'], since\nthe Appellant had provided IT Enabled Services (ITES) to its\nAssociated Enterprises (AE's). Vide order, dated 25/01/2023, passed\nunder Section 92CA(3) of the Act, TPO proposed, inter alia, the\nfollowing transfer pricing adjustments:\nS.No. Transaction\nAmount (INR)\nMethod\nMargin earned\n1\nProvision of ITES\n4,26,48,22,818/-\nTransactional\nNet Margin\nMethod\n(TNMM)\n13.80\nPercent\n3.1.\nOn 19/09/2023, the Assessing Officer passed Draft Assessment\nOrder under Section 144C(1) of the Act proposing Transfer Pricing\nAdjustment of INR.34,60,14,787/-. The Appellant filed objections\nbefore the DRP against the aforesaid Draft Assessment Order. On\n11/06/2024, the DRP disposed off the objections filed by the\nAppellant. As per the directions of the DRP, the Assessing Officer\npassed the Final Assessment Order, dated 29/07/2024, under\nSection 143(3) read with Section 144C(13) read with Section 144B\nof the Act, assessing total income of the Appellant at\nINR.83,11,88,790/- computed as under:\nSI.\nDescription\nAmount (INR)\n1\nIncome as per return of Income filed on 11/02/2021\n63,15,46,850/-\n2.\nIncome as computed under Section.143(1)(a) on 30/11/2021\n63,15,46,850/-\n3\nVariation in respect of issue of TP Adjustment\n19,96,41,940/-\nTotal Assessed Income\n83,11,88,790/-\n3.2.\nBeing aggrieved, the Appellant has preferred the present appeal\nbefore the Tribunal against the Final Assessment Order, dated\n29/07/2024, on the grounds reproduced in paragraph 2 above.\n4.\nWe have heard both the sides and have perused the material on\nrecord.\n5.\nThe Appellant has challenged the Transfer Pricing Adjustment of\nINR.19,96,41,940/- made by the Assessing Officer by way of Ground\nNo. A1 to A 13 reproduced here in Paragraph 2 above.\n6.\nGround No. 1\nGround No.1 raised by the Appellant pertains to assessing the total\ntaxable income of the Appellant of INR.83,11,88,790/- as against a\ntotal income of INR.63,15,46,850/- as computed by the Appellant in\nits return of income. During the course of hearing the Learned\nAuthorized Representative for the Appellant, stated that the\nAppellant does not wish to press this ground. Accordingly, Ground\nNo.1 raised by the Appellant is dismissed as not pressed as being\ngeneral in nature.\nGround No. 2\n7.\nGround No.2 raised by the Appellant pertains to validity of the\nimpugned assessment proceedings on account of the same being\nbarred by limitation relying on, inter-alia, the decision of the Hon'ble\nMadras High Court in case of Roca Bathroom Products Pvt. Ltd. [445\nITR 537]. In this connection, vide letter dated 15.11.2024, Appellant\nhas withdrawn the same ground stating that continuing with the\naforesaid ground would prolong the appellate process, and therefore,\nthe Appellant wishes to withdrawn Ground No.

2. Accordingly,\nGround No.2 raised by the Appellant is dismissed as withdrawn.\n8.\nGround No. A3 to 13\nWe note that by way of Ground No. 13 the Appellant has challenged\nthe incorrect computation of Transfer Pricing Adjustment. We note\nthat as per the final Assessment Order, ALP was determined at\nINR.438,44,64,758/-\nas against the actual sales of\nINR.426,48,22,811/-. Thus, the difference between the aforesaid\ntwo amounts, which comes to INR.11,96,41,940/- should have been\nadded as APL Adjustment Whereas transfer pricing addition of\nINR.19,96,41,940/- has been made. Therefore, we find merit in the\ncontention of the Assessee that the actual transfer pricing\nadjustment challenged by way of Ground No.A3 to A12 is\nINR.11,96,41,940/- (as against 19,96,41,940/-).\n9.\nIn relation to Ground No. A3 to A12, at the outset it was submitted\nby the Learned Authorised Representative for the Appellant that the\nTPO had selected final list of comparables consisting of four\ncomparables. In case MPS Limited, a comparable included by the\nTPO, is excluded from the aforesaid final list of comparables and R.\nSystems International Limited, a comparable selected by Appellant\nbut excluded by the TPO, is included in the final list of comparables,\nno Transfer Pricing Adjustments would be required. Accordingly,\nkeeping in view of the aforesaid submissions advanced by the\nLearned Authority Representative for the Appellant, we proceed to\nconsider the submissions/contentions advanced by both sides in\nrelation to (a) MPS Limited and (b) R. Systems International Limited.\n10.\nHaving considered the rival submissions and on perusal of record it\nemerges that issue of inclusion/exclusion of MPS Limited had also\ncome up for consideration during the assessment proceedings for\nthe Assessment Year 2022-2023. A copy of order, dated\n06/01/2025, passed under Section 92CA(3) of the Act for the\n Assessment Year 2022-2023 has been placed on record by the\nAppellant. On perusal of the same we find that the TPO has excluded\nMPS Limited from the final list of comparables by placing reliance\nupon the decision of Tribunal in the case of the Appellant for the\n Assessment Year 2017-2018 [ITA No.732/Mum/2022, dated\n18/08/2022]. On perusal of aforesaid decision, we find that the\nTribunal had directed exclusion of MPS Limited from the list of\ncomparables on the ground of functional dissimilarities. The relevant\nextract of the aforesaid decision of Tribunal reads as under:\n\"9.\nThe next company, which the assessee seeks exclusion is M/s\nMPS Ltd. The Ld A.R submitted that this company is engaged in\nrendering end to end services to its clients in publishing sector,\nwhich included content creation and production services. He\nsubmitted that this company is also engaged in software services\nand product development. In the annual report of this company,\nit is reported that it is engaged in five lines of businesses, viz.,\n(a) Content creation and development, (b) Content production\nand transformation, (c) Learning media solutions and customer\nsupport, (d) Order management and (e) Platform development\nand technology services. However, it has not given any\nsegmental details. The platforms developed by this company are\nnamed as Digicore, MPSTrak, Content Store, ScholarStor,\nMPSScholarlyStats. The Ld A.R submitted that this company has\ngot in-house platform development and technology division for\npublishers powered by 300+ experienced developers. Thus this\ncompany undertakes R & D Activities. The Ld A.R further\nsubmitted that this company also outsources some of its\nactivities. The outsourcing cost to total cost works out to about\n7.50%. Accordingly, the Ld A.R submitted that this company is\nperforming different functions and also adopt different business\nmodel. Further, it is involved in developing contents with the\nhelp of high skilled personnel. Accordingly, he submitted that\nthis company cannot be considered as a comparable company.\nThe Ld A.R placed his reliance on various case laws.\n9.1\nXX XX\n9.2.\nXX XX\n9.3\nFrom the submissions made by Ld A.R, we notice that the\nfunctions performed by this company in the present year under\nconsideration are identical in nature. The Ld A.R also pointed out\nthat this company offers different types of services such as (a)\nContent creation and development, (b) Content production and\ntransformation, (c) Learning media solutions and customer\nsupport, (d) Order management and (e) Platform development\nand technology services. Further it has developed different\ndomain platforms involving specialized technologies. However,\nthe assessee herein is a low end back officer support services\nprovider. Accordingly, we are also of the view that this company\ncannot be taken as a comparable company for the assessee\nherein. Accordingly, we direct exclusion of this company.”\n(Emphasis Supplied)\n11.\nOn perusal of material on record, we find that there is no change in\nfunctional profile of the Appellant and MPS Limited for the Financial\nYear 2016-2017 relevant to Assessment Year 2017-2018 and\nFinancial Year 2019-2020 relevant to Assessment Year 2020-2021.\nFor the Financial Year 2019-2020, the business segments of the\nAppellant were (a) Content Solutions, (b) Platform Solutions and (b)\neLearning Solutions¹. As per the Annual Reports the focus of MPS\nLimited was on Content Solutions with a strong emphasis on learning\noutcomes enabled by efficient yet immersive learning paths. It was\nstated that MPS Limited provided services across the entire author-\nto-reader value chain, from content authoring and development to\ndistribution and delivery². Further, the principle business activities of\nthe Company were stated to be Content Solutions (82% of total\nturnover) and Platform Solutions (18% of total turnover)³. However,\nno further segmental details are available. Further, MPS Limited has\nalso developed proprietary products/platform. On the other hand the\nAppellant continues to be a captive service provider providing\nsupport services to its AEs. Thus, MPS Limited is has functionally\ndissimilarities and in absence of segmental data, MPS cannot be\ntaken as a comparable. Therefore, respectfully following the decision\nof the Tribunal in the case of the Appellant for the Assessment Year\n2017-2018, we direct the Assessing Officer/TPO to exclude MPS\nLimited from the list of comparables\n12.\nNext, we take the issue of inclusion/exclusion of R. Systems\nInternational Limited [for short 'R Systems']. After taking into\nconsideration the rival submissions, we find that R Systems was\nrejected from the list of comparables by the TPO on account of\ndifferent accounting year. Though the accounts of R Systems were\nprepared taking calendar year as the accounting years, the quarterly\naudited accounts were available. Therefore, the Appellant had used\nthe quarterly financial statements and data available to extrapolate\nthe account statements for the financial year. We find that while\ndisposing appeal for the Assessment Year 2017-2018 [ITA\nNo.732/Mum/2022, dated 18/08/2022], the Tribunal had directed\nfor inclusion of R. Systems International Limited in the list of final\ncomparables holding as under:\n"7.\nWith regard to the plea of inclusion of M/s R systems\nInternational limited, the Ld A.R submitted that the TPO has\nrejected this company for two reasons, viz.,\n(a) this company has got different accounting year and\n(b) this company was rejected by the TPO in AY 2015-16.\nThe Ld DRP upheld the view of the TPO on the ground that this\ncompany fails in the filter, viz, \"Use of different accounting year\nfilter for comparable analysis\".\n7.1.\nXX XX\n7.2.\nXX XX\n7.3\nWe heard the parties and perused the record. With regard to the\napplication of filter of different accounting year, the Hon'ble\nDelhi High Court in the above said case has expressed the\nfollowing view:-\n“14. The Revenue is in appeal before this Court questioning\nthe admissibility of the above mentioned comparables\nwhile computing Arm's Length Price regarding the IT\nSupport services after the TPO and AO rejected the\nabove mentioned companies but was later allowed by the\nCIT (A) and ITAT. While the AO had confirmed the\nfindings of the TPO, the Ld. CIT(A) after considering the\nAssessee's submissions accepted all the four companies\nrejected by the TPO. The revenue submits that Fortune\nInfotech Ltd. was correctly rejected by TPO because the\ncompany had different financial year ending on\nDecember, 2006, whereas Assessee's financial year\nended on March, 2006. There is nothing shown to the\ncourt that supports the revenue's argument that the\nITAT fell into error in holding that if a comparable is\nfollowing different financial year then the same cannot be\nincluded in the list of comparables selected for\nbenchmarking the international transaction. Therefore,\nthe ITAT has held that if the comparable is functionally\nsame as that of tested party then same cannot be\nrejected merely on the ground that data for entire\nfinancial year is not available. If from the available data\non record, the results for financial year can reasonably\nbe extrapolated then the comparable cannot be excluded\nsolely on the ground that the comparables have different\nfinancial year endings.\"\nIn view of the above said decision rendered by Hon'ble Delhi\nHigh Court, we accept the contentions of Ld A.R that this\ncompany could not have been rejected by the TPO merely for\nthe reason that it follows different accounting year, when the\nfinancial year results for the period matching with that of the\nassessee could be collated. However, as submitted by Ld D.R, it\nis required to be examined as to whether this company gets\nitself qualified in other filters applied by the TPO also.\nAccordingly, we are of the view that this comparable company\nneeds to be examined afresh at the end of AO/TPO. Accordingly,\nwe restore this comparable company to the file of AO/TPO for\nexamining it afresh.”\n13.\nOn perusal of the above it becomes clear that the Tribunal had\nrejected the approach adopted by the TPO and directed for fresh\nexamination of R Systems as a comparable by placing reliance on\nthe judgment of the Hon'ble Delhi High Court in the case of CIT-II\nVs. McKinsey Knowledge Centre India Pvt. Ltd [ITA No. 217/2014,\nDated 27/03/2015] wherein it was held that a comparable cannot be\nrejected solely on the ground of different accounting/financial years\nprovided the results of the relevant financial year can reasonably be\nextrapolated.\n14.\nIn view of above we direct the Assessing Officer/TPO to include R.\nSystems in the list of comparable after examining the functional\ncomparability keeping in view that TNMM has been adopted as the\nmost appropriate method.\n15.\nThus, the Transfer Pricing Adjustment is set aside with directions to\nthe Assessing Officer/TPO to recomputed the Arms Length Price and\nTransfer Pricing Adjustment, if any, after taking into consideration\nour finding and adjudication hereinabove. In terms of the aforesaid,\n(a)Ground No.A5 and A8 are allowed; (b)Ground No.A3, A4, A6 and\nA7 are disposed off as having rendered infructuous; and (c) Ground\nNo. A10, A11, A12 and A13 are dismissed as having been rendered\ninfructuous with liberty to the Appellant to raise the same before the\nΤΡΟ.\nGround No. B14 to B16\n16.\nGround No. B14 to B16 raised by the Appellant pertain to the short\ngrant of credit for Dividend Distribution Tax (DDT) amounting to\nINR.7,00,917/- and the consequential levy of interest of\nINR.4,89,027/- under Section 115P of the Act and adjustment of\ndemand so raised with the income tax refund of INR.71,261/-. It has\nbeen stated that the rectification application, dated 26/08/2024,\nfiled by the Appellant in this regard is pending adjudication. On\nperusal of the said application we find that the Appellant has filed\nbefore the Assessing Officer copy of challans for deposit of DDT.\nAccordingly, the Assessing Officer is directed to grant credit of DDT\nafter verification of the aforesaid challans as per law and re-compute\nconsequential interest under Section 115P of Act, if any, and thus,\ndispose off the aforesaid rectification application. In terms of the\naforesaid, Ground No. B14 to B16 raised by the Assessee is allowed\nfor statistical purposes.\nGround No. C17\n17.\nGround No.C17 related to computation of interest under Section\n234A and 234B of the Act are consequential in nature. The Assessing\nOfficer is directed to recomputed the interest under Section 234A\nand 234B of the Act as per law. In terms of aforesaid Ground No.C17\nis treated as allowed for statistical purpose.\n18.\nIn result, the appeal preferred by the Assessee is partly allowed.\nOrder pronounced on 07.04.2025.\nSd/-\n(Om Prakash Kant)\nAccountant Member\nSd/-\n(Rahul Chaudhary)\nJudicial Member\nमुंबई Mumbai; दिनांक Dated : 07.04.2025\nMilan, LDC", "summary": { "facts": "The Assessee, Capita India Private Limited, appealed against the Final Assessment Order for AY 2020-2021. The appeal primarily concerned transfer pricing adjustments made by the TPO and subsequent assessment by the AO. The Assessee had filed its ROI, which was processed under Section 143(1), and later selected for scrutiny. A reference was made to the TPO for IT Enabled Services provided to Associated Enterprises.", "held": "The Tribunal held that the transfer pricing adjustment of INR 19,96,41,940 was incorrectly computed and should be INR 11,96,41,940. The Tribunal also directed the exclusion of MPS Limited as a comparable due to functional dissimilarities and ordered the re-examination of R. Systems International Limited as a comparable. Grounds related to DDT credit and interest were allowed for statistical purposes.", "result": "Partly Allowed", "sections": [ "143(3)", "144C(13)", "144B", "144C(5)", "153", "92CA", "115P", "143(1)", "234A", "234B", "92CA(1)", "92CA(3)" ], "issues": "The primary issues were the correctness of the transfer pricing adjustment computation, the inclusion/exclusion of comparable companies in the transfer pricing analysis, and consequential issues of DDT credit and interest." } }