DCIT-14(3)(1), MUMBAI vs. WNS GLOBAL SERVICES PVT LTD., MUMBAI

For A.Y. 2010-11, The Dy. Commissioner of Income Tax- 14(3)(1), Mumbai [ the Ld AO ] filed Appellate order of the learned Commissioner of Income-tax (Appeals)–58, Mumbai [The learned CIT (A)] passed on 31st January, 2019. Assessee, WNS Global Services Pvt. Ltd. (The Assessee) filed CO No. 52/Mum/2020.

The learned Assessing Officer has raised following 12 grounds of appeal: -

Assessee has filed cross objection raising following six grounds :-

Briefly, WNS group is engaged in the business of providing a variety of information technology enabled services, business process outsourcing services including back office administration services and call centre services to its customers. It serves several industrial segments including travel, insurance, financial services, healthcare, professional services, manufacturing, distribution and retail. The assessee is a company part of that group engaged in the business of providing information technology enabled services and BPO services. Assessee filed its return of income on 14th October, 2010 5. declaring net loss of ₹11,20,31,557/- .

The assessee submits that it provides IT enabled services to WNS North America incorporation, WNS global services United Kingdom Ltd, WNS global services Netherlands cooperative and WNS capital investment Ltd which is a separate set of business transaction [ first set of business transactions]

In the second set of business transaction assessee provides IT enabled services to WNS global services UK Ltd (town and country assistance and workflow business unit) and WNS customer solutions North America incorporation (marketics unit)

With respect to the another set of transactions for provision of IT enabled services assessee states that ii. Marketics-India division of assessee has also entered into an agreement with WNS Customer Solutions North America Under which that company provides marketing services to Marketics - India division. The compensation model between Marketics - India division and that AE is such that Marketics - India division pays a commission to AE at the rate of 18% of the contract value, when the contract is directly entered into by Marketics-India division with the client. However, in the cases, where AE enters into contract with the client and passes on the same to Marketics-India division, the pricing is based on the normal rates billed by the Marketics - India division to client minus a discount of 18%, reason being that in respect of sales to AE , Marketics - India division does not have to incur any marketing cost separately. These transactions are benchmarked by the assessee by considering assessee as the tested party. Assessee adopted the transactional net margin method using comparable providing IT enabled services. Assessee submitted that this international transaction is also at arm’s-length.

The international transactions of the assessee were referred to the Addl. Commissioner of Income Tax, transfer pricing (11)(6), Mumbai (the learned TPO) under Section 92CA(1) for determination of arm’s length price.

The learned transfer pricing officer disregarded the benchmarking of the appellant , he held that with the first set of transaction stating that foreign AE cannot be taken as a tested party as Revenue has consistently over the past years having not accepted the stand of the assessee of benchmarking its international transactions using foreign Associated Enterprises as a tested parties. SO he aggregated all the transactions entered into by the appellant and benchmarked the entity level margin of the appellant with that of the third- party comparables engaged in provision of IT enabled services. He applied the Transactional Net Margin Method considering the assessee as the tested party for determination of its Arms Length Price of international transaction. The Transfer Pricing Officer was further noted that for A.Y. 2008-09, the Dispute Resolution Panel has also accepted the assessee as tested party. Accordingly, the learned Transfer Pricing Officer selected 15 comparables whose arithmetic mean of the margin (PLI) OP/OC was determined at 24.26%, whereas, the margin of the assessee was determined at 17.07.%. Accordingly, the adjustment was proposed of ₹78,60,61,239/- by order under Section 92CA(3) of the Act, dated 27th January, 2014.

The learned Assessing Officer incorporated the above adjustment in the assessment order. The learned Assessing Officer further noted that ii. assessee has claimed deduction on intangible assets in the rate of 25% of `81,52,282/–. The claim of the depreciation because of the reason that assessee acquired the business of one company from its UK associated as per agreement dated 13/01/2004 . The business acquired was consisting of various contracts of the company. The amount paid by the assessee was capitalized in the books of accounts as intangible assets. The learned Assessing Officer was of the view that the rights acquired by the company are not intangible asset on which depreciation can be allowed. This was not the stand of the Revenue from earlier also. Therefore, depreciation of `81,52,282/– was disallowed.

Accordingly, the assessment order under Section 143(3) of the Act read with Section 144C (3) of the Act was passed on 27th May, 2014, Computing total income of the assessee was computed at `97,43,04,279/–. Wherein;

Assessee aggrieved with the order of the learned Assessing Officer preferred the appeal before the learned CIT(A). The learned CIT(A)

Therefore, the assessee and the learned Assessing Officer both are aggrieved. The learned Assessing Officer preferred the appeal and assessee has filed cross objection.

We have carefully considered the rival contentions, perused the orders of the lower authorities, considered 23 page note of ld AR . Assessee has also filed a factual paper book and case law paper book. Those are also perused.

We first adjudicate the appeal of the learned AO. Ground no. 1 to 9 of the appeal, are related to Transfer Pricing adjustment in case of assessee. We find that with respect to the first set of transaction of provision of ITeS services where the assessee has adopted foreign AE as a tested party, same has been accepted by the coordinate bench in case of the assessee for assessment year 2004 – 05 to assessment year 2009 – 10. In those orders the coordinate bench also held that both the set of transactions of provision of ITeS services should not be aggregated but should be benchmarked separately. The issue is squarely covered in favour of the assessee by the decision of the coordinate benches in case of assessee itself for [1] assessment year 2004 – 05 in ITA number 1886/ M/2009, [2] for assessment year 2005 – 06 in ITA number 631 – 2011, miscellaneous application 261 – 2019, [3] for assessment year

Further, assessee has entered into advance transfer pricing agreement for FYs 2013–14 to 2017–18 where the Transfer Pricing approach of the assessee accepting the foreign AE as a tested party is also accepted.

With respect to the second set of transactions where the learned CIT – A has directed the learned transfer pricing officer to exclude e–clerx services limited and TCS e–serve international Limited. We find that e–clerx services limited has been excluded by the co–ordinate bench in assessee’s own case for A.Y. 2008–09. Further, for A.Y. 2009–10, the learned CIT(A) rejected and excluded the above company which is accepted by the learned Assessing Officer by not agitating before the Tribunal further, therefore, we do not find any reason to not to follow the order of the co–ordinate Bench in assessee’s own case for earlier years on this count. Independently, With respect to the exclusion of TCS e–clerk serve international limited, we find that the TCS e–serve international is part of Tata group, enjoys the goodwill and brand value of the group and company is paying in expenses towards Tata equity. In view of this, we do not find any infirmity in the order of the learned CIT(A) in excluding TCS e– serve international limited from the comparability analysis.

The learned Departmental Representative also could not show any reason to deviate from the same.

In view of this, we confirm the order of the learned CIT(A) with respect to transfer pricing issues. Accordingly, ground no. 1 to 9 of the appeal of the learned Assessing Officer are dismissed.

Ground no. 10 of the appeal is with respect to deleting the disallowance of deduction under Section 10A of the Act of `11,89,92,131/– of Pune Unit no.2. The fact shows that till FY 1996–97, assessee was wholly owned subsidiary of British Airways PLC. In May 2002, WNS Mauritius Limited acquired the entire share capital of assessee from British Airways. Thus, there was change in the entire shareholding of the assessee. At the time of change in shareholding, there were three unit of the assessee which were eligible for deduction under Section 10A of the Act. However, only in one Unit - Pune Unit no.2, which was established in 2002–03 there was a profit of `11,89,92,131/– on which deduction under Section 10A of the Act was claimed for A.Y. 2010–11. The learned Assessing Officer invoked the provision of Section 10A(9) of the Act and held that due to change in the shareholding the assessee is not entitled to the

Ground no. 11 of the appeal is with respect to the disallowance of deprecation of intangible assets of contracts. The fact shows that assessee has acquired the business of one company vide agreement dated 13th January, 2004, wherein the assets acquired consists of various contract with third party clients. The assessee claims that these contracts are long term contracts and are intangible assets eligible for depreciation at the rate of 25% and accordingly, the claimed depreciation of `81,52,282/–. This issue also arose in the case of assessee in all the years from A.Y. 2005–06 to 2012–13. The co–ordinate bench for A.Y. 2005–06 to 2008–09 held that assessee is entitled to depreciation on these contracts as ‘intangible assets’. Therefore, respectfully following the same, we direct the learned Assessing Officer to delete disallowance of depreciation. Accordingly, ground no. 11 is dismissed.

In the result, appeal of the learned AO is dismissed.

In view of our decision in appeal of the learned AO, cross objection filed by the assessee have become infructuous and hence dismissed.

Accordingly, appeal of the learned AO as well as cross objections of the assessee for assessment year 2010 – 11 are dismissed. (Assessment Year 2015-16)

Assessee filed ITA number 295/Mumbai/2020 assessment year 2015 – 16 against the order passed by the Deputy Commissioner of income tax – 14 (3) (1), Mumbai (the learned AO) u/s 143 (3) read with Section 144C (13) of The Income Tax Act, 1961 in pursuance of the directions issued by The “Based on the facts and in the circumstances of the case and in law, the Appellant respectfully craves leave to prefer an appeal against the order passed by the Deputy Commissioner of Income-tax, Circle -14(3)(1), Mumbai learned AO'), under Section 143(3) r.w.s 144C(13) of the Income-tax Act, 1961 (Act') ('Assessment order), in pursuance of the directions issued by Dispute Resolution Panel - 2 ("Hon'ble DRP'), Mumbai, on the following grounds:

The learned senior advocate, Mr Porus Kaka, submitted that original adjustment was made in assessment year 2011 – 12 and impugned assessment in this appeal is assessment year 2015 – 16, therefore, this issue arose in assessee’s own case for assessment year 2011-12 and 2012 – 13 wherein this issue is decided by deleting the consequential disallowance of depreciation in assessment year 2012 – 13 as well as deleting the original adjustment to the value of contract in assessment year 2011 – 12. Therefore according to him, this issue is covered in favour of the assessee.

The learned departmental representative agreed but supported the order of the lower authorities.

We have carefully considered the rival contentions and perused the orders of the lower authorities as well as the orders of the coordinate bench in assessee’s own case for assessment year 2011 – 12 wherein the adjustment to the value of the transaction was made of the contract pursuant to which the disallowance of depreciation resulted in subsequent years. In that year in ITA number 1955/M/2016 dated 19/3/2020 wherein per paragraph number 27 the coordinate bench deleted the adjustment made to the cost of Master service agreement. Therefore, when the original addition itself is deleted, the consequential disallowance of depreciation in

Ground number 6 is with respect to the disallowance of depreciation on intangible asset representing acquisition of business contracts of ₹ 518,502,824/–. The briefly stated the facts show that the business and commercial rights were quite by assessee from WNS capital investment Ltd in respect of Master service agreement entered into between the seller company and Aviva global services private limited. On acquisition of the business assessee acquired commercial right from its associated enterprise which included the right to receive revenue coupled with all the obligation and liability is with respect to the said contract. The assessee classified the same rights acquired by it as an intangible asset as per explanation 3 (b) to Section 32 (1) of the act. Therefore the assessee claimed depreciation at the rate of 25% on the written down value of the same amounting to ₹ 518,502,824/–. The learned AO did not allow the depreciation as according to him the rights acquired by the assessee may be a commercial right but are different then the commercial right and intangible asset which are entitled to the depreciation. The learned dispute resolution panel also upheld the findings of the AO. The learned transfer pricing officer while passing the order u/s 90 2CA (3) of the act disallowed the depreciation of ₹ 181,334,581/– as a part of the transfer pricing adjustment and

The learned authorised representative submitted that that the rights acquired by the assessee are customer contracts, where interest to receive the revenue out of the service for a long- term is acquired. Therefore, same qualifies as intangible asset. It was stated that this issue is covered in favour of the assessee by the coordinate bench in assessee’s own case for assessment year 2011 – 12 and assessment year 2012 – 13 and there is no material change in the facts and circumstances of the case. The learned authorised representative further stated that this issue is covered by all the decisions in case of the assessee by the coordinate bench for respective assessment years.

The learned departmental representative vehemently supported the order of the lower authorities.

We have carefully considered the rival contention and perused the orders of the lower authorities as well as the orders of the coordinate bench in case of the assessee for earlier years. We find that the issue of disallowance of depreciation on the assets acquired out of the Master service agreement has already been dealt with by the coordinate bench in assessee’s own case for assessment year 2011 – 12 and 2012 – 13 as per paragraph number 48 of that order wherein the coordinate bench followed the orders in the case of the assessee for earlier years, we do not have any reason to deviate from the same as there is no change in material facts and circumstances of the case, therefore respectfully following the decision of the coordinate bench we direct the learned assessing officer to grant

Ground number 7 is with respect to the disallowance u/s 14 A of the act of Rs. 1,97,37,049/– made by the learned AO by invoking the provisions of rule 8D of the income tax rules 1962. The fact shows that assessee has earned income of ₹ 145,541,748 from mutual funds which is exempt u/s 10 (35) of the income tax act 1961. The assessee disallowed a sum of ₹ 1,170,329/– stating that these are the expenses incurred by the assessee for earning the exempt income. For this purpose the assessee submitted a certificate dated 10th number 2015 of chartered accountant wherein the salary expenses of the Treasury Department for the activity of investment in mutual fund was classified at ₹ 561,000/–. The infrastructure cost of ₹ 139,042 was also included as well as the communication and other administrative expenses of the cost estimated at Rs 4,70,288 were determined and the total disallowance was worked out at 11,70,329/–. The learned assessing officer dealt with the same as per paragraph number 6 of the draft assessment order wherein it is stated that the disallowance u/s 14 A has to be made pursuant to the specific formula devised as per rule 8D of the IT rules 1962. Therefore he is satisfied that the working of the disallowance made by the assessee is not in accordance with the above rule, he issued notices u/s 142 (1) of the act stating to explain the reasons and supporting documentary evidences as to why the disallowance of

Before us, the learned authorised representative contested that there is no recording of the satisfaction by the learned assessing officer about the correctness of the claim of the assessee. He submitted that the learned AO has merely dealt with the legal objection but did not say anything on the amount of expenditure incurred by the assessee which were disallowed u/s 14 A of the act. He referred to page number 71 of the paper book wherein a certificate of the chartered accountant certifying the amount of expenditure incurred by the assessee for earning of the exempt income was shown. He submitted that this issue is squarely covered in favour of the assessee for assessment year 2012 – 13.

The learned departmental representative vehemently supported the order of the learned assessing officer.

We have carefully considered the rival contention and perused the orders of the lower authorities as well as the order of the coordinate bench in assessee’s own case for assessment year 2012 – 13. In this case we find that the assessee has earned exempt income from mutual funds and offered the disallowance

In the result appeal filed by the assessee is partly allowed.