INTELENET GLOBAL SERVICES P.LTD,MUMBAI vs. ACIT 12(2)(2), MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M): This appeal in ITA No.6948/Mum/2016 for A.Y.2012-13 preferred by the order against the final assessment order passed by the Assessing Officer dated 23/09/2016 u/s.143(3) r.w.s.144C(13) of the Income Tax Act, hereinafter referred to as Act, pursuant to the directions of the ld. Dispute Resolution Panel (DRP in short) u/s.144C(5) of the Act dated 15/07/2016 for the A.Y.2012-13.

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3.1. On perusal of 3CEB report of the assessee, the ld. TPO observed that assessee has given guarantee to its AE. The assessee submitted that it acquired a company through its wholly owned subsidiary Snow Holding Company Ltd. The assessee had provided a corporate guarantee to a bank , on the strength of which, the bank has provided funds to the wholly owned subsidiary. The assessee in its TP report had taken a view that the provision of corporate guarantee to a bank on behalf of its associated enterprises (AEs) is not considered as an international transaction. The assessee in the TP report also adduced reasons for not charging guarantee commission from its AE.

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3.1.1. Intelenet UK has entered into a contract with a third party customer ATOC Ltd., for provision of services in relation to National Rail Enquiry service. Further, Intelenet UK has entered into sub-contracting agreement with assessee for the aforesaid provision of services. The provision of this guarantee does not deter the case as of which entity would be providing the end services in the event of breach of contract or otherwise. In any case, IGSPL (assessee) performs the service and even in case of breach of contract by the Intelenet UK, IGSPL would continue doing so. Thus, the provision of performance guarantee is clearly for business development, the benefit of which shall solely extend to IGSPL in terms of Revenue from ATOC Ltd., The company is in pursuance of its own business, relating to the back to back sub-contract with its subsidiary, Intelenet UK provided a counter performance guarantee to the bank in discharging its contractual responsibility to a third party customer. Accordingly, the assessee understood that the counter performance guarantee is not an international transaction requiring benchmarking. The assessee also felt that since in the event of breach of performance by the AE, the assessee would step in to perform the services on behalf of its AE, in which event, the entire revenue would flow to the assessee. Accordingly, the assessee had decided not to charge any guarantee fee from its AE for providing the performance guarantee.

3.2. We find that the ld. TPO based on the directions of the ld. DRP in earlier years held that both corporate guarantee as well as performance guarantee as an international transaction and determined the ALP of the same as under:-

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Guarantee Outstanding Rate of No. of days Guarantee Guarantee facility Guaranteed Guarantee fee amount fee amount Amount fee (in%) (in INR) Corporate $35,146,194.00 1.25% 97 days (1 $439327.4 5,218,849 guarantee- April 2011 SHCL to 6 July 2011) Performance GBP 25,00,000 1.50% 97 days (1 GBP 9966 7,13,075 guarantee- April 2011 SGS-UK to 6 July 2011) Total 59,31,924

3.3. The ld. TPO observed that assessee should have charged guarantee fees of Rs.59,31,924/- from its AE for providing corporate guarantee and performance guarantee as above.

3.4. We find that the ld. DRP had upheld the action of the ld. TPO by following its directions given in earlier years.

3.5. We find at the outset, both the parties mutually agreed that this issue is a recurring issue from A.Yrs. 2008-09 onwards and the same has been decided by this Tribunal in assessee’s own case from A.Yrs.2008-09 to 2011-12 and also in A.Y.2013-14. We find that this Tribunal in assessee’s own case for A.Y. 2013-14 in ITA No.7309/Mum/2017 dated 06/04/2021 had addressed the very same issue as under:-

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“5. Provision of Corporate and performance guarantee 5.1. The assessee acquired a company through its wholly owned subsidiary namely Snow Holding Company Limited. The assessee provided corporate guarantee to a bank that provided funds to wholly owned subsidiary for the said purpose. The assessee also provided guarantee to Railway Pension Trustee Corporation Ltd., on behalf of its AE for punctual performance of all obligations as mentioned in the agreement. Similar performance guarantee has been given to third party customer (ATCO Limited) of UK AE. The assessee submitted that the guarantee transactions were not to be considered as international transactions for variety of reasons as enumerated in the order of Ld. TPO. However, Ld. TPO, in terms of various decisions including the decision of Mumbai Tribunal in Everest Kanto (ITA No.542/Mum/2012 dated 23/11/2012) applied ALP rate of 1.5% on outstanding guarantee of Rs.138.64 Lacs and arrived at TP adjustment o fRs.2.07 lacs. The action of Ld. TPO, upon confirmation by Ld. DRP, is under challenge before us. 5.2. We find that this issue has already been adjudicated by the Tribunal in assessee’s own case for earlier years. In latest order dated 17/08/2020 for A.Yrs 2010-11 & 2011-12 (ITA Nos.1560/Mum/2015 & Ors.) the bench in para 11 held as under:- 11. Considering the order of the Tribunal for earlier years, we direct the AO/TPO to compute the corporate guarantee @0.5%. So far as charging the performance guarantee is concerned, the ld. AR for the assessee vehemently submitted that the lower authorities have not appreciated the fact that entire revenue from the performance of the contract flows to the assessee guaranteed for its own performance and there was no risk as regard the ITA No. 1560,1664 &5828/M/2015 (AY 2010-11 & 2011-12) Teleperformance Global Services Pvt Ltd performance guarantee and it is the assessee who guaranteed for its own performance. We have seen that the assessee in its statement of facts before ld DRP has specifically pleaded that in case of performance guarantee extended by the assessee, the contract entered by the Itelnet UK Ltd (on behalf of which the assessee has provided performance guarantee) with third party customers, it was actually the assessee who is undertaken they were as Itelnet UK Ltd subcontracts the work back to the assessee. The assessee is not exposed to any default risk on account of performance guarantee as it is the assessee itself who performs the work for the customer. Thus, the provision of performance guarantee by assessee with third party on behalf of its AE, Itelnet UK Ltd, has benefited the assessee itself since the actual service to be provided to third party was outsourced by the assessee by its AE. It is further pleaded that entire

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compensation received from the customer back to the assessee. We have noted that there is no finding of TPO on these facts. The TPO while making adjustment simply follows the adjustment made in earlier years. Similarly, this aspect is not considered by the learned DRP. Considering the aforesaid factual aspects this part of ground of appeal related with performance guarantee is restored to the file of assessing officer/TPO to examine the effect and pass the order a fresh in accordance with law.” 3.6. Respectfully following the aforesaid decision, we hold that ALP of Corporate guarantee shall be computed @ 0.5% of guarantee value and as regards the determination of ALP for provision of performance guarantee, the same is restored to the file of the ld. TPO for fresh adjudication in the light of above mentioned directions given by this Tribunal. Accordingly, the ground Nos.1-1.5 raised by the assessee are allowed for statistical purposes.

4.1. We have heard rival submissions and perused the materials available on record. The assessee has provided back office services to Serco UK Services Ltd., (Associated Enterprises-AE). Once the AE secures a project from a third party client for provision of back office services, it sub-contracts portion of the same to the assessee. The assessee has derived back office service income of Rs.1,19,30,049/- during the year under consideration. The assessee benchmarked this transaction by using Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM). This method was accepted by the ld. TPO. The profit level indicator (PLI) adopted by the assessee was operating profit / operating cost (OP/OC). In the TP study report, the assessee provided un-audited

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figures for the BPO segment with OP/OC of 20.45%. The ld. TPO worked out the margins of the assessee at an entity level and arrived at a negative margin of 17.65%. The final comparables chosen by the ld. TPO in his order together with the comparables margin are as under:-

Sr. No. Name of the Company PLI (OP/OC) 1. Cosmic Global Limited 38.14% 2. Informed Technologies 6.08% India Limited 3. Datamatics Financial 3.72% Services Limited 4. Jindal Intellicom Ltd -0.25% 5. Infosys BPO Ltd., 33.92% 6. Excel Infoways Ltd 41.48% Average 20.52%

4.2. The ld. TPO ignored the segmental margins of 20.45% on the ground that the said segmental margins were not audited by the assessee. Accordingly, the ld. TPO compared the negative margins at entity level of 17.65% with the comparables margin of 20.52% and made the upward adjustment for provision of back office service income to the tune of Rs.55,29,690/- as under:- Particulars Amount in Rs. Provision of back office 11930049 service income PLI of Assessee (OP/OC) -17.65% Arms Length PLI 20.52 Cost of service 14487005

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ALP of the transaction 17459739 Difference 5529690 Plus minus 5 percent 596502 Benefit available no

4.3. This action of the ld. TPO was upheld by the ld. DRP. Before us, the ld. AR drew our attention to the segmented profit and loss account for the year 01/04/2011 to 06/07/2011 in respect of various services rendered to respective AEs. For the sake of convenience, the said segmental P&L account is reproduced hereunder:-

Grand Total Intelenet (UK) (Matching with Particulars Intelenet Inc Intelenet UK Services Ltd., Other Non AE Audited P & L) Comments

as per related parties schedule in audited Revenue 10,10,87,305 8,14,64,984 1,19,30,049 1,76,24,15,094 1,95,68,97,432 financials

As per 12 months Salary-direct 2,69,72,234 3,45,90,047 26,49,516 88,42,89,128 actual payroll 1,16,21,17,204 Salary-non- allocated based on direct 1,37,24,999 1,10,60,803 16,19,787 18,72,10,689 revenue allocated based on Recruitment 6,69,924 8,59,132 65,807 2,59,77,509 2,75,72,373 direct salary allocated based on Training 1,04,686 1,34,253 10,283 46,89,749 49,38,971 direct salary allocated based on Connectivity 22,19,408 17,88,593 2,61,928 4,87,75,330 5,30,45,259 revenue Direct Costs 4,36,91,251 4,84,32,828 46,07,323 1,15,09,42,405 1,24,76,73,807

Gross Margin 5,73,96,054 3,30,32,156 73,32,726 61,14,72,689 70,92,23,625

on the basis of Electricity 15,35,662 16,12,972 3,57,281 5,58,60,829 5,93,66,745 employees Facility Mgt. Maintenance , Housekeepin on the basis of g 23,10,496 22,42,525 6,21,421 6,31,87,224 6,83,61,666 employees / seats Rent including on the basis of lease rentals 50,37,986 48,89,776 13,54,995 32,20,32,752 33,33,15,509 employees / seats Repairs and maintenance on the basis of -Buildings 85,526 83,010 23,003 70,42,805 72,34,345 employees / seats

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Repairs and maintenance on the basis of -Others 9,43,658 9,15,897 2,53,802 2,38,73,027 2,59,86,384 employees / seats on the basis of Insurance 5,23,889 5,50,263 1,21,886 4,50,12,477 4,62,08,515 employees Rates and taxes (including on the basis of wealth tax) 44,253 46,481 10,296 5,40,718 6,41,747 employees Postage Telephone allocated based on and Fax 8,48,205 6,83,358 1,00,103 1,30,74,776 1,47,06,642 revenue Travelling and allocated based on conveyance 27,08,597 21,82,824 3,19,661 5,50,16,155 6,02,27,238 revenue Printing and allocated based on stationery 4,17,268 3,36,271 49,245 85,11,180 93,13,963 revenue Discount 1,19,588 96,374 14,113 24,49,424 26,79,500 revenue/actual Sales and Marketing Expenses 34,48,555 27,79,147 4,06,989 8,14,25,702 8,80,60,392 actual and revenue Legal and revenue/actual if Professional 21,85,962 17,61,639 2,57,981 15,73,26,245 16,15,31,828 any thing specific Entertainme nt expenses 59,729 62,736 13,896 29,82,412 31,18,773 No of employees Payments to auditors 80,068 64,526 9,449 13,95,956 15,50,000 revenue Bad debts written off - - - 2,58,00,677 2,58,00,677 actual Provision for doubtful debts - - - 1293177 1293177 actual Loss on fixed assets sold / scrapped / written off 9,384 9,856 2,183 13,31,095 13,52,518 employees Provision for estimated losses on onerous com - - - 9,44,75,197 9,44,75,197 actual Provision for anticipated losses - - - 15,52,420 15,52,420 actual Depreciation 58,13,516 61,06,188 13,52,551 18,96,56,153 20,29,28,409 No. of employees Miscellaneo us Expenses 2,40,513 1,93,827 28,385 92,73,453 97,36,177 revenue 2,64,12,855 2,46,17,871 52,97,242 1,16,31,13,854 1,21,94,41,822

Profit before interest and Tax 3,09,83,198 84,14,285 20,25,484 (55,16,41,165) (51,02,18,197) Other income 14,34,05,662 Interest Expense 1,74,42,595 Profit before tax 3,09,83,198 84,14,285 20,25,484 (55,16,41,165) (38,42,55,130)

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4.4. We find that the ld. TPO had accepted the segmental results of the first two AEs. The ld. TPO had only doubted the segmental results of the third AE i.e. Intelenet UK Services Ltd. The allocation method of expenditure are the same for all the three AEs. The basis of allocation is also clearly mentioned in the aforesaid table itself. Hence, we have no hesitation to conclude that the ld. TPO having accepted the segmental results of the first two AEs mentioned in the aforesaid table ought to have accepted the segmental results of the third AE also instead of resorting to entity level benchmarking and arriving at a negative margin of 17.65%. What is sought to be benchmarked is only the provision of back office service income where the assessee had earned revenue of Rs.1,19,30,049/-. We find that the ld. TPO by arriving at the entity level negative margin of 17.65% (which is the net result of all the activities carried out by the assessee) had sought to apply the same with Revenue stream of back office service income alone which is patently illegal and unsustainable. Moreover, we find that overall entity level negative margin of 17.65% includes transactions carried out by the assessee with its AEs as well as non-AEs. The assessee had shown profit margin of 20.45% in the relevant segment of back office service income. This audited segmental results were duly submitted before the ld. DRP by the assessee, though the ld. TPO never requested assessee to furnish the audited segmental results. We also hold that there is no requirement in the statute to get the segmental results audited. The segmental results are reflected in the annual accounts of the company as per the mandate provided in Accounting Standard – 17 issued by the Institute of Chartered Accountant of India. Other than that, the segmental data submitted by the assessee before the ld. TPO need not be statutorily audited. The audited segmental results are furnished to the ld. TPO by the assessee

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only to provide more authenticity to the data contained therein. Nothing prevents the ld. TPO to verify and examine the unaudited segmental results matching with the overall audited financial statements furnished before him. Hence, the action of the ld. TPO in rejecting the segmental results furnished by the assessee for the mere reason that the same are not audited, is hereby dismissed. Reliance in this regard is placed on the decision of this Mumbai Tribunal in the case of Tecnimont ICB Pvt. Ltd., in ITA No.7098/Mum/2010 dated 25/02/2011.

4.5. We also find the reasons stated by the ld. DRP for rejecting the segmentals are factually wrong. In this regard, the relevant observations of the ld. DRP are reproduced hereunder:-

“6.1.6 From the above accounts as furnished, it is seen that majority of expenses have been allocated on the basis of revenue and the some of the expenses have been allocated on the basis of number of employees. It is not explained why depreciation, provision for estimated losses, legai and professional expenses, sale and marketing expenses have been allocated on the basis of number of employees and not on the basis of revenue. It may be mentioned the AE revenue during the year is only about 19 crores whereas non-AE revenue is balance 176 crores. However the AE salary cost as compared to non-AE salary cost is proportionately higher so much that about 24% of total salary is paid for AEs for just about 10% of AE revenue. Further the connectivity charges have been allocated on the basis of revenue but it is not explained why it should not be allocated on the basis of AE salary expenses. Similarly the assessee has allocated discount, sale and marketing expenses, legal & professional expenses, payment to auditors on the basis of revenue which is just arbitrary. Therefore we hereby agree with the findings of the TPO that the assessee has not maintained cost records of AE & non- AE segments and the allocation based statement furnished by the assessee in self serving and hence the same has been rightly rejected by the TPO. The objections of the assessee in this respect are therefore rejected.”

4.6. We find the basis of allocation of various expenses has been clearly given by the assessee for each of the segments as is evident from the aforesaid table. In any case, we find the main grievance of the ld. DRP

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seems to be that AE revenue is only Rs.19 Crores and Non-AE revenue is Rs.176 Crores and salary cost of back office income unit seems to be more by 24% and requires allocation to non-AE unit. If this observation is to be accepted then, the same would only be beneficial to the assessee as the same would result in increase of margins for the AE BPO segment. This fact itself proves that the ld. DRP had not applied its mind at all on the basis of allocation of expenses between the AE units and the non-AE units. In view of the above, the other grounds raised by the assessee on inclusion and exclusion of the comparables need not be gone into at all and they are left open.

4.7. Going by the segmental data of back office services income which is evident from the table above, the assessee had earned a margin of 20.45% and even assuming if all the comparables chosen by the ld. TPO are to be accepted, the arithmetical mean margin of comparables is only 20.52%. Hence, the transactions of the assessee would be at arm’s length requiring no TP adjustment. Accordingly, the ground Nos. 2.1 to 2.4 raised by the assessee are allowed.

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assessee in the section 154 order dated 11/11/2016, the ground Nos. 3.1 – 3.3 raised by the assessee does not survive.

6.1. We have heard rival submissions and perused the materials available on record. We find that assessee had claimed MAT credit of Rs.5,45,39,535/- in the return of income, pursuant to the income offered at Rs.16,80,98,430/-. Pursuant to the TP addition made by the ld. TPO, the income of the assessee stood increased to Rs.57,95,60,044/- and consequently the assessee’s tax liability was determined at 5,82,58,256/-. Accordingly, the assessee is eligible to claim MAT credit of Rs.5,82,58,256/- out of the brought forward MAT credit from earlier years of Rs.76,79,68,086/-. However, the ld. AO restricted the MAT credit of assessee to Rs.5,45,39,535/- as per return of income despite the fact that assessee had sufficient brought forward MAT credit. This matter requires factual verification and hence, the same is restored to the file of the ld. AO to re-compute the tax liability of the assessee in accordance with law. Accordingly, the ground No.3.4 raised by the assessee is allowed for statistical purposes.

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Order pronounced on 22/02/2022 by way of proper mentioning in the notice board.

Sd/- Sd/- (VIKAS AWASTHY) (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 22/ 02 /2022 KARUNA, sr.ps Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. 6. Guard file. //True Copy//

BY ORDER,

(Asstt. Registrar) ITAT, Mumbai