DEUTSCHE CIB CENTRE P.LTD,MUMBAI vs. ASST CIT 12(2)(1), MUMBAI

आदेश / O R D E R PER M. BALAGANESH (AM): This appeal in A.Y.2010-11 preferred by the order against the final assessment order passed by the Assessing Officer dated 04/02/2015 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 29/12/2014 for the A.Y.2010-11.

2.2. The ld. AO vide draft assessment order dated 15.03.2014 passed under section 144C(1) of the Act rejected the claim of the assessee and held that entire expenditure incurred by the assessee is to increase the share capital and thus is in the nature of capital expenditure. Further, the ld. AO held that expenditure is fully unascertainable as same has not been actually incurred by the assessee. Assessee’s objections against the aforesaid disallowance were rejected by Ld. DRP vide directions dated 29.12.2014 issued under section 144C(5) of the Act.

2.3. Aggrieved by the disallowance, the assessee is in appeal before us. In this regard, Ld. AR submitted that under the ESOP scheme, equity stock options were granted to permanent employees of Indian Branches of Deutsche Bank and employees and directors of subsidiaries of Deutsche Bank in India. The assessee is a subsidiary of Deutsche Bank and therefore the employees and directors of assessee are entitled to receive the shares of ultimate holding company i.e. Deutsche Bank under the scheme. Ld. AR referred to details provided during the course of assessment proceedings vide letter dated 18.02.2014. Ld. AR further submitted that Special Bench of the Bangalore Tribunal in the case of M/s. Deutsche CIB Centre Private Limited Biocon Ltd. v. DCIT reported in 144 ITD 21 held that discount in relation to employee stock options vested during the year is not contingent liability. The said decision of Special Bench of Bangalore Tribunal has also been affirmed by Hon’ble Karnataka High Court in CIT v. Biocon Ltd reported in 430 ITR 151. Thus, the employee stock option compensation expenses is allowable under section 37 (1) of the Act. On the other hand, Ld. DR vehemently relied upon the findings of ld. DRP.

2.4. We have considered the rival submissions and perused the materials available on record. We find that in an ESOP, the given company undertakes to issue shares to its employees at a future date at a price lower than the current market price. This is achieved by granting stock options to its employees at discount. The amount of discount represents the difference between market price of the shares at the time of the grant of option and the offer price. In order to be eligible for acquiring the shares under the ESOP, the concerned employees are obliged to render services to the company during the vesting period as given in the scheme. On the completion of the vesting period in the service of the company, such options vest with the employees. The options are then exercised by the employees by making application to the employer for the issue of shares against the options vested in them. The company, on the exercise of option by the employees, allots shares to them who can then freely sell such shares in the open market subject to the terms of the ESOP. Thus it can be seen that it is during the vesting period that the options granted to the employees vest with them. This period commences with the grant of option and terminates when the options so granted vest in the employees after serving the company for the agreed period. By granting the options, the company gets a sort of assurance from its employee for rendering uninterrupted services during the vesting period

M/s. Deutsche CIB Centre Private Limited and as a quid pro quo it undertakes to compensate the employees with a certain amount given in the shape of discounted premium on the issue of shares. As per the Revenue, the vesting of shares after award is contingent upon many subsequent events and accordingly, the provision made by the assessee on account of award of shares is only a contingent liability. Similar contentions of Revenue for denying deduction to employees stock options expenses have been specifically dealt by Special Bench of Bangalore Tribunal in Biocon Ltd. (supra). Special Bench of Tribunal after considering the ratio laid down by Hon’ble Supreme Court in Bharat Earth Movers v. CIT reported in 245 ITR 428 and Rotork Controls India (P) Ltd. v. CIT reported in 314 ITR 62 observed as under: “9.3.5 When we consider the facts of the present case in the backdrop of the ratio laid down by the Hon'ble Supreme Court in Bharat Earth Movers (supra) and Rotork Controls India (P.) Ltd. (supra), it becomes vivid that the mandate of these cases is applicable with full force to the deductibility of the discount on incurring of liability on the rendition of service by the employees. The factum of the employees becoming entitled to exercise options at the end of the vesting period and it is only then that the actual amount of discount would be determined, is akin to the quantification of the precise liability taking place at a future date, thereby not disturbing the otherwise liability which stood incurred at the end of the each year on availing the services.” 2.5. We find that the appeal preferred by the revenue against the aforesaid Special Bench’s decision was dismissed by the Hon’ble Karnataka High Court. The ld. DR before us could not point out any subsequent change in legal position. Respectfully following the ratio of Special Bench as confirmed by Hon’ble High Court, we direct the ld. AO to allow the deduction of ESOP expenses of Rs. 1,52,46,000/-. Accordingly, Ground No. 1 raised by the assessee is allowed.

M/s. Deutsche CIB Centre Private Limited 3.1. For the relevant assessment year, assessee filed return of income claiming deduction of Rs. 33,84,12,558/- under section 10A of the Act. During the course of assessment proceedings vide letter dated 15.10.2013, auditors certificate under section 10A of the Act in Form 56F was filed before the ld. AO as per which deduction of Rs. 35,53,98,193/- was claimed. Assessee again filed a letter dated 21.02.2014, requesting the ld. AO to consider the amount of Rs. 35,53,98,193/- as deduction under section 10A of the Act (as per auditor’s certificate filed on 15.10.2013) while finalising the assessment. Assessee filed another letter dated 18.03.2014 reiterating its request for considering the revised amount of deduction under section 10A of the Act.

3.2. Vide draft assessment order, the ld. AO though in principle accepted the claim of deduction under section 10A of the Act but rejected the revised claim on the ground that same has not been filed through revised return of income by relying upon the decision of Hon’ble Supreme Court in the case of Goetze (India) Pvt. Ltd reported in 284 ITR 323. In further proceedings, the ld. DRP rejected the objections raised by assessee and disallowed enhanced claim of deduction under section 10A on the basis that no CA certificate has been enclosed with letter dated 04.03.2014 filed before the ld. AO. Thereafter the ld. AO passed the final assessment order in accordance with the directions of the ld. DRP. Aggrieved, the assessee is in appeal before us.

3.3. During the course of hearing, the Ld. AR submitted that only reason for denying the deduction as per revised claim was that ld. DRP failed to take into account the auditor’s certificate dated 11.10.2010 filed before the ld. AO vide letters dated 15.10.2013 and 18.03.2014. The Ld. AR further submitted that ld. DRP wrongly noted the date of letter filed by M/s. Deutsche CIB Centre Private Limited assessee as 04.03.2014 when in fact the letter was filed on 18.03.2014. In reply, Ld. DR graciously requested that computation of deduction under section 10A as per revised claim may be sent back to ld. AO for verification.

3.4. We have considered the rival submissions and perused the materials available on record. From the facts available on record, it evident that revenue does not dispute the claim of deduction under section 10A of the Act made by the assessee in its return of income. The grievance raised by assessee is limited to denial of revised claim of deduction under section 10A of the Act as per auditor’s certificate dated 11.10.2010. We find that the audit certificate for claiming deduction under section 10A of the Act was dated 11.10.2010 which was the same date of filing the return of income by the assessee. We find that the audit certificate in Form No. 56F is enclosed in pages 194 to 196 of the paper book filed by the assessee which contains the detailed workings for computation of deduction under section 10A of the Act together with a note stating that the export turnover of Rs 33,28,53,532/- was not realised within 6 months from the end of the financial year i.e 31.3.2010 and is expected to be received within the time allowed by RBI vide Circular RBI/2004-05/264 dated 1.11.2004. We also find from page 150 of the paper book filed before us that the assessee during the course of assessment proceedings vide letter dated 21.2.2014 had duly submitted that the revised claim of deduction under section 10A of the Act was Rs 35,53,98,193/- as against that claimed in the return of Rs 33,84,12,558/-. The assessee had also submitted the detailed reconciliation of the difference in claim thereon in the said letter which is enclosed in page 151 of the paper book filed before us. Since no finding has been given by the lower authorities with regard to the computation of enhanced deduction under section 10A of M/s. Deutsche CIB Centre Private Limited the Act, we deem it fit and appropriate to remand this issue to the file of ld AO for verification of the veracity of the workings of enhanced claim made by the assessee and decide the same in accordance with law. Accordingly, Ground No.2 raised by the assessee is allowed for statistical purposes.

4.1. The assessee incurred Long Term Capital Loss of Rs. 26,29,364/- which was carried forward to future years in the return of income filed by assessee. Same was also clarified vide letter dated 18.02.2014 filed by assessee during assessment proceedings. However, the ld. AO has not granted the same in the draft assessment order and no finding was given by him thereon for his denial.

4.2. Before the ld. DRP, assessee sought direction to ld. AO to consider the Long Term Capital Loss and allow it to be carried forward to be set off in subsequent years. The ld. DRP vide directions dated 29.12.2014 held that from the copy of return of income and computation it is not discernible whether the assessee has made any claim of Long Term Capital Loss.

4.3. During the course of hearing, the Ld. AR by referring to Schedule CG and CFL to return of income filed by assessee, which is also forming part of paper book, submitted that during the relevant assessment year, assessee has incurred Long Term Capital Loss of Rs. 26,29,364/- and sought carry forward of same to future years. Ld. AR further submitted that Long Term Capital Gain was wrongly mentioned as Long Term

M/s. Deutsche CIB Centre Private Limited Capital Loss in the computation of income and thus finding of ld. DRP arrived on this basis is erroneous. Ld. DR relied on the observations of the ld. DRP.

4.4. We have considered the rival submissions and perused the materials available on record. We find from the return of income, the assessee had incurred Long Term Capital Loss of Rs. 26,29,364/- during the previous year which is duly reflected in Schedule CFL thereon. The workings of Long Term Capital Loss of Rs 26,29,364/- are enclosed in page 172 of the paper book filed before us. But by inadvertence, this figure of Long Term Capital Loss was not mentioned by the assessee in the computation of income which had triggered the ld. AO to reject the claim of the assessee despite the fact that it is a genuine claim of the assessee. We are unable to persuade ourselves to accept to the observations made by the ld. DRP and the ld. AO in this regard. Despite the fact that the correct loss figure is reflected in the relevant schedule in the return of income, the legitimate claim of the assessee has been denied by the revenue. Hence we have no hesitation in directing the ld. AO to allow the Long Term Capital Loss of Rs 26,29,364/- to be carried forward to subsequent years. Accordingly, the Ground No. 3 raised by the assessee is allowed.

M/s. Deutsche CIB Centre Private Limited

“ 19. The appellant submits that AO be directed to allow deduction on account of Education Cess and Higher and Secondary Education Cess paid by the appellants for the assessment year 2010-11”

7.1. Ld. AR submitted that issue raised by way of additional ground is purely a legal issue not requiring enquiry into any new facts. Ld. AR further submitted that additional ground is raised in view of the Hon’ble Jurisdictional High Court’s decision in the case of Sesa Goa Ltd. V. JCIT reported in 117 taxmann.com 96. On the other hand, Ld. DR relied upon decision of co-ordinate bench of the Tribunal in the case of M/s Kanoria Chemicals & Industries Ltd. V. Addl. CIT: and 2439/Kol/2018, wherein it was held that education cess is an additional surcharge levied on the income tax and therefore forms part of income tax and thus cannot be allowed as deduction.

7.2. We have considered the rival submissions. As the issue raised by the assessee by way of additional ground of appeal is purely legal issue which can be decided on the basis of material available on record, we are of the view that same can be admitted for consideration and adjudication in M/s. Deutsche CIB Centre Private Limited view of the ratio laid down by Hon’ble Supreme Court in NTPC Ltd. V. CIT reported in 229 ITR 383.

7.3. Coming to the additional ground of appeal, same is squarely covered in favour of the assessee by the decision of Hon’ble Jurisdictional High Court in the case of Sesa Goa Ltd. (supra) and Hon'ble Rajasthan High Court in the case of Chambal Fertilizers & Chemicals Ltd. v. Jt. CIT reported in 107 taxmann.com 484. As per the above decisions, the amount of education cess and higher & secondary education cess is not tax as covered under section 40(a)(ii) of the Act and accordingly allowable as deduction in computing the income from business or profession. Though coordinate bench of Tribunal has taken a contrary view in the case of M/s Kanoria Chemicals & Industries Ltd. (supra), however, as the decision in the case of Sesa Goa Ltd. (supra) has been rendered by Hon’ble Jurisdictional High Court, we are bound to follow same. Accordingly, the additional ground raised by the assessee is allowed.

8. The ground Nos.7-18 raised by the assessee is with regard to transfer pricing adjustment made by the ld. TPO.

8.1. We have heard rival submissions and perused the material available on record. The assessee is a global processing centre undertaking offshore support services for various business lines of Deutsche Bank group entities. The assessee is a subsidiary of Deutsche Knowledge Service Pte Ltd., Singapore. It provides offshore support services to its Associated Enterprises (AEs) in the nature of Information Technology Enabled Services (ITES). The ld. TPO observed that FAR analysis of the assessee revealed that it is a high-end service provider. The ld. TPO

M/s. Deutsche CIB Centre Private Limited categorised assessee as a Knowledge Process Outsourcing (KPO) service provider. The international transactions carried out by the assessee with its AEs as reported in Form 3CEB are as under:-

Sl. Nature of transaction FY 2009-10 F.Y.2008-09 Method No.

M/s. Deutsche CIB Centre Private Limited end support services which can be comparable to that of KPO service provider, as the KPO requires domain knowledge, analytical skills and decision making capabilities. Accordingly, the ld. TPO identified the comparable companies and sought to benchmark the international transactions carried out by the assessee.

8.3. The final list of comparable as chosen by the ld. TPO are as under:-

Sr. No. Name of the company (Exc. Forex) 1 Accentia Technologies 43.07 Limited 2 Vishal Information 43.49 Technologies Ltd.,(Coral Hub) Limited 3 Cosmic Global Limited 16.59 4 ICRA Online Limited 43.43 5 Informed Technologies 26.92 India Limited 34.69 8.4. As against the assessee’s margin of 22.86%, the arithmetic mean margin of comparable companies was arrived by the ld. APO at 34.69%. The ld. TPO accordingly made an adjustment of Rs.18,68,71,000/- on account of provision of support services and determined the arm’s length price thereon as under:-

Particulars Amount in Rs.’000 Cost 1,579,323 ALP Profit @34.69% 547,867 ALP Revenue 2,127,190 Actual Revenue 1,940,319 Adjustment 186,871

M/s. Deutsche CIB Centre Private Limited 8.5. We find that out of the aforesaid five comparables chosen by the ld. TPO, the comparables listed in Sr. Nos. 3-5 were infact chosen by the assessee itself. The comparables listed in Sr. Nos. 1-2 above i.e. Accentia Technologies Ltd., and Coral Hubs Ltd., were included by the ld. TPO. The ld. AR before us sought exclusion of Accentia Technologies Ltd. 8.6. We find that the ALP adjustment has been made by the ld. TPO in respect of provision of business support services rendered by the assessee to its AEs. The value of international transaction thereon was Rs.194.03 Crores. The assessee was remunerated @22.86% thereon. The Most Appropriate Method (MAM) adopted by the assessee and accepted by the ld. TPO is Transactional Net Margin Method (TNMM). The Profit Level Indicator (PLI) adopted by the ld. TPO is Operating Profit / Total Cost (OP/TC). The arm’s length margin of the comparables chosen by the assessee as per the TP study report was 6.89%. The arm’s length margin chosen by the ld. TPO as per the final list of comparables listed above was 34.69%. The ld. TPO accordingly made an adjustment of Rs.18.68 Crores in respect of provision of business support services. We find that the ld. DRP had given partial relief to the assessee by directing the ld. TPO to exclude one of the comparables i.e. Coral Hubs Ltd., and by determining the arm’s length margin of the comparables at 32.50% and consequently the TP adjustment was reduced to Rs.15.22 Crores.

8.7. The ld. AR before us vehemently argued for exclusion of Accentia Technologies Ltd., In this regard, he placed reliance on the decision of the Co-ordinate Bench of this Tribunal in assessee’s own case for A.Y.2008-09 in IT(TP)A No.134/Mum/2013 dated 09/11/2020 wherein in para 10, this Tribunal had held that Accentia Technologies Ltd., is not functionally comparable with that of the assessee company. It is not in M/s. Deutsche CIB Centre Private Limited dispute that the functions performed by the assessee and Accentia Technologies Ltd., in A.Y.2008-09 are the same with that of functions performed during the year under consideration. We find that this Tribunal had rejected this comparable i.e. Accentia Technologies Ltd., on the ground of functional dissimilarities. The relevant operative portion of the said judgement is reproduced hereunder:-

“10.3 Further, we find, that as per the “annual report‟ of the aforementioned company, i.e Accentia Technologies Limited, it had developed and owned unique intangibles/intellectual property/process i.e copyrighted products namely Iridium Medical Transcription Automation System (iMTAS); Iridium Real Time School (iRTS); Iridium Accounts Management System (iAMS); Iridium Inventory Management System (iIMS); Iridium Payroll Management System (iPMS); Iridium Business Transcription System (iBTS); and Iridium Hospital Management System (iHMS). In our considered view, the owning of the aforesaid intangible property by the aforementioned company therein renders it incomparable to the assessee before us. 10.4 Insofar, the employee cost of the aforesaid company i.e Accentia Technologies Ltd. is concerned, we find, that a perusal of its financials for the year under consideration, Page 25 of APB, therein reveals that the same works out at 12% of its total cost. Keeping in view the low employee costs of the aforesaid company, we are of the considered view that it could not have been feasibility selected as a comparable for benchmarking the International transactions of the assessee. 10.5 As regards the claim of the ld. A.R that the aforementioned company is functionally dissimilar to the assessee, we shall for the purpose of adjudicating the same look into the functional profile of the company. On a perusal of the “annual report‟ for the year under consideration, we find that the aforementioned company had ventured into areas of the health care sector viz. Medical Transcription, Medical Coding, Medical Billing, Receivables Management (Collections). In the backdrop of the aforesaid functional profile of the abovementioned company i.e Accentia Technologies Ltd, as can be gathered from its „annual report‟ Page 26 – 29 of APB, we are of the considered view that the same can be held to be functionally dissimilar to the Printed from itatorders.in A.Y.2008-09 Deutche CIB Centre Pvt. Ltd. Vs. ACIT, Circle-6(3) 20 assessee which is into provision of business support services (ITeS) to its group entities across the world.

M/s. Deutsche CIB Centre Private Limited

10.6 In the backdrop of our aforesaid observations, and reasons given above, we are of a strong conviction that the abovementioned company, i.e Accentia Technologies Ltd. also could not have been included in the final list of the comparables for the purpose of benchmarking the international transactions of the assessee for the year under consideration.” 8.8. Respectfully following the aforesaid decision, we hold that Accentia Technologies Ltd., is functionally not comparable with the assessee company and hence, we direct the ld. TPO / AO to exclude the same from the final list of comparables.

8.9. We find that the ld. AR before us stated that once Accentia Technologies Ltd., is excluded, the assessee would be within the tolerance band of +/- 5% and accordingly, there will be no need to make any adjustment in arm’s length price of international transactions of the assessee. Considering the same, we direct the ld. TPO to re-work the arm’s length margin in view of the above directions. Accordingly, the ground Nos. 7-18 raised by the assessee are allowed for statistical purposes.

Order pronounced on 31/01/2022 by way of proper mentioning in the notice board.