DEPUTY COMMISSIONER OF INCOME-TAX vs. AMDOCS DEVELOPMENT CENTRE INDIA PVT. LTD.,, PUNE

The cross appeals filed by the assessee and the Revenue were heard together and are being disposed of by this consolidated order for the sake of convenience.

The assessee has raised the following grounds of appeal:- “Ground 1 On the facts and circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) ('Ld. CIT(A),) has erred in remanding the matter back to the Learned Assessing Officer ('Ld. AO)') for computing the quantum of capacity utilisation adjustment. Ground 2 On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in rejecting the methodology adopted by the Appellant for computing the quantum of capacity utilisation adjustment. The above grounds are without prejudice to each other. Your appellant craves leave to add, amend, alter, modify and/or substitute, and to withdraw the above grounds of appeal.”

The Revenue has raised the following grounds of appeal:-

Briefly, in the facts of the case, the assessee was engaged in ITES services. The year under appeal i.e. assessment year 2007-08 was the first full year of operations of the assessee and hence it had asked for certain economic adjustments. The Tribunal in ITA No. 1412/PN/2011 vide its order dated 23.07.2012 had directed Assessing Officer to allow adjustment on account of under capacity utilization and remanded the issue back to the file of Assessing Officer for computing the adjustment. The Assessing Officer denied the said adjustment to the assessee.

The Commissioner of Income Tax (Appeals) after referring to the directions of the Tribunal under para noted that the Assessing Officer/TPO had denied adjustment on account of capacity utilization. After considering the submissions of the assessee accepted the arguments of the assessee that the Tribunal had remitted the issue for computing the working capital adjustment. Hence, the Assessing Officer had to comply with the same but in the absence of the data not being correctly furnished by the assessee before the TPO, he could not comply with the directions of the Tribunal. Then vide para 2.3.7 at page 13 the Commissioner of Income Tax (Appeals) noted that the computation

The Commissioner of Income Tax (Appeals) then directed the Assessing Officer to obtain average of the ratio of total salary to total sales registered by the comparable companies vis-à-vis the same ratio of the assessee and grant the economic adjustment for both the differences as directed by the Hon’ble Tribunal.

Both the assessee and the Revenue are in appeal against the directions of the Commissioner of Income Tax (Appeals). The assessee is aggrieved by the order of Commissioner of Income Tax (Appeals) in remitting the matter back to the file of Assessing Officer for computing the quantum of capacity utilization adjustments. The assessee also aggrieved by the order of Commissioner of Income Tax (Appeals) in rejecting methodology adopted by the assessee for computing the quantum of capacity utilization adjustment.

The Revenue is in appeal against the order of Commissioner of Income Tax (Appeals) in directing the Assessing Officer to obtain the average space utilization per seat of the comparable companies and compare it with the

The ld. AR for the assessee pointed out that while computing the economic adjustments in the hands of the assessee there is no dispute with regard to the depreciation adjustment. There is dispute only with reference to personnel cost adjustment. He further pointed out that the total revenue earned by the assessee during the year was Rs.13.90 crores on which personnel cost was Rs.9.47 crores. In case personnel cost to sales ratio is worked out then the same works to 68.14% which was much higher than the personnel cost/sales ratio of comparables finally selected, which works out to 36.72%. The ld. AR for the assessee pointed out that salary to be charged as per percentage of comparables would be Rs.5.10 crores as against the cost incurred of Rs.9.47 crores. He thus, stated that in case the adjustment is made of excess cost borne by the assessee at Rs.4.36 crores than the adjusted OP/TC would work out to 13.57%. The mean margins of the comparable companies is 15.57% and hence the international transactions undertaken by the assessee would be within +/- 5% range as provided u/s.92C(2) of the Act and no adjustment is warranted post the economic adjustment.

The learned Departmental Representative for the Revenue on the other hand placed reliance on the order of the authorities below.

The ld. AR for the assessee in rejoinder pointed out that the assessee’s appeal is filed against the directions of Commissioner of Income Tax (Appeals) in remitting the issue back to the Assessing Officer.

We have heard the rival contentions and perused the records. The limited issue which arises in the present appeal is consequent to the directions of Tribunal in assessee’s own case vide order dated 23.07.2012. The Tribunal had remitted the matter back to the file of Assessing Officer for computing the adjustments on account of under capacity utilization. The Assessing Officer/TPO denied the same as complete data was not furnished. However, the Commissioner of Income Tax (Appeals) directed the Assessing Officer to compute the adjustment by taking into account the difference in salary cost to sales ratio of the assessee vis-à-vis comparable companies. The assessee before us has filed the computation of amount of adjustment to be made on account of salary cost. After taking the percentage of personnel cost to sale ratio of comparables the working is as under :

The break up of personnel cost deducted by the assessee is as under : Particulars Reference Amount (in Rs.) Personal cost Pg. 183 of paper book 86,042,213 Training costs 2,103,173 Recruitment cost 6,595,216 Total 94,740,602

The assessee has also furnished the details of personnel cost/sales ratio of comparables and the average works out to 36.72%. In case the personnel cost adjustment is allowed to the assessee the adjusted operating profit would work out as under: Particulars Paper book Reference Amount Pg. Ref. (in Rs.) Operating Revenue [a] 13,90,31,479 178 Total costs 178 20,23,72,661 Less: non-operating expenses and economic adjustment Financial Expenses 178 -2,236,395 Personal costs adjustment 167 Annexure 1 -43,685,914 Depreciation adjustment on account of 163 -34,033,190 excess depreciation charged vis-a -vis the rates prescribed under the Companies Act. (as allowed by the Hon'ble Tribunal and verified and allowed by the Assessing Officer as well) Adjusted Operating Costs (“TC”) [b] 12,24,17,162 Adjusted Operating Profit („OP‟) [c=a-b] 1,66,14,318 Adjusted OP/TC [d=c/b] 13.57%

After allowing the personnel cost adjustment, depreciation adjustment and the non-operating expenses i.e. financial expenses as deduction out of operating revenue, the adjusted operating profit works out to Rs.1.66 crores. The adjusted OP/TC of the assessee thus works to 13.57% as against the mean margins of the comparables, which has been taken by the Assessing Officer/TPO at 15.57%. Since, the adjusted operating margins of the assessee on account of transfer pricing provision are within the range of +/- 5% no adjustment is warranted in the hands of the assessee. Accordingly, the

In the result, the appeal of the assessee is dismissed and the appeal of the Revenue is partly allowed.