GENPACT SERVICES LLC,GURGAON vs. ACIT,CIRCLE-1(3)(1) INT. TAXATION, DELHI

4. That on facts and in the circumstances of the case and in law, the A0 erred in assuming jurisdiction over the international transaction of expenditure incurred towards support services, without appreciating that the same has been considered to be at arm's length by the TPO.

4.1 The AO/ DRP have further erred in disallowing the expenditure incurred towards support services without appreciating the fact that the impugned transaction has been accepted by the TPO over the years, including the year under consideration, and hence, the same should not have been disturbed, arbitrarily alleging that the cost allocation policy is incorrect and ignoring the documentary evidence/ submissions made by the Appellant. 4.2 Not appreciating that the same have been incurred wholly and exclusively for the purposes of business and hence, an allowable business expenditure.

5. That on the facts and circumstances of the case and in law. the AO/ DRP have grossly erred in pay disallowing the support services cost amounting to Rs. 12.05,65,142 paid by the Appellant to the associated enterprise, and while doing so, have erred in: 5.1 changing the cost allocation methodology from headcount ratio to salary expense ratio, thereby partly disallowing support services cost; 5.2 not appreciating the fact that headcount represents an appropriate allocation key for allocating such costs, since the employees represent key resources utilized in the industry and overheads are planned/ incurred considering the number of employees in the organization; 6. That on facts and circumstances of the case and in law, the assessment completed by the AO is a nullity inasmuch as the AO defied the specific directions of the DRP and thereby contradicting the provisions of section 144C(10) of the Act.

7. That on facts and circumstances of the case, the AO has erred in not granting the credit of taxes deducted at source (TDS'), advance tax and self-assessment tax while computing the amount of demand payable by the Appellant.

8. That on facts and in circumstances of the case, the A0 has erred in computing excess interest under section 234B and 234Cof the Act while computing the amount of demand payable by the Appellant. That the above grounds and sub grounds of objections are without prejudice to each other. 3 The Appellant craves leave to alter, amend or withdraw all or any of the Grounds of objections herein or add any further grounds as may be considered necessary and to submit such statements, documents and papers as may be considered necessary either before or during the hearing.” 2. The assessee has also filed the Additional Ground of Appeal

which reads as under:- “That on the facts and circumstances of the case and in law, the Ld. AO has erred in not granting the depreciation allowance of Rs. 55,46,262/- towards the intangible assets (being customer contracts as well as assembled workforce).”

3. Briefly stated facts, are that assessee i.e. Genpact was incorporated in the year 1997, under the name of GE Capital International Services. It was established as an independent business unit of GE Capital. The organization was chartered to provide Business Process Management (BPM) capabilities that would deliver efficiencies to all business across GE. Genpact services LLC (India Branch) is the Indian branch of Genpact Services LLC, a US Corporation, GSL India Branch is a service provider rendering off-shore Business Process management services including collections / call centre services and other back-office support services to its AE. India branch is responsible for rendering the designated BPM/collections services from the facility in India. 3.1 In the collections area, India branch follows processes that greatly enhanced customer’s performance and productivity in relation to recovery of their debts. In the collect area, India Branch delivers both voice and non-voice (emails, letters, faxes, etc) based on processes. The collections services are supported by analytics activities, which help the clients to make fact-based decisions for superior results and customer care activities, which provide 24 x 7 hours support. While dealing with International Transactions, the AO observed that the TP report and the other relevant documents that assessee have submitted show that the following international transactions have been entered into: Sl.No. Nature of international Method Amount transaction Selected (In INR) 1. Provision of ITeS Services TNMM 1,010,382,324 2. Receipt of Services 51,087,676 3. Receipt of Support Services 248,853,359 4. Payment of License Fee 17,699,279 5. Recharge for sub-lease rent 46,358,744 6. Reimbursement of expenses Other 17,799,733 (paid) Method 7. Reimbursements (received) 9,462,817 8. Reimbursements (paid) 2,580,873

5. Inductis India Pvt. Ltd. 19.07% 6. Nihilent Ltd. 20.04% 7. L & T Technology Services Ltd. 20.61%

8. Manipal Digital Systems Pvt. Ltd. 23.03% (Merged) 9. Infobeans Technologies Ltd. 25.52% 10. Mentor Graphics (India) Pvt. Ltd. 26.17% 35TH PERCENTILE 19.00% 65TH PERCENTILE 20.61% MEDIAN 19.55% Accordingly, the arm’s length price of the international transaction related to provision of services and receipt of services is computed as below: Particulars Amount Operating Cost 859,713,378 OP/OC(%) 19.55% Arm’s Length Margin 16,80,73,965 Arm’s Length Price 1,02,77,87,343 Price shown by assessee 1,01,29,56,709 Proposed Adjustment 1,48,30,634 Based on above, an adjustment of Rs. 1,48,30,634/- is proposed in respect of provision of ITES support services.

5. Against the above order, assessee filed the objections before the DRP and DRP upheld the order of the TPO and the AO retained the same.

7.1 As regards Ground No 3 with regard to comparables, Ld. AR for the assessee submitted that assessee has pressed exclusion of two comparable companies, viz. Inductis India Pvt. Ltd and Mentor Graphics India Pvt. Ltd, only. He further submitted that if these two comparables are excluded as they fail Related Party Transaction (RPT) Filter, assessee would be satisfied and other comparables may be treated as academic for the present appeal. 7.2 Per contra, Ld. DR did not dispute the aforesaid proposition of the Ld. AR. 7.3 Upon careful consideration, we note that both the above comparables for Related Party Transaction as submitted at Page No. 41 & 407 of the Paper Book Volume-II . It is noted that as per Page No. 41 of Paper Book which is a copy of Annual Report of Inductis India Pvt. Ltd., for financial years 2017-18, 2018- 19 out of the revenue of the Company 99% of the revenue is generated from inter co transaction. It is further noted that as per Page No. 407 of Paper Book which is a copy of Annual Report of Mentor Graphics India Pvt. Ltd., for financial years 2017-18, 2018-19 out of the revenue of the Company 100% of the revenue is generated from inter co transaction. The above is excessive related party transaction rendering these two entities, un-comparable. Accordingly, we hold that these two comparables may be removed and other comparables be taken into account for computation of arm’s length price.

8. As regards Ground Nos. 4 & 5 are concerned, Ld. Counsel for the assessee submitted that these grounds are covered vide Para Nos. 7 to 15 of the aforesaid order of the ITAT. 8.1 Per contra, Ld. DR relied upon the orders of the AO and DRP. 8.2 In so far as Ground Nos. 4 & 5 are concerned, we note that these grounds are squarely covered in favour of the assessee by the decision dated 19.4.2024 of the ITAT, Delhi Coordinate Bench in assessee’s own case passed 7 (AY 2017-18), wherein the Tribunal has held as under:- “7. Assessee’s case raised a legal issue as to whether once transaction has been accepted to be at ALP by the ld TPO, can the same be questioned by the ld AO while passing an order. Admittedly, the ld TPO in the instant case was satisfied with the mark up of 5% provided in the cost sharing agreement and had not disputed the allocation of expenses in respect of services rendered to the assessee from its AEs. The ld AR before us argued that the ld. AO had proceeded to retest the ALP of the international transaction pertaining to support services. It is not in dispute that cost allocation key followed by the assessee was accepted by the revenue over the years. However, during the year under consideration, the ld AO had sought to disturb the cost allocation methodology in the form of ‘headcount basis’ which has been accepted from AY 2012–13 onwards, and proposing a disallowance of Rs 6,43,00,860/-. The ld AR also placed reliance on the CBDT Instruction No.3/2016 dated 10.03.2016.

1. 1. Nature of support Reasons for adopting the said S.no. Allocation Key services allocation key 1. Technical facilities Headcount Consists of annual maintenance maintenance charges of hardware and software, which is primarily based on the number of users.

2. Communication/ Headcount Charged on the basis the number of Telecommunication users irrespective of the revenue cost earned/ hierarchy. Thus, headcount method is more appropriate as compared to salary expenses ratio, which due to level of position/ pay- out ratio might lead to an abrupt allocation.

3. HR, training, finance, Headcount Support provided to the business of legal etc. the Appellant is not represented by the employee cost, but by the number of employees employed.

4. Staff welfare cost Headcount Primarily consists of transportation cost of the employees (cab, buses etc.) which is standard for all 9 employees.

7. Repair and Area usage Charged on the basis of total area maintainence usage which is irrespective of the revenue earned.

incurred by its related parties for and on its behalf. In order to verify the genuineness of the aforesaid claim of receipt/payment of reimbursement of expenses the A.O called upon the assessee to furnish the requisite details in respect of the same. In reply, it was submitted by the assessee that Cable and Wireless group had two entities operating in India viz. (i) Cable And Wireless India Ltd. (i.e the assessee); and (ii) Cable & Wireless Networks India Pvt. Ltd. (for short ‘CWNIPL). It was stated by the assessee that CWNIPL was engaged in the business of carrying on telecommunication networking services which included providing of National Long Distance (NLD) and International Long Distance (ILD) services. It was submitted by the assessee that administrative functions of finance, human resources for both of the aforesaid entities were managed by common staff which was under the payroll of CWNIPL. On the basis of the aforesaid facts, it was the claim of the assessee that the expenses which were incurred in respect of the aforesaid administrative functions were cross charged to it by CWNIPL on cost to cost basis. As per the details furnished by the assessee, it was noticed by the A.O that the assessee had during the year under consideration claimed to have reimbursed an amount of Rs.2,34,56,929/- to CWNIPL. It was the claim of the assessee that the aforesaid amount of reimbursement was towards support costs consisting of salary, leave encashment and gratuity expenses which were incurred by CWNIPL for and on its behalf on cost to cost basis. In order to fortify its aforesaid claim the assessee had also placed on record sample copies of ‘debit notes’. On a perusal of the details furnished in the course of the assessment proceedings, it was noticed by the A.O that the assessee had claimed that the expenses incurred by CWNIPL in respect of rendering of administrative functions were allocated to the assessee by adopting the allocation key of head count basis, as under:

However, the A.O was unable to persuade himself to accept the However, the A.O was unable to persuade himself to accept the However, the A.O was unable to persuade himself to accept the aforesaid claim of allocation of expenses aforesaid claim of allocation of expenses on head count basis. It on head count basis. It was observed by the A.O, that though the number of employees had was observed by the A.O, that though the number of employees had was observed by the A.O, that though the number of employees had fluctuated during the year under consideration but the fluctuated during the year under consideration but the fluctuated during the year under consideration but the administrative and human resource expenses had remained static administrative and human resource expenses had remained static administrative and human resource expenses had remained static at an amount of Rs.1,90,247/ at an amount of Rs.1,90,247/- and Rs.7,63,849/-,respectively. In espectively. In the backdrop of the aforesaid facts, the A.O was of the view that in the backdrop of the aforesaid facts, the A.O was of the view that in the backdrop of the aforesaid facts, the A.O was of the view that in case the allocation key of head count basis was to be accepted, case the allocation key of head count basis was to be accepted, case the allocation key of head count basis was to be accepted, then the amount of administrative and human resource expenses then the amount of administrative and human resource expenses then the amount of administrative and human resource expenses would not had remained constant throughout the year. would not had remained constant throughout th would not had remained constant throughout th Accordingly, the A.O backed by his aforesaid conviction was of the Accordingly, the A.O backed by his aforesaid conviction was of the Accordingly, the A.O backed by his aforesaid conviction was of the view that the logic of adopting the head count basis as the view that the logic of adopting the head count basis as the view that the logic of adopting the head count basis as the allocation key for the aforesaid expenses could not be accepted and allocation key for the aforesaid expenses could not be accepted and allocation key for the aforesaid expenses could not be accepted and rejected the same. Observing, that as neither any valid rejected the same. Observing, that as neither any val rejected the same. Observing, that as neither any val methodology for allocation of expenses was submitted by the methodology for allocation of expenses was submitted by the methodology for allocation of expenses was submitted by the assessee nor the one submitted was found to be substantiated, assessee nor the one submitted was found to be substantiated, assessee nor the one submitted was found to be substantiated, therefore, the A.O was of the view that there was no other option therefore, the A.O was of the view that there was no other option therefore, the A.O was of the view that there was no other option but to appropriate on an estimate basis a part of the aforesaid but to appropriate on an estimate basis a part of the aforesaid but to appropriate on an estimate basis a part of the aforesaid expenses as not covered under Sec. 37(1) of the Act. As such, in the xpenses as not covered under Sec. 37(1) of the Act. As such, in the xpenses as not covered under Sec. 37(1) of the Act. As such, in the absence of the requisite information the A.O on an ad hoc basis absence of the requisite information the A.O on an ad hoc basis absence of the requisite information the A.O on an ad hoc basis disallowed 30% of such expenses and made a consequential disallowed 30% of such expenses and made a consequential disallowed 30% of such expenses and made a consequential addition/disallowance of Rs. 70,37,078/ addition/disallowance of Rs. 70,37,078/- under Sec. 37 of the Act. under Sec. 37 of the Act.

16. The assessee has raised additional Ground vide letter dated 16.08.2023 together with the petition under Rule 11 of the Income Tax Appellate Tribunal Rules, 1963. The additional ground is reproduced here under:- “That on the facts and circumstances of the case and in law, the Ld. AO has erred in not granting the depreciation allowance of Rs.73,95,017 towards the intangible assets (being customer contracts as well as assembled workforce.

“During the FY 2009-10 (relevant to AY 2010-11), the Appellant acquired a business of third- party debt collection services as well as part of the analytics business from Genpact India Pvt Ltd ('the seller entity') for a total sum of Rs.62,12,70,648 vide agreement to sell entered into between the Appellant and Genpact India. Out of the total purchase consideration of Rs.62, 12,70,648, an aggregate sum of Rs.22, 16,00,276 (paid towards acquisition of customer contracts as well as the assembled workforce) was claimed as revenue expenditure by the Appellant on its return of income ('ROI'), filed for AY 2010-11. Subsequently, the ROI of AY 2010-11 was selected for scrutiny assessment under section 143(3) of the Act. The Ld. AO, vide assessment order, dated May 21, 2014 (enclosed as Appendix 1), inter-alia, took a view that the aforesaid amount of Rs.22, 16,00,276, incurred by the Appellant towards acquisition of customer contracts and assembled workforce, is in the nature of capital expenditure and hence the same should have been capitalised as intangible assets by the Appellant. Accordingly, the sum of Rs.22, 16,00,276 was added back to the returned income of the Appellant and a corresponding depreciation claim of 25% i.e., Rs. 5,54,00,069 was allowed to the Appellant under section 32(1)(ii) of the Act.

Being aggrieved by the aforesaid assessment order passed for AY 2010-11, the Appellant preferred an appeal before the Ld. Commissioner of Income-tax (Appeal) ['CIT(A)'] On appeal, the Ld. CIT(A) vide its order, dated February 15, 2016, passed under section 250 of the Act, had upheld the view taken by dead Further, the Ld. CIT(A), for the limited purpose of allowing depreciation under the Aby the AO. Further, the old, sum of Rs. 22, 16,00,276, only Rs. 16,05,41,276 was to be considheld that out of the of intangible assets for allowing depreciation at the rate of 25%. Being aggrieved with the aforesaid order passed by the Ld. CIT(A), the Appellant preferred an appeal before the Hon'ble ITAT, in relation to AY 2010-11. In this connection, the Hon'ble ITAT, now, vide its order, dated January 31, 2023 (enclosed as Appendix 2), reversed the decision of Ld. CIT(A) to the extent of change in valuation of intangible assets made by the Ld. CIT(A), and consequently, upheld the assessment order, dated May 21, 2014, passed by your predecessor, whereby INR 22, 16,00,276 incurred by the Appellant was to be treated as capital expenditure and depreciation was to be allowed on the same. Considering the disallowance of revenue expenditure treating the same as capital expenditure and allowance of depreciation thereon in the assessment order of AY 2010-11, and subsequent upholding of the same by the Hon'ble ITAT for AY 2010-11, the Appellant is eligible to claim depreciation allowance of Rs 73,95,017 (being depreciation at the rate of 25% on the written down value of intangible assets so created in AY 2010-11) for the AY 2017-18. However, the said depreciation of Rs.73,95,017 has not been allowed to the Appellant vide the captioned assessment order, dated June 27, 2022, passed for the AY 2017-18. Hence, it is submitted that the Appellant should be allowed the depreciation allowance of Rs.73,95,017 on the intangible assets, in line with the assessment order upheld by the Hon'ble ITAT for AY 2010-11.”