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

4. The ground Nos. 2 and 3 raised by the assessee are challenging the disallowances of cost of support services amounting to ₹6,43,00,860/-.

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 Page | 3 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.

Nature of support Nature of support Reasons for adopting the said Reasons for adopting the said Nature of support Nature of support Reasons for adopting Reasons for adopting the said the said S.no. S.no. Allocation Key Allocation Key S.no. S.no. Allocation Key Allocation Key services services services services allocation key allocation key allocation key allocation key 1. 1. 1.

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. 4. 4.

5. Rent Area usage Charged on the basis of total area 5. 5. usage which is irrespective of the revenue earned. Electricity and water Area usage Charged on the basis of total area 6. usage which is irrespective of the revenue earned. 7.

Salary cost of employees is not an appropriate indicator of the support required by the businesses. It would be unreasonable to expect that the time or communication facilities extended to the employees depend on the salary of the respective employees. Similarly, for other heads as well, headcount was appropriately reflective of the level of support required by the assessee, for instance: - Telecommunication cost (voice based, and non-voice based) are charged on the basis the number of users (Headcount) irrespective of the revenue earned/ hierarchy. Thus, Headcount method in this case would be more appropriate as compared to salary expenses ratio, which due to level of position/pay-out ratio might lead to an abrupt allocation.

- The amount of support HR department provides to the business of the assessee is not represented by the employee cost, but the number of employees employed by the it.

- The technical facilities maintenance primarily consists of annual maintenance charges of hardware and software's, which is primarily based on the number users. Accordingly, salary ratio is not an appropriate methodology for allocation the said cost and headcount is the apt basis of allocation for these support costs. Trainings in the BPOs are of standard nature and are imparted to all the employees (part of the infrastructure support costs). Accordingly, headcount is the appropriate basis of cost allocation.

- The staff welfare cost primarily consists of transportation cost of the employees (cab, buses etc.) which is allocation for these services.

- The staff welfare cost primarily consists of transportation cost of the employees (cab, buses etc) which is standard for all employees. Accordingly, headcount is the appropriate basis of allocation for these services.

“2. Briefly stated, the assessee company is a branch of a foreign company incorporated in United Kingdom and has been granted permission by the Reserve Bank of India to set up a branch office in India with effect from 23.03.1995. The assessee company is engaged in the business of providing telecommunication networking services which includes network design and management, project management and implementation, network management, providing lease circuit and trading of equipment and maintenance. The assessee company had filed its Page | 8 return of income for A.Y. 2012-13 on 30.11.2012, declaring its total income at Rs. 6,71,08,313/-. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act.

3. During the course of the assessment proceedings the A.O made a reference under Sec. 92CA(1) of the Act to the Transfer Pricing Officer- 1(3)(1), Mumbai (for short ‘TPO’) for the purpose of determining the Arm’s Length Price (ALP) of the international transactions of the assessee as were detailed in its ‘Audit report’ in ‘Form No. 3CEB’. Further, on a perusal of the financial statements, it was observed by the A.O that the assessee company pursuant to certain related party transactions had received amounts towards reimbursement of expenses. Also, it was noticed by the A.O that the assessee company had reimbursed its share of common pool expenses which were claimed to have been 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 aforesaid However, the A.O was unable to persuade himself to accept the aforesaid However, the A.O was unable to persuade himself to accept the aforesaid claim of allocation of expenses on head count basis. It was observed by claim of allocation of expenses on head count basis. It was observed by claim of allocation of expenses on head count basis. It was observed by the A.O, that though the number of employees had fluctuated during the the A.O, that though the number of employees had fluctuated during the A.O, that though the number of employees had fluctuated during year under consideration but the administrative and human resource year under consideration but the administrative and human resource year under consideration but the administrative and human resource expenses had remained static at an amount of Rs.1,90,247/- and expenses had remained static at an amount of Rs.1,90,247/ expenses had remained static at an amount of Rs.1,90,247/ Rs.7,63,849/-,respectively. In the backdrop of the aforesaid facts, the ,respectively. In the backdrop of the aforesaid facts, the ,respectively. In the backdrop of the aforesaid facts, the A.O was of the view that in case the allocation ke A.O was of the view that in case the allocation key of head count basis y of head count basis was to be accepted, then the amount of administrative and human was to be accepted, then the amount of administrative and human was to be accepted, then the amount of administrative and human resource expenses would not had remained constant throughout the year. resource expenses would not had remained constant throughout the resource expenses would not had remained constant throughout the Accordingly, the A.O backed by his aforesaid conviction was of the view Accordingly, the A.O backed by his aforesaid conviction was of the view Accordingly, the A.O backed by his aforesaid conviction was of the view that the logic of adopting that the logic of adopting the head count basis as the allocation key for the head count basis as the allocation key for the aforesaid expenses could not be accepted and rejected the same. the aforesaid expenses could not be accepted and rejected the same. the aforesaid expenses could not be accepted and rejected the same. Observing, that as neither any valid methodology for allocation of Observing, that as neither any valid methodology for allocation of Observing, that as neither any valid methodology for allocation of expenses was submitted by the assessee nor the one submitted was expenses was submitted by the assessee nor the one submitted was expenses was submitted by the assessee nor the one submitted was found to be substantiated, therefore, the A.O was of the view that there be substantiated, therefore, the A.O was of the view that there be substantiated, 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 was no other option but to appropriate on an estimate basis a part of the was no other option 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, aforesaid expenses as not covered under Sec. 37(1) of the Act. As such, aforesaid expenses as not covered under Sec. 37(1) of the Act. As such, in the absence of the requisite information th in the absence of the requisite information the A.O on an ad hoc basis e A.O on an ad hoc basis disallowed disallowed disallowed 30% 30% 30% of of of such such such expenses expenses expenses and and and made made made a a a consequential consequential 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.

“D(i). As is discernible from the records, the A.O had in the course of the “D(i). As is discernible from the records, the A.O had in the cour “D(i). As is discernible from the records, the A.O had in the cour assessment proceedings made a reference to the Transfer Pricing Officer-1(3)(1), assessment proceedings made a reference to the Transfer Pricing Officer assessment proceedings made a reference to the Transfer Pricing Officer Mumbai (for short 'TPO') for the purpose of determining the Arm's Length Price Mumbai (for short 'TPO') for the purpose of determining the Arm's Length Price Mumbai (for short 'TPO') for the purpose of determining the Arm's Length Price (ALP) of the international transactions of the assessee as were detailed in its 'Audit (ALP) of the international transactions of the assessee as were detailed in its 'Audit (ALP) of the international transactions of the assessee as were detailed in its 'Audit report' in 'Form No. 3CEB'. On the basis of his order passed under Sec. 92CA(3), report' in 'Form No. 3CEB'. On the basis of his order passed under Sec. 92CA(3), report' in 'Form No. 3CEB'. On the basis of his order passed under Sec. 92CA(3), dated 25.01.2016, the TPO had held the international transactions of the assessee dated 25.01.2016, the TPO had held the international transactions of the assessee dated 25.01.2016, the TPO had held the international transactions of the assessee to be at arm's length. It has been the claim of the assessee before the lower to be at arm's length. It has been the claim of the assessee before the lower to be at arm's length. It has been the claim of the assessee before the lower authorities, and also before us, that once the TPO had held the transaction of nd also before us, that once the TPO had held the transaction of nd also before us, that once the TPO had held the transaction of reimbursement of expenses to be at arm's length, the A.O as per Sec. 92CA(4) was reimbursement of expenses to be at arm's length, the A.O as per Sec. 92CA(4) was reimbursement of expenses to be at arm's length, the A.O as per Sec. 92CA(4) was obligated to pass an order in conformity with the ALP determined by the TPO. As obligated to pass an order in conformity with the ALP determined by the TPO. As obligated to pass an order in conformity with the ALP determined by the TPO. As such, it was the claim of the such, it was the claim of the Id. A.R, that after the TPO had held the reimbursement Id. A.R, that after the TPO had held the reimbursement of expense by the assessee to its AE viz. CWNIPL to be at arm's length, the A.O was of expense by the assessee to its AE viz. CWNIPL to be at arm's length, the A.O was of expense by the assessee to its AE viz. CWNIPL to be at arm's length, the A.O was divested of his jurisdiction to relook into the basis of allocation of such expenses, as he as per Sec. 92CA(4) of the Act remained under a statutory obligation to pass the order in conformity with the ALP determined by the TPO.

(ii). We have given a thoughtful consideration to the aforesaid claim of the assessee, and are persuaded to subscribe to the aforesaid contention so advanced by him. Admittedly, the transaction of reimbursement of expenses by the assessee (a branch of a foreign company) to CWNIPL i.e its Indian AE, is an International transaction within the meaning of Sec.92B of the Act. As per Sec. 92CA(4) of the Act, on receipt of order under sub-section (3) of Sec. 92CA, the A.O shall proceed to compute the total income of the assessee under sub-section (4) of Sec. 92C in conformity with the arm‟s length price so determined by the TPO. As is discernible from the order of the DRP, it was the claim of the assessee that now when the Asst. Commissioner of Income-tax (Transfer Pricing)-1(3)(1), Mumbai, had during the course of the TP proceedings accepted the reimbursement of expenses to be at arm‟s length, therefore, as per the provisions of Sec. 92CA(4) of the Act, the A.O was obligated to pass the order and compute the total income of the assessee in conformity with the arm‟s length price so determined by the TPO. Also, in support of his aforesaid claim the assessee had relied on the order of the ITAT, Bangalore in the case of Herbalife International India (P) Ltd. Vs. ACIT (2016) 65 taxmann.com 143 (Bang). In our considered view, now when the TPO on a reference made to him under Sec. 92CA(1) of the Act for benchmarking the international transactions of the assesssee, had accepted the ALP of the reimbursement of expenses by the assessee to its AE viz. CWNIPL, 6075 & 756/Mum/2017 A.Ys. 2012-13,2013-14 & 2014-15 Cable and Wirless (India) Limited Vs. The DCIT (I.T.), Circle-2(1)(1) thereafter, the A.O as per the mandate of Sec. 92CA(4) of the Act, was statutorily bound to compute the total income of the assessee in conformity with the arm‟s length price so determined by the TPO. Although, the A.O in the course of the assessment proceedings continues to remain vested with the jurisdiction to verify as to whether or not an expense claimed by the assessee as a deduction was incurred wholly and exclusively for the purpose of its business, however, in the garb of exercise of such jurisdiction he is precluded to redetermine the arm‟s length price of an international transaction, in any way. In our considered view, now when the TPO while benchmarking the international transactions of the assessee, had not disturbed the arm‟s length price of the transaction of reimbursement of expenses by the assessee to its AE viz. CWNIPL, therefore, a relooking into the basis of allocation of such expenses inter se the assessee and CWNIPL would clearly militate against the express provisions of Sec. 92CA(4) of the Act. Our aforesaid view, that the A.O as per the mandate of Sec. 92CA(4) is obligated to compute the income of the assessee in conformity with the ALP so determined by the TPO, is fortified by the judgment of the Hon‟ble High Court of Bombay in Vodafone India Service (P) Ltd. Vs. Union of India (2013) 359 ITR 133 (Bom) and that of the Hon‟ble High Court of Delhi in CIT Vs. Oracle India (P) Ltd. (2011) 243 CTR 103 (Del). Also, support is drawn from the order of the ITAT, Delhi in DCIT vs, YKK India Pvt. Ltd. Accordingly, on the basis of our aforesaid observations, we are of a strong conviction that the rejection of the allocation key of reimbursement of expenses by the assessee to its AE viz. CWNIPL after the arm‟s length price of the same had been accepted by the TPO, would clearly be contrary to the mandate of law.

AY Order passed u/s Order dated 2011-12 143(3) 25.05.2015 2012-13 143(3) 16.03.2016 2013-14 143(3) 13.10.2016 2014-15 143(3) 13.10.2016 2015-16 143(1) 12.10.2016 2016-17 143(1) 01.08.2017

“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, theold, 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.”

Order pronounced in the open court on 19 /04/2024.