DCIT (LTU), NEW DELHI vs. M/S. EXL SERVICE.COM (INDIA) PVT. LTD., NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘I-1’, NEW DELHI Before Sh. N. K. Saini, AM and Sh. Kuldip Singh, JM ITA No. 302/Del/2015 : Asstt. Year : 2010-11 Exl Service.Com (India) Pvt. Ltd., Vs Deputy Commissioner of Income 414, 4th Floor, DLF Jasola, Tax, Large Tax Payer Unit, Tower-B, Plot No. 10 & 11, DDA New Delhi District Centre, Jasola, New Delhi-110044 (APPELLANT) (RESPONDENT) ITA No. 615/Del/2015 : Asstt. Year : 2010-11 Deputy Commissioner of Income Vs Exl Service.Com (India) Pvt. Ltd., 414, 4th Floor, DLF Jasola, Tower- Tax, Circle-1 (LTU), New Delhi-110017 B, Plot No. 10 & 11, DDA District Centre, Jasola, New Delhi-110044 (APPELLANT) (RESPONDENT) PAN No. AAACE5174C Assessee by : Sh. Ajay Vohra, Adv. Sh. Abhishek Agarwal, Adv. Revenue by : Sh. Piyush Jain, CIT DR Date of Hearing : 07.10.2017 Date of Pronouncement : 03.01.2017 ORDER Per N. K. Saini, AM:

These cross appeals by the assessee and the department are directed against the order dated 28.11.2014 passed by the AO u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as the Act).

2 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. 2. In the assessee’s appeal, following grounds have been raised: “1. That on the facts and in the circumstances of the case and in law, the assessment order passed by the Ld. Assessing Officer ("Ld. AO") is bad in law. 2. The Ld. AO/ Ld. Transfer Pricing Officer ("Ld. TPO") has grossly erred in disregarding the details submitted by the Appellant and not following the directions issued by the Ld. Dispute Resolution Panel ("Ld. DRP") wherein the Ld. DRP has directed to give the economic adjustment on account of accelerated depreciation charged by the Appellant in its books of account, as compared to the depreciation rates prescribed under Schedule XIV of the Companies Act, 1956 and also erred in not following the guidance by DRP with respect to the treatment of provision for doubtful debts as operating or non-operating in nature. 3. The Ld. AO/ Ld. TPO erred in not providing appropriate adjustment on account of differences in working capital. 4. The Ld. AO/ Ld. TPO erred in not applying appropriate interest rate as directed by the Ld. DRP on the outstanding receivables and thus, not following the directions issued by the Ld. DRP. 5. The Ld. DRP erred in confirming the Ld. AO/ Ld. TPO's approach of determining the arm's length price ("ALP") of the international transactions pertaining to provision of Information Technology

3 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. ("IT") enabled services. In doing so, the Ld. AO/ Ld. TPO has grossly erred in: 5.1 disregarding the ALP as determined by the Appellant in the TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ("the Rules") as well as fresh search and in particular modifying/ rejecting the filters applied by the Appellant; 5.2 disregarding multiple year/prior years' data used by the Appellant in the TP documentation and holding that current year (i.e. Financial Year 2009-10) data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation; 5.3 not appropriately considering the functions, assets and risk profile of the companies used for comparison with the Appellant, thereby including in the final comparable set certain companies with completely different functional profile; 5.4 resorting to arbitrary rejection of low-profit/ loss making companies based on erroneous and inconsistent reasons; 5.5 excluding certain companies considered by the Appellant in its TP documentation/ fresh search on arbitrary/ frivolous grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed;

4 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. 5.6 erroneously retaining companies having abnormal margins/ volatile operating margins in the final comparables' set, that signify high element of entrepreneurial risk as opposed to the Appellant who is a captive service provider bearing limited risk; 5.7 not appreciating the risk profile of the services rendered by the Appellant and not allowing the risk adjustment to the Appellant; 5.7.1 without prejudice, that if risk adjustment is not allowed to compensate for risk free activities of the Appellant and hence considered it to be risk bearing, in that case appropriate tested party for the arm's length analysis should be the Appellant's overseas Associated Enterprise ("AE"); 5.7.2 without prejudice, no further attribution of profits to the Appellant is necessary as in the present scenario the profits currently retained by the AE in the value chain (as compared to the profits earned by the Appellant) are in effect lower than what should be prudently attributed to the AE as per the profit split analysis carried out; 5.8 not appreciating the fact that in the relevant assessment year the Appellant was entitled to a tax holiday on its profits from provision of IT enabled services and therefore did not have any motive of deriving any tax advantage by manipulating the transfer prices of its international related party transactions;

5 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. 5.9 not appreciating that in the instant case the collective addition made by Ld. TPO (Rs. 85.75 crores) and profits already booked by the Appellant (Rs. 66.49 crores) and another group entity viz. Inductis (India) Private Limited (Rs. 19.80 crores) are in effect more than profits earned by entire Exl Group on a worldwide basis; 5.10 following a contradictory approach, in principle, in considering provisions for expenses/write back as non-operating in nature by placing reliance on Safe Harbour Rules issued vide CBDT Notification No. S.O. 2810 while on the other hand completely ignoring the mark-up percentage prescribed by aforesaid notification (which mentions that the prescribed rate is more than the ALP) for low end captive IT enabled service providers and adjusting the arm's length price of the Appellant at much higher percentage. 6. Without prejudice to the ground no. 4, the Ld. DRP erred in confirming the Ld. AO/ Ld. TPO's order which provides that the alleged international transactions pertaining to outstanding receivables do not satisfy the arm's length principle envisaged under the Act. In doing so, the Ld. AO/Ld. TPO has grossly erred in: 6.1 re-characterizing the outstanding related party receivable from overseas AEs beyond 90 days period as short term loans advanced to the AEs and imputing interest thereon; 6.2 disregarding the business/ commercial arrangement by not appreciating the fact that

6 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. unlike a loan or borrowing, outstanding receivable is not an independent transaction which can be viewed on standalone basis and needs to be examined with the commercial transaction as a result of which the debit balance has come into existence; 6.3 rejecting the Appellant's contention that the impact of working capital investment made by the Appellant should be evaluated using Transactional Net Margin method ("TNMM") as the most appropriate method rather than independently benchmarking the outstanding receivables of the Appellant by considering State Bank of India Prime Lending Rate ("SBI PLR") for comparability which does not amount to the application of Comparable Uncontrolled Price Method ("CUPM") or any of the "method" defined in the Act; 6.4 ignoring the Appellant's contention, without prejudice to its other arguments, that if at all interest is to be imputed, instead of 14.75%, the LIBOR rate for the Assessment Year 2010-11 should be applied for imputing interest; 6.5 ignoring the Appellant's contention that the recovery of the receivables is within the time limit prescribed/approved by Reserve Bank of India. 7. Strictly without prejudice to the above grounds, the Ld. TPO/ Ld. AO erred on facts and in law in not appreciating that: 7.1 the adjustment on international transaction of provision of IT enabled services and also on

7 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. outstanding receivables (alleged international transactions) is leading to imputing the double income on the same/single international transaction and hence results in double taxation of the same amount which is not in accordance with the provisions of the law; 7.2 imputing the interest on alleged international transaction has resulted in abnormally high effective mark-up of 33.16% for benchmarking the captive low-end/risk free activities of the Appellant. 8. The reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the draft assessment order based on which he reached the conclusion that it was 'necessary or expedient' to refer the matter to the Ld. TPO for computation of the ALP, as is required under section 92CA(1) of the Act. 9. The Ld. TPO/ AO erred in enhancing the income of the Appellant by Rs. 85,75,75,003 holding that the international transactions do not satisfy the arm's length principle envisaged under the Act and in doing so have grossly erred in not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case. 10. The Ld. AO has grossly erred on facts and in law by disregarding judicial pronouncements in India in undertaking the TP adjustment. 11. The Ld. AO / Ld. DRP has erred in law and on the facts and circumstances of the case by

8 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. disallowing differential depreciation of Rs. 7,00,527 on Voice Recording Software License stating that depreciation on such software license was to be claimed @ 25% as against 60% claimed by the Appellant. 12. The Ld. AO / Ld. DRP erred in law and on the facts and circumstances of the case by making a disallowance of notional expenditure of Rs. 16,90,576 per provisions of section 14A of the Act read with rule 8D of the Rules. The Ld. AO has erred in: 12.1 The Ld. AO also erred in law and on the facts and circumstances of the case in making addition of notional expenditure of Rs. 16,90,576 per provisions of section 14A of the Act while calculating book profit under section 115JB of the Act. 13. The Ld. AO/ Ld. DRP erred in law and on the facts and circumstances of the case by making an addition of Rs. 269,241 as unexplained expenditure under section 69C of the Act disregarding the submissions made by the Appellant in this regard. The Ld. AO/ Ld. DRP has erred in: 13.1. making the addition of Rs. 269,241 merely on the basis of Individual Transaction Statement generated through internal system of the Income Tax Department wherein TDS of Rs. 30,505 under section 1941 of the Act was reported as paid on 30 July 2010;

9 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. 13.2. holding that the amount of Rs. 30,505 is the amount of tax which was deducted late by the Appellant. While the amount of Rs. 30,505 is the amount of rent expenditure on which tax along with interest of Rs. 5,844 was deposited by the Appellant on 30 July 2010. Due to which, the Appellant could not trace the TDS entry of Rs. 30,505 in its TDS return at the time of assessment / DRP proceedings. While the Appellant was able to trace the amount of expenses of Rs. 30,505 out of its TDS return at the time of TDS proceedings initiated by the TDS Office on the basis of disallowance of Rs. 2,69,241 being made in the draft assessment order. 14. The Ld. AO erred in law and on the facts and circumstances of the case by making an addition of Rs. 463 in respect of contribution to Employee State Insurance wrongly considering the date of payment to be beyond the due date of filing of return ignoring the submission made by the Appellant that the payment was in fact made within the year under consideration on 26 October 2009. The Ld. AO also erred in: 14.1. considering the original return of income filed by the Appellant for the year under consideration on 15 October 2014, as belated return ignoring the fact that the due date of filing of the return of income for the assessment year 2010-11 was extended vide Press Release No.402/92/2006-MC (42 of 2010) dated 28 September 2010 issued by the Central Board of Direct Taxes.

10 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. 15. The Ld. AO has erred in law and on the facts and circumstances of the case in not allowing deduction under section 10A/10B of the Act in respect of profit and gains of business and profession as computed by the Ld. AO and not following the directions issued by the Ld. DRP wherein the Ld. DRP has directed to compute deduction under section 10A/10B of the Act with reference to the income computed by the Ld. AO under the head 'profits and gains of business and profession' and not the profit as computed by the Appellant. 16. The Ld. AO erred in law and on the facts and circumstances of the case in not allowing set-off of business loss of Rs. 5,04,30,717 pertaining to units other than those claiming deduction under section 1OA of the Act despite the fact that the said business loss is mentioned in the computation of income in the assessment order. 17. The Ld. AO has erred in not allowing deduction under section 80G of the Act amounting to Rs. 104,000 as per the return of income, while passing the assessment order. 18. The Ld. AO erred in law and on the facts and circumstances of the case in not allowing credit of the taxes paid by the Appellant for the year under consideration while computing the taxes payable in pursuance to the assessed income. 19. The Ld. AO erred in law and on the facts and circumstance of the case by directing to levy the

11 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. interest under section 234B, 234C and 234D of the Act. 20. The Ld. AO erred in law and on the facts and circumstance of the case by initiating penalty proceedings under section 271(l)(c) of the Act for furnishing inaccurate particulars of income and concealment of income. The above grounds of appeal are mutually exclusive and without prejudice to each other. The Appellant craves leave to add, alter, amend, vary or rescind any of the above grounds either before or at the time of hearing in the interest of natural justice.” 3. Grounds raised in the departmental appeal read as under: “1. On the facts and the circumstances of the case and in law, the Hon'ble DRP has erred in directing to accept the assessee's claim opted for an accelerated depreciation policy and give adjustment on the same on account of Arm's Length Price adjustment u/s 92CA(3) without appreciating the findings of TPO. 2. On the facts and in circumstances of the case and in law, the Hon'ble DRP has erred in directing to grant working capital adjustment on account of Arm's Length Price adjustment u/s 92CA(3) without appreciating the findings of TPO.

12 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. 3. On the facts and in the circumstances of the case and in law, the Hon'ble DRP has erred in directing to allow deduction u/s 10A/10B in respect of income of Rs. 8,11,956/- from sale of scrap. 4. On the facts and in the circumstances of the case and in law, the Hon'ble DRP has erred in directing to delete the disallowance on account of depreciation on Goodwill of Rs. 9,62,23,671/-, which is not applicable as per the provision of Income Tax Rule, 1962. 5. On the facts and in the circumstances of the case and in law, the Hon'ble DRP has erred in directing to delete the excess depreciation of Rs. 5,00,376/- on Software License, depreciation restricted @25% instead of @60% claimed, which is not applicable as per the provision of Income Tax Rule, 1962. 6. The appellant craves leave to add to, alter, amend or vary from the above grounds of appeal at or before the time of hearing.” 4. At the first instance, we will deal with the appeal of the assessee.

13 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. account of difference in Arm’s Length Price (ALP) of the international transaction relating to IT enabled services.

14 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. of comparable companies falls ± 5% range, therefore, the transaction was considered to be at arm’s length. The TPO however did not agree with the various filters used by the assessee in its TP study and used certain more filters. He rejected 5 comparables from assessee’s set and selected 6 new comparables. The TPO accordingly selected a set of 9 comparables (3 from assessee’s set and 6 from new companies) whose average margin was 33.52% as against that of the assessee’s 14.47% and accordingly proposed an addition of Rs.87,38,95,581/- to the income of the assessee. Thereafter, the AO passed draft assessment order dated 07.03.2014 in conformity with the order of the TPO u/s 144C of the Act. Against the said assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP) and submitted that changes to the ALP determined by the assessee was not justified and the economic analysis carried out by the assessee in the TP documentation should be accepted and that the discrepancy in the operating margin computation of the comparable should be rectified. It was further submitted that the TPO has taken a contrary approach in considering companies demonstrating super normal growth/constitutionally high revenue/profits and rejecting companies with persistent

15 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. loss. It was further submitted that the TPO arbitrarily excluded certain companies on the very foolish grounds even though those were comparables in terms of functions performed, assets employed and risk assumed. It was also submitted that the TPO rejected/ignored the companies for which current year data was available in the public database at the time of assessment proceedings which are comparable to IT enabled back-office services of the assessee.

16 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. diminishing revenue/persistent losses and the negative net worth and observed that this filter was perfectly valid because no company would like to sustain losses or having diminishing revenue beyond reasonable period and that a company whose performance is extremely divergent from the normal industry trend cannot be considered as suitable comparable. The ld. DRP also upheld the view of the TPO in rejecting the companies having Related Party Transaction (RPT) of 25% and more and showing service income less than 75% of the total income from ITES services. The ld. DRP upheld the action of the TPO in rejecting the following companies and observed as under: S.No. Name of the Observation of DRP company 1. Aditya Birla This company is having Minacs significant RPT (33.53%) and Worldwide it also fails the export sales filter (71.57%). Hence, not a suitable comparable. 2. CG-Vak Software This Panel observed from the and Exports Ltd. P & L A/c of the comparable that the cost of services “Domestic” has been debited as Rs.3.24 Crores which works out to 56.44% of total revenue of Rs.5.74 Crores. The preponderance of major portion of this expenditure being in the nature of employee cost is very high. Therefore, the observation of

17 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. the TPO that the company fails employee cost filter is not correct. The TPO is directed to include this company as a comparables. Having said that, since under ITeS segment the revenue is just Rs.82.78 lacs which is below the turnover filter of Rs.5 crores, therefore, this company is not a suitable comparables. 3. Cepha Imaging P. This company is engaged in e- Ltd. publishing services. Hence, not a suitable comparable. 4. Informed This company is having sales Technologies below Rs.5 crores. Hence, not India Ltd. a suitable comparable. 5. R. Systems This company is having International Ltd. financial year ending other than March. Hence, not a suitable comparables. The ld. DRP also justified the inclusion of the following comparables: 1. Accentia Technologies Ltd. 2. TCS e-serve Ltd. 3. TCS e-serve International Ltd. 4. I-gate Global Solutions Ltd. 10. Now the assessee is in appeal. The ld. Counsel for the assessee mainly objected the inclusion of Accentia Technologies Ltd., TCS e-serve Ltd. and TCS e-serve International Ltd. and submitted that during the year under

18 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. consideration M/s Exl Technology Ltd. was amalgamated with Asscent Info Serve Pvt. Ltd. (subsidiary of Accentia) in terms of approval by the Hon’ble High Court vide order dated 25.04.2009, for this reason it was to be excluded from the list of comparables. It was further stated that this company owns intangible i.e. goodwill amounting to Rs.2,94,49,287/- and was providing services to healthcare industry in the nature of medical transcription, medical coding and receivable management etc. Therefore, it was functionally dissimilar and deserves to be excluded. The reliance was placed on the following case laws: � Mentor Graphics Noida Pvt. Ltd. Vs DCIT in ITA No. 1969/Del/2006 � E Gain Communication Pvt. Ltd. Vs ITO in ITA No. 1685/PN/2007 � Demag Cranes and Components Pvt. Ltd. Vs DCIT in ITA No.120/PN/2011 � Nokia India Pvt. Ltd. Vs ACIT in ITA No. 4559/Del/2011 � Emersons Process Management India Pvt. Ltd. Vs ACIT in ITA No. 8118/Mum/2010 � Pitney Bowes Software India Pvt. Ltd. Vs ITO in ITA No. 679/Del/2014 � Mercer Consulting India Pvt. Ltd. Vs DCIT in ITA No. 966/Del/2014 � Navisite India Pvt. Ltd. Vs ITO in ITA No. 5329/Del/2012 � Maral Overseas Ltd. Vs ACIT 136 ITD 177

19 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. � Riviera Home Furnishings Vs ACIT 237 Taxman 520 � CIT Vs Punjab Stainless Steel Industries 364 ITR 144 (SC) � CIT Vs Sadhu Forging Ltd. 336 ITR 444 (Del.) 11. In his rival submissions the ld. DR supported the orders of the authorities below and further submitted that if as a result of merger/demerger the resultant/remaining company becomes functionally different only then that company may be excluded as a comparable. The reliance was placed on the decision of the ITAT Mumbai Bench in the case of m/s Wills Processing Services (India) Pvt. Ltd. Vs DCIT reported at 30 ITR (Trib.) 39 (Mum.) and Vodaphone India Services Pvt. Ltd. reported at 146 ITD 78 (Mum.). It was further submitted that the assessee itself did not take merger and acquisition as filter, now selectively applying this filter, the whole search process becomes vitiated and biased in favour of the assessee because the other comparables might have been having the intangible.

20 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. High Court vide order dated 25.04.2009 and this extra ordinary event occurred after the TP study was prepared by the assessee. It is also not in dispute that the comparable M/s Accentia Technologies Ltd. was having intangible i.e. goodwill amounting to Rs.21,94,49,287/- and also the said company was functionally dissimilar from the assessee because it was providing services to healthcare industry in the nature of medical transcription, medical coding, billing and receivable management while the assessee was engaged in the business of rendering of transaction processing services, internet and voice based customer care services for its worldwide clients. Therefore, functionally also this company i.e. Accentia Technologies Ltd. was different and not comparable.

21 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. amalgamated company and due to which the comparable has high OP by TC margin. As pointed out by the assessee, there was amalgamation of a company during the relevant year, and the said company, therefore, cannot be considered as comparable due to this extraordinary event which occurred in the relevant year as rightly held by the Tribunal inter alia in the case of Excellence Data Research (P.) Ltd. v. ITO [2014] 49 taxmann.com 409/66 SOT 15 (URO) (Hyd.). Therefore, following the decision of the co-ordinate bench of this Tribunal in the case of Excellence Data Research (P.) Ltd. (supra) the AO/TPO is directed to exclude the Accentia Technologies Limited from the list of comparables on this ground. Further, this company also provides KPO services, LPO and DPO besides offering software services. Therefore as this enrolled in knowledge processing outsourcing it is functionally dissimilar to the assessee. Further, it does not contain segment wise functional results and in absence of such segmental information, it cannot be used for comparing the PLI of the assessee. It is also noted that it is also having significant amount of brands, intellectual property rights and goodwill as compared to the assessee. Therefore, in view of the above reasons this company is required to be excluded. Further relying on the decision of Jurisdictional High Court in case of Rampgreen Solutions (P.) Ltd. v. CIT [2015] 377 ITR 533/234 Taxman 573/60 taxmann.com 355 (Delhi) wherein it is held that KPO are ITeS where the service providers have to employ advanced level of skills and knowledge. This is absent in this case of assessee which is low end

22 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. ITES service provider such as which enables network management and other back office support services performed by assessee which primarily include remote monitoring and maintenance of Equant global network platforms and services, co- ordination, remote configuration, and implementation of quality customer networking solutions. Therefore this comparable is ordered for its exclusion accordingly.” 14. Since the facts in the assessee’s case are similar to the facts involved in the aforesaid referred to case of M/s Equant Solutions India (P) Ltd. So, respectfully following the aforesaid order, we direct the AO to exclude this comparable while working out the arm’s length price.

23 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. to ITES as well as software development services. The company also owns intangible of substantial amount and is benefitted usually by the Tata Brand. The company is also making appellant for use of such brand. Therefore this aspect also makes this comparable is inappropriate and therefore we order to exclude this comparable. TCS e-service Ltd. is mainly involved in transaction processing and technology services. It carries on business of providing technology service such as software testing, verification and validation. It is also developed a software such as transport management software therefore functionally this company is dissimilar to the assessee company. It also owns huge intangible and use of 'Tata' Brand, which has definitely benefited this comparable, it is directed to be excluded.” In view of the above, we direct the AO/TPO to exclude these companies also from the list of the comparables while working out the ALP.

24 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. wise details of the remittances outstanding on AEs before the TPO vide submissions dated 22.08.2013. On perusal of the said details, the TPO observed that in certain cases, the remittances were received by the assessee after sometime lag than the period agreed between the parties (i.e. 90 days). The TPO re-characterized the delay in receipt of receivable as unsecured loans advanced to the AE and sought to impute notional interest on the delay in receipt of receivable @ 14.75%, on the basis of average base rate of SBI at 11.75% plus a markup of 300 basis points. The AO accordingly proposed the impugned adjustment in the draft assessment order. The assessee raised the objections before the DRP and submitted as under: • “working capital adjustment takes into account the impact of outstanding receivables on the profitability. • Re-characterization of the Assessee's alleged international transaction of outstanding receivables is not warranted and it should not be viewed on standalone basis as an independent transaction, disregarding the business/ commercial arrangement of the Assessee. • That they are not charging interest on overdue balances which is outstanding to non AEs. • under the Indian transfer pricing regulations, benchmarking of an international transaction has to be carried out against uncontrolled comparable transactions and carrying out the benchmarking

25 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. with the Prime Lending Rate of a bank is not permissible as the same does not amount to application of CUP or any of the "method". • On without prejudice basis, even if one were to impute interest, then LIBOR rate should be applied on the international loan for imputing interest. • additional mark-up of 300 basis points should not be charged since no basis is provided by the TPO. • Considering ninety days period is without any basis and this could differ based on facts and circumstances of each case.” 18. The ld. DRP after considering the submissions of the assessee directed the AO to verify the amount of receivable by observing in paras 12.2 to 12.2.3 of the order dated 23.09.2014 which read as under: “12.2 After carefully considering the arguments of the taxpayer and the reasoning provided by the TPO following three issues needs to be addressed in this case: i) Whether, the law provides for benchmarking of the "interest on receivables" as per the provisions of the Income Tax Act. ii) Whether the TPO was justified in his approach of separately benchmarking the "receivables" outstanding more than 90 days as transaction, by applying CUP Method on the transactions entered with AE and without appreciating that on the receivables outstanding with non AEs the taxpayer is not charging any interest.

26 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. iii) Whether, the rate of interest charged by the TPO at the rate of 14.88% was justified. 12.2.1 With regard to the issue at (i) above this DRP is of the considered view that "Receivables" falls within the ambit of international transaction as defined under section 92B(1), explanation (i)(c) which was inserted with retrospective effect from 01.04.2006 Hence, the TPO was fully justified in considering the aforesaid transaction as International Transaction and examining if the receivables from the associated enterprises were within the arm's length range or not. 12.2.2 With regard to the issue at (ii) above, in view of the provisions of Chapter X which specifically mandates the taxpayer as well as the TPO to carry out FAR analysis to determine the ALP of any international transaction. Since, the taxpayer in its TP documentation did not benchmark the arm's length price of the international transaction relating to interest chargeable on receivables from the AE separately by way of analysis of the functions, assets and risks, therefore TPO was well within his right to benchmark the same as "interest on receivable" is a separate international transaction under section 92B(1). In coming to this conclusion this DRP draw strength from the decision of the Hon'ble ITAT in the case of Star India Pvt. Ltd. Vs ACIT (2008-TIOL-426-ITAT-MUM) and UCB India Pvt. Ltd. (317 ITR 292 (AT) (Mumbai) and catena of other cases wherein it has been held that each transaction needs to be separately benchmarked. The clubbing of the transactions is allowed only as an exception and not as a rule. Section 92B(1) is also clear in this regard. The clubbing of transaction is possible only when the underlying international transactions are

27 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. homogenous in nature. In the case of the taxpayer, the international transaction relating to interest chargeable on receivables was not considered separately by the taxpayer. Section 92C(1) allows the determination of The arm's length price in relation to an international transaction by any of the six methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons. When a 'class of transaction' is considered, then, while creating such class of transaction it is necessary to club similar transactions. The transaction referred to in these grounds do not belong to the class. Since, in the present case as per the service agreement the payment is to be received within the period of 90 days, therefore, the TPO was justified to charge interest beyond the Arm's length period. Any delay beyond a period of 90 days, in an arm's length situation would have warranted a return based on opportunity cost of the money Accordingly, this Panel upholds that any delay beyond the arm's length period should have been subject matter adjustment and TPO has rightly determined the ALP by applying CUP method. But since as on the amount outstanding beyond 90 days on the transactions entered with non AEs, the taxpayer has not charged interest thereon, therefore, taxpayer is to provide the necessary data in this regard and TPO is directed to compute the interest forgone on these outstanding also and give benefit of same and bring to tax only the net interest income. 12.2.3 The issue at (iii) above which relates to charging of interest on the outstanding receivables this Panel holds that TPO has rightly given a finding in his order that the entire cost to the Indian entity or opportunity cost to the Indian entity will be with reference to the interest rates prevailing

28 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. in India In these circumstances, the TPO was justified in adopting the prime lending rate of SBI to be an appropriate CUP On the issue of various risks assumed by the taxpayer, an analysis has duly been carried out by the TPO in his order. Further, with regard to the charging of interest carrying support from the Safe Harbour Rules which came into force in September, 2013 "though they are not applicable for the year under consideration, but the principle is justifiably applicable in the case of the taxpayer for the instant international transaction to be benchmarked Accordingly. The TPO/AO is accordingly directed to verify the amount of receivables. i) In case the aggregate amount of receivables from the AEs does not exceed Rs 50 crores, apply Prime Lending Rate of SBI as on 30th June of relevant previous year plus 150 basis points. ii) In case the aggregate amount of receivables from the AEs exceeds Rs.50 crores, apply SBI Base rate as on 30th June of relevant previous year plus 300 basis points. The grounds of objection on this issue are disposed accordingly.” Thereafter, following the direction of the ld. DRP, the AO made the impugned adjustment.

29 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. the AE till the time, it has been actually remitted to the assessee and for which the AE would have paid interest, it was a continuing debit balance and was not an international transaction per se. It was further submitted that as per the provisions contained in Section 92B of the Act, the essential requirement for a transaction to be covered within the ambit of Section 92B of the Act was that it should be between two or more AEs either of whom is a non-residence and as per the provisions contained in Clause (v) of Section 92F of the Act, the term “transaction” includes an arrangement, understanding or action. Therefore, from the co-joint reading of provisions contained in Section 92B and 92F of the Act, it could be inferred that Transfer Pricing regulation would be applicable to any transaction being arrangement, understanding or action in concert, inter alia, in the nature of purchase, sale or lease of tangible or intangible property or any other transaction having bearing on profits, income, losses or assets of such enterprises. Therefore, the continuing debit balance only reflects that the payment, even though due has not been made by the debtor, it is not, however, necessary that a payment is to be made as soon as it becomes due and many factors including terms of payment, normal business practices etc. influence the fact of payment in respect of a commercial transaction and that unlike a loan or borrowing, it is not an independent transaction which can be viewed

30 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. on a standalone basis. The reliance was placed on the following case laws: � Evonik Degussa India (P) Ltd. Vs ACIT 51 TTJ 1 � Nimbus Communications Ltd. Vs ACIT 139 TTJ 214 � Patni Computers Systems Ltd. Vs DCIT in ITA No. 426 and 1131/Pn/2006 � Bharti Airtel Ltd. Vs ACIT in ITA No. 5816/Del/2012 � Micro Ink Ltd. Vs Addl. CIT in ITA No. 2873/Ahd./2010 � CIT Vs M/s Cotton Naturals (I) Pvt. Ltd. in ITA No. 233/2014 � Sony Ericsson Mobile Communications India Pvt. Ltd. Vs CIT 374 ITR 118 � CIT Vs EKL Appliances in ITA No. 1068/2011 & 1070/2011 � Allcargo Global Logistics Ltd. Vs ACIT in ITA Nos. 4909 & 4910/Mum/2012 � AWB India (P) Ltd. Vs DCIT in ITA No. 6480/Del/2012 � DCIT Vs Air Liquide Engineering India (P.) Ltd. in ITA Nos. 1040 & 1159/Hyd/2011 & 1408/Hyd/2010 � Sony India (P) Ltd. Vs DCIT 114 ITD 448 (Del) � Kusum Healthcare Pvt. Ltd. Vs ACIT in ITA No. 6814/Del/2014 � Goldstar Jewellery Ltd. Vs JCIT in ITA No. 6570/Mum/2012 � Micro Inks Ltd. Vs ACIT in ITA No. 1668/Ahd/2006 � ACIT Vs Information Systems Resources Pvt. Ltd. in ITA No. 7757/Mum/2012 20. It was further submitted that no separate adjustment on account of interest was to be made in case where the entity level margin of

31 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. the assessee was found to be higher than the comparable companies. It was also submitted that even if the delay in receipt of receivable was considered in the nature of unsecured loan, the interest shall be charged @ 1.28% calculated on the basis of average of month end LIBOR. The reliance was placed on the following case laws: � DCIT Vs Cotton Naturals (I) Pvt. Ltd. in ITA No. 233 of 2014 � Bharti Airtel Ltd. Vs ACIT in ITA No. 5816/Del/2012 � Siva Industries and Holdings Ltd. Vs ACIT in ITA No. 2148/Mds/…. � Tata Autocomp Systems Ltd. Vs ACIT in ITA No. 7354/Mum/2011 � Four Soft Ltd. Vs DCIT 142 TTJ 358 (Hyd.) � DCIT Vs Tech Mahindra Ltd. 46 SOT 141 (Mum) � Tricom India Ltd. Vs ITO in ITA No. 322/Mum/2014 � Aurionpro Solutions Ltd. in ITA No. 7872/Mum./2011 � Hinduja Global Solutions Ltd. Vs ACIT in ITA No. 254/Mum/2013 � Advanta India Ltd. Vs ACIT in ITA No. 1643/Ban/12 21. In his rival submissions the ld. DR strongly supported the orders of the authorities below and further submitted that the transactions of the nature of deferred payment or receivable or any other debit etc. is covered as international transaction vide explanation (i)(c) introduced by the Finance Act, 2012 in Section 92B of the Act with retrospective effect from 01.04.2002. Therefore,

32 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. interest charged/not charged on outstanding receivables is an international transaction. The reliance was placed on the judgment of the Hon’ble Bombay High Court in the case of CIT-2, Pune Vs Patni Computers System Pvt. Ltd. reported at 215 Taxman 108 (Mum.). The reliance was also placed on the following decision of the ITAT Bangalore: � Logix Micro Systems Ltd. Vs ACIT (2011) 8 ITR (Trib.) 525 (Bang.) 22. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the receivable represented continuing debit balances and revealed that the payment, even though due had not be made by the debtor. However, the exact nature of the receivables is not clear. It is not clear as to whether these receivables represented lending or guarantee or these were against the sales or advance or represented the deferred payments. So, in the absence of clear facts on record, we are unable to reach at a just conclusion. We, therefore, deem it appropriate to remand this issue back to the file of the AO/TPO for fresh adjudication in accordance with law by providing due and reasonable opportunity of being heard to the assessee and by considering the various decisions cited by both the parties, mentioned in the former part of this order.

33 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. 23. Next issue vide Ground No. 11 relates to the disallowance of differential depreciation of Voice Recording Software License.

34 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. 26. Now the assessee is in appeal. The ld. Counsel for the assessee submitted that this issue is covered in assessee’s favour in the case of HCL Comnet Systems and Services Ltd. Vs CIT in ITA No. 5906/Del/2010. It was further stated that as per the settled position in law, when a hardware or software is used alongwith computer notwithstanding that such software may be acquired/purchased independent of the computer, such hardware or software is termed as “computer” and is eligible for depreciation, at the rate of depreciation applicable to computer i.e. 60%. The reliance was placed on the following case laws: � CIT Vs Birlasoft Ltd. in ITA No. 1284/2011 (Delhi) � CIT Vs BSES Yamuna Powers Ltd. 358 ITR 47 (Del) � CIT Vs Citicorp Maruti Financle Ltd. in ITA 1712 & 1714/2010 (Del) � CIT Vs Orient Ceramics and Inds Ltd. 200 Taxman 64 (Del) � CIT Vs BSES Rajdhani Powers Ltd. in ITA No. 1266/2010 (Del) 27. In his rival submissions the ld. CIT DR strongly supported the orders of the authorities below.

35 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. High Court in the case of CIT Vs BSES Yamuna Powers Ltd. (2013) 358 ITR 47 (supra) where in it has been held that: “Computer accessories and peripherals such as printers, scanners and server form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are part of the computer system, they are entitled to depreciation at the higher rate of 60%.” We, therefore, in view of the ratio laid down by the Hon’ble High Court in the aforesaid referred to case, direct the AO to allow the claim of the assessee for depreciation @ 60%.

36 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. 31. Now the assessee is in appeal. The ld. Counsel for the assessee submitted that the disallowance had been made by the AO on notional/hypothetical basis without establishing nexus of specific expenses with exempt income and that the onus was on the revenue to bring on record, the nexus between the expenses and the exempt income. The reliance was placed on the following case laws: � CIT Vs Walfort Share & Stock Brokers 326 ITR 1 (SC) � Maxopp Investment Ltd. Vs CIT 347 ITR 272 (Del.) � Minda Investments Ltd. Vs DCIT 138 TTJ 240 (Del. Trib.) � Bunge Agribusiness India P. Ltd. Vs DCIT 132 ITD 549 (Del. Trib.) � Maruti Udyog Ltd. Vs DCIT 92 ITD 119 (Del. Trib.) 32. It was further submitted that the artificial/ad-hoc disallowance u/s 14A of the Act is not permissible without any cogent basis and material on record. The reliance was placed on the following case laws: � Godrej & Boyce Mfg. Co. Ltd., Mumbai Vs DCIT 328 ITR 81 (Bom.) � Chemical & Metallurgical Design Co. Ltd. in ITA No. 803/2008 (Del.) � CIT Vs Ms. Sushma Kapoor 319 ITR 299 (Del) � CIT Vs Metalman Auto P. Ltd. 336 ITR 434 (P&H)

37 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. � CIT Vs Reliance Industries Ltd. 339 ITR 632 (Bom) � CIT Vs Torrent Power Ltd. 363 ITR 474 (Guj.) � Maxpax Investment Ltd. Vs ACIT 104 TTJ 881 (Del. Trib.) � ACIT Vs Eicher Ltd. 101 TTJ 369 (Del.) � Maruti Udyog Ltd. Vs DCIT 92 ITD 119 (Del.) � Wimco Seedlings Ltd. Vs DCIT 107 ITD 267 (Del.) ™ � DLF Ltd. Vs CIT 27 SOT 22 (Del.) � ACIT Vs Jindal Saw Pipes Ltd. 118 TTJ 228 (Del.) � Impulse ((India) (P) Ltd. Vs ACIT 22 SOT 368 (Del.) � ACIT Vs Champion Commercial Co. Ltd. in ITA No. 644/Kol./2012 � CIT Pilani Investment & Industries Corp. Ltd. in ITA No. 653/Kol./2012 � CIT Vs Gujarat Power Corporation Ltd. in ITA No. 1587/2009 � G.D. Metsteel (P) Ltd. Vs ACIT (2011) 47 SOT 62 (Mum.) (Trib.) � ACIT Vs Punjab State Coop. & Mktg. (Chd. Trib.) � CIT Vs Adarsh Kumar Goel (2011) 199 Taxmann 149 (P&H) (Mag.) � ACIT Vs SIL Investment Ld. 148 TTJ 213 (Del.) 33. It was also submitted that no disallowance on account of administrative and other expenses can be made as these are fixed in nature and does not, in any way, relate to or vary with the investments made for earning exempt income and that for the purpose of computing disallowance, only investments which actually yielded exempt income during

38 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. the year should have been taken into consideration as against total investments appearing in the balance sheet for the relevant year. The reliance was placed on the following case laws: � ACB India Ltd. Vs ACIT 374 ITR 108 � REI Agro Ltd. Vs DCIT 144 ITD 141 (Kol.) 34. It was contended that the assessee had made the investments in shares of subsidiary company, viz. Exl Support Services Pvt. Ltd., out of commercial expediency, which would accordingly, not fall within the purview of Section 14A of the Act. The reliance was placed on the following case laws: � CIT Vs Bharat Hotels Ld. in ITA Nos. 535 & 536/Del/2015 (Del.) � CIT Vs Oriental Structural Engineers Pvt. Ltd. 216 Taxman 92 (Del.) � VA Tech Escher Wyss Flovel (P) Ltd. in ITA No. 1676/2001 (Del. Trib.) � CIT Vs Knorr Bremse India (P) Ltd. Vs DCIT in ITA No. 1676/2002 (Del. Trib.) � Interglobe Enterprises Vs DCIT in ITA Nos. 1362 & 1032/Del/2013 (Del.) (Trib.) � Holcim India (P) Ltd. Vs DCIT in ITA No. 5123/Del/2012 (Del. Trib.) � Garware Wall Ropes Ltd. Vs ACIT in ITA No. 5408/2012 (Mum. Trib.) � ACIT Vs M/s Spray Engineering Devices Ltd. in ITA No. 646/Chd/2009

39 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. � J.M. Financial Ltd. Vs ACIT in ITA No. 4521/Mum/2012 (Mum. Trib.) 35. It was further contended that the AO while computing the book profits u/s 115JB of the Act had made the adjustment of Rs.16,90,576/- computed u/s 14A of the Act. It was further submitted that as per Clause (f) of Explanation-1 to Section 115JB of the Act, the net profit as shown in the profit and loss account is required to be increased by the following amounts: “I. relatable to income exempt under section 10 or section 11 or section 12; II. provided any such amount is debited to the profit and loss account during the relevant previous year.” 36. The reliance was placed on the following case laws: � Pr. CIT Vs Bhushan Steel Ltd. in ITA No. 593/2015, order dated 29.09.2015 by the Hon’ble Delhi H.C. � Quippo Telecom Infrastructure Ltd. Vs ACIT in ITA No. 4931/Del/2010 37. In his rival submissions the ld. CIT DR supported the orders of the authorities below.

40 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. record. In the present case, it is not clear as to whether the AO had considered the only investment which yielded the exempt income or the entire investment made by the assessee. It is also not clear as to whether the investments were made by the assessee in the shares of subsidiary company out of commercial expediency. We, therefore, in the absence of the clear fact on record, deem it appropriate to set aside this issue back to the file of the AO/TPO to be adjudicated afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee.

41 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. exempt income under Section 14A read with Rule 8D. The ITAT has rightly held that this being in the nature of disallowance, and with Explanation 115JB not specifically mentioning Section 14A of the Act, the addition of Rs.89,00,000 was not justified. The view taken by the ITAT cannot be faulted with. It is consistent with the decision in Apollo Tyres Ltd. Vs Commissioner of Income Tax (2002) 255 ITR 273 (SC) which held that “the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to Section 115J.”The Court declines to frame a question on the above issue.” 40. We, therefore, by keeping in view the ratio laid down in the aforesaid referred to case, direct the AO to exclude the amount of adjustment made u/s 14A of the Act r.w. Rule 8D of the Income Tax Rules, 1962 while computing the book profits u/s 115JB of the Act.

42 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. deposited in the Government Treasury on 30.07.2010 before the due date of filing the return. The AO, however, considered the amount of Rs.30,505/- being the amount of TDS deducted and arrived at the figure of Rs.2,69,241/- as rent payment made by the assessee. The said amount was added in the hands of the assessee u/s 69C of the Act considering the same as unexplained expenditure.

43 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. record. In the present case, it appears that during the course of assessment proceedings, the assessee was unable to produce the relevant documents in support of its claim. However, during the course of proceedings u/s 201(1)/201(1A) of the Act, the transaction was fully explained and clarified in detail. We, therefore, deem it appropriate to set aside this issue back to the file of the AO for verification and adjudication afresh.

44 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. ITA No.615/Del/2015 for the assessment year 2010-11

45 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. Motherson Innovative Engineering Ltd. (2014) 150 ITD 195 (Delhi) and some other decisions to bring home his point of view of not carrying out any adjustment on account of difference in depreciation. 5.13. There can be no dispute on the principle that calculation of ‘Operating profit’ as envisaged under Rule 10B(1)(e) embraces cumulative effect of all the items of income and expenses which are of operating nature. Ordinarily, there can be no question of considering each item of such operating expenses or income in isolation de hors the other expenses to claim adjustment on the ground of such expenditure or income of the assessee on the higher side seen individually or as a percentage of other operating expense/incomes in comparison with its comparables. The reason is obvious that when we consider the operating profit margin, the effect of all the individual higher or lower items of expenses or incomes gets submerged in the overall operating profit margin, ruling out the need for any adjustment on one-to-one comparison. One company may have taken a building on rent for carrying on its business, in which case, it will pay rent which will find its place in the operating costs. For the purposes of making comparison, one cannot contend that the payment of rent by one enterprise in comparison with a non-payment of rent by another, should be neutralized by giving proper adjustment from the operating profit of the comparable. The manifest reason is that the other enterprise may have its own office premises and the amount of depreciation on such premises will also form part of its operating cost. When we consider the operating profit of the first enterprise which is paying rent

46 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. and then compare it with the second enterprise which is not paying any rent but is claiming depreciation on its own premises, the overall effect of rent in one case gets counterbalanced with depreciation on premises of the other. Similar is the position of a company having purchased new assets charging higher amount of depreciation allowance in its books of accounts vis-a-vis another comparable company using old assets with lower amount of depreciation. No adjustment on account of difference in the amounts of depreciation of two companies is called for when the operating profits are determined because in the case of a company having purchased new asset, there will be lower repair cost and vice versa. The effect of all the individual items of operating expenses and incomes culminates into the operating profit margin. That is why, the legislature has provided for comparing the ratio of ‘operating profit margin’ to a similar base of the assessee with that of its comparables, thereby dispensing with the need for making any adjustment on account of higher or lower amount of individual items of expenses and incomes. Merely because the amount of depreciation of one enterprise is more or less than the other, can never be a reason to seek adjustment. Such higher amount of depreciation may be due to large scale of the company and host of other factors. By considering percentage of operating profit margin under the TNMM of the assessee as well as comparables, the higher or lower volume of two companies becomes immaterial and so is the quantum of depreciation. The nitty- gritty of the matter is that no adjustment can be allowed simply for the reason that one company has charged higher amount of depreciation vis-a-vis its

47 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. comparable companies. Not only no adjustment on this score is permissible, the assessee cannot also seek an exclusion or inclusion of a company on the ground that the ratio of its depreciation to total expenses is more or less in comparison with comparables. It is so for the reason that such higher percentage of depreciation to total expenses is marginalized by the lower percentage of repairs and other incidental costs of the assets and vice versa. 5.14. However, the position may be a little different when there is a difference in the rates of depreciation charged by two companies on similar category of assets. One company may adopt the policy of charging depreciation on its assets in conformity with the rates prescribed in Schedule XIV of the Companies Act and other company may adopt a policy of charging depreciation at the higher rates or lower than those prescribed under Schedule XIV. This can be demonstrated with the help of an example. Other things being equal, if the operating profit of company A, after claiming depreciation of Rs.10 on the value of asset worth Rs.50 with rate of depreciation 20%, is Rs.100, the operating profit of company B with everything same including the value of assets at Rs.50, but with rate of depreciation 30%, will be Rs.95. It shows that the comparability is jeopardized due to higher rate of depreciation charged by company B at 30% in comparison with lower rate of depreciation charged by company A at 20%. In such a situation, although both the companies use similar type of assets and everything else is also equal, but their respective operating profit percentages undergo change due to higher or lower rate of depreciation, thereby

48 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. distorting their comparability. It is this difference in the amounts of depreciation due to different rates of depreciation and not due to different quantums of depreciation simiplicitor, which calls for bringing both the companies at par. 5.15. At this juncture, we will consider the ratio of the decisions relied by the ld. DR to bolster his submission for not granting any adjustment on account of difference in the rates of depreciation on similar assets. In Sumi Motherson (supra), the assessee requested for suitable reduction towards higher depreciation charged by it, thereby boosting its percentage of depreciation to sales at a much higher level than that of comparables. Rejecting this contention, the tribunal held that it is not allowed to compare each and every item of the operating cost incurred by the assessee with similar cost in the case of comparables to ask for any adjustment. It is the overall effect of all such individual items descending into operating profit, which is considered for benchmarking the assessee’s international transaction and if the amount of depreciation is distinctly compared with comparables, leaving aside other related and consequential items, such as repair costs etc., then the results are likely to be distorted. It was further observed that to ask for adjustment, it is essential that there should be some independent and substantial reason. It was held that : ‘In the context of depreciation, one can rightly appreciate the need to make adjustment, if rate of depreciation charged by the assessee vis-a-vis its comparables is different. But the simplicitor difference in the amount of depreciation is inconsequential.’

49 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd.

5.16. Almost similar proposition has been laid down by the Delhi Bench of the tribunal in Nokia India (P) Ltd. VS. DCIT 2014-TII-224-ITAT-DEL-TP by disapproving the exclusion of some companies on the strength of the filter of lower or higher depreciation as a percentage of total costs. In so holding, it observed that the higher amount of depreciation is usually coupled with the lower repair cost etc., and vice versa. That is how, it held that : ‘there can be no justification in applying the filter of rejecting the companies with depreciation higher or lower than a particular percentage of total costs.’. It is, thus, overt that these two cases relied by the ld. DR, in fact, support the case of the assessee rather than the Revenue. 5.17. Another case relied by the ld. DR in 24/7 Customer Com Pvt. Ltd. VS. DCIT 2012-TII-143- ITAT-BANG-TP, again does not take us any further. In that case, the assessee raised an additional ground for suitable adjustment towards higher rate of depreciation charged by the assesee vis-a-vis its comparables. It is patent from the penultimate para of this order that the tribunal eventually remitted the issue of depreciation, as raised through the additional ground, to the file of the AO/TPO for a fresh consideration and decision. So, this order also does not support the case of the Revenue. The last case relied by the ld. DR is Lason India Pvt. Ltd. VS. ACIT 2012-TII-47-ITAT-MAD-TP. The assessee in that case provided depreciation on assets under SLM at the rates higher than those provided in Schedule XIV, whereas the comparables provided for depreciation as per Income-tax Rules on written

50 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. down value method. The assessee claimed before the tribunal that if depreciation of the assessee is also brought to the w.d.v. method, then its operating profit would be more. The tribunal rejected this claim of the assessee. In our considered opinion, the adjustment has been rightly denied because the method of charging depreciation was different and further the assessee sought adjustment from its profits, which is not permissible as will be seen infra. The ld. AR also candidly admitted that his point was limited to the adjustment due to difference in the rates of depreciation from SLM of the assessee to SLM of the comparables and not otherwise as is the position in Lason India Pvt. Ltd. (supra). 5.18. The sum and substance of the above cases is that neither any adjustment can be made for a simplicitor higher/lower amount of depreciation in itself or as a percentage of the total operating expenses nor an otherwise comparable company ceases to be comparable because of the above factors. However, an adjustment is called for when there is a difference in the rates of depreciation on similar types of assets under similar method of charging depreciation. At the cost of repetition, we want to accentuate the line of distinction between two cases, viz., first in which the amount of depreciation is more due to higher value of the assets employed by one company and second, in which the amount of depreciation is more not due to higher value of the assets employed by one company but due to higher rates of depreciation. Whereas, the first situation would not call for any adjustment, the second one would warrant adjustment in the

51 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. operating profit of the comparable company. That is where Rule 10B(1)(e) (ii) & (iii) read with Rules 10B(2) & (3) come into play for neutralising the difference in the operating profits of the two otherwise comparable companies by making a “reasonably accurate adjustment ... to eliminate the material effects of such differences”. 5.19. Now the next question is as to in whose hands the above adjustment should be allowed. The ld. AR argued that the excessive rate of depreciation charged by the assessee should be lowered to the rates as prescribed under Schedule XIV to the Companies Act so as to bring a parity between the rates of depreciation charged by the assessee vis-a- vis its comparables. This contention in our considered opinion, is not tenable. It has been noticed above that Rule 10B(1)(e)(iii) contemplates the making of adjustment to the net profit margin of the comparables determined under sub-clause (ii) to Rule 10B(1)(e). Even Rule 10B(3) also requires the making of adjustment in the hands of comparables to eliminate the material effects of differences. Thus, the adjustment can be made only in the hands of the comparables’ operating profit margin and not to that of the assessee. 5.20. The ld. DR pleaded for not allowing any adjustment on this score by arguing that the difference in the rates of depreciation by the assessee and comparables does not affect the computation of the net operating profit margin on a long term basis. He stated that the higher rates of depreciation would no doubt lower the profit in the earlier years, but such reduction of profits would be

52 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. set off with the higher amount of profit due to lower amount of depreciation in the later years, thereby, nullifying the effect of such higher rate of depreciation over the life time of an asset. Asserting on this argument, the ld. DR stated that no adjustment could be accordingly allowed. 5.21. This contention, in our considered opinion does not move forwards the case of Revenue for the reason that Chapter X of the Act requires computation of income from international transactions having regard to ALP on year to year basis. There is no provision for determining the ALP of an international transaction for more than one year in a consolidated manner. Unlike the hitherto determination of undisclosed income for the block period as provided under Chapter XIV-B of the Act, as opposed to year-to–year basis, there is no such provision for determining the ALP of an international transaction for more than one year by considering a few years as one unit during which an asset is put to use. Not only is this exercise impermissible under the law, but is also impractical of application. Various assets will have varying useful life spans due to different rates of depreciation and their useful life will not terminate at one common point of time, so as to facilitate the making of adjustment at such point of time. Be that as it may, since the legislature requires determination of ALP of an international transaction on yearly basis, what we need to do is to find out the effect of depreciation on year to year basis and not on a consolidated basis extending to the life time of such assets.

53 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. 5.22.1. The ld. DR made still another contention opposing the assessee’s stand. It was argued that re-calculating the operating profits of the comparable companies by providing depreciation on SLM in the hands of comparables at the higher rates, at par with the assessee’s, would distort the comparison. He explained his point of view by stating that no doubt with the increase in the rates of depreciation of the comparables for the current year at par with the assessee, would achieve comparability, but this would adversely affect the calculation of operating profit of the comparables because of the inclusion of proportionate depreciation also on the assets which still appear in their books but actually depreciated fully due to parity with the assessee’s higher rates of depreciation. It was explained with the help of an example in which the assessee is charging depreciation under SLM at the rate of 33.33% on a particular asset considering the useful life of three years, as against the comparables providing depreciation on similar asset under SLM at the rate of 16.21% by impliedly considering its useful life a little over six years. He explained that the comparable company providing depreciation at 16.66% on SLM would continue to hold assets in 4th, 5th and 6th year as well and the amount of depreciation in these three years will also be at 16.21% despite the fact that this particular asset has exhausted its useful life after three years as has been done by the assessee. This proposition, in the opinion of the ld. DR, warranted reduction in the amount of depreciation of comparables companies to the extent of 16.21% of the value of such asset from 4th to 6th years. It was thus pleaded that if

54 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. some adjustment is to be allowed in favour of the assessee in line with the above arguments of the ld. AR, then a simultaneous negative adjustment on account of the above factor should also be directed. 5.22.2. This contention advanced on behalf of the Revenue can be properly appreciated if one understands the striking dissimilarities between the scheme of charging depreciation under the Income- tax Act, 1961 and the Companies Act, 1956. The concept of block of assets exists under the Act by which all the assets of a particular species having the same rate of depreciation are considered together as one unit. This can be seen from sec. 2(11) of the Act, which defines "block of assets" to mean ‘a group of assets falling within a class of assets comprising— (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being …….., in respect of which the same percentage of depreciation is prescribed’. Under the scheme of block of assets, depreciation is charged on the total written down value of such block as appearing at the end of the year at the prescribed rates. There is no provision for charging depreciation on individual assets. Similarly, there is no mandate for computing capital gain at the time of transfer of such individual assets, unless the block of assets ceases to exist as such. Capital gains are computed u/s 50 of the Act under two prescribed situations by considering the block of assets in entirety de hors the event of sale of individual asset. First is the situation under which the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of

55 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of (i) expenditure incurred wholly and exclusively in connection with such transfer or transfers; (ii) the written down value of the block of assets at the beginning of the previous year; and (iii) the actual cost of any asset falling within the block of assets acquired during the previous year. It is this excess which is deemed to be the capital gains arising from the transfer of short-term capital assets. Second is the situation in which any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year. In such a situation, the cost of acquisition of the block of assets is taken as the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year. The income received or accruing as a result of such transfer or transfers is deemed to be the capital gains arising from the transfer of short-term capital assets. A careful perusal of the above provisions deciphers that the individual assets on their purchase merge with other assets of that block, thereby losing their separate identity. Depreciation is provided on the basis of the written down value of such block and not the w.d.v. of such individual assets. Even the event of their transfer also does not lead to automatic charging of capital gains, unless the case falls under either of two clauses of section 50. Assessee gets depreciation on the w.d.v. of such assets, which stand merged with the w.d.v. of the block, even after their transfer, of course subject to

56 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. the provisions of section 50 and other relevant sections. 5.22.3. Now let us examine the position under the Indian Companies Act, 1956. Section 349 deals with the determination of net profits. Sub-section (1) provides that in computing the net profits of a company in any financial year, : ‘(a) credit shall be given for the sums specified in sub-section (2) and credit shall not be given for those specified in sub- section (3); and (b) the sums specified in sub- section (4) shall be deducted, and those specified in sub-section (5) shall not be deducted.’. Clause (k) of sub-section (4) states that deduction shall be allowed for ‘depreciation to the extent specified in section 350’. The later section, in turn provides that: ‘The amount of depreciation to be deducted in pursuance of clause (k) of sub-section (4) of section 349 shall be the amount of depreciation on assets as shown by the books of the company at the end of the financial year expiring at the commencement of this Act or immediately thereafter and at the end of each subsequent financial year, at the rate specified in Schedule XIV.’ Clause (d) of sub-section (3) states that in making the computation aforesaid, no credit shall be given for ‘profits from the sale of any immovable property or fixed assets of a capital nature comprised in the undertaking or any of the undertakings of the company, unless the business of the company consists, whether wholly or partly, of buying and selling any such property or assets:’ At this stage, it is relevant to note the prescription of the proviso to this clause which stipulates that : ‘where the amount for which any fixed asset is sold exceeds the written-down value thereof referred to

57 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. in section 350, credit shall be given for so much of the excess as is not higher than the difference between the original cost of that fixed asset and its written down value.’ Clause (d) of sub-section (5) further provides that in making the computation aforesaid, no deduction shall be allowed for loss of a capital nature including loss on sale of the undertaking or any of the undertakings of the company or of any part thereof not including any excess referred to in the proviso to section 350 of the written-down value of any asset which is sold, discarded, demolished or destroyed over its sale proceeds or its scrap value. Proviso to section 350 provides that: ‘if any asset is sold, discarded, demolished or destroyed for any reason before depreciation of such asset has been provided for in full, the excess, if any, of the written-down value of such asset over its sale proceeds or, as the case may be, its scrap value, shall be written off in the financial year in which the asset is sold, discarded, demolished or destroyed.’ 5.22.4. On a reading of sections 349 in conjunction with section 350 of the Companies Act, it emerges that depreciation on each asset is separately provided at the rates specified in Schedule XIV for the purposes of the determination of profit. If an asset is sold or discarded before providing full depreciation on it, then the excess of the w.d.v. of such asset over its sale price/scrap value, to the extent provided, shall be written off in the financial year in which the asset is sold or discarded. In the converse situation, where the amount for which any fixed asset is sold exceeds the written-down value thereof referred to in section 350, then credit shall

58 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. be given for so much of the excess, to the extent provided, as is not higher than the difference between the original cost of that fixed asset and its w.d.v. in the year of its sale. These two situations can be demonstrated with the help of a simple example. If asset A with original cost of Rs. 100 having w.d.v. of Rs.40 is sold for Rs.50, then the profit of Rs.10 is to be credited to the Profit and Loss account for the year of sale of such asset. If asset A with original cost of Rs. 100 having w.d.v. of Rs.40 is sold for Rs.30, then the loss of Rs.10 is to be debited to the Profit and Loss account for the year of sale/scrapping of such asset. 5.22.5. On a comparative study of the scheme for charging depreciation and treatment of profit/loss on the sale of specific assets under both the statutes, we observe that whereas, the Act does not recognize individual assets for the purposes of allowing depreciation and grants depreciation on the block of assets, the Companies Act recognizes the existence of separate assets and stipulates depreciation on each asset distinctly in the Profit and loss account. When an asset is sold, there is no scope for calculating profit or loss on sale of each asset in excess of its w.d.v. under the Act. It is done only for the block of assets in the manner given and to the extent enshrined in section 50. On the other hand, the Companies Act mandates claiming deduction for loss or crediting gain on the sale of each asset separately to its Profit and Loss account, which is not in excess of difference between the original cost and the w.d.v. of such asset.

59 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. 5.22.6. With the above legal position at hand, let us evaluate the contention of the ld. DR that the comparables companies’ depreciation for the current year would also include depreciation in respect of the assets which have seen the end of their useful life but still continue to form part of the schedule of fixed assets because of providing depreciation at lower rates on such assets in comparison with the assessee. This contention of the ld. DR, though appears attractive at the first blush, but loses its shine on an in-depth analysis. It is severely simple that if an asset has reached the milestone of the end of its useful life, then it would be either sold or discarded. Ordinarily, no company would continue to hold obsolete assets. Once an asset is sold after its useful life, the company will write off the unamortized depreciation in the year of its sale or discarding, by considering its sale price and w.d.v. and hence it would cease to appear in the books of account. Once it does not appear in the books of account, there can be no question of any depreciation on it in the later years as has been put forth on behalf of the Revenue. Continuing with the example given by the ld. DR, we find that the particular asset on the completion of its useful life of three years would become obsolete in fourth year and sold/discarded by the company and the short- fall in the amount and depreciation charged over its cost would be accordingly written off in its accounts. In such a situation, that particular asset with useful life of three years would cease to appear in the Schedule of fixed assets of the comparable company at the end of fourth, fifth and sixth years respectively, As such, no value of such assets will be available for depreciation in the next year(s).

60 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd.

5.23. Turning to the facts of the instant case, we find that the method of charging depreciation, both by the assessee and its comparables, is by and large the same that is SLM. The assessee is seeking adjustment only due to higher rates of depreciation charged by it under SLM with the lower rates of depreciation charged by four comparable companies, other than Mapro Industries Ltd. and Karvy Consultants Ltd. In view of above discussion, we hold that the operating profit margins of these four comparable companies should be recomputed by the TPO/AO in line with the rates of depreciation charged by the assessee under SLM. To put it simply, the amount of depreciation of the four comparable companies on their assets shall also be recomputed under the SLM alone as per the rates at which the assessee has provided depreciation. In doing so, if the comparable companies have charged depreciation at a lower rate in comparison with the assessee, then suitable increase should be made to their amount of depreciation and if the comparables have charged depreciation at a higher rate in comparison with the assessee on some of the assets, then suitable reduction should be made in the amount of their depreciation. Here it is significant to note that one of these four companies, namely, Nucleus Netsoft and GIS India Ltd has charged depreciation on all its assets under SLM except for Computers, on which it provided depreciation on written down value basis. The TPO should see if he can correctly deduce the amount of depreciation, on the basis of data available, for the year on ‘Computers’ also under SLM. If due to one reason or the other, such precise calculation is not

61 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. possible, then no adjustment should be carried out in the calculation of the operating profits of this company, even on other items of assets. Ordinarily, we would have ordered for the exclusion of this company from the list of comparables in the event of no possibility of computing depreciation on computers under the SLM by converting it from w.d.v. method, because of this being a material factor and not quantifiable. But since neither the assessee nor the Revenue seek the exclusion of this company from the list of comparables, we cannot suo motu order so. We, therefore, sum up our conclusion on this aspect of the matter by holding that if the assessee as well as the comparable companies are using the SLM and there is a difference in the rates of depreciation charged by them, then there is a need to make suitable adjustment to the profits of the comparables.” 52. Therefore, in view of the similarity in the facts for the year under consideration vis-à-vis the facts for the assessment year 2003-04, this issue is set aside to the AO to be decided in the same line as directed for the assessment year 2003-04 in the aforesaid referred to order dated 22.12.2014.

62 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. 54. As regards to this issue the ld. Counsel for the assessee at the very outset stated that this issue is also squarely covered in favour of the assessee by the decision of the various Benches of the Income Tax Appellate Tribunal as per following details: � Mentor Graphics Noida Pvt. Ltd. Vs DCIT in ITA No. 1969/Del/2006 � E Gain Communication Pvt. Ltd. Vs ITO in ITA No. 1685/PN/2007 � Demag Cranes and Components Pvt. Ltd. Vs DCIT in ITA No. 120/PN/2011 � Nokia India Pvt. Ltd. Vs ACIT in ITA No. 4559/Del/2011 � Emersons Process Management India Pvt. Ltd. Vs ACIT in ITA No. 8118/Mum/2010 � Pitney Bowes Software India Pvt. Ltd. Vs ITO in ITA No. 679/Del/2014 � Mercer Consulting India Pvt. Ltd. Vs DCIT in ITA No. 966/Del/2014 � Navisite India Pvt. Ltd. Vs ITO in ITA No. 5329/Del/2012 55. In his rival submissions the ld. CIT DR although supported the order of the AO but could not controvert the aforesaid contention of the ld. Counsel for the assessee.

63 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. Delhi in the case of Equant Solutions India (P.) Ltd. Vs DCIT, Circle-3, Gurgaon reported at (2016) 66 Taxmann.com 192 wherein it has been held as under: “27. Regarding the ground of working capital adjustment, Ld. AR contended that the assessee should have been granted working capital adjustment. Ld. TPO denied this on the ground that working capital according to him is relevant only where there is situation of o inventory and receivable and not in case of the service industry. He denied this because assessee has failed to demonstrate that difference in working capital deployed is making a difference in margin earned by the assessee and its comparables. 28. Before us AR of the assessee contended that the full details were submitted to TPO however same was rejected despite several decision of ITAT in IT and ITEs segment granting working capital adjustments. He submitted that AO has denied the same on the principles visualized by him at para no nine of his order. 29. We find that the assessee made detailed submissions before the lower authorities on this issue, which we do not extract for the sake of brevity. Suffice to say that the contentions raised by the assessee have not been dealt with by the TPO as well as the DRP properly and assessee to needs to be provided one more opportunity in the interest of justice for proving its case for working capital adjustments. The propositions of law laid down by the Tribunals on the issue of working

64 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. capital adjustment in ITes and IT segment deserves to be considered by TPO. Thus, it would be appropriate to set aside the matter to the file of the Assessing Officer/T.P.O. for fresh adjudication, in accordance with law on the issue of claim of the assessee on working capital adjustments.” 57. So, respectfully following the aforesaid referred to order, this issue is set aside to the file of the AO/TPO for fresh adjudication in accordance with law after providing due and reasonable opportunity of being heard to the assessee.

65 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. establish that the said receipt was inextricably linked to the business activities of the assessee. Accordingly, claim of deduction u/s 10A/10B of the Act was reduced by Rs.8.11.956/- by the AO. The assessee raised the objection before the DRP and stated that the income earned from sale of scrap inextricably linked to the business activities of the assessee and it was part of core business operation. The reliance was placed on the decision of the ITAT Bangalore Bench in the case of Wipro Ltd. reported at 5 SOT 805.

66 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. income is not directly linked to in the business of the taxpayer when the taxpayer has bifurcated the receipts from the 10A/10B units and other units. Considering the totality of the facts, the Panel holds that the said scrap incomeis to be considered as part of the receipts of the 10A/10B units and therefore, would be eligible for deduction under the respective sections. The AO is therefore, directed to allow the relief to the taxpayer on this account.” 61. Now the department is in appeal. The ld. CIT DR reiterated the observations made by the AO.

67 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. 10A/10B of the Act. The reliance was placed on the following case laws: � Maral Overseas Ltd. Vs ACIT 136 ITD 177 (Trib.) � Riviera Home Furnishings Vs ACIT 237 Taxman 520 (Del.) � CIT Vs Punjab Stainless Steel Industries 364 ITR 144 (SC) � CIT Vs Sadhu Forging Ltd. 336 ITR 444 (Del.) 63. We have considered the submission of both the parties and carefully gone through the material available on the record. It is noticed that on a similar issue the Hon’ble Jurisdictional High Court in the case of CIT Vs Sadhu Forging Ld. (supra) held as under: “that the industrial undertaking set up by the assessee was for the purpose of manufacture of steel forging, transmission gears and part and accessories of motor vehicles and the scrap of these items was stated to be a by-product of manufacturing process. The activity of forging was "manufacturing" within the ambit of section 80-IB. It was immaterial that the assessee was doing the job of forging also for customers and was charging them on job work basis or on the basis of labour charges. It would still be qualified as carrying on eligible business under section 80-IB. The activities of the assessee were in giving heat treatment for which it had earned labour charges and job work charges. It could thus be said that the assessee had done a process on the raw material which was nothing but a part and parcel of the

68 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. manufacturing process of the industrial undertaking. These receipts could not be said to be independent income of the manufacturing activities of the undertaking of the assessee and thus could not be excluded from the profits and gains derived from the industrial undertaking for the purpose of computing deduction under section 80-IB. These were gains derived from the industrial undertaking and so entitled for the purpose of computing deduction under section 80-IB. There could not be any two opinions that manufacturing activity of the type of material being undertaken by the assessee would also generate scrap in the process of manufacturing. The receipts from sale of scrap being part and parcel of the activity and being proximate thereto would also be within the ambit of gains derived from the industrial undertaking for the purpose of computing deduction under section 80-IB.” 64. In the aforesaid referred to case although the issue was related to the deduction u/s 80IB of the Act. However, the ratio laid down therein that the receipt from sale of scrap beng part & partial of the activity and being proximate thereto would also be within the ambit of gain derived from the industrial undertaking. We, therefore, do not see any infirmity in the directions of the ld. DRP on this issue and as such do not see any merit in the appeal of the department on this issue.

69 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. 65. The next issue vide Ground No. 4 relates to the direction of the DRP to delete the disallowance proposed by the AO on account of depreciation on goodwill.

70 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. was allowable on the cost of asset as reduced by the depreciation already allowed by the earlier owner (WDV) and in case of intangible asset, the depreciation was allowable on the cost as evidenced through documentary evidence in respect of that specific asset. The AO accordingly, disallowed the claim of the depreciation on the goodwill. The reliance was placed on the following case laws: � CIT Vs Star Resorts P. Ltd. 335 ITR 587 (P&H) � Chowgule & Co. Vs ACIT (2011) 137 TTJ 596 (Panaji ITAT) 67. Being aggrieved the assessee raised objection before the ld. DRP and submitted as under: “That applying the principle of ejusdem generis and considering the use of words ‘similar nature’, depreciation under section 32(1) of the Act would be admissible on other intangible assets also, which fall within the genus or are in the nature of the six specified intangible assets but do not necessarily answer the description of the aforesaid six assets. Goodwill will fall within the ambit of ‘any other business or commercial right of similar nature’ as provided in Section 32(1)(ii) of the Act and hence depreciation on the same shall be eligible at the rate applicable to other intangible assets specified therein. The assessee has also placed reliance on various judicial precedents.”

71 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. 68. The ld. DRP after considering the submissions of the assessee directed the AO to allow the depreciation on the goodwill by observing in paras 16.4.1 to 16.4.5 of the order dated 23.09.2014 passed u/s 144C(5) of the Act which read as under: “16.4.1 The Panel has examined the matter. It is seen that the assessee has acquired Global Travel Service Centre (GTSC) vide agreement dated 4.11.2009 for total consideration of Rs.150,87,36,000/- subject to working capital adjustment. The effective date of acquisition is 1.3.2010. This transaction has been finalized on slump sale basis. The net purchase price was approximately Rs.1350 million out of which identifiable assets were allocated value based upon the book value. The difference between the purchase consideration and the value of net identifiable assets acquired has been recognized as goodwill of Rs.769 million. Under these facts, the issue for consideration is if the assessee is entitled for depreciation on this balance sum of Rs.769 million and if so, for what classification and rate? 16.4.2 The Panel therefore, perused the decision of Delhi High Court in the case of Areva T&D India Limited vs. DCIT [2012] 20 taxmann.com 29 (Delhi). The facts of the said case where that a business was acquired by the assessee company on slump sale basis for a total consideration of Rs.44.70 crore Out of it, tangible asset were transfer for net value of Rs.28.11 crores and the balance amount of Rs. 16.59 crores was claimed by

72 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. the assessee for acquisition of various business and commercial rights characterized as 'goodwill'. Such business and commercial rise comprised of business claims, business records, business information's, contracts, skilled employees, know-how etc. The assessee claimed depreciation on such intangible assets u/s 32(1)(ii). The ITAT decided the matter in favour of the assessee and thereafter assessee either department approached the high court. Under these facts, Hon'ble High Court held that as under: "13. In the present case, applying the principle of ejusdem generis, which provides that where there are general words following particular and specific words, and meaning of the latter words shall be confined to things of the same kind, as specified for interpreting the expression "business or commercial rights of similar nature' specified in Section 32(1)(ii) of the Act, it is seen that such rights need not answer the description of 'knowhow, patents, trademarks-, licenses or franchises' but must be of similar nature as the specified assets. On a perusal of the meaning of the categories of specific intangible assets referred in Section 32(1)(ii) of the Act preceding the term "business or commercial rights of similar nature', it is seen that the aforesaid intangible assets are not of the same kind and are dearly distinct from one another The fact that after the specified intangible assets the words "business or commercial rights of similar nature" have been additionally used, clearly demonstrates that the Legislature did not intend to provide for depreciation only in respect of specified intangible assets but a/so to other categories of

73 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. intangible assets, which were neither feasible nor possible to exhaustively enumerate, in the circumstances, the “nature of 'business or commercial rights" cannot be restricted to only the aforesaid six categories of assets, viz., knowhow, patents, trademarks, copyrights, licenses or franchises. The nature of "business or commercial rights" can be of the same genus in which ail the aforesaid six assets fall. All the above fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business. In the circumstances, it is observed that in case of the assessee, intangible assets, viz,, business claims; business information; business records; contracts; employees; and knowhow, are all assets, which are invaluable and result in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The aforesaid intangible assets are, therefore, comparable to a license to carry out the existing transmission and distribution business of the transferor In the absence of the aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. This view is fortified by the ratio of the decision of the Supreme Court in Techno Shares & Stokes Ltd. (supra) wherein it was held that intangible assets owned by the assessee and used for the business purpose which enables the assessee to access the market and has an

74 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. economic and money value is a "license" or "akin to a license" which is one of the items falling in Section 32(1) (ii) of the Act. 14. In view of the above discussion, we are of the view that the specified intangible assets acquired under slump sale agreement were in the nature of "business or commercial rights of similar nature" specified in Section«32(1)(ii) of the Act were accordingly eligible for depreciation under that Section." In the case of Cyber India Online Limited vs. ACIT [2014] 42 taxmann.com 108 (Delhi) the facts before the Hon'ble ITAT were that the assessee-company was engaged in the business of online and other electronic media and other business Another company by name 'C' was also carrying on the- business among other business of online and other electronic media through internet and other network including database, online magazines, newsletter, etc The assessee entered into a slump sale agreement dated 23.08.1999 with the company 'C;, whereby it acquired the running business of 'C' of online and other electronic media through internet and other networks, including databases, online magazines, newsletters, lock-stock-and-barrel with effect from 01.09.1999 for a lump-sum consideration of Rs One crore. Further the assessee had recorded the book value of the net tangible assets in the balance-sheet on the date of transfer at Rs, 38 lakhs. The balance part i.e. Rs. 62 lakhs over and above the book value of the net tangible assets was allocated in the balance-sheet as 'goodwill', which comprised of Patents, trademarks or copyrights,

75 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. privileges and interest of the vendor company in any inventions and employees- in the return of income filed for the assessment year 2005-06, the assessee claimed depreciation on 'goodwill'. Hon'ble ITAT after relying upon the decision of Hon'ble Supreme Court in CIT vs. Smifs Securities Limited 348 ITR 302 and decisions of Delhi High Court in Areva T&D India Limited (supra) and CIT vs. Jai Parabolic Springs Limited 306 ITR 42 held under: "7.16 In the light of the Hon'ble Supreme Court and the Hon'ble High Court of Delhi's order and in the aforesaid facts and circumstances of the case, we find that since the assessee purchased the business lock stock & barrel and has shown the value of the goodwill right from the acquisition onwards i.e. from the year 2000 onwards in the balance sheet and book of account and since there was no objection from the Revenue in respect to the value of the goodwill until the impugned assessment year 2005-06, therefore, we are of the opinion that goodwill denotes an intangible asset and is required for its business and commercial rights, we have no hesitation to hold that the Ld, CIT(A) have erred in upholding the AO's finding which disallowed the depreciation on goodwill and therefore the impugned order of the Ld. CIT(A) is set aside and the addition of Rs. 1,669,020/- made on this account is deleted." 16.4.3 The Panel finds that the facts and circumstances of the case is discussed above and the

76 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. case of the assessee are similar where the business has been taken over on slump sale basis and depreciation has been claimed on the differential amount between the consideration paid and allocable to the tangible assets. Hon'ble Delhi Court in the case of Areva T&D has put this differential amount towards intangible assets of the nature of 'business or commercial rights of similar nature' specified in section 32(1 )(ii) of the Act. In the instant case, the assessee has clearly mentioned that such business or commercial rights inter-alia, includes intellectual property rights (comprising of a patent for 'method and system for improve travel transaction billing and reconciling', contracts related to business, business authorizations (comprising of STPI Licenses, product bonded warehouse licenses, licenses to import and store petroleum etc), softwares (MS Office Pro, individual license etc), facility lease agreement, process knowledge know-how, 900 trained workforce, all goodwill of GTSC business etc The AO has not contradicted the above or found anything which is incorrect on this account Moreover, it is seen that GTSC business has increase the turnover of the assessee substantially in the subsequent years. While the total GTSC turnover was only Rs.80,62 million during FY 2009-10 it increase to Rs. 1157.67 millions in FY 2010-11 and Rs.1169.80 million in FY 2011-12, Thus, it cannot be said that the assessee is not benefited by such 'business or commercial rights of similar nature' specified in section 32(1)(ii). 16.4.4 The case laws relied by the AO are also not applicable on the facts and circumstances of the

77 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. case and in many case stands over rule by the decision of Hon'ble Supreme Court in Smifs Securities Limited (supra), Moreover, Delhi High Court in the case of CIT vs. Hindustan Coca Cola Beverages P. Limited [2011] 198 taxmann 104 had held that: "payment on account of goodwill is similar to assets like patents, copyrights, trademarks, licenses referred to in the definition of the block of assets in the senses that the function of all these assets is to restrict their misuse and to earn maximum profits in the business. The function of goodwill acquired by the assessee also is same in view of the fact that it maximizes the profits of the company, Therefore, the taxpayer's goodwill being a valuable commercial asset similar to other intangibles specified in the definition of block of assets is eligible to depreciation." 16.4.5 In the light of the above, the Panel holds that the reasoning of the AO for disallowance of depreciation on this account is not on sound footing and therefore, he is directed to allow depreciation on the differential amount under consideration.” 69. Now the department is in appeal. The ld. DR strongly supported the order of the AO and reiterated the observations made by him.

78 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. and further submitted that the difference/excess of purchase and capitalized in the books of the assessee, on which depreciation is allowable. The reliance was placed on the following case laws: � CIT Vs Smifs Securities Ltd. 348 ITR 302 (SC) � Bharti Teletch Ltd. 278 CTR 339 (Del.) � Areva T & D India Ltd. Vs DCIT 345 ITR 421 71. We have considered the submissions of both the parties and perused the material available on the record. In the present case, it is noticed that the ld. DRP directed the AO to allow the depreciation on the goodwill by following the decision of the ITAT wherein the judgment of the Hon’ble Apex Court in the case of CIT Vs Smifs Securities Ltd. reported at 348 ITR 302 and the decision of the Hon’ble Jurisdictional High Court in the case of Areva T&D India Ltd. Vs DCIT reported at 345 ITR 421 has been followed. We, therefore, by considering the totality of the facts, do not see any valid ground to interfere with the findings given by the ld. DRP on this issue. As such do not see any merit in this appeal of the department on this issue.

79 ITA Nos. 302 & 615/Del/2015 Exl Service.Com (India) Pvt. Ltd. restricted by the DRP @ 25% instead of 60% claimed by the assessee.

Sd/- Sd/- (Kuldip Singh) (N. K. Saini) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 03/01/2017 *Subodh* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5.DR: ITAT ASSISTANT REGISTRAR