GIL SHARED SERVICES PRIVATE LTD.,,CHENNAI vs. ACIT (OSD), CHENNAI

आदेश / O R D E R

PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:

This is an appeal filed by the assessee against the Order passed

u/s.143(3) r.w.s.144C(13) dated 24.11.2016 by the Asstt. Commissioner

of Income tax (OSD),Corporate Range-2,Chenneia for the AY 2012-13.

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2.0 The assessee has raised total 13 grounds in this appeal which are

very lengthy and repetitive. The Ld.AR submitted during the appeal that

effectively if Ground Nos.6, 8 & 9 are disposed off the remaining grounds

are not pressed and stands disposed off.

The grounds of appeal listed below are without prejudice to each other.

Issue 1: Upward TP adjustment of Rs.4,11,77,019/-

Ground of objection 1 — General ground

The order passed by the Ld. Assistant Commissioner of Income Tax (OSD), Corporate Range 2, Chennai (Assessing Officer or the AO) pursuant to the order of the Ld. Deputy Commissioner of Income-tax (Transfer pricing officer or TPO) and the directions issued by the Hon’ble Dispute Resolution Panel, Bangalore (DRP) to the extent prejudicial to the Appellant, is erroneous and bad in law.

Erroneous arm’s length analysis:

Ground of objection 2 — Rejection of economic analysis of the Appellant without any cogent reasons

The Ld. AO/ TPO and the Hon’ble DRP have erred, in law and in facts by not accepting the economic analysis conducted by the Appellant in accordance with the provisions of the Income tax Act, 1961 (the Act) read with Income tax Rules, 1962 (the Rules) for determination of arm’s length price of the international transaction of the Appellant. The TPO also conducted a fresh economic analysis for selection of comparable companies without providing any cogent reasons for undertaking the same.

Ground of objection 3 — Cherry picking of comparable companies

Without prejudice to the above, the Ld. AO/TPO and the Hon’ble DRP have erred in law and facts, and violated principles of natural justice by not providing the detailed process (i.e. accept/reject matrix and the reason of rejections of the companies rejected qualitatively) of the fresh economic analysis conducted for identification of comparable companies, and thus have resorted to cherry picking of the companies undertaking non-comparable activities.

Ground of objection 4— Erroneous characterization of the Appellant

The Ld. AO/TPO and Hon’ble DRP has erred by considering the appellant as high-end Information Technology enabled Service (ITeS) provider on the basis of his own surmises and conjectures, without appreciating its actual business profile (i.e. provider of routine ITeS) and also disregarding the fact that the Appellant is operating as a low risk captive service provider.

Erroneous comparability analysis

Ground of objection 5— Application of invalid Filters

The Ld. TPO/ AO and the Hon’ble DRP have erred in law and in facts by applying certain arbitrary quantitative and qualitative filters for the purpose of selection of comparable companies and also erred in adding/ rejecting certain companies based on inappropriate criteria/reasons.

Ground of objection 6 — Objection on comparable companies

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(i) The Ld. TPO/AO and the Hon’ble DRP have erred in inclusion of the following functionally dissimilar companies for the purpose of determination of ALP under section 92C of the Act:

• lnfosys BPO Limited; • Cosmic Global Limited; and • Acropetal Technologies Limited.

(ii) The Ld. TPO/ AO and the Hon’ble DRP have erred in law and facts by not considering (on the basis of various arbitrary comparability factors/parameters) the following companies as comparable despite being functional comparable to the Appellant assumed b:

• Jindal Intellicom Limited; • Informed Technologies Limited; • Caliber Point Systems Limited; • R Systems International Limited; • ACE BPC Services Private Limited; and • Datamatics Financial Services Limited.

Errors in computation of operating margins

Ground of objection 7 — Incorrect computation of operating margins

The TPO/AO has erred in computing the operating margins of the comparable companies by not relying on the figures available in annual reports. Further, the TPO/AO has excluded certain items of income and expense as non-operating, without providing any valid basis and reasons for the same. The TPO and AO have further erred in not following the directions of the Hon’ble DRP by failing to rectify the errors in computation of operating margin of the comparable companies.

Ground of objection 8 — Rejection of claim for excess depreciation adjustment

Without prejudice to other grounds of objections, the Ld. TPO/AO and the Hon’ble DRP have erred in law and facts by considering excess depreciation on account of change in useful life of asset as an operating expense and rejecting the adjustment claimed by the appellant to treat the same as an extraordinary expense and non-operating in nature, for the purpose of computing the operating margin of the Appellant.

Other grounds of objections

Ground of objection 9 — Non-granting of working capital adjustment

The TPO/AO and the Hon’ble DRP have erred, in law and facts, by not making suitable adjustments to account for differences in the working capital of the Assessee vis-ã-vis the comparable companies under sub-rule (3) of Rule 10B.

Ground of objection 10 — Non-granting of risk adjustment

The TPO/IAO and the Hon’ble DRP have erred, in law and facts, by not making suitable adjustments to account for differences in the level of risk of the Assessee vis-ã-vis the comparable companies under sub-rule (3) of Rule 10B.

Ground of objection 11 — Use of single year data (which was not available at the time of maintaining TP documentation)

The Ld. TPO/AO and the Hon’ble DRP have erred in law and in facts, by determining the arms length margin price using only Financial Year 2011-12 data, as against multiple year data adopted by the Appellant without appreciating that multiple year data has an influence on the determination of transfer prices in relation to the international transactions and also not giving due cognizance to the rules notified by the CBDT vide Notification No. 83/2015 [F. No.142/25/2015-TPL].

Ground of objection 12 — +1-5% tolerable range as provided in proviso to Sec 92 C (2)

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The Ld. TPO/AO and the Hon’ble DRP have erred in law and in facts, in computing the arm’s length price without giving benefit of +/- 5 percent under the proviso to section 92C of the Act. Issue 2: Infusion of interest Ground of objection 12 — Erroneous levy of interest under Section234B, Section 234C and Section 234D The Ld. AO has erred by levying interest under Section 234B, 234C and 234D of the Income-tax Act, 1961 (Act) despite the fact that the additions to the income were un- anticipated and there would be consequential reduction in the interest once the appeal is allowed on the issue. Issue 3: Initiation of penalty proceedings Ground of objection 13 — Initiation of penalty proceedings The Ld. AO has erred in initiating penalty proceedings under Section 271 (1) (C) of the Act, without appreciating the fact that the transfer pricing adjustments arising on account of difference in the approaches adopted by the Appellant vis-à-vis the Ld. TPO/ AO does not amount to any concealment of particulars of income or furnishing of inaccurate particulars by the Appellant. The Appellant craves leave to add to/alter/amend/substitute any of the above grounds of appeal, at the time, before or at the time of hearing of the appeal, so as to enable the Appellate authority to decide this appeal according to law.

3.0 Background of the Company:

M/s. GIL Shared Services Private Limited is incorporated on 18

December 2009 as a private Limited Company. The company has been set

up to be engaged in the business of providing transaction processing

services in relation to logistics, finance and customer support. On 28 July

2010, the company became a wholly owned subsidiary of Agility Logistics

Holdings Pte Limited, Singapore. The assessee company provides IT

enabled support services exclusively to Agility Group entities, specifically

transaction processing in relation to Logistics, Finance and Customer

Support.

4.0 The assessee has entered in to international transactions of

Rs.19,12,16,984/- as per the details given below:

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Associated enterprises & Details of International Transactions:

Sl. Amount of Transactions Method adopted Details of transaction No. (in Rs.) by the assessee Provision of IT enabled 17, 23,65,364 1. services Reimbursements of 1,28,57,444 2. received/receivable by GILSSPL TNMM Reimbursements 59,94,176 3. paid/payable by GILSSPL 19,12,16,984

The AO referred the international transaction to the TPO for

determining the ALP. The assesse has adopted the TNMM as most

appropriate method for the purpose of determining of ALP and adopted PLI

of OP/OC. The operating margins calculated by the assessee after

claiming the depreciation adjustments and has adopted the three years

weighted average instead of current year data to determine the ALP of its

transaction as per the proviso of Rule 10B(4) of Income Tax Rules, hence

the AO rejected the TP study of the assessee and made independent

search process on the criteria of ITES/BPO segment and selected the

following comparables:

Sl.No. Name of the Company OPIOC(%) 1 Cosmic Global Ltd. 40.88 2 Jindal Intelli Corn Ltd. -0.09 3 Microgenetics Limited 19.61 4 Infosys Limited 35.95 5 ICRA Online Limited 14.93 6 Aceropetal India Limited 26.3 7 Accentia Technologies 11.84 Average 21.35

5.0 The TPO arrived the assessee’s margin at 7.27% against the

average margin of 21.35% of comparables and issued show cause notice

to the assesse. The assesse filed objections stating that the TP study

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made by the assessee company has been complied with all the Indian TP

Regulations as per Sec.92C of Income Tax Act and requested to accept the

TP study of the assessee. Further, the assessee has requested for

inclusion of some more additional comparables and for adjustments of

excess depreciation charged to PLI account as non-operating item,

working capital adjustment, risk adjustment and exclusion of some of the

comparables selected by the TPO and for adoption of multiple year data.

The TPO rejected all the objections raised by the assesse and selected the

final set of comparables as under:

Name of the company Average Cosmos Global Limited 40.73 Jindall Intellicom Ltd 1.4 Microgenetics Limited 20.41 Infosys BPO Limited 33.72 ICRA Online Limited 16.63 Accropetal India Limited 35.74 Accentia Technologies 11.05 Average 22.81

6.0 The AO arrived at the average margin of 22.81% as above and

proceeded to determine the ALP of the International transaction as under:

Based on the above discussions, the ALP is calculated as under: S.No Description Rs. 1 Assessee’s margin(A) 7.27% 2 Comparable margin(B) 22.8 1% 3 AE sales(C) 17,4061,661 4 Operating cost (D) 16,22,60,596 5 Operating Profit pertaining to AE sales 11800065 6 Expected profit with profit margin of 22.81% on cost =E 37011656 7 ALP of AE sales (D + E)=F 199272252 8 Actual AE sales(C) 17,40,61,661 9 Difference proposed to be adjusted(F-C) 2,52,10,591

From the final set of comparables, average margin worked out to

22.81% against the tested party’s margin of 7.27%. The ALP of the

international transaction was worked out to Rs.19,92,72,752/- against the

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actual sales of Rs. 17,40,61,661/- and the difference was worked out to

Rs.2,52,10,591/- as per the workings and suggested for upward

adjustment of Rs.2,52,10,591/-. The AO issued draft Assessment Order

proposing adjustments as suggested by the TPO and in response to the

draft Assessment Order, the assesse filed the objections before the DRP.

7.0 The DRP after considering the objections raised by the assesse,

rejected for exclusion of the following comparables from the list of

comparables selected by the TPO –

Similarly, the assessee has requested for inclusion of the following

comparables:

Which was rejected by the DRP.

7.1 The assessee has requested for inclusion of some more

comparables in Ground No.6 but not agitated in this appeal. The DRP also

has rejected the assessee’s request for adjustments in respect of excess

depreciation for computing operating margin, working capital adjustment

and risk adjustment. Accordingly, the DRP issued the directions to the AO

to frame assessment u/s.143(3) r.w.s. 144C. The AO made the

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assessment making adjustment of Rs.2,52,10,591/- and passed the

Assessment Order u/s.143(3) r.w.s. 144C of the Act on 02.03.2016 which

is in appeal before us.

8.0 In Ground No.6, the assesse has argued for exclusion of the

following comparables:

The assessee has requested for inclusion of the following

comparables:

9.0 Cosmos Global Ltd:

Objecting for inclusion of Cosmic Global Ltd., the Ld.AR argued that

the services of the Cosmic Global Ltd., are functionally not comparable.

The company engaged in the medical transcription and consultancy

services, translation services and outsourcing the services. The Ld.AR

submitted a copy of the financial statement of the Cosmic Global Ltd. out

of the total Revenue of Rs.10.34 Cr., a sum of Rs.9.92 Cr. was received

from the translation service charges and the amount paid for outsourcing

the translation charges was Rs.4.19 Cr. thereby the assesse contended

that the functions of the company are dissimilar and the major portion of

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the Revenue was from translation charges and it cannot be taken as

comparable company. On the other hand, Ld.DR relied on the DRP order

and the TPO order.

9.1 We heard the rival submissions and perused the material placed on

record.

The functions of the assesse company are logistics, finance and

customers support and providing transaction processing services.

Whereas the major source of Revenue of M/s.Cosmic Global Ltd., was

derived from the translation services and outsourced from sub-

contractors. Against the total Revenue of 10.34 Crores translation charges

received by the M/s.Cosmic Global Ltd., was Rs.9.92 Cr. and paid was

Rs.4.19 Crores and the employees cost was Rs.2.45 Cr. The Hon’ble Co-

ordinate Bench of ITAT, Bangalore, in the case of M/s.e4e Business

Solutions India Ltd., in ITA No.1845/Bang/2013 held that the company is

entirely different in nature of activity since it has received major share of

Revenue from translation charges and paid the same and accordingly

excluded this company from the list of comparables. From the above, the

assesse has demonstrated that the functions of the M/s.Cosmic Global

Ltd., are dissimilar from the assessee’s company and the M/s.Cosmic

Global Ltd., is not a good comparable with that of the assesse company.

The Ld.AR also relied on the following judicial pronouncements.

i. Hon’ble Delhi HC in Xchanging Technology Services India P. Ltd. ITA 813/2015 – ii. Hon’ble AP & Telangana HC in Market Tools Research Pvt Lt., I.T.A. Nos.471/ 2014 iii. Hon’ble Delhi HC in Rampgreen Solutions Pvt. Ltd.

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iv. ITA 102/2015Hon’ble Bangalore ITAT e4e Business Solutions India Pvt. Ltd IT(TP)A No.1845/Bang/2013

The Ld.DR did not bring any evidence to show that the functions of

the assessee company are similar to that of M/s.Cosmic Global Ltd .

Therefore, we direct the AO to exclude the M/s.Cosmic Global Ltd., from

the list of comparables.

10.0 M/s.Infosys BPO Ltd:

The assessee objected for inclusion of M/s.Infosys BPO Ltd., as

comparable mainly on the turnover and brand value in the market. The

Ld counsel of the assessee submitted that the Infosys BPO, the business

process outsourcing subsidiary of Infosys (NYSE: INFY), is an end-to-end

outsourcing services provider. Infosys BPO addresses the business

challenges and unlocks business value by applying proven process

methodologies with integrated IT and business process outsourcing

solutions. The company applies business excellence frameworks to

significantly reduce costs, enhance effectiveness, and optimize business

processes. The assessee company focuses on integrated end-to-end

outsourcing and delivery of result-oriented benefits to its clients through

reduced costs, ongoing productivity improvements, and process

reengineering.

The assesse contended that the turnover of the M/s.Infosys BPO Ltd.

was Rs.1312 Cr., the brand value and the asset wise cannot be compared

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with that of the assesse. The assessee also relied on the following

decisions:-

i. Capital IQ Information Systems (India) Pvt.Ltd., (Hyd)ITAT,ITA No.124/2014 ii. Berkadia Services(India)(P) Ltd., (Hyd)ITAT,ITA No.294/2014 iii. Unisys India(P) Ltd., (Bangalore)ITAT,ITA No.67/2015 iv. IGS Imaging Services (I) Pvt Ltd., (Bangalore)ITAT,ITA No.470/2013 On the other hand the Ld DR argued that the assessee has selected

TNMM as most appropriate method and the assessee company is a

subsidiary company of AGILITY a global logistic leader and has leading

brand value for providing integrated logistics and the brand value of the

assessee company cannot be under estimated. The assessee is engaged

in the complicated and diverse functions which required high level of skills.

The Ld.DR argued that the submissions made before the DRP have been

reiterated by the Ld.AR and the Ld.DRP has considered above submissions

and given finding in Para No.4.3.2. The DRP in Para No.4.3.2 observed

that the assessee is creating, improving and modifying the products and

IPs in its day to day functioning. However through an internal

arrangement, ownership of all these intangibles/IPs/Brands are shifted out

of India and the assessee keeps calling itself a cost plus entity. The Ld DR

further submitted that the DRP has placed reliance on the Hon’ble ITAT

Bangalore Bench decision in the case of Society General Global solution

Centre (p) Ltd v. DCIT (2016)69 taxmann.com336 while rejecting

assessee’s objection.

10.1 We heard the rival submissions and perused the material placed on

record.

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The main contention of the assessee is that the M/s.Infosys BPO Ltd.,

is company with huge turnover and due to brand value in the market it is

in a better position to bargain a higher price for the services rendered

which reflects in the Profit & Loss A/c. M/s.Infosys BPO Ltd., is one of the

top rated companies in the ITES domain. The turnover of M/s.Infosys BPO

Ltd., is as high as Rs.1312 Cr. against the assesse’s turnover of Rs.17.40

Cr. and high turnover effects the margins of the company. However the

assessee has not made out a case how the huge turnover has materially

impacted the margins of the company. Functions of the assessee company

are fairly complex and diverse and these jobs require high level of skills.

The DRP has analyzed the profile of the company and given a finding that

functions of the company are similar to that of Infosys. As per Rule 10B(4)

for selection of a comparable Turnover and brand value are not the

criteria. The assessee is in the service sector where fixed costs are

nominal and cost of service is proportionate to the services rendered by

the assessee. The assessee is doing the captive services to its AE and the

brand building and turnover cannot be an impediment to bargain the price

for its services. Though there are decisions in favour of assessee to

exclude the comparables based on turnover we are unable to accept the

argument of the assessee unless assessee makes out case that the high

turnover has made substantial impact on the margins. The issue of a

particular company is a comparable or not is an exercise which has to be

carried out every year in case of an assessee considering the facts of that

specific year and not blindly following any precedents. Similarly in the

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case captive units brand building is not an impediment in fixation of price.

The Co-ordinate Bench of Bangalore in the case law relied upon by the

DRP has considered the issue of turnover filter and decided against the

assessee for exclusion of the company from the list of comparables.

Therefore, we hold that Infosys BPO cannot be excluded from the list of

comparables. The assessee’s appeal on this ground is dismissed.

11.0 Acropetal Technologies India Ltd.:

The next issue is exclusion of Acropetal Technologies India Ltd from

the list of comparables. The ld.AR submitted that the Company is involved

in the following segments • Engineering design service • Information technology service • Healthcare The AR further submitted that the company is functionally non

comparable segment in relation to the Healthcare segment, the company

provides the following service:

• Patient Life Cycle Management (including EMR) • Physician & Clinical Life Cycle Management • Hospital Administration Management • Drug Discovery & Administration Management • Disease Life Cycle Management

These services are either in the nature of knowledge process

outsourcing or medical process outsourcing which are mainly done by the

highly technical employees whereas the work done by the assessee are in

the nature of low end services. On the other hand, the Ld.DR relied on the

order of lower authorities.

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11.1 We heard the rival submissions and perused the material placed on

record.

The assessee is also engaged in the fairly complex and diverse

functions which require high degree of skills. The DRP in its order stated

that the TPO considered only ITES segment for the purpose of TP study.

However, Ld.AR in his arguments brought to our notice that during the

year the company had acquired two US based companies namely Line

Beyond Inc. USA and Optech Consulting Inc., USA during the FY 2011-

12.This apart the company also acquired two domestic companies namely

Mind River Information Technologies Ltd., and 51% of stake in Kinifotech

(P) Ltd. Such extraordinary events of acquisitions and amalgamations

effects the profit margins of the company and on the same set of facts Co-

ordinate Bench of Hyderabad in Intoto Software company Ltd. in ITA

No.1196/Hyd/2010 has excluded the comparables. This issue

amalgamations and take over has not been considered by the DRP or the

TPO at the time of assessment or before DRP proceedings. Therefore, the

matter is remitted back to the file of the AO/TPO to consider the

objections raised by the assesse and decide the matter afresh.

12.0 M/s.Jindal Intellicom Pvt. Ltd.:

The assesse has argued for inclusion of M/s.Jindal Intellicom Pvt. Ltd., The

DRP has directed the TPO to exclude the Jindal mainly because of the

Revenue from outsourcing work. The Ld.AR submitted that This

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comparable was not disputed by the TPO and the assessee also did not

contest it before DRP. DRP on its own accord has rejected this Comparable

stating that it derives major income from USA. Referring to Paper Book

Page No.17, the Ld.AR stated that the assessee company also derives @

92.89% of income from USA and this is an erroneous rejection by DRP.

12.1 During the appeal, Ld. DR argued that the assessee has argued for

exclusion of M/s.Cosmic Global Ltd., as comparable merely because of the

translation charges received and outsourcing work. Jindal Intellicom Ltd’s

major share of revenue is from outsourcing work and on the similar

logic, Jindal is also required to be rejected.

12.2 We heard the rival submissions and perused the material placed on

record. The DRP has examined the case of Jindal and extracted the annual

report in paragraph No.4.8 which reads as under:

During the financial year ended 31st March, 2012 there is a decline in revenue by 21% and as a result the profitability has also gone down by 59%. Your company provides IT and ITES services in the international and domestic market, in the international market, where the Company only caters to the USA market, adverse business climate has been witnessed for outsourcing work over the last year. It has impacted the Company adversely and impacted its profitability to an extent. The Company adversely and impacted its profitability to an extent. The Company started its domestic operations 18, months back which have now started showing good results and business is now picking up well in this territory. Your company foresees a large potential in domestic market and is now pursuing opportunities more aggressively.

Further DRP observed that M/s.Jindal was facing peculiar problem

due to its services being meant for its international market, in USA. The

assessee company has not suffered any such major disadvantage as its

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transactions are with its AE in Singapore/Kuwait. From the annual report

and the observation of the DRP we find that there were extraordinary

events which has affected the margins of Jindal. In addition to the above

for exclusion of M/s.Cosmic Global Ltd., one of the reasons argued by the

assessee was it’s major share of Revenue derived from translation charges

and outsourcing work and this Tribunal has directed the AO to exclude the

Cosmic Global as comparable on the same reason. Following the same

reasoning, we are unable to accept the contention of the assesse to

include Jindal as comparable and the same is rejected.

13.0 R Systems International Ltd:

The assessee submitted that the company M/s.R Systems

International Ltd., is engaged in two segments namely Software

development and customization services and Business process

outsourcing services. The TPO rejected the company as comparable since

the company is following the different FY. The assesse is following April to

March as the financial year, where as R Systems is following January to

December as a financial year. The DRP confirmed the order of the TPO

stating that Rule 10B(4) mandates utilization of current year data and

Rule 10D(4) places reliance on contemporaneous data and just as earlier

years data companies having different Financial year ending with change

in economic and market conditions with time cannot be denied.

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13.1 Ld.AR during the appeal hearing relied on the decision of the Delhi

ITAT in the case of M/s.Exevo India Private Ltd v ITO and Techbooks

International Pvt. Ltd. In ITA No.240/Del/2015 and argued that

companies having different financial year ending operating during the

same period of time as the assessee, were also facing similar business

cycles, market and economic conditions that the other comparables and

the assessee (having a financial year of April to March) were facing.

Therefore in the absence of evidence available to the contrary that there

has been a significant impact in the margins due to change in different

reporting/accounting period, it would be incorrect to disregard the

companies using this filter. In case of R systems quarter wise financial

data is available hence the same should be included as comparable. The

assessee further relied on the following decisions:

In the case of RR Donnelly Co-ordinate Bench of ITAT has directed

the assessee to furnish the complete information to the TPO for due

verification.

13.2 We heard the rival submissions and perused the material placed

before us.

Both the companies are functionally similar. However M/s R Systems

is engaged in two segments namely Software development and

customization services and Business process outsourcing services. Though

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the assessee contended that only BPO segment is taken for computation

of margin it is not authenticated information since it is not known whether

the comparable company is maintaining separate books of accounts

segment wise. The TPO has rejected the comparable since the company

was following different financial years. There are decisions of Tribunals

wherein it was held that the companies following different financial year is

not a good comparable. However, the Ld.AR relied on the decisions of Co-

ordinate Bench in the case law cited (supra) wherein it was held that if

the complete information is available there can be no objection for

inclusion. The Chennai Co-ordinate Bench directed the AO to adopt the

comparable on submission of the information from the audited accounts of

the company. In the case of R Systems it is engaged in two segments and

following the different F.Y. We direct the assessee to collect and reconcile

the data from audited accounts including the year ending adjustment

entries to the comparable financial year and submit the same for further

verification of the TPO/DRP. We direct the DRP/AO to adopt R Systems as

comparable on submission of complete reconciled data relating to the

financial year followed by the R Systems with the assessee company.

Accordingly we remit back to the file of the AO to decide the issue as per

the discussion made in this order. This ground of the appeal allowed for

statistical purposes.

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14.0 M/s.Informed Technologies Ltd.:

The TPO/DRP rejected the company as comparable as it was having

other income to the extent of 48% of the total turnover and no segmental

details are available. The assessee argued that though there was

substantial income under the head other income, the other income

declared in the Financial statement was after netting of direct expenses

relating to other income. No financial statements have been placed before

us to verify the same. As per the Annual Report of the company, the

company has advanced a sum of Rs.74,55,955/- to Magnacem

Pharmaceuticals under the same management interest free. It was not

clear whether the interest free loan granted to the Magnacem out of

interest bearing funds or non interest bearing founds and other related

expenses. If the loan is granted out of interest bearing funds there would

be a change in the interest and the margins. Further, other non operating

income declared was net of direct expenses but not the administrative,

marketing distributions expenses which require consideration. Merely by

reducing the direct expenses of non operating income margins of

operating income cannot be determined. While computing the margins all

other relevant expenses require careful consideration. The Ld.AR has not

submitted the complete segmental data to arrive at the margins of

operating income. The DRP has rightly observed that there is no proper

internal audit system. Considering the notes on accounts and Annual

Report and non availability of corresponding expenditure relating to other

operating income we hold that the DRP has rightly rejected the company

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as comparable. Accordingly, the assessee’s ground on inclusion of

M/s.Informed Technology Ltd., is dismissed.

15.0 In ground No.6 the assessee has raised a ground for inclusion of the

following companies also as comparables: • Calibre Points Systems Ltd. • Ace BPO Services • Data Finance Services Ltd.

During the appeal, the Ld.AR has not made any arguments on

inclusion of the above companies. Therefore, the assessee’s appeal on

inclusion the above comparables is dismissed as not pressed.

16.0 The next ground argued by the assessee was rejection of claim for

excess depreciation adjustment in Ground No.8 of the appeal:

The assessee claimed a sum of Rs.1,09,85,120/- relating to excess

Depreciation on account of change in useful life of assets as an extra

ordinary item and requested adjustment for computing the margins of the

assessee. The TPO has not considered the excess depreciation since the

assessee has not given due credit in the subsequent years and the

assessee will have double advantage if the adjustment is given in this year

and get benefit in the subsequent year also. The DRP has confirmed the

order of the TPO stating that the assessee is a cost plus entity, whether

the cost is more or less the assessee is bound to get fixed margin on the

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service rendered. The assessee also could not demonstrate the effect of

this item on the profit margin and submit appropriate evidence.

16.1 During the appeal, the Ld.AR argued that the company has shifted

its office. Due to shifting of the office, certain items of fixed assets which

could not be moved to the new premises were written off as excess

amount of depreciation and claimed as adjustment which was not

considered by the TPO for computing the operating margins. Since the

items cannot be moved due to the nature of assets, it was a loss incurred

during the year and it should take into account for computing the

operating margin and requested for adjustment. The assessee also relied

on the decision of Hon’ble Delhi High Court in the case of CIT v.

Transwitch India Pvt. Ltd. In ITA No.678/2012 & CM 20555/2012 (Delhi)

on 17.07.2013 wherein the Hon’ble Delhi High Court upheld the order of

the Tribunal allowing the adjustment in computing the ALP in Para No.7 as

under:

It is not disputed that if the figure of Rs.1,1 1,73,078/- is duly accounted for and taken into consideration, then the operating margin of the respondent/assesse come to 17.80%, which is higher than the comparable operating margin of 17.09%, taken as a benchmark by the TPO. Submission on behalf of the appellant that the parent company should have shared the burden or a part thereof is not legally tenable. The said expenditure was incurred by the Indian company because of peculiar problems faced by them as a result of which they had to shift the place from where they were operating. The abnormality and difficulty resulting in extra expenditure was not created or caused by the associated enterprise. They were not responsible or liable for the said payments/expenditure. The associated enterprise did not have legal or contractual obligation to make extra or additional payment beyond the true and correct Value of the transaction. 8. In view of the factual findings recorded by the Tribunal, we do not find any substantial question of law arises in this appeal and the same is, accordingly, dismissed.

16.2 In the assessee’s case also the facts are similar. The assessee had

discarded the items of assets which could not be re-used in the new

ITA No.3485/Mds/2016 :- 22 -:

premises. The shifting of premises was not at the instance of the AE and

the assessee shifted its office for its operational advantage. Therefore, we

are of the considered opinion that the assessee’s case is squarely covered

by the decision of the Hon’ble Delhi High Court (cited Supra) and

accordingly, direct the AO to allow the adjustment of excess depreciation

on discarded items while computing the ALP. The assessee’s appeal on

this issue is allowed.

17.0 Ground No.9 of the assessee is related to not allowing suitable

adjustments for working capital of the assessee. During the TP proceedings,

the assessee has requested for working capital adjustment to which the

TPO has rejected the adjustment stating that the contention would be

relevant only in the event of assessee’s working capital being negative. In

the instant case, there can be no grievance for the assessee since its

margins are not affected by negative working capital. Also, being a captive

service provider, the transactions of the asseseee are mainly with the AE.

The TPO placed reliance on the decision of the Hon’ble ITAT ‘C’ Bench,

Chennai in ITA No. 2112/Mds/2011 (AY 2007-08) in the case of Mobis

India Limited Vs. DCIT, wherein, the Hon’ble ITAT has held that “the

assessee has not been able to justify the adjustments that were required

to be made on account of negative working capital.”

17.1 The assessee has requested for working capital adjustment and the

TPO has rejected the assessee’s request for working capital adjustment

ITA No.3485/Mds/2016 :- 23 -:

since there was no negative working capital and the assessee is captive

service provider and the transactions of the assessee are mainly with the

AE. The Ld.TPO also relied on the decision of the Tribunal in the case of

Mobis India Limited cite (supra). The assessee filed the appeal before the

DRP and the DRP has rejected the assessee’s request for adjustment of

working capital adjustment.

17.2 We heard both the parties and considered the submissions made by

the Ld.AR as well as the Ld.DR.

The TPO has rejected the contention for working capital adjustment

since there was no negative working capital and the Ld.AR submitted the

details of working capital adjustment. However, the pricing model of the

assessee and the AE were not furnished by the Ld.AR. The Ld.AR relied

on the decision of M/s.Foxteq Services India Pvt. Ltd. Vs. ACIT dated

01.09.2016 in ITA No.174/Mds/2016, the Co-ordinate Bench in the

decision relied upon by the assessee in Para No.7 held as under:

ITA No.3485/Mds/2016 :- 24 -:

In the above case relied up on by the assessee the ITAT remitted the

matter back to the file of the DRP to reconsider the issue comparing the

working capital employed by the assessee and comparable companies. In

the instant case, the assessee is a captive services provider, most of the

transactions are only with the AE. Unless the pricing model of the

assessee as well as AE is furnished, it is not known what was the actual

margin for sale of the product by the assessee and the purchase of the

product and the hidden costs of interest etc. For a query from the bench,

the Ld.AR of the assessee has agreed to submit the details of the pricing

model. The reasons for working capital gap i.e. the gap between the

realization of debtors and period of payment to creditors need to be

examined since the assessee is serving only to the AE being the creditor

for supplies. Therefore, we direct the assessee to furnish the pricing model

of the assessee as well as AE and other details to demonstrate why the

working capital adjustment is required and how it has materially impacted

the profit margins of the assessee company in the light of the fact that the

assessee is a captive service provider to the AE and the reasons for delay

on receivables and reasons for working capital gap. Therefore, we set-

aside the issue to the file of the AO/TPO to examine the issue afresh on

merits. Accordingly, we set-aside the orders of the lower authorities

orders and allow the appeal of the assessee for statistical purposes.

18.0 No other ground or issues raised in this appeal in respect of transfer

pricing adjustments which were assailed by the assessee in the grounds of

ITA No.3485/Mds/2016 :- 25 -:

appeal have been argued by the Ld.AR. Therefore the remaining grounds on transfer pricing are dismissed as not pressed.

19.0 Ground No.12 is related to charging of interest u/s.234A, 234B, 234C and 234D which consequential in nature and mandatory. The Ld.AR did not make any arguments on this issue. Therefore this ground is dismissed. 20.0 Ground No.13 is related to initiation of penalty proceedings which consequential in nature and no argument has been advanced by the Ld.AR therefore this ground is dismissed.

21.0 In the result, the appeal of the assessee is partly allowed.

Order pronounced in the Open Court on 26th April, 2017, at Chennai.

Sd/- Sd/- (एन.आर.एस. गणेशन) ("ड.एस. सु�दर $संह) (N.R.S. GANESAN) (D.S.SUNDER SINGH) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER

चे�नई/Chennai, 5दनांक/Dated: 26th April, 2017. TLN

आदेश क0 .�त$ल6प अ7े6षत/Copy to: 1. अपीलाथ-/Appellant 4. आयकर आयु8त/CIT 2. ./यथ-/Respondent 5. 6वभागीय .�त�न�ध/DR 6. गाड* फाईल/GF 3. आयकर आयु8त (अपील)/CIT(A)