EXI SERVICE COM (INDIA) (P) LTD vs. ACIT CIRCLE-11 (1),

That the Commissioner of Income-tax (Appeals) erred on facts and in law in rejecting the following comparable companies primarily engaged in rendering IT enabled services: Page 3 of 15

That in case benchmarking had to be done using current year's data, then the lower authorities erred on facts and circumstances of the case, in not taking into account other LT. enabled companies (identified using 'Prowess' data base of CMIE), performing identical functions as comparable companies for the said benchmarking.

Having heard the submissions and considered the order of the ITAT in assessee’s own case in the light of the submissions of the parties, Ground No.2 alongwith the sub-grounds is dismissed following the order of the Co-ordinate Bench.

Addressing Ground No.-3.1 & 4 wherein the assessee agitates the adjustment on account of the idle capacity, the Ld.AR has canvassed that 95% of the total revenue of the assessee came from “Conseco”. As a result of loss of this business the capacity of the assessee was not completely utilized as the group was trying to obtain other customers. In view of this fact it was submitted that the assessee could not close any of its facilities nor could the assessee terminate its employees as such a conduct would have adversely effected its reputation in the market. The profitability of the assessee it was submitted was driven down by idle time and the other employee related cost including idle capacity. Due to the loss of its major business from Conseco the average ideal time of the employees was as high as 23.40%. Attention was invited to paper Book page 78 to 82. The capacity utilization considering the seating capacity on triple shift basis it was stated was as low as 27%. Accordingly appropriate adjustments for un-utilized capacity relying upon Paper Book pages 78 to 82 was prayed for. The jurisprudence in support of such an action it was submitted is available. Reliance was placed on the following decisions:- (1) Global Turbine Services Inc. vs. ADIT (ITA No.3484/Del/2011); (2) ACIT vs Fiat India Pvt.Ltd. (ITA No.1848/Mum/2009); (3) Brintons Carpers Aisa Pvt.Ltd. vs ACIT (ITA No.1296/PN/2010); (4) E.I.Dupont India Pvt.Ltd. vs DCIT (ITA No.5336/Del/2010); (5) Transwitch India Pvt.Ltd. vs ACIT (ITA no.6083/Del/2010)-The said order of the Tribunal was upheld by the Jurisdictional High Court vide order dated 17.07.2013; (6) DCIT vs Panasonic AVC Networks India Co. Ltd. (ITA No.4620/Del/2011) 5.1. Reliance was also placed on the decision of the dated 10.07.2014 in in the case HCL Technologies BPO Services Ltd. vs ACIT (copy filed).after considering various decisions including the decisions has mandated such an adjustment. Accordingly relying upon Paper Book page 78- 82 it was his submission that after excluding the abnormal cost the operating profit margin of the assessee, the operating cost ratio to work out to 27.92% as against 12.80% in the case of the comparables. Thus since the operating profit to cost ratio of the assessee is higher at 27.92%, the entire adjustment made would be deleted.

The Ld. Sr. DR submitted that the calculations may be verified however no contrary view judgement or fact was referred to on behalf of the Revenue.

Considering the submissions of the parties and the material available on record in the face of the consistent orders of the ITAT including the latest decision wherein one of us is a party (authored by Ld. AM) respectfully following the orders of the Tribunal, the issue is restored back to the file to the TPO for verification and necessary relief. 8. Addressing the issue raised in Ground No.3.1(ii) the Ld.AR submitted that the assessee follows an aggressive method of depreciation of its assets which would be evident from a perusal of its balance sheet. The assessee it was submitted depreciates its assets at a higher rate than as per Schedule XIV to the Companies Act, 1956. For the year under consideration it was submitted the assessee has charged additional depreciation of Rs.14,19,51,272/- to its P&L A/c thus impacting its profit margin. 8.1. On the said issue the DRP in 2006-07 assessment year directed the TPO to recompute the depreciation charged by the comparables at the rate applied by the assessee. Further the ITAT also in 2003-04 assessment year vide its order dated 22.12.2014 in in para 5.23 directed that operating profit of the comparables should be recomputed by the TPO in line with the rates of depreciation charged by the assessee under the SLM. Accordingly, it was submitted if the OP/OC ratio of the comparable companies considered by the CIT(A) is considered then it worked out to -15% and if OP/OC ratio of comparables considered by the TPO is considered then it works out to - 8.4%. Since the average operating profit margin of the assessee is at -3.14% then the international transactions undertaken by the assessee it was submitted would be at arms length applying TNMM. 8.2. Addressing the background, attention was invited to pages 1-42 of the Paper Book which contain transfer pricing documentation made available to the TPO. Referring to the same, it was submitted that the assessee in its transfer pricing study had selected the following 9 comparables:- S.No. Name of the Company Margins (OP/TC) Weighted 2003 2002 average 1. Ace Software Exports 11.64% 17.63% 14.88% 2. Allsec Technologies Ltd. 12.55% 9.53% 11.65% 3. Apex Logical Data Conversion Pvt.Ltd. 14.30% 22.26% 17.80% Page 8 of 15

Considering the judicial precedent in assessee’s own case the Ld. CIT DR stated that as far as the calculations are concerned the issue has to be verified by the TPO and in the face of the order of the Co-ordinate Bench as the issue has to go back it was submitted that he would have no objection if the calculations as considered by the TPO are taken on record and the departmental ground is allowed. The Ld. AR in reply submitted the let the TPO consider both the calculations and he would have no objection.

We have heard the rival submissions and perused the material available on record following the judicial precedent in the light of the submissions of the parties, we allow the departmental appeal as canvassed by the ld. CIT DR and not opposed by the Ld. AR and direct the TPO/AO to recompute the operating margins of the comparables retained by the TPO in line with the rates of depreciation charged by the assessee under the straight line method. Accordingly departmental appeal is allowed and Ground No.3.1(ii) of the assessee is also allowed for statistical purposes. Page 10 of 15

Qua Ground No.7 the assessee prays for exclusion of Fortune Infotech Ltd. The request for such a relief was based on the argument that the said company has extraordinary profits during the year. This fact it was submitted is evident from its Annual Report-copy available in the Paper Book. The said issue it was also submitted has already been taken into consideration for this specific assessment year by the Banglore Bench of the Tribunal in the case of 24/7 Customer.Com Ltd. vs DCIT in 227/Bang./2010 which has further taken into consideration the fact that Fortune Infotech Ltd. has developed its own software namely “Fine Tran” and “Image index”. In the assessee’s own case also it was submitted that the ITAT though has rejected the exclusion of Fortune in 2003-04 assessment year however while so holding the Bench returned a finding that Fortune Infotech in 2003-04 Financial year relevant for 2004-05 assessment year developed its own intangibles thus in the year under consideration it was submitted it should be excluded as a comparable. For ready-reference, the relevant extract from the order at paper book page 117-118 is reproduced hereunder:- 8.3. Turning to the facts of this company, we find that the ld. AR has harped on higher OP/OC margin of this company for the year under consideration at 108%, in contrast to 67% for the preceding year and 39% for the succeeding year to contend for its exclusion due to abnormal profits. In our considered opinion, the year in question cannot be considered as abnormal when viewed in the light of the fact that its profit rate has progressed from the preceding year. The decline in the profit rate for the succeeding year is due to the reasons given by the company in its Annual report for next year, a copy which is available on pages 178 onwards of the paper book. In his message to the shareholder, the Managing Director of the company stated that the year ending 31st March 2004 (i.e. succeeding year) was a year of consolidation in which it “sacrificed immediate profits for much larger gains by preparing ourselves for future growth”. The Annual report of this company for the next year indicates that it developed its own intangibles in such next year. These factors indicate that financial year 2003-04 relevant to assessment year 2004-05 was abnormal for Fortune Infotech Ltd. But for that, its profit progressed from assessment year 2002-03 to assessment year 2003- 04 in question. 8.4. Reference to the Tribunal order in the case of 24/7 Customer (supra), for seeking exclusion of Fortune Infotech Ltd., is again misplaced. The palpable reason for our this conclusion is that the Tribunal order in that case is for the assessment year 2004-05 and we have noticed from the Annual report of this company that it was an abnormal year of its operations in which it sacrificed immediate profits for larger gains in future by developing its Page 11 of 15

We have heard the rival submissions and perused the material available on record. It is seen that the Co-ordinate Bench in the case of 24/7 Customer.Com Ltd. (cited supra) vide its decision dated 09.11.2012 for 2004-05 assessment year has taken into consideration that the said company i.e M/s Fortune Infotech Ltd. Fine had developed its own software called “fine tran” and “image index” for performing specialized services in medical prescription and patients record management. In these circumstances, we are of the view that a comparable company which has developed unique software cannot be considered to be a comparable company of the assessee who is an IT-enabled company who is performing the work generated for it by its AE wherein the substantial intangibles are owned by the AE. The said company cannot be considered a comparable for the assessee. The ownership of unique intangibles in the case of the said comparables in the year under consideration has been taken not of by the Co-ordinate Bench in asessee’s own case in the immediately Page 12 of 15

Addressing Ground no.10 it was submitted by the Ld.AR that on facts there was no transfer of profit by the assessee to AE in other jurisdictions. The issue in assessee’s own case has been dismissed by the ITAT in for 2003-04 assessment year vide para 7.1 to 7.3 and in the present proceedings the assessee is not serious in contesting the issue as on facts the assessee is confident that there would be no transfer pricing adjustments. Thus the ground has been filed only to keep the issue alive and reliance is placed on Sony India Pvt. Ltd. vs CBDT 288 ITR 52 (Del.) and Sony Ericson Mobile Communications India Pvt. Ltd. vs CIT and Ramp Green Solutions Pvt. Ltd. vs CIT (ITA No.102/2015) of the Delhi High Court.

The Ld. CIT DR relying upon the decision of the ITAT in assessee’s own case in the 2003-04 assessment year submitted that he would want to rely on the detailed finding therein on similarity of facts and circumstances and it was further stated that facts of no two case can be identical.

We have heard the rival submissions and perused the material available on record where the ground is raised only to keep the issue alive. In view thereof the assessee’s ground is dismissed following the order of the ITAT in assessee’s own case. The dismissal here will not prejudice the assessee from arguing this issue if so warranted in some other year.

Addressing the facts qua Ground No.13 & 14 reliance was again placed on the order of the ITAT in its own case passed in 2003-04 assessment year specific paras 10.1 to 10.3 of the same.

The record shows that the AO considering the reply of the assessee in regard to provision of expenses disallowed the same holding that the provision on adhoc basis was to be added back to its income as the expenses had not been incurred by the assessee. In appeal the CIT(A) partly allowed the assessee’s appeal following the view taken in 2003-04 assessment year. The position has I.T.A .No.-1940 & 1982/Del/2008 been considered by the Co-ordinate Bench in the aforesaid order. For ready- reference, it is reproduced hereunder:- 9. “Having dealt with all the issues raised by the ld. AR on the addition towards transfer pricing adjustment, we set aside the impugned order on this issue and send the matter back to the TPO/AO for making a fresh determination of the ALP under this segment in conformity with our above observations and conclusions, after allowing a reasonable opportunity of hearing to the assessee. 10.1. Ground Nos. 16 and 17 of the assessee’s appeal are against the sustenance of disallowance of provision of expenses amounting to ` 32,08,612/-. 10.2. Briefly stated, the facts of these grounds are that the assessee created provision for expenses to the tune of ` 5,18,03,004/- and claimed deduction for the same. As the assessee failed to furnish specific bills for which the above provision was made, the AO made addition of equal sum. The ld. CIT(A) observed that the assessee was not provided adequate opportunity of adducing necessary evidence in support of its claim of provision for expenses. After considering the relevant material furnished by the assessee, the ld. CIT (A) deleted addition of ` 4.85 crore for which the invoices were available. As regards the remaining amount of ` 32.08 lac for which the invoices were not available, the ld. CIT (A) sustained the addition. The assessee is aggrieved against the sustenance of addition to this extent. 10.3. After considering the rival submissions and perusing the relevant material on record, it is observed that the assessee is constantly making provision for expenses on year-to-year basis on the estimate of reasonable expenses incurred but the bills not received up to the year-ending. When in the subsequent year, the bills are received, such provision is reversed. If the actual amount of expenses for which the provision was made falls short of such provision, then deduction is claimed for the excess expenditure and in the converse situation, the earlier excess provision created is reversed in the succeeding year. This method of accounting has been accepted by the Revenue in the past without any question. Now simply because the invoices were not available when the matter was considered by the ld. CIT(A), it cannot be said that the liability ceased to exist. From the details of the sustenance of disallowance, it can be seen that the expenses are basically in the nature of professional fee, telephone expenses, communication expenses and consultation, etc. The point for determination of the question of deduction is the crystalization of liability for incurring such expenses and not the actual receipt of the invoices. This contention raised on behalf of the assessee about the incurring of actual liability in respect of these expenses has not been controverted on behalf of the Revenue. Going by the mandate of the mercantile system of accounting and following the rule of consistency, we order for the deletion of the addition sustained in the first appeal. This ground of appeal is allowed.”

The Ld. CIT DR relies upon the order of the authorities below. Page 14 of 15

We have heard the rival submission and considered the material available on record. In the absence of any distinguishing fact or circumstance referred to by the Revenue where admittedly the facts and circumstances need to be verified the issue is restored to the AO to consider the correctness of the claim and grant necessary relief in accordance with law.

In the result, the appeal of the Revenue is allowed and the appeal of the assessee is partly allowed for statistical purposes. The order is pronounced in the open court on 16th October, 2015.