2021 (11) TMI 1056 - AT - Income Tax

TP Adjustment - Exclusion of Infosys BPO Limited TCS E-Serve Limited - HELD THAT - In the instant case, the profile of the assessee and that of the profile of assessee in the case of M/s.Indecomm Global Services (India) Private Limited are similar. The assessment year concerned this case and in in the case of M/s.Indecomm Global Services (India) Private Limited is 2012-2013. Therefore, respectfully following the Co-ordinate Bench order of the Bangalore Tribunal in the case of M/s.Indecomm Global Services (India) Private Limited 2019 (8) TMI 1664 - ITAT BANGALORE we direct the AO / TPO to exclude Infosys BPO Limited and TCS e-Serve Limited from the list of comparables. Depreciation Adjustment - HELD THAT - It is clear if there is difference in depreciation in the case of assessee and the comparable cases, reasonable depreciation adjustment is to be made to determine the arm s length of the international transaction. On perusal of the TPO s order and the DRP s order, confirming the same, it is clear that the directions of the Tribunal in its earlier order has not been given effect to. TPO has admitted that depreciation cost of the comparable companies is lesser than the assessee (since deprecation policy followed by comparable companies is as per Companies Act, whereas the assessee was showing higher rate of depreciation based on some agreement. Hence, suitable depreciation adjustment ought to have been made by AO / TPO. Therefore, this issue is restored to the files of the AO / TPO. AO / TPO is directed to allow depreciation adjustment if they notice the rate of depreciation are different in the case of the assessee and the comparable cases. Therefore, ground 4 is allowed for statistical purposes. Negative Working Capital Adjustment - HELD THAT - Admittedly in this case, the assessee is a captive service provider and it is operating on cost plus basis. Therefore, following the order of the Tribunal in the case of ACIT v. e4e Business Solutions India Private Limited 2020 (12) TMI 1255 - ITAT BANGALORE , we hold that there should not be any negative working capital adjustment. It is ordered accordingly. Therefore, ground 7 is allowed. Deduction of Educational Cess - HELD THAT - On identical facts, the Bangalore Bench of the Tribunal in the case of DCIT v. GE BE Private Limited 2020 (11) TMI 1057 - ITAT BANGALORE had held that educational cess is to be allowed as a deduction.We direct the AO / TPO to allow the educational cess as a deduction.

Summary

Issues Involved:
1. Exclusion of Infosys BPO Limited and TCS E-Serve Limited from the list of comparables.
2. Depreciation adjustment.
3. Negative working capital adjustment.
4. Deduction of educational cess.

Issue-wise Detailed Analysis:

1. Exclusion of Infosys BPO Limited and TCS E-Serve Limited from the List of Comparables:
The Tribunal had remanded the issue to the TPO for exclusion of Infosys BPO Limited and TCS E-Serve Limited. The TPO and DRP held these companies as comparable to the assessee. The assessee argued that these companies are functionally dissimilar. The Tribunal referenced the case of Indecomm Global Services (India) Pvt. Ltd., where Infosys BPO Limited was excluded due to functional incompatibility and ownership of brands, and TCS E-Serve Limited was excluded due to its engagement in high-end KPO services. The Tribunal directed the AO/TPO to exclude Infosys BPO Limited and TCS E-Serve Limited from the list of comparables, thereby allowing ground 3.

2. Depreciation Adjustment:
The Tribunal had remanded the matter to the TPO to re-examine the rates of depreciation and make reasonable adjustments if the rates differed between the assessee and comparable companies. During remand proceedings, the TPO did not grant any depreciation adjustment, confirmed by the DRP. The assessee contended that the TPO acknowledged the difference in depreciation rates but refused adjustment on extraneous issues. The Tribunal noted that the TPO admitted the depreciation cost difference and directed the AO/TPO to allow depreciation adjustment if they notice different rates. Therefore, ground 4 was allowed for statistical purposes.

3. Negative Working Capital Adjustment:
The issue was raised in the original proceedings but not specifically adjudicated. The TPO computed the working capital adjustment at (-) 1.48%, confirmed by the DRP. The assessee argued that negative working capital adjustment cannot be made for captive service providers, referencing the Tribunal's decisions in ACIT v. e4e Business Solutions India Private Limited and GXS India Technology Centre Private Limited. The Tribunal reiterated that negative working capital adjustment is not appropriate for captive service providers operating on a cost-plus basis. Therefore, ground 7 was allowed.

4. Deduction of Educational Cess:
The additional ground, being purely legal, was admitted based on the judgment of the Hon’ble Apex Court in National Thermal Power Co. Ltd. v. CIT. The Tribunal referenced the Bangalore Bench's decision in DCIT v. GE BE Private Limited, which allowed educational cess as a deduction. Following this precedent, the Tribunal directed the AO/TPO to allow the educational cess as a deduction, thereby allowing the additional ground.

Conclusion:
The appeal filed by the assessee was partly allowed, with specific directions provided for each issue. The Tribunal's decision ensured that functionally dissimilar companies were excluded from comparables, appropriate depreciation adjustments were made, negative working capital adjustments were not applied to captive service providers, and educational cess was allowed as a deduction.