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TMI Blog2018 (8) TMI 1205X X X X Extracts X X X X X X X X Extracts X X X X ..... we direct the TPO to re-compute the margins without making any negative working capital adjustment. Accordingly, this ground stands allowed. Issue of reimbursements - While agreeing with the contention of the assessee that reimbursements should be excluded from both the assessee’s margins as well as the margins of the comparables, we deem it fit to restore the issue to the TPO/Assessing Officer for examining the claim of the assessee in light of the evidences filed by the assessee along with its application dated 21.1.2016 and submitted to the office of DCIT – TP- 2(3)(1) New Delhi. Thus, this ground stands allowed for statistical purposes. Notional interest being charged on receivables - the adjustment made by the TPO/Ld. DRP on account of interest on receivables is not sustainable in the eyes of law in the case of the assessee as, undisputedly, the taxpayer is a debt free company. Consequently, this ground is also allowed in favour of the assessee. Other issues - Selection of comparable and disallowance u/s 14A r/w Rule 8D. The appeal of the assessee stands allowed - ITA No. 1203/Del/2017 - - - Dated:- 20-8-2018 - SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SHRI SUDHA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment order was passed by making an addition of ₹ 16,74,76,422/- on account of adjustment in the ALP with respect to the international transactions. The DRP also partially upheld the disallowance made u/s 14A of the Income Tax Act, 1961 (hereinafter called the Act ) and as per the directions, this disallowance was computed at ₹ 4,69,227/-. The assessment was completed at an income of ₹ 33,21,86,867/-. 2.4 Now the assessee is in appeal before the ITAT against the final assessment order and has raised the following grounds of appeal:- 1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assessing Officer ( AO ) is bad in law. 2. The Ld. Dispute Resolution Panel ('DRP') has inadvertently rejected specific ground raised by the Appellant during DRP proceedings in respect of seeking adjustment claimed on account of difference in the rate of depreciation charged by the comparables vis-a-vis Appellant's rate of depreciation. The Appellant has filed a rectification application with the Hon'ble DRP requesting appropriate adjudication on the same, which is pending. 3. The Ld. AO/ Ld. TPO er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... margins/ volatile operating margins in the final comparables' set, that signify high element of entrepreneurial risk, thereby not appreciating the risk profile of the services rendered by the Appellant and not allowing risk adjustment to the Appellant; 3.7.1. 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 ( AEs ); 3.8. considering reimbursement of expenses received as part of the core transaction of the Assessee and recomputing the PLI after considering it as part of the operating revenue and operating cost, thus, in effect proposing that a mark-up is required to be earned on such non-core, non-value adding pass through transactions. 4. The Ld. AO/ Ld. TPO erred on facts and in law in enhancing the income of the Appellant by ₹ 38,24,938 holding that the alleged international transactions pertaining to outstanding receivables do not satisfy the arm's length principle envisaged under the Act and in doing so have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Straight Line Method. However, the assessee depreciated its assets at a rate higher than the rates prescribed under Schedule XIV of the Companies Act, 1956 whereas the comparables considered by the TPO adopted the rates as prescribed under the Companies Act, 1956, thereby charging a lower rate of depreciation. The Ld. AR submitted that both the TPO as well as the Ld. DRP had denied the adjustment on account of depreciation on the ground that the assessee had failed to furnish the margin computations of the comparable companies taking into account the depreciation charged by the assessee. The Ld. AR drew our attention to the relevant pages in the paper book and submitted that the detailed working in this regard was duly submitted before the TPO as well as the Ld. DRP. The Ld. AR submitted that if this depreciation adjustment was allowed on the margins of the comparables selected by the TPO, then the average margin would come to 16.58%. It was further submitted that in the immediately preceding year i.e. assessment year 2011-12, the Ld. DRP, in assessee s own case, had accepted the assessee s claim for depreciation adjustment. It was also submitted that the Ld. DRP had given a simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AR also placed reliance on numerous other judicial precedents in support of his claim that no adjustment was warranted on account of notional interest on receivables in case of debt free companies. 3.5 With respect to the comparables being sought to be excluded by the assessee, the contentions of the Ld. AR were as under:- ( i) Eclerx Services Ltd: It was submitted by the Ld. AR that this company was functionally different from the assessee company as Eclerx was engaged in the business of providing Knowledge Processing Outsourcing (KPO) Services and it was engaged in providing business/data analytics and customized process solution for clients in financial services, manufacturing, retail, media, travel and hospitality. It was further submitted that Eclerx provided services through two business units, viz. financial services and sales and marketing services but no segmental data was available in the annual report of this company. It was also submitted that in the immediately preceding year i.e. assessment year 2011-12, the Ld. DRP had excluded this company on account of it being functionally different from the assessee. It was further submitted that similarly in as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany, high scale of operations, brand value associated with the company and high-end nature of services. ( iv) Acropetal Technologies Ltd (segment): The Ld. AR submitted that this company was also not functionally comparable company as Acropetal Technologies Ltd. was engaged in providing healthcare services which included innovation, patient life cycle management, physician and clinical life cycle management, hospital administration management, drug discovery and administration management and disease life cycle management. The Ld. AR also drew our attention to the annual report of the company and submitted that segmental reporting was not available. It was also submitted that during the year under consideration, there were extraordinary events in Acropetal Technologies Ltd. as this company had acquired two US based companies. The Ld. AR also submitted that Acropetal Technologies Ltd. undertook substantial research and development activities and had also been making consistent investment in developing intellectual property which was not so in the case of the assessee. Reliance was placed on some orders of the ITAT Delhi Benches wherein this company was rejected on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that the Ld. DRP had dealt with the objections of the assessee in a methodical and judicious manner and there was no legal infirmity in the same. The Ld. CIT DR vehemently argued that the final assessment order passed subsequent to the directions of the Ld. DRP needed to be upheld. 5.0 We have heard the rival submissions and perused the material available on record. As far as the issue of adjustment with respect to depreciation is concerned, it is seen that the Ld. DRP in its directions for assessment year 2011-12, vide order dated 21.12.2015, had directed the TPO to allow depreciation adjustment in terms of the order of the ITAT in the case of EXLservice.com vs. ACIT reported in TII-313-ITAT-DEL-TP. Similarly for assessment year 2014-15, the Ld. DRP, vide its order dated 6.4.2018, directed the TPO to verify the claim of the assessee and re-compute the margins. The Ld. DRP has also noted in its directions for assessment year 2014-15 that the adjustment with respect to depreciation had also been upheld by the ITAT in assessee s group entity s case for assessment years 2004-05, 2005-06, 2007-08 and 2010-11. It is also seen that the Delhi Bench of the ITAT in the case of EXLs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion 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. 5.0.1 Therefore, keeping in view the principle of consistency and also respectfully following the ratio laid down by the Coordinate Bench, we direct the TPO to examine the facts and allow the depreciation adjustment to the assessee. Accordingly, this ground stands allowed for statistical purposes. 5.1 Coming to the issue of the assessee s challenge to the directions of the Ld. DRP in granting working capital adjustment to the assessee without the assessee raising any objection regarding the same before the Ld. DRP and, consequently, the same resulting in negative working capital adjustment being made by the TPO/Assessing Officer (AO), we find that this issue is covered in favour of the assessee by the order of ITAT Hyderabad Bench in the case of Adaptec (India) (P.) Ltd. vs. ACIT reported in (2015) 57 taxmann.com 307 (Hyderabad Trib.). In this case, the ITAT Hyderabad Bench has opined that there was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Tribunal), which was confirmed by the Hon ble Delhi High Court as well the Hon ble Apex Court, has held that adjustment made by the TPO/Ld. DRP on account of interest on receivables was not sustainable in the eyes of law in the case of the assessee as, undisputedly, the taxpayer is a debt free company. During the course of proceedings before us, the Ld. CIT DR could not point out any reason as to why this Bench should take a view different from the view taken by the Coordinate Bench in the order for assessment year 2010-11 in assessee s own case as aforesaid. Respectfully, following the order of the co-ordinate Bench in assessee s own case for AY 10-11 and in view of principle of consistency, we hold that the adjustment made by the TPO/Ld. DRP on account of interest on receivables is not sustainable in the eyes of law in the case of the assessee as, undisputedly, the taxpayer is a debt free company. Consequently, this ground is also allowed in favour of the assessee. 5.4 Coming to the issue of comparables, our observations and findings are as under:- ( i) Eclerx Services Ltd: The assessee has challenged the inclusion of this company as comparable on the ground th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company was engaged in software development, no separate segments in the financials were available, there was significant increase in revenue and there were acquisitions by this company. The order of the tribunal was upheld by the Hon ble Delhi High Court in PCIT vs. B.C. Management Services (P) Ltd. reported in (2018) 253 Taxman 138 (Delhi). This company also directed to be excluded by the Delhi Bench of the ITAT in the case of Avaya India (P) Ltd. vs. ACIT reported in (2015) 64 Taxmann.com 452 (Delhi Tribunal), Vodafone India Services P. Ltd. reported in (2016) 66 taxmann.com 246 (Delhi Tribunal) and Exevo India (P) Ltd. vs. ITO reported in 72 Taxmann.com 339 (Delhi Trib.) on the ground that segmental data was missing. On similar reasoning of absence of segmental data and following the settled judicial precedents, we direct the exclusion of this company from the final set of comparables. ( iii) TCS E-Serve Ltd: It is the contention of the Ld. AR that TCS E-Serve Ltd. renders services which are functionally dissimilar to that of the assessee company and we note that the averment of the AR is correct in this regard. We also note that TCS E-Serve Ltd. has a huge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear under consideration as is evident from the perusal of the annual report which has been placed on record. Therefore, we have no other option but to direct the exclusion of this company from the final set of comparables. It is directed accordingly. ( v) R Systems International Ltd: The assessee is seeking to get this company included as a comparable. It is seen that this company was rejected as a comparable on the ground that this company had a different financial year ending. The issue of accepting a company having a different financial year ending as a comparable is no more res integra and the Hon ble Punjab Haryana High Court in the case of CIT vs. Mercer Consulting (India) (P) Ltd. reported in (2017) 390 ITR 615 (P H) has upheld the order of the ITAT Delhi Bench reported in (2014) 150 ITD 1(Delhi Trib.) on the issue. The Hon ble Punjab Haryana High Court held that they were entirely in agreement with the decision of the Tribunal that if the data relating to the financial year o is strictly available from the annual accounts of that comparable then it cannot be held as not passing the test of sub rule (4) of Rule 10B. The Hon ble Punjab Haryana High Court h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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