T.C.A.No.414 of 2018 IN HIGH COURT OF JUDICATURE AT MADRAS RESERVED ON : 05.08.2020 PRONOUNCED ON: 19.08 .2020 CORAM HONOURABLE MR.JUSTICE T.S.SIVAGNANAM and HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN T.C.A.No.414 of 2018 Commissioner of Income Tax, Corporate Circle-3 Chennai. .. Appellant Versus Visual Graphics Computing Services India Private Limited 1-4. 10th Floor, ''Zenith'' Ascendas International Tech Park CSIR Road, Chennai 600 113 PAN:AAACV3342H .. Respondent Prayer:- Tax Case Appeal filed under Section 260-A of Income Tax Act, 1961, against order of Income Tax Appellate Tribunal, D Bench, Chennai, dated 26.07.2017 made in I.T.A.No.3458/Mds/2016 relating to Asst Year 2012-2013. 1 http://www.judis.nic.in T.C.A.No.414 of 2018 For Appellant : Mr.M.Swaminathan, Senior Standing Counsel assisted by Ms.V.Pushpa Venkatesan, Junior Standing Counsel For Respondent :Mr.Nishant Thakkar assisted by Ms.Jasmine Amalsadwala Mr.R.Venkatanarayanan JUDGMENT T.S.SIVAGNANAM, J. This appeal filed by Revenue under Section 260A of Income Tax Act, 1961 ('the Act' for brevity) is directed against order dated 26.07.2017 in I.T.A.No.3458/Mds/2016, on file of Income Tax Appellate Tribunal 'D' Bench, Chennai ('the Tribunal' for brevity) for assessment year 2012-13. appeal is admitted on following Substantial Questions of Law: (i) Whether Tribunal was right in holding that inclusion of companies with different financial years ending as comparables though Rule 10 B (4) of Income Tax Rules refers only to data relating to financial year of 2 http://www.judis.nic.in T.C.A.No.414 of 2018 assessee in which international transaction has been entered into? (ii) Whether Tribunal was right in granting risk adjustments of 2% on adhoc basis, when assessee neither demonstrated same nor quantified adjustment? (iii). Whether Tribunal was right in directing and granting working capital adjustment for assessee based on order for assessment year 2008-2009 when it has not demonstrated influnce working capital intensity on transfer price of assessee? (iv). Whether Tribunal was right in directing for removal comparable companies merely on basis of higher turnover as compared to tested party when no correlation exists between turnover and profits in service industry? (v). Whether Tribunal was right in holding that provisions of Section 14A read with Rule 8D will have no applicability if there is no exempt income earned or received during previous year though disallowance is linked to expenditure incurred on investment fetching exempt income? 3 http://www.judis.nic.in T.C.A.No.414 of 2018 background facts: 2.1. assessee is wholly owned subsidiary of McKinsey & Co Inc., USA (AE). It is captive service provider to its AE primarily to render visual aid services and back office services relating to global finance and accounting. assesee has two units one at Chennai and another at Tiruvananthapuram. Chennai Unit carries out accounting and payment process through its AE's. assessee clubbed both services and treated same to be falling within domain of ITES. assessee adopted Transactional Net Margin method (TNMM) to arrive at Arms Length Price ('ALP' for brevity). PLI adopted his operating profit / operating cost. assessee stated that its standalone ITS profit margin is 11.89% as against comparables weighted average margin of 10.33% after seeking adjustment for working capital and risk (before adjustment margin of comparables margin stood at 10.85%). Department issued show cause notice dated 11.09.2015 and ultimately, margin was reworked at 10.06% vide letter dated 29.09.2015, to which assessee filed their objections. objections were regarding process adopted for undertaking fresh 4 http://www.judis.nic.in T.C.A.No.414 of 2018 search was not mentioned; use of single year data is not appropriate; working capital adjustment was not considered and risk adjustment was not considered. assessee was provided with names of 10 comparables with their margin in percentage. They objected to inclusion of M/s.Capgemini Business Services, HGS International and TCS e-serve international on ground that these companies had related party transaction exceeding 25%. These objections found favour with Department and they were dropped from final list of comparables. assessee objected to inclusion of Infosys BPO Ltd on account of large turnover of said Company. 2.2. contention was rejected by referring to decision of Delhi Tribunal in Ameriprise India Ltd (2015) 62 taxmann.com 237 (Delhi- Trib). assessee also sought for removal of Cosmic Global Ltd from list of comparables on ground of functional dissimilarities. This contention was also rejected stating that assessee had originally included this Company as one of its comparables in TP study. assessee's request to include Datamatics Financial Services was not accepted, as this comparable was rejected in TP study by assessee since there were 5 http://www.judis.nic.in T.C.A.No.414 of 2018 persistent losses. With these observations, Transfer Pricing Officer ('TPO' for brevity) arrived at final set of comparables, listed out names of 10 companies with margin in percentage; computing average margin at 16.62%. TPO stated that margin of assessee is only 10.06% as per show cause notice dated 11.09.2015 and there is short fall of 6.56% and adjustment to ALP was worked. TPO held that there is upward adjustment of Rs.6,16,39,089/- required to ALP of International transactions entered into by assessee. TPO made it clear that findings and discussions are only confined to assessment year 2012-13. 2.3. Pursuant to order of TPO dated 27.01.2016, Assessment Officer drew draft Assessment Order dated 09.02.2016. assessee filed their objections before Dispute Resolution Panel II, Bangalore (hereinafter 'DRP' for brevity) on 15.03.2016. DRP by it's order dated 14.09.2016 issued directions as per Section 144C(5) of Act and giving effect to, order was passed by TPO on 25.11.2016 and Assessing Officer on 30.11.2017. Aggrieved by same, assessee 6 http://www.judis.nic.in T.C.A.No.414 of 2018 preferred appeal to Tribunal. Tribunal with regard to inclusion of Infosys BPO Limited as comparable while determining ALP, took note of decision in assessee's own case for assessment year 2008-09 in I.T.A.No.2340/mds/2012 dated 10.02.2017 and directed Assessing Officer to exclude Infosys BPO Limited from list of comparables . With regard to order rejecting comparables selected by assessee having different financial year, even though said companies were functionally comparable, Tribunal took note of its coordinate Bench decisions in case of R R Donnelley India Outsource Private Limited Vs. DCIT (2016) 75 taxmann.com 306 (Chennai Trib) and remitted matter back to Assessing Officer by directing to furnish data for financial year 2009-10 (1st April and 31st March) to TPO, who after verification shall consider same as comparable to assessee's case so as to determine ALP. 2.4. While issuing such direction, Tribunal referred five other decisions of Tribunals, with regard to retaining Cosmic Global Limited as comparable. Tribunal took note of its decision in 7 http://www.judis.nic.in T.C.A.No.414 of 2018 assessee's own case in I.T.A.NO.2340/mds/2012 dated 10.12.2017 and directed Assessing Officer to exclude M/s.Cosmic Global Ltd from list of comparables. With regard to adjustments which were sought for by assessee, to account for differences in working capital position of assessee vis-a-vis comparables, Tribunal took note of assessee's own case in I.T.A.No.2340/mds/2012 and remitted matter back to Assessing Officer to rework working capital adjustment, necessary after considering value of advances and deposits recoverable in cash or kind or for value to be receivable from four Companies on issue relating to risk adjustment. 2.5. Tribunal took note of its decision in case of M/s.KOB Medical Textiles Pvt. Ltd Vs. DCIT (ITA No.855/Mds/2015, dated 09.03.2017 and directed Assessing Officer to grant 2% towards risk adjustment on adhoc basis. With regard to disallowances under Section 14A of Act to tune of Rs.4,15,359/- in computing income under provisions of Act, Tribunal held that assessee has not earned any exempt income during subject assessment year and accordingly deleted 8 http://www.judis.nic.in T.C.A.No.414 of 2018 disallowance under Section 14 of Act. In doing so, it referred to decision of Honble Division Bench of this Court in CIT Vs. Chettinad Logistics (P) Ltd (2017) 80 taxmann.com 221. 3. Revenue is on appeal on all five grounds decided by Tribunal. 4. We have elaborately heard Mr.S.Swaminathan, learned Senior Standing counsel assisted by Ms.V.Pushpa Venkatesan, learned standing counsel appearing for appellant and Mr.Nishant Thakkar, learned counsel assisted by Ms.Jasmine Amalsadwala and Mr.R.Venkatanarayanan, learned counsel appearing for respondent. 5. It was argued by Mr.M.Swaminathan, learned Senior Standing Counsel that order passed by Tribunal while remanding two of issues out of five issues arising in matter, Tribunal has not assigned any reasons and Transfer Pricing Officer would not be in position to decipher as to scope of remand and this would be good 9 http://www.judis.nic.in T.C.A.No.414 of 2018 reason to interfere with impugned order. With regard to exclusion of Infosys BPO Limited, it is submitted that DRP had elaborately considered this issue and without referring to reasons assigned, Tribunal had mechanically followed decision in assessee's own case for assessment year 2008-09 and directed exclusion of Infosys BPO Limited from list of comparables. Further it is submitted that decision in assessee case for assessment year 2008-09 has not been accepted by Department and T.C.A.No.137 of 2018 has been admitted by Division Bench of this Court and matter is pending. 6. It is pointed out by Mr.Nishant Thakkar, learned counsel for assessee that Substantial Questions of Law raised by Revenue in T.C.A.No.137/2018 does not cover said issue regarding exclusion of Infosys BPO Limited from list of comparables and in this regard, drew our attention to memorandum of grounds of appeal in T.C.A.No.137/2018, wherein five Substantial Questions of Law were raised by Revenue, but, only four Substantial Questions of Law were admitted 10 http://www.judis.nic.in T.C.A.No.414 of 2018 and this issue is not of Substantial Question of Law which has been entertained in this appeal. 7. On perusal of memorandum of grounds of appeal as well as order of Hon'ble Division Bench dated 03.04.2018, we find that this issue has not been agitated by Revenue, insofar as assessee's own case for assessment year 2008-09. Therefore we confirm finding of Tribunal directing exclusion of Infosys BPO Limited from list of comparables. conclusion arrived at by us is duly supported by decision of Hon'ble Division Bench of Karnataka High Court in PCIT Vs. Swiss Re Global Business Solutions India P. Ltd. (2018) 96 taxmann.com 643 (kar.HC). order impugned in said appeal passed by Tribunal noted that Turnover of Infosys BPO Limited is Rs.649.56 Crores while Turnover of assessee Company therein was Rs.11 Crores, which is much more than 65 times of said assessee's Turnover and therefore, Court held that there is no illegality or infirmity in order passed by Commissioner of Income Tax (Appeals) ['CIT (A)' for brevity] excluding said Company out of comparables. 11 http://www.judis.nic.in T.C.A.No.414 of 2018 Court also take note of decision of High Court of Punjab and Haryana in case of Agilant Technologies (International) Pvt. Ltd Vs. ACIT 2015 SCC OnLine P&H 10135 and held that Companies having turnover of more than 23 times of assessee's turnover cannot be compared with assessee. decision of Bombay High Court in case of CIT vs. M/s.Pentair Water India Pvt. Ltd [(2016) 381 ITR 216] was also taken note of in PCIT Vs. Sanvih Info Group Private Limited (I.T.Appeal No.420 of 2019 (Del.HC) dated 16.05.2019. Court noted discussion in Chry Capital Investment Advisors India (P.) Ltd.., Vs. Deputy Commissioner of Income Tax, [2015 376 ITR 183 (Del)], wherein it was stated that Infosys Technologies Ltd. cannot be compared with respondent assessee (therein), as seen from financial data and it should be excluded from list of comparables for reason that it was giant Company in area of development of software. 8. In PCIT Vs. Symphony Marketing Solutions India Pvt. Ltd., [2020 113 taxmann.com 77 (Delhi)], it was held that where assessee was rendering ITES services to its AE as captive service provider, company 12 http://www.judis.nic.in T.C.A.No.414 of 2018 having huge turnover and brand value assuming all risks leading to higher profits, could not be accepted as comparable. Court noted decision in case of CIT Vs. Pentari Water India (P) Ltd., (2016) 69 taxmann.com 180 (Bom) and decision of High Court of Delhi in CIT V. Agnity India Technologies (P.) Ltd., (2013) ITA 1204/2011 dated 10.07.2013. Similar view was taken by High Court of Karnataka in Principal Commissioner of Income Tax V. M/s.Obopay Mobile Technoloty India Private Ltd., (I.T.A.No.586 of 2016) dated 23.07.2018. 9. In Commissioner of Income Tax-2, Pune vs. Principal Global Services (P.) Ltd. (2018) 95 taxmann.com 315 (Bombay), Court dealt with correctness of exclusion of Infosys BPO Limited by Tribunal from list of comparables to determine ALP and following decisions in Agnity India Technologies (P.) Ltd., (supra) and M/s.Pentair Water India Pvt. Ltd (supra), affirmed order passed by Tribunal. above decisions will come to aid and assistance of assessee squarely to hold that order passed by Tribunal on said issue is proper. 13 http://www.judis.nic.in T.C.A.No.414 of 2018 10. On next issue with regard to rejection of comparable selected by assessee having different financial year as pointed out, Tribunal followed decision in R R Donnelley India Outsource Private Limited Vs. DCIT (cited supra) and remanded matter back to Assessing Officer by issuing similar direction as issued in said order. 11. argument of Revenue is that direction is devoid of reasons. We do not agree with said submission because Tribunal had referred to decision of R R Donnelley India Outsource Private Limited Vs. DCIT (supra). All directions contained thereunder were issued and position of law as applied by Tribunal merits acceptance. Our views/conclusion is strengthened by decision of High Court of Delhi in PCIT Vs. Baxter India Pvt. Ltd (ITA No.260 of 2018) dated 26.07.2018. It is also case arising out of assessment for year 2012-13, wherein Court took note of decision in case of CIT-II Vs. Mckinsey Knowledge Centre Pvt. Ltd. (ITA.NO.217/2014) dated 27.03.2015, wherein it was held that if from available data, results for financial year can 14 http://www.judis.nic.in T.C.A.No.414 of 2018 reasonably be extrapolated then comparable cannot be excluded. Therefore, we find no error in order passed by Tribunal on this issue 12. Next issue is with regard to assessee plea to remove Cosmic Global Limited from list of comparables. Tribunal followed assessee's own case in I.T.A.No.2340/mds/2012 arising for assessment year 2008-09 and as noted by us while recording submissions of Mr.Nishant Thakkar, learned counsel for respondent, appeal filed by Revenue before Division Bench of this Court in T.C.A.No.137 of 2018 has not been admitted on said question of law which goes to show that Revenue has accepted decision of Tribunal to said extent and therefore we find that Tribunal was right in directing Assessing Officer to exclude Cosmic Global Limited from list of comparables. 13. next issue is with regard to making suitable adjustment to account for differences in working capital position, wherein, Tribunal remanded matter to Assessing officer to rework working capital 15 http://www.judis.nic.in T.C.A.No.414 of 2018 adjustment. We find that issue to be fully factual and no substantial question of law flows from it. While on this issue, we refer to decision of Division Bench of this Court in case of Commissioner of Income Tax Vs. Same Deutz-Fahr India (P) Ltd., [(2018) 253 Taxman 32 (madras)], wherein it was held that right of appeal under Section 260A of Act is not automatic and it is limited right of appeal restricted only to cases which involve substantial questions of law and it is not open to High Court to sit in appeal over factual findings arrived at by Tribunal. Similar view was taken by High Court of Karnataka in I.T.A.No.536 of 2015 connected with I.T.A.No.537 of 2015 dated 25.06.2018 (PCIT Vs. M/s.Sofbrands India Pvt Ltd.,) which was followed in decision of High Court of Karnataka in PCIT Vs. LM Wind Power Technologies India Pvt. Ltd., in ITA.No.213 of 2017 dated 05.07.2018 . Therefore order of Tribunal remitting matter to Assessing Officer to rework working capital adjustment is affirmed and is not interfered as no substantial question of law arises for consideration on said issue. 16 http://www.judis.nic.in T.C.A.No.414 of 2018 14. next issue is with regard to order granting risk adjustment at 2% before TPO. assessee stated that risk adjustment can be computed based on 'Sharpe Ratio' which appears to be operating profit margin earned by comparable Companies over and above risk free interest rate with risk assumed by comparable Companies and computes additional return earned on account of risk adjustments. additional operating profit margin earned by Company on account of risk adjustment, multiplied with capital employed to arrive at additional operating profit. 15. TPO had denied adjustments on ground that information is not readily available in public domain to fine tune margins of comparables on basis of standard benchmarks to adjust for differential functional profile of entities. TPO relied on decision of Chennai Tribunal in Mobis India Ltd in ITA 2112/mds/2011 dated 14.08.2013 and held that adjustments cannot be matter of routine while computing operating margins of comparables and more 17 http://www.judis.nic.in T.C.A.No.414 of 2018 particularly, Statute itself has given another relief by way of adjusting price by another 5% before resorting to any adjustment by TPO. correctness of said finding of TPO was challenged before DRP by assesee. DRP while rejecting submission of assessee distinguished decision of ITAT in M/s.Lason India Pvt. Ltd., Vs. Joint Commissioner of Income Tax (I.T.A.No.1026/Mds./2014 for assessment year 2009-10 by observing that in case of Lason india, no examination regarding existence of risk or how risk has to be calculated is done and in case of assessee, they have provided calculation based on 'Sharpe's Ratio' and therefore, facts are different. DRP referred to decision of Bangalore ITAT in Zyme Solutions in IT(TP).A.No.465/Bang/2015, wherein Tribunal held that DRP ought not to have directed TPO to consider risk adjustment at 1%. Secondly, DRP took up for consideration alternate submission of assessee based on 'Sharpe's ratio' calculation. However contention stood rejected on ground that claim of assessee has not sufficiently substantiated. Tribunal while examining correctness of finding of DRP, took note of decision in M/s.KOB Medical 18 http://www.judis.nic.in T.C.A.No.414 of 2018 Textiles Pvt. Ltd. Vs. DCIT in ITA.NO.855/Mds/2015 dated 09.03.2017 and directed Assessing Officer to grant 2% towards risk adjustment on adhoc basis. 16. Revenue argued before us stating that such adhoc adjustment could not have been done by Tribunal. Tribunal took note of arguments of assessee that they function under limited risk because they are wholly owned subsidiary of their AE and they are captive service provider and whereas comparable Companies has independent entities, assessee being captive service provider is very relevant factor. After noting factual position, Tribunal referred to decision in M/s.KOB Medical Textiles Pvt. Ltd (supra), wherein Tribunal held that risk adjustment could be given only to Company to Company basis, considering level of risk involved between assessee and comparable Companies adopting percentage of risk adjustment granted thereunder. Tribunal directed Assessing Officer to grant 2% towards risk adjustment on adhoc basis. We find that no substantial question of law 19 http://www.judis.nic.in T.C.A.No.414 of 2018 flows from this issue as it is entirely factual. Accordingly, finding of Tribunal on this issue does not call for any interference. 17. next issue is with regard to applicability of provision of Section 14(A) read with Rule 8D of Act. This issue has been decided by Hon'ble Division Bench of this Court in case of Commissioner of Income Tax, Central Board, Chennai Vs. Chettinad Logistics Private Limited (2017) 80 taxmann.com 221 (madras), wherein it was held that Section 14A cannot be invoked. We note that exempt income was earned by assessee in relevant assessment year. Special Leave Petition filed by Revenue as against this decision was dismissed by Hon'ble Supreme Court on ground of delay as well as on merits in judgment reported in CIT, Chennai Vs. Chettinad Logistics Pvt. Ltd., (2018) 95 taxmann.com 250 (SC). Therefore Substantial question of law no.5 has to be answered against Revenue. 18. In result, appeal filed by Revenue is dismissed and Substantial Questions of Law nos.(i), (iii), (iv) and (v) are answered 20 http://www.judis.nic.in T.C.A.No.414 of 2018 against Revenue and Insofar as question no.(ii) is concerned, we find that same to be fully factual and no substantial question of law arises on said issue and accordingly same stands rejected. No costs. (T.S.S.,J) (V.B.S.,J) 19.08.2020 sk Index: Yes / No Internet: Yes / No Speaking Order/Non-Speaking Order To Commissioner of Income Tax, Corporate Circle-3 Chennai. 21 http://www.judis.nic.in T.C.A.No.414 of 2018 T.S.SIVAGNANAM, J. AND V.BHAVANI SUBBAROYAN, J. sk Predelivery Judgment in T.C.A.No.414 of 2018 19.08 .2020 22 http://www.judis.nic.in Commissioner of Income-tax, Corporate Circle-3 Chennai v. Visual Graphics Computing Services India Private Limited