M/s. AMD India Private Ltd, Bangalore V. Income-Tax Officer, Bangalore

ITA 113/BANG/2017

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 1303 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 10 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-12-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2011-2012
• Appeal Filed On: 18-01-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRADEEP KUMAR BENGALURU
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Related party transaction; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Bad and doubtful debts
• Section: 143(3); 201; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER IT(TP)A NO.113/BANG/2018 ASSESSMENT YEAR: 2012-13 AMD INDIA PRIVATE LIMITED, NO.102 & 103, EXPORT PROMOTION INDUSTRIAL PARK, WHITEFIELD ROAD, BENGALURU 560 066. PAN: AAECA 6756C VS. THE INCOME TAX OFFICER, WARD 1(1)(3), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI PADAMCHAND KHINCHA, CA RESPONDENT BY : SHRI PRADEEP KUMAR, CIT(DR)(ITAT), BENGALURU. DATE OF HEARING : 02.12.2019 DATE OF PRONOUNCEMENT : 05.12.2019 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT IT(TP) A.NO.113/BANG/2017 IS AN APPEAL BY THE AS SESSEE AGAINST THE ORDER DATED 16/12/2016 PASSED BY ITO, WARD 1(1) (3) U/S 143(3) R.W.S 144C(13) OF THE INCOME TAX ACT, 1961 ( THE ACT) RE LATING TO ASSESSMENT YEAR 2012-13. IT(TP)A NO.113/BANG/2017 PAGE 2 OF 14 2. THE FIRST ISSUE THAT ARISES FOR CONSIDERATION IN THIS APPEAL IS WITH REGARD TO DETERMINATION OF ARMS LENGTH PRICE (ALP) IN RESPECT OF INTERNATIONAL TRANSACTION OF RENDERING OF SOFTWARE DEVELOPMENT SERVICES BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISE (AE). TH E ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF PROVIDING CONTRA CT SOFTWARE DEVELOPMENT SERVICES (SWD SERVICES). THE ASSESSEE RENDERED SWD SERVICES TO ITS AE. THE TRANSACTION OF RENDERING SO FTWARE DEVELOPMENT SERVICES BY THE ASSESSEE TO ITS AE WAS A TRANSACTI ON WITH AN ASSOCIATED ENTERPRISE (AE) AND WAS THEREFORE AN INTERNATIONAL TRANSACTION. AS PER THE PROVISIONS OF SEC.92 OF THE ACT, INCOME FROM INTERN ATIONAL TRANSACTION HAS TO BE COMPUTED HAVING REGARD TO ARMS LENGTH PRICE (ALP). 3. IT IS NOT IN DISPUTE BETWEEN THE ASSESSEE AND TH E REVENUE THAT THE TRANSACTION NET MARGIN METHOD (TNMM) WAS THE MOST A PPROPRIATE METHOD (MAM) FOR DETERMINATION OF ALP AND THAT THE PROFIT LEVEL INDICATOR TO BE ADOPTED FOR COMPARISON OF THE ASSESSEES PROFIT WIT H THAT OF COMPARABLE COMPANIES WAS OPERATING PROFIT/TOTAL COST (OP/TC). THE OP/TC OF THE ASSESSEE WAS 12.77%. THE ASSESSEE IN ITS TP STUDY SELECTED 8 COMPARABLE COMPANIES WHOSE ARITHMETIC MEAN OF OP/TC WAS COMPARABLE WITH THE PROFIT MARGINS OF THE ASSESSEE AND WAS ACC EPTABLE. IT WAS CLAIMED BY THE ASSESSEE THAT THE PRICE CHARGED BY I T IN THE INTERNATIONAL TRANSACTION WAS AT ARMS LENGTH. THE TRANSFER PRICI NG OFFICER (TPO) TO WHOM THE DETERMINATION OF ALP WAS REFERRED BY THE A O, SELECTED 10 COMPANIES AS COMPARABLE COMPANIES WITH THE ASSESSEE . THUS A FINAL SET OF 10 COMPARABLE COMPANIES WAS CHOSEN BY THE TPO AS COMPARABLE COMPANIES. THE ARITHMETIC MEAN OF PROFIT MARGIN OF THESE COMPANIES AFTER AND BEFORE ADJUSTMENT TOWARDS WORKING CAPITAL ADJUS TMENT SELECTED BY TPO WAS AS FOLLOWS: IT(TP)A NO.113/BANG/2017 PAGE 3 OF 14 SL. NO. NAME OF THE COMPANY MARK-UP ON TOTAL COSTS (WCUNADJ) (IN %) 1. DATAMATICS GLOBAL SERVICES LTD. 14.57 2. GENESYS INTERNATIONAL CORPN. LTD. 30.09 3. ICRA TECHNO ANALYTICS LTD. 17.24 4. INFOSYS LTD. 43.10 5. LARSEN & TOUBRO INFOTECH LTD. 25.47 6. MINDTREE LTD. 15.01 7. PERSISTENT SYSTEMS LTD. 27.20 8. RS SOFTWARE (INDIA) LTD. 15.34 9. SASKEN COMMUNICATION TECHNOLOGIES LTD. 12.15 10. SPRY RESOURCES INDIA PVT. LTD. 26.18 AVERAGE MARK-UP 22.63 4. BASED ON THE ABOVE AVERAGE ARITHMETIC MEAN OF PR OFIT MARGIN OF THE COMPARABLE COMPANIES, THE TPO COMPUTED THE ALP OF T HE INTERNATIONAL TRANSACTION OF RENDERING OF SWD SERVICES BY THE ASS ESSEE TO ITS HOLDING COMPANY AS FOLLOWS:- COMPUTATION OF ARMS LENGTH PRICE BY THE TPO AND AD JUSTMENT MADE: ARMS LENGTH MEAN MARK-UP 22.63% LESS: WORKING CAPITAL ADJUSTMENT 2.57% ADJUSTED MEAN MARK-UP OF THE COMPARABLES 20.06% OPERATING COST RS121,19,54,144 ARMS LENGTH PRICE 120.06% OF OPERATING COST RS14 5,50,72,145 PRICE RECEIVED RS131,23,18,343 SHORTFALL BEING ADJUSTMENT U/S. 92CA RS14,27,53,802 ARMS LENGTH MEAN MARK-UP 22.63% LESS: WORKING CAPITAL ADJUSTMENT 2.57% ADJUSTED MEAN MARK-UP OF THE COMPARABLES 20.06% OPERATING COST RS121,19,54,144 ARMS LENGTH PRICE 120.06% OF OPERATING COST RS14 5,50,72,145 PRICE RECEIVED RS131,23,18,343 SHORTFALL BEING ADJUSTMENT U/S. 92CA RS14,27,53,802 IT(TP)A NO.113/BANG/2017 PAGE 4 OF 14 5. THE DIFFERENCE BETWEEN THE PRICE CHARGED BY THE ASSESSEE AND THE ALP DETERMINED BY THE TPO VIZ., RS.14,27,53,802/- W AS ADDED TO THE TOTAL INCOME BY THE AO IN HIS DRAT ASSESSMENT ORDER DATED 22.3.2016 AS ADDITION ON ACCOUNT OF SHORTFALL BEING ADJUSTMENT U/S.92CA O F THE ACT. 6. THE ASSESSEE FILED OBJECTIONS TO THE DRAFT ASS ESSMENT ORDER BY THE AO BEFORE THE DISPUTES RESOLUTION PANEL (DRP). THE DRP IN ITS DIRECTIONS DATED 30.11.2016 GAVE SOME DIRECTIONS AND CONSEQUEN TLY THE ADDITION PROPOSED BY THE TPO WAS REDUCED BY RS.5,76,37,917/- . THE DRP EXCLUDED 6 OUT OF THE 10 COMPARABLE COMPANIES CHOSE N BY THE TPO BUT CHOSE TO RETAIN 4 COMPARABLES CHOSEN BY THE TPO FOR THE FOLLOWING REASONS:- ON GIVING EFFECT TO THE ABOVE DIRECTIONS, THE FO LLOWING COMPANIES ARE RETAINED AS COMPARABLES:- SL.NO. NAMES OF THE COMPANIES MARGIN AFTER WORKING CAPITAL ADJUSTMENT 1 L & T INFOTECH LTD. 24.89% 2 MINDTREE LTD. 14.10% 3 PERSISTENT SYSTEMS LTD. 26.31% 4 R S SOFTWARE (INDIA) LTD. 16.94% MEAN MARGIN 20.56% THE ABOVE ADJUSTED MEAN MARGIN OF 20.56% IS HIGHER THAN THE ADJUSTED MEAN MARGIN OF 20.06% COMPUTED BY THE TPO BASED ON THE TEM COMPARABLES. IN SUCH CIRCUMSTANCES, WE ARE OF THE VIEW THAT LARGER SET OF THE COMPARABLES TAKES CARE OF DI FFERENCES, IF ANY, AND THEREFORE WE UPHOLD THE SET OF THE COMPARABLES SELECTED BY THE TPO. 7. PURSUANT TO THE DIRECTIONS OF THE DRP, THE AO PA SSED THE FINAL ASSESSMENT ORDER WHEREIN THE TP ADJUSTMENT STOOD RE WORKED AT A LESSER FIGURE THAN WHAT WAS ORIGINALLY SUGGESTED BY THE TP O. THE AO PASSED A FAIR ORDER OF ASSESSMENT MAKING THE ADDITION ON ACC OUNT OF DETERMINATION OF IT(TP)A NO.113/BANG/2017 PAGE 5 OF 14 ALP BY THE TPO AS MODIFIED BY THE DRP. AGGRIEVED B Y THE ADDITION MADE IN THE FAIR ORDER OF ASSESSMENT, THE ASSESSEE HAS R AISED SEVERAL GROUNDS OF APPEAL CHALLENGING THE ADDITION ON SEVERAL COUNTS. HOWEVER AT THE TIME OF HEARING THE LEARNED COUNSEL RESTRICTED HIS ARGUMENT S TO EXCLUSION OF 5 COMPARABLES OUT OF THE 10 COMPARABLE COMPANIES THAT REMAIN IN THE FINAL LIST OF COMPARABLE COMPANIES AFTER THE DIRECTIONS O F THE DRP VIZ., (A) GENESYS INTERNATIONAL CORPN.LTD., (B) ICRA TECHNO A NALYTICS LTD., (C) INFOSYS LTD., (D ) LARSEN AND TOUBRO INFOTECH LTD., AND ( D) PERSISTENT SYSTEMS LTD. ANOTHER GRIEVANCE OF THE ASSESSEE ON THE DETERMINATION OF ALP IS THAT THE PLI OF OP/OC CHOSEN BY THE ASSESSEE AND ACCEPTED BY THE TPO WAS ALTERED BY THE TPO BY NOT CONSIDERING THE R EVERSAL OF PROVISION FOR SERVICE TAX AS OPERATING INCOME. 8. THE LEARNED COUNSEL FOR THE BROUGHT TO OUR NOTIC E A DECISION OF THE ITAT BANGALORE BENCH IN THE CASE OF CGI INFORMATION SYSTEMS & MANAGEMENT CONSULTANTS PRIVATE LTD., VS. ACIT IT(TP ) A.NO.183/BANG/2017 FOR AY 2012-13 ORDER DATED 11.4. 2018 WHEREIN 4 OUT OF THE AFORESAID FIVE COMPARABLE COMPANIES VIZ., (A ) GENESYS INTERNATIONAL CORPN.LTD., (B) INFOSYS LTD., (C ) LARSEN AND TOUB RO INFOTECH LTD., AND ( D) PERSISTENT SYSTEMS LTD. WERE EXCLUDED BY THE ITAT . THE FUNCTIONAL PROFILE OF THE ASSESSEE IN THIS APPEAL AND THAT OF THE ASSE SSEE IN THE DECISION CITED BY THE LEARNED COUNSEL FOR THE ASSESSEE IS TH E SAME. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL:- 28. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTE D BEFORE US THAT THE COMPARABILITY OF THE 3 COMPANIES OUT OF TH E AFORESAID 4 COMPANIES WHICH THE ASSESSEE SEEKS TO EXCLUDE FROM THE LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO VIZ., INFOSY S LTD., LARSEN & TOUBRO INFOTECH LTD. AND PERSISTENT SYSTEM S LTD., WERE CONSIDERED BY THE ITAT DELHI BENCH IN THE CASE OF A GILIS INFORMATION TECHNOLOGIES INDIA (P) LTD. VS. ACIT (2 018) 89 TAXMANN.COM 440 (DELHI-TRIB.) FOR THE SAME AY 2012- 13. IN THIS REGARD IT WAS SUBMITTED THAT THE FUNCTIONAL PROFILE OF THE ASSESSEE IT(TP)A NO.113/BANG/2017 PAGE 6 OF 14 IS SAME AS THAT OF THE ASSESSEE IN THE CASE OF AGIL IS INFORMATION TECHNOLOGIES INDIA (P) LTD., IS IDENTICAL IN AS MUC H AS THE SAID COMPANY WAS ALSO INVOLVED IN PROVIDING SWD SERVICES TO ITS AE AND THE TPO HAD CHOSEN 16 COMPARABLE COMPANIES OUT OF WHICH 6 COMPANIES CHOSEN BY THE TPO IN THE CASE OF THE AS SESSEE FOR THE PURPOSE OF COMPARABILITY WERE THE SAME. HIS SU BMISSION WAS THAT THE DECISION RENDERED BY THE TRIBUNAL IN THE C ASE OF AGILIS INFORMATION TECHNOLOGIES INDIA (P) LTD., (SUPRA) WO ULD BE EQUALLY APPLICABLE TO THE ASSESSEE IN THE PRESENT C ASE ALSO. THE LEARNED DR SUBMITTED THAT THE DRP IN ITS DIRECTIONS HAS MERELY ACCEPTED WITH THE REASONING OF THE TPO AND THEREFOR E THE ISSUE OF EXCLUSION OF THESE COMPANIES SHOULD BE DIRECTED TO BE EXAMINED AFRESH BY THE DRP. 29. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN THE CASE OF AGILIS INFORMATION TECHNOLOGIES INDIA (P) LTD., (SU PRA), THIS TRIBUNAL CONSIDERED THE COMPARABILITY OF THE 3 COMP ANIES WHICH THE ASSESSEE SEEKS TO EXCLUDE FROM THE FINAL LIST O F COMPARABLE COMPANIES CHOSEN BY THE TPO. THE FUNCTIONAL PROFIL E OF THE ASSESSEE AND THAT OF THE ASSESSEE IN THE CASE OF AG ILIS TECHNOLOGIES INDIA (P) LTD., IS IDENTICAL IN AS MUC H AS THE SAID COMPANY WAS ALSO INVOLVED IN PROVIDING SWD SERVICES TO ITS AE AND THE TPO HAD CHOSEN SOME COMPARABLE COMPANIES WH ICH WERE ALSO CHOSEN BY THE TPO IN THE CASE OF THE ASSE SSEE FOR THE PURPOSE OF COMPARABILITY. IN THE AFORESAID DECISIO N THE TRIBUNAL HELD ON THE COMPARABILITY OF THE 3 COMPANIES WHICH THE ASSESSEE SEEKS TO EXCLUDE AS FOLLOWS: (A) INFOSYS LTD., WAS EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES BY FOLLOWING THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. AGNITY INDIA TECHNOLOG IES (2013) 36 TAXMANN.COM 289 (DELHI). THE DISCUSSION IS CONT AINED IN PARAGRAPHS 4.5 TO 4.7 OF THE TRIBUNALS ORDER. THE TRIBUNAL ACCEPTED THAT INFOSYS LTD. IS A GIANT RISK TAKING C OMPANY AND ENGAGED IN DEVELOPMENT AND SALE OF SOFTWARE PRODUCT S AND ALSO OWNS INTANGIBLE ASSETS AND THEREFORE NOT COMPARABLE WITH A SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE A SSESSEE IN THAT CASE. (B) LARSEN & TOUBRO INFOTECH LTD., WAS EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES BY RELYING ON THE DECISION OF THE DELHI BENCH OF ITAT IN THE CASE OF SAXO INDIA (P) LTD. VS . ACIT IT(TP)A NO.113/BANG/2017 PAGE 7 OF 14 (2016) 67 TAXMANN.COM 155 (DEL-TRI). THE DISCUSSIO N IS CONTAINED IN PARAGRAPHS 4.8 TO 4.10 OF THE TRIBUNAL S ORDER. THE TRIBUNAL HELD THAT L & T INFOTECH LTD., WAS A SOFTW ARE PRODUCT COMPANY AND SEGMENTAL INFORMATION ON SWD SERVICES W AS NOT AVAILABLE. THE TRIBUNAL ALSO NOTICED THAT THE APPE AL FILED BY THE REVENUE AGAINST THE TRIBUNALS ORDER WAS DISMISSED BY THE HONBLE DELHI HIGH COURT IN ITA NO.682/2016. (C) PERSISTENT SYSTEMS LTD., WAS EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES ON THE GROUND THAT THIS COMPAN Y WAS A SOFTWARE PRODUCT COMPANY AND SEGMENTAL INFORMATION ON SWD SERVICES WAS NOT AVAILABLE. THE TRIBUNAL IN COMING TO THE ABOVE CONCLUSION REFERRED TO THE DECISION RENDERED BY ITA T DELHI BENCH IN THE CASE OF CASH EDGE INDIA PVT.LTD. VS. I TO ITA NO.64/DEL/2015 ORDER DATED 23.9.2015 AND THE DECISI ON OF HONBLE DELHI HIGH COURT IN THE CASE OF SAXO INDIA PVT.LTD. (SUPRA). THE FINDINGS IN THIS REGARD ARE CONTAINED IN PARAGRAPHS 4.14 TO 4.16 OF ITS ORDER. 30. RESPECTFULLY FOLLOWING THE DECISION OF THE TRI BUNAL WE HOLD THAT THE AFORESAID 3 COMPANIES BE EXCLUDED FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF ARRIVING AT THE ARITHMETIC MEAN OF COMPARABLE COMPANIES FOR THE PUR POSE OF COMPARISON WITH THE PROFIT MARGINS. IN THIS REGARD WE ARE ALSO OF THE VIEW THAT THE PLEA OF THE LEARNED DR FOR A REMA ND OF THE ISSUE TO THE DRP ON THE GROUND THAT THE DRP HAS NOT GIVEN ANY REASONS IN ITS DIRECTIONS CANNOT BE ACCEPTED. THE DRP HAS ENDORSED THE VIEW OF THE TPO IN ITS DIRECTIONS AND THEREFORE THE REASONS GIVEN BY THE TPO SHOULD BE REGARDED AS THE CONCLUSIONS OF THE DRP. 31. THE LEARNED DR NEXT SUBMITTED THAT GENESYS INTERNATIONAL CORPORATION LTD., SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. THE COMPARABILITY OF THIS CO MPANY WITH THE ASSESSEE HAS BEEN DISCUSSED BY THE TPO IN PAGE- 11 OF HIS ORDER. THE ASSESSEE OBJECTED TO INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLE COMPANIES FOR THE REASON THAT TH IS COMPANY IS FUNCTIONALLY DIFFERENT AND OWNS INTANGIBLE ASSETS W HICH ARE PECULIAR ONLY WHEN THE ASSESSEE OWNS SOFTWARE PRODU CTS. THE OBJECTIONS OF THE ASSESSEE ARE CONTAINED IN ITS LET TER DATED 22.12.2015 ADDRESSED TO THE TPO AND IN ANNEXURE-B T O THE SAID LETTER. THE RELEVANT PORTION OF THE OBJECTION IS A T PAGE 711-713 OF THE ASSESSEES PAPER BOOK. ACCORDING TO THE ASSESS EE THIS IT(TP)A NO.113/BANG/2017 PAGE 8 OF 14 COMPANY IS ENGAGED IN PROVIDING GEOGRAPHICAL INFORM ATION SERVICES COMPRISING OF PHOTOGRAMMETRY, REMOTE SENSI NG, CARTOGRAPHY, DATA CONVERSION, STATE OF THE ART TERR ESTRIAL AND 3D GEOCONTENT INCLUDING LOCATION BASED AND OTHER COMPU TER BASED RELATED SERVICES. PAGE-38 OF THE ANNUAL REPORT 201 2 CONTAINING THE ABOVE DESCRIPTION WAS BROUGHT TO THE NOTICE OF THE TPO. ATTENTION OF THE TPO WAS INVITED TO THE DIRECTORS R EPORT TO THE SHAREHOLDERS AT PAGE II OF THE ANNUAL REPORT 2012, WHEREIN THE DIRECTORS HAVE INFORMED THE SHAREHOLDERS THAT THE C OMPANY CONTINUED IN ITS JOURNEY TO BE INNOVATORS AND LEADE RS IN THE FIELDS OF LOCATION BASED SERVICES RELATED GEO PLATFORMS AN D ADVANCED SURVEY TECHNIQUES. THERE IS NO SEGMENTAL REPORTING BECAUSE IT IS STATED IN THE ANNUAL REPORT THAT THIS COMPANY IS ON LY IN ONE SEGMENT VIZ., GIS BASED SERVICES AND THEREFORE THER E IS NO REQUIREMENT OF SEGMENTAL REPORTING. IT WAS ALSO SU BMITTED THAT THIS COMPANY OWNS SUBSTANTIAL INTANGIBLES EQUIVALEN T TO 10.42% OF ITS TOTAL TURNOVER. 32. THE TPO HOWEVER HAS REGARDED THIS COMPANY AS A COMPARABLE COMPANY BY OBSERVING THAT THIS COMPANY D EVELOPS SOFTWARE FOR MAPPING AND GEOSPATIAL SERVICES AND OP ERATES A FEW DEVELOPMENT CENTRES IN INDIA. THE COMPANY IS PREDO MINANTLY INTO SOFTWARE DEVELOPMENT SERVICES. THE INTANGIBLE S IN THE POSSESSION F THE COMPANY ARE ONLY THE GIS DATABASE WHICH IS ONLY DEPRECIATION. IT DOES NOT ADD SIGNIFICANT VALUE TO THE COMPANY. 33. THE OBJECTIONS AS PUT FORTH BEFORE THE TPO WER E REITERATED BEFORE THE DRP. THE DRP IN PARAGRAPH 6.2.2 & 6.2.3 OF ITS DIRECTIONS DEALT WITH THIS ISSUE AS FOLLOWS: 6.2.2. THE FUNCTIONS OF THE ASSESSEE COMPANY HAVE BEEN EXAMINED IN DETAIL. A FINANCIAL PRODUCT ON WHICH T HE SETTLEMENT SYSTEM OF BANK RUNS IS A REAL TIME SYSTEM. IT IS V ERY COMPLEX. ANY BUG OR PROBLEM IN IT CAN CRASH THE ENTIRE BANKI NG SYSTEM OF SEVERAL NATIONS. THE ASSESSEES CLAIM OF PROVIDING ONLY BASIS SOFTWARE SERVICES IS REJECTED. 6.2.3. THE PANEL HOLDS THAT THE SOFTWARE FOR FINAN CIAL PRODUCT IS MUCH MORE COMPLEX THAN A GEOSPATIAL SOFTWARE. THER EFORE, THE PANEL HOLDS THAT THE GENESYS IS A VALID COMPARABLE. IT(TP)A NO.113/BANG/2017 PAGE 9 OF 14 34. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE DRP HAS COMPLETELY PROCEEDED ON WRONG FACTS WHICH DOES NOT EITHER EMANATE FROM THE ORDER OF THE TPO OR THE SUBMISSION S OF THE ASSESSEE. HE REITERATED SUBMISSIONS MADE BEFORE TH E TPO AND DRP. THE LEARNED DR RELIED ON THE ORDER OF THE DRP /TPO. 35. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE R IVAL SUBMISSIONS. IT IS CLEAR FROM THE MATERIAL BROUGHT TO THE NOTICE OF THE TPO BY THE ASSESSEE THAT THIS COMPANY RENDERS M APPING AND GEOSPATIAL SERVICES. IN RENDERING SUCH SERVICES IT DEVELOPS SOFTWARE. BUT THAT DOES NOT MEAN THAT THIS COMPANY IS IN THE BUSINESS OF SOFTWARE DEVELOPMENT. THE BUSINESS PRO FILE OF THIS COMPANY AS PER THE ANNUAL REPORT DOES NOT SHOW THAT THIS COMPANY IS INTO SOFTWARE DEVELOPMENT SERVICE. THE ONLY LINE OF BUSINESS THAT THIS COMPANY CARRIES ON IS RENDERING GIS BASED SERVICES AND THIS IS CLEAR FROM THE ANNUAL REPORT W HICH SPECIFIES THAT SINCE THE COMPANY CARRIES ON ONLY ONE LINE OF BUSINESS VIZ., GIS BASED SERVICES THERE IS NO NEED TO GIVE ANY SEG MENTAL RESULTS. IN THE CIRCUMSTANCES, WE ARE OF THE VIEW THAT THERE IS NO BASIS FOR THE TPO TO CONCLUDE THAT THIS COMPANY IS PREDOMINAN TLY INTO SOFTWARE DEVELOPMENT SERVICES. THE PRESENCE OF INT ANGIBLE ASSETS IS INDICATIVE OF THE FACT THAT THIS COMPANY IS NOT IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. THE TPO HAS OVERLOO KED THIS ASPECT AND PROCEEDED ON THE BASIS THAT THE PRESENCE OF INTANGIBLE ASSETS WOULD NOT BE SIGNIFICANT. RULE 10B(2) OF TH E INCOME TAX RULES, 1962 (RULES) SPECIFICALLY PROVIDES THAT FOR THE PURPOSES OF SUB-RULE (1) OF RULE 10B, THE COMPARABILITY OF AN I NTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: ( A ) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACT ION; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSE TS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, B Y THE RESPECTIVE PARTIES TO THE TRANSACTIONS; IN THE GIVEN FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT GENESYS INTERNATIONAL CORPORATION LTD., CANNOT BE C ONSIDERED AS A COMPARABLE COMPANY AND THE SAID COMPANY SHOULD BE EXCLUDED FROM THE FINAL LIST OF COMPARABLE COMPANIES. WE HO LD ACCORDINGLY. IT(TP)A NO.113/BANG/2017 PAGE 10 OF 14 9. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBU NAL WE HOLD THAT THE AFORESAID 4 COMPANIES BE EXCLUDED FROM THE FINAL LI ST OF COMPARABLE COMPANIES FOR THE PURPOSE OF ARRIVING AT THE ARITHM ETIC MEAN OF COMPARABLE COMPANIES FOR THE PURPOSE OF COMPARISON WITH THE PR OFIT MARGINS. 10. AS FAR AS THE COMPARABLE COMPANY ICRA TECHNO AN ALYTICS LTD., IS CONCERNED THE SAID COMPANY WAS EXCLUDED BY THE DRP ON THE GROUND OF FUNCTIONAL COMPARABILITY. BESIDES THE ABOVE, THE RELATED PARTY TRANSACTION IN THE CASE OF THE AFORESAID COMPANY WAS MORE THAN 25% AS IS EVIDENT FROM PAGE 1129 & 1130 OF ASSESSEES PAPER BOOK CON TAINING THE FINANCIAL STATEMENT OF THIS COMPANY FROM CAPITALINE DATABASE, WHICH DETAILS ARE EXTRACTED AT PAGE 863 OF ASSESSEES PAPER BOOK WHIC H IS OBJECTIONS FILED BY THE ASSESSEE BEFORE THE DRP. IN THE CIRCUMSTANC ES, THIS COMPANY HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIE S. WE HOLD ACCORDINGLY. 11. AS FAR AS THE REQUEST OF THE ASSESSEE TO COMPUT E THE PLI OF THE ASSESSEE BY CONSIDERING PROVISION FOR SERVICE TAX W RITTEN BACK AS PART OF THE OPERATING PROFIT OF THE ASSESSEE, THE FACTUAL D ETAILS ARE AS FOLLOWS: ASSESSEES MARGIN FOR SOFTWARE DEVELOPMENT SEGMENT PARTICULARS AMOUNT (INR) TOTAL OPERATING REVENUE 1,31,24,45,359 ADD: FOREX GAIN CONSIDERED AS OPERATING PURSUANT T O DRP DIRECTION 2,94,35,226 REVISED TOTAL OPERATING REVENUE 1,34,18,80,585 OPERATING COST 1,21,19,54,144 LESS: REVERSAL OF PROVISION FOR SERVICE TAX (NOTE 1 ) 2,20,57,615 REVISED TOTAL OPERATING COST 1,18,98,96,529 OPERATING MARGINS 15,19,84,056 OP/OC 12.77% IT(TP)A NO.113/BANG/2017 PAGE 11 OF 14 12. THE ASSESSEE IS EXPORTER OF SERVICE AND THEREFO RE ELIGIBLE TO CLAIM REFUND OF SERVICE TAX INPUT. ACCORDINGLY, THE ASSES SEE HAD PASSED RECEIVABLE ENTRY FOR CERTAIN CATEGORIES OF SERVICES TAX INPUT. HOWEVER FOR CERTAIN CATEGORIES OF SERVICES TAX INPUT, THE TAX DEPARTMENT DENIED REFUND OF SERVICE TAX. ACCORDINGLY THE ASSESSEE MADE PROVI SION AGAINST SERVICE TAX REFUND RECEIVABLE AND SIMULTANEOUSLY FILED APPEAL B EFORE APPELLATE AUTHORITIES FOR CLAIM OF REFUND. DURING THE YEAR UN DER CONSIDERATION, CERTAIN APPELLATE ORDERS WERE RECEIVED GRANTING REFUND FOR CERTAIN CATEGORIES OF SERVICE TAX INPUT. BASED ON SUCH ORDERS, THE ASSESS EE REVERSED THE PROVISION BY CREDITING PROFIT AND LOSS ACCOUNT. [PA GE 845-854 OF PB-L (PART II)]. 13. IN THE TP ORDER, THE TPO HAS CONSIDERED PROVISI ON FOR DOUBTFUL DEBTS AS NON-OPERATING IN NATURE. THE DRP HAS UPHELD THE ACTION OF THE TPO. 14. THE ASSESSEE SUBMITS THAT AS THE REVERSAL OF P ROVISION IS LINKED TO BUSINESS ACTIVITY, THE SAME SHOULD BE TREATED AS OP ERATING IN NATURE. IN SUPPORT OF THIS, THE ASSESSEE RELIES ON THE FOLLOW ING DECISIONS: I) SONY INDIA (P.) LTD. V. DCIT [2008] 114 ITD 448 (DE LHI) II) LOGICA PRIVATE LIMITED V. ACIT [2013] 36 TAXMANN.CO M 374 (BANGALORE-TRIB). 15. WE HAVE CONSIDERED THE SUBMISSION OF THE LEARNE D AR ON THIS ISSUE AND FIND THAT IN THE DECISION RENDERED IN THE CASE OF SONY INDIA (P) LTD. VS. DCIT 114 ITD 448 (DELHI), THIS ASPECT HAS BEEN CONSIDERED AND IT WAS HELD THAT PROVISIONS WRITTEN BACK IN THE P&L A/C S HOULD BE REGARDED AS FORMING PART OF THE OPERATING PROFIT OF THE TAXPAYE R. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ARE AS FOLLOWS:- IT(TP)A NO.113/BANG/2017 PAGE 12 OF 14 106.2 AFTER CONSIDERING FACTS AND CIRCUMSTANCES OF THE C ASE, WE DO NOT SEE ANY GOOD GROUND FOR NOT PERMITTING THE T AXPAYER TO RAISE THE GROUND BEFORE THE TRIBUNAL WHICH IS CLEAR LY ARISING OUT OF THE IMPUGNED ORDER. AS NOTED EARLIER, THE REVENU E HAS NOT CHALLENGED RELEVANT PART OF THE ORDER OF THE CIT(A) . THEREFORE, THE OBJECTION NOW BEING TAKEN BY THE LEARNED DEPART MENTAL REPRESENTATIVE IS NOT JUSTIFIED. ON MERIT, WE SEE N O GOOD REASON TO EXCLUDE PROVISIONS WRITTEN BACK AS NOT FORMING P ART OF COMPUTING OPERATING PROFIT OF THE TAXPAYER. IN OUR CONSIDERED OPINION, EXCLUSION OF ABOVE PROVISION IS BASED UPON MISCONCEPTION OF REAL NATURE OF THE ENTRY GENERATIN G INCOME. IT IS NOT PRACTICALLY POSSIBLE FOR A BUSINESSMAN TO ACTUA LLY DISBURSE ALL EXPENSES INCURRED BY IT IN THE FINANCIAL YEAR AND, THEREFORE, A LARGE NUMBER OF BUSINESS LIABILITIES (MANUFACTURING INCLUDED) ARE PROVIDED IN THE ACCOUNTS OF A GIVEN YEAR. IT IS ELE MENTARY THAT THERE IS NO DIFFERENCE BETWEEN ACTUAL DISBURSEMENT OF AN EXPENDITURE OR PROVISION THEREOF. HOWEVER, RECOVERY OF LIABILITY PROVIDED MAY BECOME BARRED BY LIMITATION OR FOR SOM E OTHER REASONS, LIABILITY GETS UNENFORCEABLE OR IS REDUCED OR CEASES TO EXIST WITH THE PASSAGE OF TIME. THEREFORE, IT MAY B E NECESSARY TO WRITE BACK SUCH A LIABILITY. BUT, IT CANNOT FOLLOW THAT THE LIABILITY WAS NOT EXPENDITURE OF BUSINESS OR OPERATING EXPENS E. CESSATION OF A LIABILITY IS A TAXABLE INCOME UNDER S. 41 OF T HE IT ACT. THE UNDERLYING PRINCIPLE BEHIND ABOVE PROVISION IS THAT REVENUE TAKES BACK A BENEFIT WHICH IT GRANTED EARLIER, BUT WHICH, DUE TO SUBSEQUENT EVENTS OR CHANGED CIRCUMSTANCES SHOULD B E CHARGED TO TAX AS 'INCOME'. STATUTORY PROVISION OVERRIDES GENE RAL UNDERSTANDING THAT MERE CREATION OF A BENEFIT TO A TAXPAYER BY ADMISSION OR CESSATION OF A DEBT OR A LIABILITY SHO ULD NOT RESULT IN AN INCOME. THUS, CREATION OF UNPAID LIABILITY AND I TS WRITE BACK IS A NORMAL INCIDENT OF A BUSINESS OPERATION WHICH IS CARRIED EVERYWHERE IN ACCOUNTS TO HAVE TRUE PICTURE OF PROF ITS OF THE RELEVANT PERIOD. IF A LIABILITY HAS CEASED TO EXIST AND IS REQUIRED TO BE ACCOUNTED FOR AND SHOWN AS INCOME BY THE TAXPAYE R AND, IN CASE IT IS NOT SO SHOWN THE TAXPAYER CAN BE SUBJECT ED TO A PENAL ACTION UNDER INDIAN REGULATIONS. IN THIS CONNECTION , WE CAN REFER TO DECISION OF THE SUPREME COURT IN THE CASE OF CIT VS. S. TEJA SINGH (1959) 35 ITR 408 (SC). HAVING REGARD TO STAT UTORY PROVISIONS, IT CANNOT BE SAID THAT PROVISION OR WRI TING BACK OF LIABILITY IS NOT PART OF OPERATING PROFIT OR WOULD NOT BE TAKEN INTO CONSIDERATION FOR COMPUTING THE SAME. THE ASPECT OF LIABILITIES IT(TP)A NO.113/BANG/2017 PAGE 13 OF 14 WRITTEN OFF WAS IGNORED WITHOUT CONSIDERING NATURE AND CHARACTER OF SUCH LIABILITIES. IT WOULD HAVE BEEN DIFFERENT I F A FINDING WAS RECORDED THAT PROVISION WRITTEN BACK DID NOT RELATE TO BUSINESS OPERATIONS OF THE TAXPAYER. THERE IS NO SUGGESTION ON THE ABOVE LINES. FURTHER, IT IS NOT THE CASE OF THE REVENUE T HAT LIABILITIES WRITTEN BACK WERE WRONGLY PROVIDED FOR. IT IS A SET TLED AND WELL ACCEPTED PROPOSITION THAT ADJUSTMENT CAN BE MADE ON LY ON ACCOUNT OF DIFFERENCES. IT IS NOT POSSIBLE TO BELIE VE THAT OTHER COMPARABLE ENTITIES TAKEN INTO CONSIDERATION ARE NO T MAKING AND WRITING BACK PROVISION OF LIABILITIES NO MORE REQUI RED. THERE IS NO MATERIAL NOR THERE IS ANY FINDING TO SUPPORT ACTION OF THE REVENUE AUTHORITIES. WE CAN THEREFORE MAKE A GENERAL OBSERV ATION THAT ALL BUSINESS ENTERPRISES ARE MAKING AND WRITING BACK LI ABILITIES AS A NORMAL INCIDENT OF OPERATING BUSINESS. THE EXPENSES FOR WHICH PROVISIONS WERE ORIGINALLY MADE WERE CONSIDERED OPE RATING IN NATURE AND ALLOWED IN ASSESSMENT. THESE PROVISIONS NO LONGER REQUIRED BY THE TAXPAYER DURING THE YEAR UNDER REVI EW WERE REVERSED IN THE BOOKS OF ACCOUNT AS PER MERCANTILE SYSTEM OF ACCOUNTING AND SHOWN AS INCOME. THEREFORE, ON FACTS WE DO NOT SEE ANY JUSTIFICATION FOR EXCLUDING PROVISIONS WRIT TEN BACK IN THE P&L A/C AS NOT FORMING PART OF THE OPERATING PROFIT OF THE TAXPAYER. ACCORDINGLY, CLAIM OF THE TAXPAYER IS ACC EPTED. 16. RESPECTFULLY FOLLOWING THE AFORESAID DECISION, WE HOLD THAT PROVISION WRITTEN BACK SHOULD BE REGARDED AS PART OF THE REVE NUE OF THE ASSESSEE WHILE DETERMINING PLI. 17. THE TPO IS DIRECTED TO COMPUTE THE ALP OF THE I NTERNATIONAL TRANSACTION OF RENDERING OF SWD SERVICES IN THE LIG HT OF THE DIRECTIONS CONTAINED IN THIS ORDER, AFTER AFFORDING THE ASSESS EE OPPORTUNITY OF BEING HEARD. NO OTHER GROUNDS RELATING TO TRANSFER PRICIN G ADJUSTMENT, WERE PRESSED FOR ADJUDICATION. 18. THE OTHER ISSUE THAT REMAINS FOR CONSIDERATION IS THE ISSUE OF GRANT OF APPROPRIATE MAT CREDIT. THE ISSUE HAS BEEN DEAL T WITH BY THE DRP BY DIRECTING THE AO TO ALLOW MAT CREDIT, IF AVAILABLE, ACCORDING TO THE PROVISIONS OF SEC.115JAA OF THE ACT. WE ARE OF THE VIEW THAT THE SAID IT(TP)A NO.113/BANG/2017 PAGE 14 OF 14 DIRECTIONS ARE PROPER AND WE DIRECT THE AO TO ALLOW MAT CREDIT AS PER THE DIRECTIONS OF THE DRP. 19. THE OTHER GROUNDS OF APPEAL ARE EITHER CONSEQUE NTIAL OR WERE NOT ARGUED AND HENCE CALLS FOR NO ADJUDICATION. 20. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 05 TH DAY OF DECEMBER, 2019. SD/- SD/- ( D S SUNDER SINGH ) ( N V VASUDEVA N ) ACCOUNTANT MEMBER VICE PRE SIDENT BANGALORE, DATED, THE 05 TH DECEMBER, 2019. / DESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.