Allegris Services India Pvt Ltd, Bangalore V. Deputy Commissioner of Income tax, Bangalore

ITA 1370/BANG/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 7625 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 10 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-09-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 09-08-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 10-11-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Rule of consistency; Retrospective amendment; Working capital adjustments; Initiation of penalty proceedings; Bad and doubtful debts; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A BEFORE S HRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO , ACCOUNTANT MEMBER I.T . (T.P) A. NO . 1370 /BANG/20 14 (ASSESSMENT YEAR : 20 09 - 10 ) M/S. ALLEGIS SERVICES INDIA PVT. LTD., COMME RCE @ MANTRI, LEVEL - 3, NO.12/1 & 12/2, NS PALYA, BANNERGHATTA RAOD, BANGALORE - 560 076 . . APPELLANT. VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 11(1), BANGALORE. .. RESPONDENT. I.T. (T.P) A. NO .1438/BANG/2014 (ASSESSMENT YEAR : 20 09 - 10 ) (BY REVENUE) ASSESSEE BY : SHRI CHAVALI NARAYAN, CA R E VENUE BY : SHRI B.R. RAMESH, JCIT (D.R) DATE OF H EARING : 09.08.2017. DATE OF P RONOUNCEMENT : 15.09. 201 7 . O R D E R PER SHRI VIJAY P AL RAO, J .M . : THESE CROSS APPEALS ARE DIRECTED AGAINST THE OR DER DT.8.9.2016 OF COMMISSIONER OF INCOME TAX (APPEALS) - IV, BANGALORE FOR THE ASSESSMENT YEAR 2009 - 10. 2 IT (TP) A NO S . 1370 & 1438 /BANG/ 2014 2. FIRST WE TAKE UP THE APPEAL FILED BY THE ASSESSEE WHEREIN THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS : 1. THE LEARNED CIT(A) HAS ERRED IN LAW AND FACTS, BY UPHOLDING THE ADDITION OF RS. 6,16,22,813 MADE BY THE LEARNED ASSESSING OFFICER ( AO ) / TRANSFER PRICING OFFICER ( TPO ) ON ACCOUNT OF CORPORATE TAX AND TRANSFER PRICING MATTERS. CORPORATE TAX MATTERS 2. THE LEARNED CIT(A) HAS ERRED IN LAW AND FACTS BY UPHOLDING THE ORDER OF THE LEARNED AO THAT THE PAYMENTS MADE BY THE APPELLANT AMOUNTING TO RS.2,60,62,411 IN RELATION TO SOFTWARE LICENSE ARE IN THE NATURE OF ROYALTY 3. THE LEARNED CIT(A) HAS ERRED IN LAW AND FACTS BY UPHOLDING THE ORDER OF THE LEARNED AO THAT THE PAYMENTS MADE BY THE APPELLANT AMOUNTING TO RS.39,62,893 IN RELATION TO SOFTWARE LICENSE ARE IN THE NATURE OF ROYALTY . 4. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACTS, BY NOT ACCEPTING THE CONTENTIONS FILED BY THE APPELLANT WHILE DISTINGUISHING THE CASE OF THE APPELLANT FROM THE DECISION OF THE KARNATAKA HIGH COURT IN THE CASE OF CIT VS SAMSUNG ELECTRONICS CO LTD AND OTHERS (ITA NO 2808 OF 2006 AND OTHERS) 5. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACTS, BY UPHOLDING THE ACTIONS O F THE LEARNEDAO IN CONSIDERING SOME OF THE SOFTWARE EXPENSES AMOUNTING TO RS. 2,10,206 TO BE IN THE NATURE OF CAPITAL EXPENDITURE AND DISALLOWING THE SAME. TRANSFER PRICING MATTERS 6. THE LEARNED CIT(A) HAS ERRED IN LAW AND FACTS, BY UPHOLDING THE ADDITION OF RS. 3,14,50,365 MADE BY THE LEARNED AO / TPO ON ACCOUNT OF ADJUSTMENT TO THE ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS ENTERED BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISES ( AES ). ; 7. THE LEARNED CIT(A) HAS ERRED IN LAW AND FACTS BY NOT ACC EPTING THE APPELLANT S PLEA IN ENTIRETY AND CONFIRMING WITH THE LEARNED AO/TPO ON NOT ACCEPTING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE INCOME - TAX RULES, 1962 ( RULES ), AND CONDUCTING A FRESH ECONOMIC ANALYSIS FOR THE DETERMINATION OF THE ARM S LENGTH PRICE IN CONNECTION WITH THE IMPUGNED INTERNATIONAL TRANSACTION AND HOLDING THAT THE APPELLANT S INTERNATIONAL TRANSACTION IS NOT AT ARM S LENGTH; 3 IT (TP) A NO S . 1370 & 1438 /BANG/ 2014 8. THE LEARNED CIT(A) HAS ERRED IN LAW AND F ACTS BY UPHOLDING THE ACTION OF AO/ TPO IN DETERMINATION OF THE ARM S LENGTH MARGIN/ PRICE USING ONLY SINGLE YEAR DATA I.E. FOR FY 2008 - 09 AND NOT ALLOWING THE USE OF MULTIPLE YEAR DATA AS APPLIED BY THE APPELLANT IN THE TRANSFER PRICING DOCUMENTATION ; 9. TH E LEARNED CIT(A) HAS ERRED IN UPHOLDING THE ACTION OF AO/ TPO IN DISREGARDING THE SEGMENTAL FINANCIAL INFORMATION FOR THE SOFTWARE DEVELOPMENT AND IT ENABLED SERVICES RENDERED TO ITS AE S PROVIDED IN THE TRANSFER PRICING DOCUMENTATION . FURTHER THE LEARNED CIT(A) ERRED IN UPHOLDING THE ACTION OF AO/ TPO IN REALLOCATING THE TOTAL COSTS ON THE BASIS OF REVENUE AND NOT PROVID ING AN OPPORTUNITY OF BEING HEARD WHILE REALLOCATING THE COSTS . SOFTWARE DEVELOPMENT SERVICES TRANSACTION 10. THE LEARNED CIT(A) HAS ERRED I N LAW AND FACTS BY UPHOLDING THE ACTION OF AO/TPO IN REJECTING CERTAIN COMPARABLES CONSIDERED BY THE APPELLANT IN THE COMPARABILITY ANALYSIS BY APPLYING DIFFERENT QUANTITATIVE AND QUALITATIVE FILTERS: A. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS, BY NOT ACCEPTING THE APPELLANT S PLEA THAT COMPANIES SHOULD NOT BE REJECTED USING EMPLOYEE COST GREATER THAN 25% OF THE TOTAL REVENUES AS A COMPARABILITY CRITERION. B. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS, BY NOT ACCEPTING THE APPELLANT S PLEA THAT REJECTING COMPANIES USING EXPORT SALES LESS THAN 75% OF THE OPERATING REVENUES AS A COMPARABILITY CRITERION IN RESPECT OF THE SOFTWARE DEVELOPMENT SERVICES TRANSACTION, IS NOT APPROPRIATE. C. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS, BY NOT ACCEPTI NG THE APPELLANT S PLEA THAT COMPANIES HAVING DIFFERENT ACCOUNTING YEAR (I.E. COMPANIES HAVING ACCOUNTING YEAR OTHER THAN MARCH 31 OR COMPANIES WHOSE FINANCIAL STATEMENTS WERE FOR A PERIOD OTHER THAN 12 MONTHS) SHOULD NOT BE REJECTED . D. THE LEARNED CIT(A) HA S ERRED IN LAW AND IN FACTS, BY NOT ACCEPTINGTHE APPELLANT S PLEA THAT IN CASE OF CERTAIN COMPARABLE COMPANIES CONSOLIDATED RESULTS CAN BE USED FOR ANALYSIS. THE APPELLANT HAD CONSIDERED THE CONSOLIDATED RESULTS IN ONLY THOSE CASES WHERE THE INCOME OF THE INDIAN COMPANY CONSTITUTED MORE THAN 75% OF THE CONSOLIDATED COMPANY - WIDE/ SEGMENTAL REVENUES. 11. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS,BY UPHOLDING THE ACTION OF AO/TPO IN ACCEPTING/ REJECTING CERTAIN COMPARABLE COMPANIES BASED ON UNREASONABLE COMPARABILITY CRITERIA. 4 IT (TP) A NO S . 1370 & 1438 /BANG/ 2014 12. THE LE ARNED CIT(A) HAS ERRED IN LAW AND IN FACTS BY UPHOLDING THE ACTION OF THE AO/ TPO IN REJECTING CERTAIN COMPARABLE COMPANIES ON AN ADHOC BASIS STATING THAT THE WORKING CAPITAL ADJUSTMENTS IN RELATION TO SUCH COMPANIES DISTO RTS THE PROFIT MARGINS . FURTHER, THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACTS BY UPHOLDING THE ACTIONS OF THE AO/ TPO IN RESTRICTING THE WORKING CAPITAL ADJUSTMENT ON AN ADHOC BASIS TO THE AVERAGE COST OF CAPITAL COMPUTED AT 1.71 PERCENT IN THE CASE OF COMPARABLE COMPANIES 13. THE LEARNED CIT(A) HAS ERRED, IN LAW AND FACTS, BY NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE APPELLANT VIS - - VIS THE COMPARABLES AND CONCLUDING THAT ONCE THE WORKING CAPITAL ADJUSTMENT IS G RANTED, THERE IS NO NECESSITY OF PROVIDING ANY FURTHER ADJUSTMENTS.; IT ENABLED SERVICES TRANSACTION 14. THE LEARNED CIT(A) ERRED IN UPHOLDING THE ACTIONS OF AO/TPO IN REJECTING CERTAIN COMPARABLES CONSIDERED BY THE APPELLANT IN THE COMPARABILITY ANALYSIS BY A PPLYING DIFFERENT QUANTITATIVE AND QUALITATIVE FILTERS; A. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS, BY UPHOLDING THE ACTIONS OF THE AO/ TPO IN REJECTING CERTAIN COMPARABLE COMPANIES IDENTIFIED BY THE APPELLANT FOR HAVING DIFFERENT ACCOUNTING YEAR ( I.E. COMPANIES HAVING ACCOUNTING YEAR OTHER THAN MARCH 31 OR COMPANIES WHOSE FINANCIAL STATEMENTS WERE FOR A PERIOD OTHER THAN 12 MONTHS). 15. THE LEARNED CIT(A) ERRED IN LAW AND IN FACTS BY UPHOLDING THE ACTIONS OF THE AO/ TPO IN REJECTING COMPANIES BASED ON UNREASONABLE COMPARABILITY CRITERIA ; 16. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACTS BY UPHOLDING THE ACTION OF THE AO/ TPO IN RESTRICTING THE WORKING CAPITAL ADJUSTMENT ON AN ADHOC BASIS TO THE AVERAGE COST OF CAPITAL COMPUTED AT 0.91 PERCENT IN THE CASE OF COMPARABLE COMPANIES. FURTHER THE LEARNED CIT(A) HAS ERRED IN UPHOLDING THE ACTION OF THE LEARNED AO / TPO IN PROVIDING NEGATIVE WORKING CAPITAL ADJUSTMENT OF 0.94 PERCENT ; 17. THE LEARNED CIT(A) ERRED LAW AND IN FACTS BY NOT PROVIDING ANY METHODOLOGY OR QUANTIFYING THE RISK ADJUSTMENT AND MERELY DIRECTING THE AO/ TPO TO PROVIDE FOR RISK ADJUSTMENT ; GENERAL GROUNDS 18. THE LEARNED CIT(A) HAS ERRED , IN LAW AND IN FACTS, BY UPHOLDING THE ACTION OF THE AO/ TPO IN COMPUTING THE ALP WITHOUT GIVING BENEFIT OF +/ - 5 PERCENT UNDER THE PROVISO TO SECTION 92C(2) OF THE ACT; 5 IT (TP) A NO S . 1370 & 1438 /BANG/ 2014 19. THE LEARNED CIT(A) HAS ERRED, IN LAW AND FACTS, IN CONFIRMING THEIMPOSITION OF INTEREST UNDER SECTIONS 234D OF THE ACT BY THE LEARNED AO ; 20. THE LEARNED CIT(A) HAS ERRED, IN LAW AND FACTS, IN UPHOLDI NG INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT BY THE LEARNED AO. 3. GROUND NO.1 IS GENERAL IN NATURE AND DOES NOT REQUIRE ANY SPECIFIC ADJUDICATION. 4. GROUND NOS.2 TO 5 ARE REGARDING DISALLOWANCE UNDER SECTION 40(A )(IA) OF THE INCOME TAX ACT, 1961 (IN SHORT 'THE ACT') OF PAYMENT TOWARDS SOFTWARE LICENSES TREATED BY THE ASSESSING OFFICER AS ROYALTY FOR WANT OF TDS. THE ASSESSEE HAS ALSO RAISED ADDITIONAL GROUNDS WHICH ARE AS UNDER : CORPORATE TAX MATTERS 21. WITHO UT PREJUDICE TO THE GROUNDS 2 TO 4, THE LEARNED CIT(A) HAS FAILED TO APPRECIATE THAT DURING THE FINANCIAL YEAR 2008 - 09 RELEVANT TO THE ASSESSMENT YEAR 2009 - 10, THE APPELLANT WAS NOT LIABLE TO WITHHOLD TAX ON THE PAYMENTS MADE AS THERE WAS NO PROVISION UNDE R THE ACT MANDATING THE DEDUCTION OF TAX AT SOURCE ON THE PAYMENTS MADE ON PURCHASE OF COMPUTER SOFTWARE AND THERE WERE MANY FAVORABLE JUDICIAL PRECEDENCE INCLUDING THE JURISDICTIONAL TRIBUNAL RULINGS. 22. WITHOUT PREJUDICE TO THE GROUNDS 2 TO 4, THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT EXPLANATION 5 TO SECTION 9(1)(VI) WAS INSERTED VIDE FINANCE ACT, 2012 WITH EFFECT FROM 1 JUNE 1976 AND WAS HIT BY THE DOCTRINE OF IMPOSSIBILITY OF PERFORMANCE . THE ADDITIONAL GROUNDS RAISED BY T HE ASSESSEE ARE NOT NEW ISSUES BUT AN ADDITIONAL PLEA/ARGUMENT RAISED BY THE ASSESSEE REGARDING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER SECTION 40(A)(IA) OF THE 6 IT (TP) A NO S . 1370 & 1438 /BANG/ 2014 ACT. THEREFORE IN VIEW OF THE FACT THAT THE SUBSTANTIAL ISSUE HAS BEEN RAISED IN THE MAIN G ROUND, THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE ON THE SAME ISSUE ARE ADMITTED FOR CONSIDERATION AND ADJUDICATION ALONG WITH THE GROUND NOS.2 TO 5. 5. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT PRIOR TO THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. SAMSUNG ELECTRONICS CO. LTD. 320 ITR 209, THE ASSESSEE WAS UNDER THE BONA FIDE BELIEF THAT THE PAYMENT ON ACCOUNT OF SOFTWARE LICENSES DOES NOT FALL UNDER THE DEFINITION OF ROYALTY AND THEREFORE THE ASSESSEE WAS UNDER NO OBLIGATION TO DEDUCT TAX AT SOURCE ON THE SAID PAYMENT FOR SOFTWARE LICENSE. HE HAS FURTHER SUBMITTED THAT THERE WERE NUMBER OF JUDICIAL PRECEDENTS ON THIS ISSUE WHEREIN THIS TRIBUNAL HAS HELD THAT THE PAYMENT MADE FOR PURCHASE OF SOFTWARE DOES NOT FALL UNDER THE DEFINITION OF ROYALTY PROVIDED UNDER SECTION 9(1)(VI) OF THE ACT. THUS HE HAS SUBMITTED THAT A SUBSEQUENT AMEN DMENT OR A DECISION CANNOT BE THRUST UPON THE ASSESSEE FOR DEDUCTION OF TAX IN RESPECT OF A TRANSACTION COMPL ETED MUCH PRIOR TO THE SAID DECISION. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL DT.23.11.2016 IN THE CASE OF ACIT VS. AURIGENE 7 IT (TP) A NO S . 1370 & 1438 /BANG/ 2014 DISCOVERY TECHNOLOG IES (P) LTD. IN IT(TP)A NO.1479/BANG/2013. THUS THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT DISALLOWANCE MADE BY THE ASSESSING OFFICER IS NOT JUSTIFIED WHEN THERE WAS NO SUCH LAW OR DECLARATION OF LAW AT THE TIME OF PAYMENT MADE BY THE ASSESSEE TO CAST THE DUTY ON THE ASSESSEE TO DEDUCT TA X. 6. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. SAMSUNG ELECTRONICS CO. LTD. (SUPRA) THOUGH WAS SUBSEQUENT TO THE TRANSACTION IN QUESTION H OWEVER , THE SAID DECISION HAS NOT BROUGHT INTO STATUTE ANY NEW LAW BUT IT IS ONLY A DECLARATION AND INTERPRETATION OF EXISTING LAW. HE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE REL EVANT MATERIAL ON RECORD. THERE IS NO DISPUTE THAT THE TRANSACTION IN QUESTION REGARDING PAYMENT OF PURCHASE OF SOFTWARE WAS COMPLETED IN THE F.Y. 2008 - 09 WHEREAS THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. SAMSUNG ELECTRONICS CO. LTD. (SUPRA) WAS PASSED ON 15.10.2011 MUCH LATER THAN THE TIME OF TRANSACTION CARRIED OUT BY THE ASSESSEE. I T IS ALSO NOT IN DISPUTE THAT THIS ISSUE OF CONSIDERING THE 8 IT (TP) A NO S . 1370 & 1438 /BANG/ 2014 PAYMENT FOR PURCHASE OF SOFTWARE AS ROYALTY IS A HIGHLY DEBATABLE ISSUE AND VARIOU S HIGH COURTS HAVE TAKEN DIVERGENT VIEWS ON THIS ISSUE. THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ACIT VS. AURIGENE DISCOVERY TECHNOLOGIES (P) LTD. (SUPRA) HAS CONSIDERED AN IDENTICAL ISSUE IN PARAS 3 TO 5 AS UNDER : 03. WE HEARD THE RIVA L SUBMISSIONS AND GONE THROUGH THE RELEVANT ORDERS. THE ASSESSEE RE SUBMITTED THE PLEA TAKEN BEFORE THE LOWER AUTHORITIES AND PLACED ON THE RULING OF THE HON'BLE BANGALORE ITAT IN SONATA INFORMATION TECHNOLOGY LTD V. ACIT (103 ITD 324) WHICH HAD HELD THAT PAYMENTS FOR SOFTWARE LICENSES DO NOT CONSTITUTE ROYALTY UNDER THE PROVISIONS OF THE ACT AND HENCE DISALLOWANCE UNDER SECTION 40(A) (IA) OF THE ACT WOULD NOT BE APPLICABLE. THE CHANGE IN THE LEGAL POSITION ON TAXATION OF COMPUTER SOFTWARE WAS ON ACCOUNT OF THE RULING OF THE KARNATAKA HIGH COURT IN CIT V. SAMSUNG ELECTRONICS CO. LTD. (320 ITR 209), WHICH WAS PRONOUNCED ON 15.10.11 THAT IS MUCH LATER THAN THE CLOSURE OF THE FY 2010 - 11. SUBSEQUENTLY, THE FINANCE ACT 2012 ALSO INTRODUCED, RETROSPECTIVELY, EXPL ANATION 4 TO SECTION 9(1 (VI) OF THE ACT TO CLARIFY THAT PAYMENTS FOR, INTER ALIA. LICENSE TO USE COMPUTER SOFTWARE WOULD QUALIFY AS ROYALTY. DURING THE FY 10 - 11, THE ASSESSEE DID NOT HAVE THE BENEFIT OF CLARIFICATION BROUGHT BY THE RESPECTIVE AMENDMENT. AS SUCH, FOR THE FY 2010 - 11, IN LIGHT OF THE PROVISIONS OF SECTION 9(1)(VI) OF THE ACT READ WITH JUDICIAL GUIDANCE ON THE TAXATION OF COMPUTER SOFTWARE PAYMENTS, TAX WAS NOT REQUIRED TO BE DEDUCTED AT SOURCE. GIVEN THE PRACTICE IN PRIOR ASSESSMENT YEARS, T HE ASSESSEE WAS OF THE BONA FIDE VIEW THAT THE PAYMENT OF SOFTWARE LICENSE FEE WAS NOT SUBJECT TO TAX DEDUCTION AT SOURCE UNDER SECTION 194J/195 OF THE ACT. IT IS SUBMITTED THAT LIABILITY TO DEDUCT TAX AT SOURCE CANNOT BE FASTENED ON THE ASSESSEE ON THE B ASIS OF RETROSPECTIVE AMENDMENT TO THE ACT (FINANCE ACT 2012 AMENDMENT THE DEFINITION OF ROYALTY WITH RETROSPECTIVE EFFECT FROM 01.04.1976) OR A SUBSEQUENT RULING OF A COURT (THE KARNATAKA HC IN CIT V SAMSUNG ELECTRONICS CO. LTD. (16 TAXMANN.COM 141) WAS PASSED ON OCTOBER 15, 2011). COURTS HAVE CONSISTENTLY UPHELD THIS PRINCIPLE AS SEEN IN: ITO V. CLEAR WATER TECHNOLOGY SERVICES (P.) LTD. (52 TAXMANN.COM 115) KERALA VISION LTD V. ACIT (4 6 TAXMANN.COM 50) SONIC BIOCHEM EXTRACTIONS (P.) LTD V. ITO (35 TAXMANN.COM 463) CHANNEL GUIDE INDIA LTD V. ACIT (25 TAXMANN.COM 25) DCIV. VIROLA INTER NATIONAL (20 14(2) TMI 653) 9 IT (TP) A NO S . 1370 & 1438 /BANG/ 2014 CIT V. KOTAK SECURITIES LTD. (20 TAXMANN.COM 846). 04. THE RELEVANT PORTION OF THE CIT(A) ORDER IS EXTRACTED AS UNDER : DISALLOWANCE OF EXPENSES UNDER 40(A)(I) / 40(A)(IA) : 5.1. AS REGARDS DISALLOWANCE OF EXPENSES UNDER 40(A)(I)/40(A)(IA), IT HAS BEEN SUBMITTED THAT THE COMPANY HAD DETERMINED THE RATE OF TAX TO BE DEDUCTED AND FOLLOWING THE JUDGMENTS THAT WERE PREVALENT AT THE TIME OF TAX DEDUCTION, SUPREME COURT IN THE CASE OF TATA CONSULTA NCY SERVICES AND JURISDICTIONAL TRIBUNAL IN THE CASE OF SAMSUNG ELECTRONICS CO. LTD, THE APPELLANT SUBMITTED THAT THE SAID JUDGMENT SHALL NOT BE APPLICABLE SINCE IT WAS PRONOUNCED ON 15/10/2011 AND VELANKANI MAURITIUS LTD., WHEREAS THE LIABILITY TO DEDUCT TAX FOR THE APPELLANT WAS THE F.Y. 2010 - 11. THE APPELLANT HAS RELIED ON THE JUDGMENT OF COCHIN TRIBUNAL IN THE CASE OF KERALA VISION LTD AND AGRA TRIBUNAL IN THE CASE OF VIROLA INTERNATIONAL, WHEREIN IT WAS HELD THAT 'THE LAW AMENDED WAS UNDOUBTEDLY RE TROSPECTIVE IN NATURE BUT SO FAR AS TAX WITHHOLDING LIABILITY IS CONCERNED, IT DEPENDS ON THE LAW AS IT EXISTED AT THE POINT OF TIME WHEN PAYMENTS, FROM WHICH TAXES OUGHT TO HAVE BEEN WITHHELD, WERE MADE. THE TAX - DEDUCTOR CANNOT BE EXPECTED TO HAVE CLAIRVO YANCE OF KNOWING HOW THE LAW WILL CHANGE IN FUTURE.' FURTHER, SOFTWARE PAYMENT WAS INCLUDED IN DEFINITION OF ROYALTY ONLY VIDE EXPLANATION TO SECTION 9(1)(VI)INSERTED RETROSPECTIVELY VIDE FINANCE ACT, 2012 AND WHEN THE PURCHASE WAS MADE, THE APPELLANT DID NOT HAVE THE BENEFIT OF CLARIFICATION BROUGHT BY THE RETROSPECTIVE AMENDMENT. IT IS IMPOSSIBLE TO FASTEN LIABILITY FOR DEDUCTING TAX AT SOURCE RETROSPECTIVELY AS TAX IS TO BE DEDUCTED AT SOURCE AT THE TIME WHEN THE PAYMENT IS CREDITED OR MADE. THIS VIEW H AS BEEN UPHELD BY THE BANGALORE TRIBUNAL IN THE CASE OF DCIT VS M/S WS ATKINS INDIA PVT LTD (ITA NO 14671BANG12014 AND THE MUMBAI TRIBUNAL IN THE CASE OF CHANNEL GUIDE INDIA LTD. VS ACIT ([2012] 25 TAXMANN.COM 25). 5.2 TH E ITAT 'C' BENCH IN THE CASE M/S WS ATKINS INDIA PVT. LTD AND IN THE CASE OF INFOTECH ENTERPRISES LTD OF THE HYDERABAD BENCH OF THE TRIBUNAL WHEREIN IT HAS BEEN HELD THAT SECTION 40(A)(IA) WOULD NOT APPLY TO DISALLOW PAYMENTS WHEN TDS WAS NOT DONE AND SUBS EQUENTLY BECOME TAXABLE ON ACCOUNT OF A RETROSPECTIVE LEGISLATION. IT HAS ALSO REFERRED TO IN THE CASE OF SONIC BIOCHEM EXTRACTIONS PVT. LTD. (SUPRA), IDENTICAL ISSUE WAS CONSIDERED AND DECIDED BY 10 IT (TP) A NO S . 1370 & 1438 /BANG/ 2014 THE MUMBAI TRIBUNAL. FOLLOWING WERE THE RELEVANT OBSERVATIO NS: - 'THE ASSESSEE PURCHASED SOFTWARE, CAPITALIZED THE PAYMENT TO THE COMPUTERS ACCOUNT AS THE SOFTWARE CAME ALONG WITH THE HARDWARE OF COMPUTERS AND CLAIMED DEPRECIATION. ON THE GROUND THAT PURCHASE OF SOFTWARE IS ESSENTIALLY PURCHASE OF COPYRIGHT WHICH A TTRACTS TAX DEDUCTION AT SOURCE UNDER SECTION 194J, THE ASSESSING OFFICER INVOLVED THE PROVISIONS OF SECTION 40(A)(IA) AND DISALLOWED THE DEPRECIATION CLAIMED. THE COMMISSIONER (APPEALS), CONFIRMED THE ACTION OF THE ASSESSING OFFICER ON THE GROUND THAT THE PURCHASE OF SOFTWARE AMOUNTED TO ACQUISITION OF INTANGIBLE ASSET AND THEREFORE, THE PAYMENT WAS ROYALTY AND DISALLOWABLE. ON APPEAL: HELD, (I) THAT MERE PURCHASE OF SOFTWARE, A COPYRIGHTED ARTICLE, FOR UTILISATION OF COMPUTERS CANNOT BE CONSIDERED AS PUR CHASE OF COPYRIGHT AND ROYALTY. THE ASSESSEE DID NOT ACQUIRE ANY RIGHTS FOR MAKING COPIES, SELLING OR ACQUIRING WHICH GENERALLY COULD BE CONSIDERED WITHIN THE DEFINITION OF 'ROYALTY'. EXPLANATION 2 TO SECTION 9(1)(VI) CANNOT BE APPLIED TO PURCHASE OF A COP YRIGHTED SOFTWARE, WHICH DOES NOT INVOLVE ANY COMMERCIAL EXPLOITATION THEREOF. THE ASSESSEE SIMPLY PURCHASED SOFTWARE DELIVERED ALONG WITH COMPUTER HARDWARE FOR UTILIZATION IN THE DAY - TO - DAY BUSINESS.' 5.3 RELYING ON THE ABOVE DECISION, THE ITAT 'C' BENCH , BANGALORE UPHELD THE ORDER OF THE CIT(A) WHO HAD OBSERVED THAT THE ASSESSEE DID NOT HAVE THE BENEFIT OF THE CLARIFICATION BROUGHT ABOUT BY THE RETROSPECTIVE AMENDMENT THAT THE PAYMENTS TANTAMOUNT TO PAYMENT FOR ROYALTY AND CONSEQUENTLY TAX WAS TO BE DED UCTED U/S 194J. THE LAW AS EXTANT ON THE DATE WHEN THE PAYMENT FOR OBTAINING THE SOFTWARE WAS MADE, HAS NOT CATEGORICALLY LAID DOWN THAT TAX IS REQUIRED TO BE DEDUCTED. IT IS IMPOSSIBLE TO FASTEN LIABILITY FOR DEDUCTING TAX AT SOURCE RETROSPECTIVELY. 5 .4 IN VIEW OF THE ABOVE DECISIONS, IT IS CORRECT TO SAY THAT IT IS NOT POSSIBLE TO FASTEN LIABILITY FOR DEDUCTING TAX AT SOURCE RETROSPECTIVELY AS TAX IS TO BE DEDUCTED AT SOURCE AT THE TIME WHEN THE PAYMENT IS CREDITED OR MADE. WHEN PURCHASE OF SOFTWARE WAS MADE THE ASSESSEE DID NOT HAVE THE BENEFIT OF THE CLARIFICATION BROUGHT ABOUT BY THE RETROSPECTIVE AMENDMENT. THE CONTENTION OF THE APPELLANT IS CORRECT THAT THE SOFTWARE PAYMENT DISALLOWED BY THE AO DID NOT WARRANT WITHHOLDING OF THE 11 IT (TP) A NO S . 1370 & 1438 /BANG/ 2014 TAX U/S 40(A)(IA) AND 40(A)(IA) (BY AN ORDER OF CORRIGENDUM DT 20.11.2015) OF THE ACT. THEREFORE DISALLOWANCE MADE BY THE AO ON ACCOUNT OF SOFTWARE PAYMENT WANT OF WITHHOLDING OF TAX IS HEREBY DELETED. 05. THE CIT(A) FOLLOWED THE DECISION OF THIS TRIBUNAL IN M/S WS A TKINS INDIA PVT. LTD, SUPRA, WHICH REFERRED THE DECISIONS OF HYDERABAD BENCH OF THE TRIBUNAL IN INFOTECH ENTERPRISES LTD IN ITA 115/HYD/2011 WHEREIN IT HAS BEEN HELD THAT SECTION 40(A)(IA) WOULD NOT APPLY TO DISALLOW PAYMENTS WHEN TDS WAS NOT DONE AND SUB SEQUENTLY BECOME TAXABLE ON ACCOUNT OF A RETROSPECTIVE LEGISLATION. IT HAS ALSO REFERRED TO THE DECISIONS OF THE DELHI & MUMBAI TRIBUNAL IN SMS DEMAG PVT LTD , 132 ITJ 498 & SONIC BIOCHEM EXTRACTIONS PVT. LTD. 23 ITR (TRIB) 447, RESPECTIVELY. WE UPHOLD THE DECISION OF THE CIT(A) AND DISMISS THE GROUNDS RAISED BY THE REVENUE. THUS IT IS CLEAR THAT THE CO - ORDINATE BENCH OF THIS TRIBUNAL WHILE DECIDING THIS ISSUE HAS TAKEN NOTE OF VARIOUS DECISIONS IN FAVOUR O F THE ASSESSEE ON THE POINT THAT THE PAYMENT FO R PURCHASE OF SOFTWARE DOES NOT FALL IN THE DEFINITION OF ROYALTY. RESPECTFULLY FOLLOWING THE DECISION OF CO - ORDINATE BENCH OF THIS TRIBUNAL, WE DELETE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 8. GROUND NOS.6 TO 9 ARE REGARDING TRANSFER PRICIN G ADJUSTMENT IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES AS WELL AS IT ENABLED SERVICES TRANSACTIONS. 9. THE ASSESSEE HAS REPORTED THE INTERNATIONAL TRANSACTIONS IN TWO SEGMENTS I.E. SOFTWARE DEVELOPMENT SERVICES AND ITES. THE LIMITED GRIEVANCE OF T HE ASSESSEE IN THESE GROUNDS OF APPEAL IS THAT WHILE COMPUTING THE MARGINS OF THE ASSESSEE, THE TPO HAS REALLOCATED THE COST BETWEEN THE TRANSACTIONS WITH ASSOCIATED ENTERPRISES (AES) AND TRANSACTIONS WITH NON - AE THIRD PARTY IN BOTH SEGMENTS AND THEREBY M ADE 12 IT (TP) A NO S . 1370 & 1438 /BANG/ 2014 THE ADDITION UNDER SECTION 92CA OF THE ACT. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE HAS ALLOCATED THE INDIRECT COST BETWEEN THE AE AND NON - AE TRANS A CTIONS ON THE BASIS OF REVENUE HOWEVER , DIRECT COSTS HAVE BEEN ALLOCATED ON ACTUAL BASIS. THE TPO WHILE DETERMINING THE ARM S LENGTH PRICE (ALP) HAS REALLOCATED THE ENTIRE COST IN THE RATIO OF REVENUE BETWEEN THE AE AND NON - AE. THUS THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT THE TPO HAS COMMITT ED AN ERROR AS WELL AS CROSSED JURISDICTION BY ALLOCATING THE ENTIRE COST ON TURN OVER BASIS. HE HAS FURTHER POINTED OUT THAT FOR THE ASSESSMENT YEARS 2010 - 11 TO 2012 - 13, THE TPO HAS ACCEPTED THE ALLOCATION OF COST MADE BY THE ASSESSEE AND THEREFORE ONLY FOR THE YEAR UNDER CONSID ERATION, THE TPO HAS DISTURBED THE ALLOCATION OF COST AND REWORKED OUT THE MARGINS OF THE ASSESSEE IN RESPECT OF THE INTERNATIONAL TRANSACTIONS. HE HAS FILED THE TP ORDE R AS WELL AS ASSESSMENT ORDER FOR THE ASSESSMENT YEARS 2010 - 11 TO 2012 - 13. HE HAS ALSO RELIED UPON THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL DT.18.4.2017 IN THE CASE OF 3D NETWORK S PTE LTD. (INDIA BRANCH) VS. ACIT IN IT(TP)A NOS.544 & 622/BANG/2011. 10. ON THE OTHER HAND, THE LEARNED DEPARTM ENTAL REPRESENTATIVE HAS SUBMITTED THAT WHEN THE ASSESSEE IS PROVIDING SAME SERVICES TO THE AE AS WELL AS NON - AE THEN THE ALLOCATION OF COST ON THE BASIS OF RATIO OF TURNOVER IS PROPER AND JUSTIFIED. SINCE THE PROFIT ON THE TRANSACTION WITH AE IS ELIGIBLE FOR DEDUCTION UNDER SECTION 10A OF THE ACT THE ASSESSEE IS ALLOCATING THE COST DIS PROPORTIONATELY TO THE NON - AE TRANSACTION TO AVOID THE TAX. HE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 13 IT (TP) A NO S . 1370 & 1438 /BANG/ 2014 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS W ELL AS THE RELEVANT MATERIAL ON RECORD. THE SEGMENTAL FINANCIAL RESULTS OF THE ASSESSEE AS PER THE TP DOCUMENT HAS BEEN REPRODUCED BY THE TPO IN PARA 3 AS UNDER : 12. THE ASSESSEE HAS SHOWN THE OPERATING MARGIN OF INTERNATIONAL TRANSACTIONS IN SOFT WARE DEVELOPMENT SEGMENT AND ITES SEGMENT AT 14.64% AND 17.54% RESPECTIVELY. THE TPO FOUND THAT THE ASSESSEE HAS MADE A DISPROPORTIONATE COST ACROSS THE SEGMENT AND IT HAS BEEN RESULTED IN HIGH MARGINS IN AE TRANSACTION AND LOSS IN NON - AE TRANSACTION. ACCORDINGLY, THE TPO HAS RECOMPUTED THE MARGINS BY REALLOCATION OF THE COST IN PARA 4 AS UNDER : 14 IT (TP) A NO S . 1370 & 1438 /BANG/ 2014 13. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS POINTED OUT THAT FOR ALL THE SUBSEQUENT ASSESSMENT YEARS I.E. ASSESSMENT YEARS 2010 - 11 TO 2012 - 13, THE TPO HAS ACCEPTED THE ALLOCATION OF COST ON THE SAME BASIS AS ALLOCATED BY THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION. IT IS PERTINENT TO NOTE THAT THE QUESTION OF ALLOCATION OF COST ARISES ONLY IN RESPECT OF THE INDIRECT COST INCURRED FOR ALL THE TRANSACTIONS AND THEREFORE , THE SAME HAS TO BE ALLOCATED ON THE BASIS OF TURNOVER OR ANY OTHER PROPER BASIS. IN THE CASE OF THE ASSESSEE IT IS CONTENDED THAT THE ASSESSEE ITSELF HAS ALLOCATED THE INDIRECT COST ON TURNOVER BASIS AND THE DIRECT COST WHICH RELATES TO A PARTICULAR TRANSACTION HAS BEEN ALLOCATED BY THE ASSESSEE ON THE ACTUAL BASIS AND THEREFORE THE TPO WAS NOT JUSTIFIED IN ALLOCATING THE DIRECT COST ON TURNOVER BASIS. ON PRINCIPLE WE DO AGREE WITH THE CONTENTION OF THE 15 IT (TP) A NO S . 1370 & 1438 /BANG/ 2014 ASSESSEE THA T THE DIRECT COST HAS TO BE ALLOCATED ON ACTUAL BASIS AND NOT ON THE BASIS OF TURNOVER. IN THE CASE OF M/S. 3D NETWORK P TE LTD VS. ACIT (SUPRA), THE CO - ORDINATE BENCH OF THIS TRIBUNAL WHILE DEALING WITH AN IDENTICAL ISSUE HAS HELD IN PARA 11 AS UNDER : 11. HAVING CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD WE FIND THAT THE TPO HAS TAKEN NOTE OF THE FACT THAT THE EMPLOYEES COST ALLOCATED TO THE AMC SEGMENT WAS HIGHLY EXCESSIVE IN COMPARISON TO THE OTHER TWO SEGMENTS. F URTHER, THE TPO HAS NOTED THAT THE OTHER INDIRECT COST WERE ALSO NOT PROPERLY ALLOCATED BY THE ASSESSEE WHILE COMPUTING THE OPERATING MARGINS FOR THE PURPOSE OF BENCH MARKING ITS INTERNATIONAL TRANSACTION. THE TPO THEN UNDERTAKEN THE EXERCISE OF REALLOCAT ION OF THE TOTAL OPERATING COST IN THE RATIO OF TURNOVER OF THREE SEGMENTS. IT IS PERTAINING TO NOTE THAT THE ALLOCATION OF COST CAN BE MADE ONLY IN RESPECT OF INDIRECT COMMON COST INCURRED IN RESPECT OF ALL THE SEGMENTS. THEREFORE THE ALLOCATION OF THE COST CAN BE MADE ONLY IN RESPECT OF THE INDIRECT COST. THE COST WHICH IS DIRECTLY RELATED TO A PARTICULAR SEGMENT CANNOT BE REALLOCATED. THE SAME CAN BE EXAMINED FOR THE PURPOSE OF ALLOWABILITY AND GENUINENESS BUT NOT FOR THE PURPOSE OF REALLOCATION. AC CORDINGLY, WE FIND THAT THE ACTION OF THE TPO IN ALLOCATING THE DIRECT AS WELL AS INDIRECT COST IN THE RATIO OF TURNOVER OF EACH SEGMENT IS NOT PROPER AND JUSTIFIED. HENCE WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE IMPUGNED ORDER OF THE CIT(A) WHICH HA S TAKEN NOTE OF THE FACT THAT IF THE DIRECT COST IS TAKEN OUT FROM THE ALLOCATION THEN THE ADJUSTMENT MADE BY THE TPO WILL NOT SURVIVE. HENCE WE UPHOLD THE IMPUGNED ORDER OF THE CIT(A) QUA THIS ISSUE. THUS THE ACTION OF THE TPO IN ALLOCATING THE DIRE CT AS WELL AS INDIRECT COST AS ALLEGED BY THE ASSESSEE IN THE RATIO OF TURNOVER OF EACH SEGMENT AND TRANSACTION IS NOT JUSTIFIED. FURTHER THE TPO HAS ACCEPTED THE ALLOCATION OF THE COST BY THE ASSESSEE BETWEEN THE AE AND NON - AE TRANSACTION FOR 16 IT (TP) A NO S . 1370 & 1438 /BANG/ 2014 THE ASSESSM ENT YEARS 2010 - 11 TO 2012 - 13. WE HAVE GONE THROUGH THE RESPECTIVE ORDERS OF THE TPO/A.O. AND NOTED THAT THE TPO HAS NOT DISTRIBUTED THE ALLOCATION OF COST MADE BY THE ASSESSEE FOR THE SUBSEQUENT ASSESSMENT YEARS . IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE AS WELL AS THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL (SUPRA) , WE ARE OF THE CONSIDERED OPINION THAT SO FAR AS THE DIRECT COST IS CONCERNED THE SAME HAS TO BE ALLOCATED ON ACTUAL BASIS INSTEAD OF TURNOVER BASIS. ACCORDINGLY, WE SET A SIDE THIS ISSUE TO THE RECORD OF THE TPO/A.O. FOR LIMITED PURPOSE OF PROPER VERIFICATION AND ALLOCATION OF THE COST IN THE LIGHT OF THE ABOVE OBSERVATIONS AS WELL AS IN THE LIGHT OF THE SUBSEQUENT ORDERS OF THE TPO FOR THE ASSESSMENT YEARS 2010 - 11 TO 201 2 - 13. 14. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS : 17 IT (TP) A NO S . 1370 & 1438 /BANG/ 2014 15. THE ONLY ISSUE ARISES IN THE APPEAL OF THE REVENUE IS REGARDING THE GAIN/LOSS ARISING DUE TO FOREX FLUCTUATION ON THE RECEIVABLE FROM THE AE TO BE TREATED AS OPERATING REVENUE OR C OST AS THE CASE MAY BE. 16. WE HAVE HEARD THE LEARNED DR AS WELL AS LEARNED AR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THIS ISSUE IS NO LONGER RES INTEGRA AS THE TRIBUNAL HAS BEEN TAKING A CONSISTENT VIEW THAT THE GAIN OR LOSS ARISING DUE TO THE FOREIGN EXCHANGE FLUCTUATION ON THE EXPORT 18 IT (TP) A NO S . 1370 & 1438 /BANG/ 2014 RECEIVABLES FROM AE, THEN THE SAME IS IN THE NATURE OF OPERATING REVENUE / OPERATING COST AND HAS TO BE PART OF THE OPERATING REVENUE/OPERATING COST AS THE CASE MAY BE. FURTHER AS A PRINCIPLE OF CONSISTENCY AN D P ARITY, A SIMILAR TREATMENT HAS TO BE GIVEN IN THE CASE OF COMPARABLES. THE LEARNED AUTHORISED REPRESENTATIVE HAS RELIED UPON THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL DT.23.11.2012 IN THE CASE OF M/S. TRIOLOGY E - BUSINESS SOFTWARE INDIA PVT . LTD. VS. DCIT IN IT(TP)A NO.1054/BANG/2011. WE FIND THAT THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE SAID CASE HAS CONSIDERED AND DECIDED THIS ISSUE IN PARA 79 AS UNDER : 79. THE FOLLOWING OTHER OBJECTIONS WERE ALSO RAISED BY THE ASSESSEE RE GARDING DETERMINATION OF ALP: (A) INAPPROPRIATE COMPUTATION OF OPERATING MARGINS OF COMPARABLES AND THAT OF THE ASSESSEE: THIS OBJECTION IN OUR VIEW DOES NOT REQUIRE ANY SPECIFIC CONSIDERATION AND WILL BE COVERED BY THE DECISION THAT WILL BE RENDERED ON POINT (B) BELOW. (B) TREATING FOREIGN EXCHANGE GAIN OR LOSS AND PROVISION FOR BAD DEBTS AS NON - OPERATING IN NATURE AND FRINGE BENEFIT TAX AS PART OF OPERATING COST: AS FAR AS FOREIGN EXCHANGE GAIN/LOSS BEING CONSIDERED AS NOT FORMING PART OF THE OPERAT ING COST, THE REASONING OF THE REVENUE IS THAT SUCH LOSS OR GAIN CANNOT BE SAID TO BE ONE REALIZED FROM INTERNATIONAL TRANSACTION THOUGH THEY MAY FORM PART OF THE GAIN/LOSS OF THE ENTERPRISE AND THEREFORE THEY SHOULD BE EXCLUDED WHILE DETERMINING OPERATING COST. ON THE ABOVE ISSUE WE FIND THAT THE BANGALORE BENCH OF ITAT IN THE CASE OF SAP LABS INDIA (P) LTD. VS. ACIT (2011) 44 SOT 156 (BANG.) HAS TAKEN THE VIEW THAT FOREIGN EXCHANGE FLUCTUATION GAINS ARE REQUIRED TO BE ADDED TO OPERATING REVENUE. FOLLOWI NG THE SAME, THE AO IS DIRECTED TO ACCEPT THE CLAIM OF THE ASSESSEE IN THIS REGARD. AS FAR AS PROVISION FOR BAD DEBTS ARE CONCERNED, THE TPO HAS ACCEPTED THAT THE SAME WOULD BE PART OF OPERATING EXPENSES PROVIDED THE SAME IS INCURRED EVERY YEAR FOR AT LEA ST THREE YEARS AND THE MANNER IN WHICH PROVISION IS MADE IS CONSISTENT. THE ASSESSEE IN REPLY TO THE QUERY OF THE TPO ON THE ABOVE ASPECT HAS NOT FURNISHED ANY DETAILS. WE ARE OF THE VIEW THAT THE ASSESSEE SHOULD BE AFFORDED 19 IT (TP) A NO S . 1370 & 1438 /BANG/ 2014 OPPORTUNITY TO EXPLAIN ITS PO SITION ON THE ABOVE AND THE AO IS DIRECTED TO CONSIDER THE SAME IN ACCORDANCE WITH LAW. AS FAR AS FRINGE BENEFIT TAX (FBT) IS CONCERNED, THE SAME WAS NOT CONSIDERED BY THE TPO AS PART OF OPERATING COST IN THE CASE OF COMPARABLES AND THEREFORE THE SAME SHO ULD ALSO NOT BE CONSIDERED AS PART OF OPERATING COST OF THE ASSESSEE. WE HOLD ACCORDINGLY AND DIRECT THE AO TO COMPUTE THE OPERATING COST OF THE ASSESSEE. ACCORDINGLY, IN VIEW OF THE ABOVE DISCUSSION AS WELL AS THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE IMPUGNED ORDER QUA THIS ISSUE. 17. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED AND APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 15T H SEPT ., 2017. SD/ - ( INTURI RAMA RAO ) ACCOUNTANT MEMBER SD/ - ( VIJAY PAL RAO ) JUDICIAL MEMBER BANGALORE, DT. 15 .0 9 .2017. *REDD Y GP COPY TO : 1 APPELLANT 4 CIT(A) 2 RESPONDENT 5 DR. ITAT, BANGALORE 3 CIT 6 GUARD FILE SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL BANGALORE.