M/s. Ciena India Private Limited, Gurgaon V. ITO, New Delhi

ITA 1453/DEL/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 90977 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 1 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-04-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 20-04-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 11-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JUDY JAMES
• Assessee Lawyers: HIMANSHU S SINHA; MD FAHAD KHALID
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary
• Section: 143(3); 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI C.M. GARG, JM ITA NO.1453/DEL/2014 ASSESSMENT YEAR : 2009-10 CIENA INDIA PVT. LTD., GROUND, MEZZANINE & 9 TH FLOOR, DLF PLAZA TOWER, PHASE-I, DLF CITY, GURGAON. PAN: AACCC6131B VS. ITO, WARD-3(3), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI HIMANSHU S. SINHA, ADVOCATE & SHRI MD. FAHAD KHALID, CA DEPARTMENT BY : SHRI JUDY JAMES, STANDING COUNSEL DATE OF HEARING : 22.04.2015 DATE OF PRONOUNCEMENT : 24.04.2015 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE ARISES OUT OF THE FINAL ORDER PASSED BY THE AO ON 30.01.2014 U/S 143(3) READ WITH SECTION 1 44C(13) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEAR 2009-10. ITA NO.1453/DEL/2014 2 2. CERTAIN GROUNDS RAISED IN THIS APPEAL WERE EITHE R NOT PRESSED OR STATED TO BE GENERAL NOT REQUIRING ANY SPECIFIC ADJ UDICATION. SUCH GROUNDS STAND DISMISSED. 3. THE FIRST ISSUE ARGUED BY THE LD. AR IS AGAI NST ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT OF RS.15,43,32,633/- IN RESPECT OF INTERNATIONAL TRANSACTION OF PROVISION OF CONTRACT R&D SERVICES. 4. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF CIENA CORPORATION, USA AND IS E NGAGED IN THE BUSINESS OF PROVISION OF SOFTWARE DEVELOPMENT SERVI CES AND MARKETING SUPPORT SERVICES TO ITS OVERSEAS GROUP COMPANIES. THE ASSESSEE REPORTED CERTAIN INTERNATIONAL TRANSACTIONS. THE ASSESSING OFFICER (AO) REFERRED THE INTERNATIONAL TRANSACTIONS TO THE TRANSFER PRIC ING OFFICER (TPO) FOR DETERMINATION OF THEIR ARMS LENGTH PRICE (ALP). T HE FIRST DISPUTE IS QUA THE INTERNATIONAL TRANSACTION OF `PROVISION OF SOF TWARE DEVELOPMENT SERVICES ALSO REFERRED TO AS `PROVISION OF CONTRAC T R&D SERVICES WITH TRANSACTED VALUE OF RS.1,35,29,54,809/-. THE ASSES SEE APPLIED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE ITA NO.1453/DEL/2014 3 METHOD WITH THE PROFIT LEVEL INDICATOR (PLI) OF OPE RATING PROFIT TO TOTAL COST (OP/TC) TO EXPLAIN THAT IT WAS AT ALP. THE ASS ESSEE DECLARED PROFIT MARGIN UNDER THIS SEGMENT AT 13%. IN ORDER TO DEM ONSTRATE THAT THE SERVICES WERE PROVIDED AT ARMS LENGTH PRICE, IT CH OSE 20 COMPANIES AS COMPARABLES WITH THEIR AVERAGE PLI AT 14.4%. THE T PO REJECTED 15 OUT OF SUCH 20 COMPANIES AND ADDED TWO NEW COMPANIES TO MAKE A FINAL TALLY OF COMPARABLE COMPANIES AT 7, WITH THEIR AVER AGE OP/TC AT 25.89%. FOLLOWING IS THE FINAL LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO WITH THEIR RESPECTIVE PROFIT MARGINS:- SL.NO. NAME OF THE COMPANY MARGINS) 1. AKSHAY SOFTWARE TECHNOLOGIES LTD. 12.41 2. LGS GLOBAL LTD. 21.26 3. NEILSOFT LIMITED 15.54 4. SASKEN COMMUNICATION TECHNOLOGIES LTD. 15.99 5. ZYLOG SYSTEM LTD. 15 6. BODHTREE CONSULTING LTD. 68.63 7. INFOSYS TECHNOLOGIES LTD. 40.94 AVG 27.11 ITA NO.1453/DEL/2014 4 5. AFTER ENTERTAINING THE OBJECTIONS RAISED BY THE ASSESSEE, THE TPO PROPOSED TRANSFER PRICING ADJUSTMENT OF RS.16,89,39 ,756/-. THE ASSESSEE RAISED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PAN EL (DRP). THE PANEL GAVE CERTAIN DIRECTIONS TO THE TPO AND DIRECTED TO RE-DETERMINE THE ALP ACCORDINGLY. FOLLOWING THE DIRECTIONS GIVEN BY THE DRP, THE TPO PASSED ORDER ON 29.1.2014 AND RE-DETERMINED THE ALP OF THIS INTERNATIONAL TRANSACTION AT RS.1,50,72,87,442/-, WHICH LED TO THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT TO THE TUNE OF RS.15.43 CRORE. THE ASSESSEE IS AGGRIEVED AGAINST T HE MAKING OF THIS ADDITION. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT CAN BE SEEN FROM THE ORDERS OF THE AUTHORITIES BELOW THAT THE ASSESSEES ADOPTION OF TNMM AS THE M OST APPROPRIATE METHOD WITH THE PLI OF OP/TC HAVE NOT BEEN DISTURBE D. THE ASSESSEE IS AGGRIEVED ON TWO SCORES ON THIS INTERNATIONAL TRANS ACTION, VIZ., FIRSTLY, AGAINST THE INCLUSION/EXCLUSION OF CERTAIN COMPANIE S IN/FROM THE FINAL LIST OF COMPARABLES AND SECONDLY, NOT ALLOWING THE RISK ADJUSTMENT. ITA NO.1453/DEL/2014 5 7. FIRST, WE ARE ESPOUSING THE INCLUSION/EXCLUSI ON OF CERTAIN COMPANIES. BEFORE EMBARKING ON THE EXERCISE OF MAKI NG COMPARISON OF THE COMPANIES PRESENTLY ASSAILED BY THE ASSESSEE, I T IS SIGNIFICANT TO FIRST CONSIDER THE FUNCTIONAL PROFILE OF THE ASSESSEE UND ER THIS SEGMENT. IT CAN BE SEEN FROM THE TPOS ORDER THAT HE HAS STATED THE ASSESSEE TO BE PRIMARILY ENGAGED IN THE PROVISION OF SOFTWARE DEVE LOPMENT SERVICES TO ITS AE. IT HAS ALSO BEEN STATED THAT THE ROLE OF T HE ASSESSEE IS TO EXECUTE THE WORK SUB-CONTRACTED BY ITS AE. WE HAVE GONE THR OUGH THE ASSESSEES TP STUDY REPORT, A COPY OF WHICH IS AVAILABLE ON PA GES 11-155 OF THE PAPER BOOK, FROM WHICH IT CAN BE NOTICED THAT THE C IENA GROUP IS A SUPPLIER OF COMMUNICATIONS NETWORKING EQUIPMENT, SO FTWARE AND SERVICES THAT SUPPORT THE DELIVERY AND TRANSPORT OF VOICE, VIDEO AND DATA SERVICES. THE PRODUCTS OF CIENA GROUP INCLUDE OPTI CAL NETWORKING, BROADBAND NETWORKING AND DATA NETWORKING PRODUCTS A LONG WITH NETWORK AND SERVICES MANAGEMENT SOFTWARE USED IN COMMUNICAT ION NETWORKS AND FOLLOWED BY TELECOMMUNICATIONS SERVICE PROVIDERS AC ROSS THE GLOBE. THE GROUP SPECIALIZES IN TRANSITIONING LEGACY COMMUNICA TIONS NETWORKS TO BE CONVERGED, NEXT GENERATION ARCHITECTURE CAPABLE OF DELIVERING A MIX ITA NO.1453/DEL/2014 6 OF HIGH BAND WIDTH SERVICES. THE ASSESSEE IS ENGAG ED IN DESIGN, DEVELOPMENT AND MAINTENANCE OF SOFTWARE, WHICH ESSE NTIALLY INCLUDES THE ACTIVITIES, NAMELY, SOFTWARE DEVELOPMENT SERVIC ES; PROCUREMENT, RESEARCH AND TECHNOLOGY; DEVELOPMENT OF DESIGN; AFT ER-SALES ACTIVITY; AND ACCOUNTING/ADMINISTRATION. THE ASSESSEE PROVID ES CONTRACTUAL SOFTWARE DEVELOPMENT SERVICES TO ITS GROUP COMPANY ALONE. THESE SERVICES INCLUDE MAINTENANCE AND UPDATION ACTIVITIE S. THE ASSESSEE IS COMPENSATED BY ITS USA ASSOCIATED ENTERPRISE (AE) W ITH AGGREGATE OF DIRECT AND INDIRECT COSTS INCURRED BY IT IN PERFORM ING THE SERVICES TO CIENA, USA PLUS SUITABLE MARK-UP TO BE DECIDED ON A GREED BASIS FROM TIME TO TIME. FOR THE YEAR UNDER CONSIDERATION, TH E ASSESSEE WAS ALLOWED A MARK-UP OF 13%. AS PER THE AGREEMENT ENTERED INT O BETWEEN THE ASSESSEE AND CIENA, USA, THERE IS A CONFIDENTIALIT Y CLAUSE BY WHICH ALL INFORMATION COMMUNICATED TO ONE PARTY BY THE OTHER CAN BE USED ONLY FOR THE PURPOSES OF THIS AGREEMENT. CLAUSE 9 OF TH E AGREEMENT IS CAPTIONED AS INTELLECTUAL PROPERTY RIGHTS. THIS CLAUSE PROVIDES THAT THE ASSESSEE, AT NO TIME, SHALL ACQUIRE OR RETAIN ANY R IGHT, TITLE OR INTEREST WHATSOEVER IN THE WORK DONE BY IT. THIS CLAUSE FUR THER PROVIDES THAT THE ITA NO.1453/DEL/2014 7 INTELLECTUAL PROPERTY RIGHTS IN THE FORMAT, PRESENT ATION, PROCEDURES, PROCESS, COMPUTER SOFTWARE AND OTHER MATERIAL OF WH ATEVER NATURE CREATED, DEVELOPED OR ENHANCED BY CIENA INDIA IN TH E COURSE OF PROVIDING THE SERVICES TO CIENA, USA SHALL BE AND REMAIN THE SOLE PROPERTY OF CIENA, USA ABSOLUTELY. FROM THE ABOVE CLAUSES OF THE AGREEMENT, IT IS MANIFEST THAT THE ASSESSEE IS SIMP LY A CAPTIVE UNIT PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS AE W ITHOUT ACQUIRING OR RETAINING ANY INTELLECTUAL PROPERTY RIGHTS IN THE W ORK DONE BY IT FOR AND ON BEHALF OF ITS FOREIGN AE, FOR WHICH IT IS COMPEN SATED WITH ACTUAL COSTS INCURRED PLUS 13% MARK UP. TOTAL OPERATING REVENUE OF THE ASSESSEE FROM THIS SEGMENT STANDS AT RS.135.29 CRORE WITH TH E OPERATING COSTS AT RS.119.73 CRORE, GIVING PROFIT BEFORE INTEREST AND TAX AT RS.15.56 CRORE WITH PROFIT RATIO OF 13%. WITH ABOVE UNDERSTANDING OF THE NATURE OF SERVICES PROVIDED BY THE ASSESSEE TO ITS AES UNDER THIS SEGMENT, WE WILL TAKE UP THE DISPUTED COMPANIES, ONE BY ONE, FOR CO NSIDERATION AS TO THEIR COMPARABILITY. ITA NO.1453/DEL/2014 8 INFOSYS TECHNOLOGIES LTD . 8.1. THE TPO NOTICED THAT THIS COMPANY WAS FINDING PLACE IN THE ACCEPT/REJECT MATRIX BUT WAS REJECTED IN THE TP DOC UMENTATION BY CLAIMING THAT IT FAILED FUNCTIONAL AREA COMPARABILI TY. THE TPO FOUND THIS COMPANY TO BE INTO SOFTWARE DEVELOPMENT SERVIC ES QUALIFYING ALL THE FILTERS APPLIED BY HIM. THE ASSESSEE RAISED CERTAI N OBJECTIONS AGAINST THE INCLUSION OF THIS COMPANY, BUT WITHOUT ANY SUCCESS. THE TPO COMPUTED OPERATING PROFIT MARGIN OF THIS COMPANY AT 40.94% A ND INCLUDED IT IN THE FINAL LIST OF COMPARABLES. THE ASSESSEE IS AGGRIEV ED AGAINST THE INCLUSION OF THIS COMPANY IN THE ULTIMATE SET OF COMPARABLES. 8.2. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE RELEVANT MATERIAL ON RECORD. IT CAN BE SEEN THAT THE TPO HA S INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES BY REJECTING THE ASSESSEES CONTENTION ABOUT THE BRAND OF THIS COMPANY HELPING IN EARNING HUGE PROFITS AND ALSO THE BRAND-RELATED PROFITS SWELLING THE ULTIMATE PROFIT RATE OF THIS COMPANY. WE FIND THAT THE ASSESSEE IS ONLY A CAPTIVE UNIT RENDERING SERVICES TO ITS AE ALONE WITHOUT ACQUIRIN G ANY INTELLECTUAL ITA NO.1453/DEL/2014 9 PROPERTY RIGHTS IN THE WORK DONE BY IT IN THE DEVEL OPMENT OF SOFTWARE. THE HONBLE DELHI HIGH COURT IN CIT VS. AGNITY INDIA TECHNOLOGIES (P) LTD. (2013) 219 TAXMANN 26 (DEL) CONSIDERED THE GIANTNESS OF INFOSYS LTD., IN TERMS OF RISK PROFILE, NATURE OF SERVICES, NUMBER OF EMPLOYEES, OWNERSHIP OF BRANDED PRODUCTS AND BRAND RELATED PRO FITS, ETC. IN COMPARISON WITH SUCH FACTORS PREVAILING IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD., BEING, A CAPTIVE UNIT PROVI DING SOFTWARE DEVELOPMENT SERVICES WITHOUT HAVING ANY IP RIGHTS I N THE WORK DONE BY IT. AFTER MAKING COMPARISON OF VARIOUS FACTORS AS ENUMERATED ABOVE, THE HONBLE DELHI HIGH COURT HELD INFOSYS LTD. TO BE IN COMPARABLE WITH AGNITY INDIA TECHNOLOGIES PVT. LTD. THE FACTS OF TH E INSTANT CASE ARE MORE OR LESS SIMILAR INASMUCH AS THE EXTANT ASSESSE E IS ALSO A CAPTIVE SERVICE PROVIDER WITH A LIMITED NUMBER OF EMPLOYEES AT ITS DISPOSAL AND ALSO NOT OWNING ANY BRANDED PRODUCTS BUT, RENDERING ONLY OFFSHORE SERVICES WITH NO EXPENDITURE ON R&D ETC. WHEN WE C ONSIDER ALL THE ABOVE FACTORS IN A HOLISTIC MANNER, THERE REMAINS A BSOLUTELY NO DOUBT IN OUR MIND THAT INFOSYS TECHNOLOGIES LTD. IS INCOMPAR ABLE TO THE ASSESSEE COMPANY. RESPECTFULLY FOLLOWING THE JUDGMENT OF TH E HONBLE ITA NO.1453/DEL/2014 10 JURISDICTIONAL HIGH COURT IN AGNITY INDIA (SUPRA) , WE HOLD THAT INFOSYS TECHNOLOGIES LTD., CANNOT BE HELD AS COMPARABLE WIT H THE ASSESSEE COMPANY. THIS COMPANY IS, THEREFORE, DIRECTED TO B E EXCLUDED FROM THE LIST OF COMPARABLES. BODHTREE CONSULTING LTD . 9.1. THE TPO TREATED BODHTREE CONSULTING LTD. AS ON E OF THE COMPARABLES. THE ASSESSEE OBJECTED TO THE INCLUSIO N OF THIS COMPANY ON THE GROUND OF FUNCTIONAL DISSIMILARITY AND ITS FLUC TUATING PROFIT MARGINS. THE TPO REJECTED THE ASSESSEES CONTENTION ABOUT TH E SUPER NORMAL PROFITS EARNED BY THIS COMPANY DURING THE YEAR AND ALSO HELD THE SAME TO BE FUNCTIONALLY SIMILAR INASMUCH AS IT HAVING ONLY ONE IDENTIFIABLE REPORTING SEGMENT, I.E., SOFTWARE DEVELOPMENT SERVI CES. THE ASSESSEE IS UPSET WITH THE INCLUSION OF THIS COMPANY IN THE FIN AL LIST OF COMPARABLES. 9.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PE RUSING THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUAL REPORT OF THIS COMPANY, A COPY OF WHICH IS AVAILABLE ON PAGES 951 ONWARDS OF THE PAPER BOOK, THAT IT HAS ONLY ONE SEGMENT, NAMELY, SOFTWARE DEVELOPM ENT. IT IS ENGAGED ITA NO.1453/DEL/2014 11 IN PROVIDING OPEN AND END-TO-END WEB SOLUTIONS, OFF -SHORING DATA MANAGEMENT, DESIGN AND DEVELOPMENT OF SOLUTIONS. WH EN WE CONSIDER THE NATURE OF SERVICES PROVIDED BY THE ASSESSEE UND ER THIS SEGMENT, NAMELY, SOFTWARE DEVELOPMENT, THERE REMAINS NO DOUB T THAT FUNCTIONALLY BODHTREE CONSULTING LTD. IS A COMPARABLE ENTITY. 9.3. AS REGARDS THE FLUCTUATING PROFIT MARGINS O F THIS COMPANY OVER THE YEARS, WE FIND FROM THE EXTRACTIONS MADE IN THE TPO S ORDER THAT THE RATIO OF PROFIT BEFORE INCOME-TAX TO SALES FOR THE FINANCIAL YEAR 2007-08 WAS AT 15.63% WHICH, FOR THE INSTANT YEAR, INCREASE D TO 44.49%. IN THE IMMEDIATELY SUCCEEDING YEAR, THE PROFIT RATE CAME D OWN TO 22.38% AND IN THE FINANCIAL YEAR 2010-11, THE COMPANY HAS REPO RTED LOSS OF (-) 1.89%. BEFORE EVALUATING THE CONTENTION OF THE LD. AR ON THIS ASPECT, WE WANT TO MAKE IT CLEAR THAT HIGH OR LOW PROFIT MARGI N OF A COMPANY CANNOT BE CONSIDERED AS A CRITERIA FOR TREATING IT AS INCO MPARABLE. NOTWITHSTANDING THE SIMPLICITOR HIGHER OR LOWER PRO FIT MARGIN, A COMPANY OTHERWISE COMPARABLE, CANNOT BE IGNORED. ON E CAN CONSIDER ITA NO.1453/DEL/2014 12 SUCH A COMPANY AS INCOMPARABLE ONLY IF HIGHER OR LO WER PROFIT IS DUE TO ABNORMAL CIRCUMSTANCES. 9.4. THE LD. AR SUBMITTED THAT BODHTREE CONSULTING LTD. CANNOT BE CONSIDERED AS COMPARABLE BECAUSE OF A DIFFERENT MOD EL OF REVENUE RECOGNITION. HE INVITED OUR ATTENTION TOWARDS THE A NNUAL REPORT OF THIS COMPANY, IN WHICH IT HAS BEEN SPECIFICALLY REPORTED THAT REVENUE FROM SOFTWARE DEVELOPMENT IS RECOGNIZED BASED ON SOFTWAR E DEVELOPED AND BILLED TO CLIENTS. HE SUBMITTED THAT THE COSTS INC URRED BY THIS COMPANY IN RESPECT OF THE PROJECTS PENDING COMPLETION AT THE E ND OF THE YEAR ARE BOOKED AT THE TIME OF INCURRING, BUT, THE INCOME IS RECOGNIZED ON THE RAISING OF BILLS IN SUBSEQUENT YEAR, THEREBY DISTOR TING THE FIGURE OF OPERATING PROFIT FOR A PARTICULAR YEAR. IN CONTRAST TO THAT, THE LD. AR SUBMITTED THAT THE ASSESSEE WAS RECOGNIZING REVENUE FROM SOFTWARE DEVELOPMENT SIDE BY SIDE WITHOUT WAITING FOR THE CO MPLETION OF THE PROJECT. 9.5. UNDER THE MERCANTILE SYSTEM OF ACCOUNTING, INCOME IS RECOGNIZED AT THE TIME OF ITS ACCRUAL AND THE EXPENSES BECOME DEDUCTIBLE WHEN ITA NO.1453/DEL/2014 13 LIABILITY TO PAY IS INCURRED. THE DATES OF ACTUAL PAYMENT OF EXPENSES OR RECEIPT OF INCOME BECOME INSIGNIFICANT. THIS IS AL SO CALLED `MATCHING CONCEPT, AS PER WHICH INCOME IS RECOGNIZED WITH TH E INCURRING OF EXPENSES. TO PUT IT SIMPLY, IF INCOME DOES NOT ACC RUE FROM A PARTICULAR TRANSACTION, THE EXPENSES INCURRED FOR SUCH TRANSAC TION ARE EXCLUDED FROM THE TRADING AND PROFIT & LOSS ACCOUNT BY CARRYING T HEM TO BALANCE SHEET. TO ILLUSTRATE, IF THERE IS AN INCOMPLETE CONTRACT W ORTH RS.100 FOR DOING A PARTICULAR WORK, AND THE ASSESSEE HAS INCURRED RS.6 0 ON THIS PROJECT TILL THE CLOSE OF THE YEAR, BUT THE INCOME IS TO BE REC OGNIZED ONLY ON THE COMPLETION OF THE PROJECT WHICH EVENT WILL TAKE PLA CE IN THE SUBSEQUENT YEAR, THEN, THE AMOUNT OF RS.60 IS NOT CONSIDERED A S EXPENDITURE FOR THAT YEAR, BUT IS TAKEN TO THE BALANCE SHEET AS CLOSING WORK-IN-PROGRESS, WHICH BECOMES OPENING STOCK FOR THE SUBSEQUENT YEAR AND THE INCOME IS FINALLY COMPUTED FROM SUCH PROJECT/CONTRACT IN THE NEXT YEAR ON THE RAISING OF BILL OF RS.100/- AFTER ALLOWING DEDUCTI ON FOR THE EXPENSES INCURRED IN THE EARLIER YEAR AT RS. 60 AND THE FURT HER EXPENSES INCURRED IN THE YEAR OF RAISING OF THE BILL. IN THIS WAY, THE P ROFIT FOR THE EARLIER YEAR OF INCURRING EXPENSES OF RS.60 AND THE NEXT YEAR OF RAISING INVOICE OF ITA NO.1453/DEL/2014 14 RS.100 GIVES TRUE AND FAIR VIEW OF THE PROFITABILIT Y OF THAT ENTERPRISE FOR BOTH THE YEARS. IF THIS ENTERPRISE, INSTEAD OF CAP ITALIZING RS. 60 IN THE FIRST YEAR, CLAIMS DEDUCTION IN THE YEAR OF INCURRI NG ITSELF BUT RECOGNIZES INCOME OF RS.100 IN THE NEXT YEAR, THEN PROFIT OF BOTH THE YEARS, NAMELY, THE FIRST AND THE SECOND, WILL NOT GIVE A FAIR VIEW. 9.6. COMING BACK TO THE FACTS OF THE INSTANT CAS E, WE FIND FROM SCHEDULE 12 THAT THERE IS A MENTION OF SIGNIFICANT ACCOUNTING POLICY AT SL. NO.3, WHICH PROVIDES THAT : REVENUE FROM SOFTWARE DEVELOPMENT IS RECOGNIZED BASED ON SOFTWARE DEVELOPMENT AND BILLED TO CLIENTS. IF SOME SOFTWARE DEVELOPMENT PROJECT IS INCOMPLETE AT THE END OF THE YEAR, THIS NOTE MAY ENTAIL TWO SITUATIONS , VIZ., THE FIR ST, IN WHICH THE EXPENSES INCURRED IN RESPECT OF SUCH SOFTWARE DEVELOPMENT MA Y BE CAPITALIZED, WHICH APPEARS TO BE A MORE RATIONAL MANNER OF DEPIC TING THE TRUE AND FAIR VIEW OF THE PROFITABILITY OF THE ENTERPRISE; AND T HE SECOND, IN WHICH SUCH EXPENSES MAY BE STRAIGHTWAY TAKEN AS REVENUE COST FOR THE YEAR OF ITS INCURRING ITSELF, WHICH MAY NOT REFLECT A TRUE AND FAIR VIEW OF THE PROFITS ON YEAR TO YEAR BASIS. THE CONTENTION OF THE LD. AR IS THAT WHEREAS ITA NO.1453/DEL/2014 15 BODHTREE FELL INTO THE SECOND SITUATION, THE ASSESS EE WAS IN THE FIRST SITUATION. THOUGH THIS CONTENTION ABOUT BODHTREE AC COUNTING FOR EXPENSES IN THE YEAR OF INCURRING BUT CONSIDERING I NCOME ONLY ON THE CONCLUSION OF THE PROJECT IN THE SUBSEQUENT YEAR SO UNDED A LITTLE AWKWARD, WE ATTEMPTED TO FIND OUT THE AMOUNT OF CAP ITALIZED EXPENSES IN RESPECT OF INCOMPLETE PROJECTS AT THE END OF THE YE AR. APPARENTLY, WE COULD NOT FIND OUT ANY SUCH CAPITALIZED VALUE OF WO RK-IN-PROGRESS IN THE BALANCE SHEET OF THE COMPANY ON STANDALONE BASIS. WE DIRECTED THE LD. DR TO EXAMINE THE ANNUAL REPORT OF THIS COMPANY AND POINT OUT THE AMOUNT OF EXPENSES CAPITALIZED IN RESPECT OF INCOMP LETE WORK AT THE END OF THE YEAR. ON THE NEXT DATE OF HEARING, THE LD. D R FAILED TO SPECIFICALLY POINT OUT ANY AMOUNT OF SUCH CAPITALIZED EXPENSES W ITH THE OPENING OR CLOSING BALANCE. THIS PRIMA FACIE SHOWS THAT THE EXPENSES INCURRED IN RESPECT OF INCOMPLETE PROJECTS OF SOFTWARE DEVELOPM ENT AT THE END OF THE YEAR, BUT BILLED IN THE SUBSEQUENT YEAR, WERE, IN F ACT, TREATED AS EXPENSES FOR THE CURRENT YEAR ALONE. IN THE SAME MANNER, EX PENSES INCURRED IN THE PRECEDING YEAR FOR THE CONTRACTS OF SOFTWARE DEVELO PMENT REMAINING INCOMPLETE AT THE END OF THE YEAR, ALSO MUST HAVE BEEN INCLUDED IN THE ITA NO.1453/DEL/2014 16 EXPENSES OF THE LAST YEAR ALONE, BUT, THE INCOME GE TTING RECOGNIZED ON THE RAISING OF BILLS IN THE CURRENT YEAR. THIS ALB EIT, PATENTLY DEFORMS THE CORRECT PROFITABILITY ON YEAR TO YEAR BASIS, YET, B UT WE CANNOT HELP THE SITUATION. WHEN THE POSITION OF ACCOUNTS OF BODHTRE E IS SUCH THAT IT DOES NOT PROPERLY MATCH EXPENSES WITH REVENUE, IT LOSES ITS CREDIBILITY FOR MAKING A LOGICAL COMPARISON WITH A COMPANY THAT ACC OUNTS FOR EXPENSES MATCHING WITH THE REVENUE. ONCE IT IS HELD THAT TH E PROFITS OF BODHTREE CONSULTING LTD. DO NOT REPRESENT FAIR PROFITABILITY ON YEAR TO YEAR BASIS, THIS COMPANY LOSES ITS TAG OF AN EFFECTIVE COMPARAB LE. WE, THEREFORE, ORDER FOR THE EXCLUSION OF THIS COMPANY FROM THE FI NAL LIST OF COMPARABLES. TUTIS TECHNOLOGIES LTD . 10.1. THE ASSESSEE INCLUDED THIS COMPANY IN THE LI ST OF COMPARABLES, WHICH THE TPO EXCLUDED. 10.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD, WE GET FROM THE SHOW CAUSE NOTI CE ISSUED BY THE TPO DATED 19.12.2012, A COPY OF WHICH IS AVAILABLE FROM PAGE 221 ITA NO.1453/DEL/2014 17 ONWARDS OF THE PAPER BOOK, THAT WHEREAS THE TPO G AVE ADVERSE REMARKS AGAINST OTHER COMPARABLES, BUT MENTIONED AGAINST TH IS COMPANY THAT : THIS IS A SUITABLE COMPARABLE. THE ASSESSEE REPL IED TO THIS SHOW CAUSE NOTICE ON 28.12.2012, A COPY OF WHICH IS AVAILABLE ON PAGES 232 ONWARDS OF THE PAPER BOOK. APART FROM ASSAILING TH E OBJECTIONS TAKEN UP BY THE TPO ON OTHER COMPARABLES, THE ASSESSEE SUBMI TTED THAT THIS COMPANY WAS ACCEPTED BY THE TPO AS COMPARABLE. HOWE VER, THE TPO INADVERTENTLY OMITTED TO INCLUDE IT IN THE FINAL SE T. THERE IS NO DISCUSSION EITHER IN THE TPOS ORDER OR THE DIRECTION GIVEN BY THE DRP AS TO WHY THIS COMPANY WAS BEING CONSIDERED AS INCOMPARABLE. IT IMPLIES THAT THE TPO THOUGH TREATED THIS COMPANY AS COMPARABLE, BUT, ERRONEOUSLY OMITTED TO INCLUDE IT IN THE FINAL SET OF COMPARABL ES. IN SUCH CIRCUMSTANCES, THERE IS NO LOGIC IN NOT PLACING IT IN THE FINAL SET OF COMPARABLES. WE, THEREFORE, ORDER FOR TREATING THI S COMPANY AS COMPARABLE. ITA NO.1453/DEL/2014 18 GOLDSTONE TECHNOLOGIES LTD . 11.1. THE ASSESSEE INCLUDED THIS COMPANY IN ITS L IST OF 20 COMPARABLES. THE TPO HELD THIS COMPANY TO BE INCOMPARABLE ON THE GROUND THAT ITS BUSINESS SEGMENTS RELATED TO ITES, IT SERVICES, MED IA AND IPTB. THESE REMARKS FIND PLACE IN THE AFORESAID SHOW CAUSE NOTI CE. DURING THE COURSE OF PROCEEDINGS, THE TPO EXAMINED THE ANNUAL REPORT OF THIS COMPANY WHICH INDICATED THAT THE BUSINESS SEGMENT I NCLUDED CERTAIN ACTIVITIES WHICH WERE DISSIMILAR TO THE SOFTWARE DE VELOPMENT. HE REJECTED THIS COMPANY, INTER ALIA , ON THE GROUND OF ITS FAILING THE EXPORT TURNOVER FILTER. THE ASSESSEE IS AGGRIEVED AGAINST THE EXPULSION OF THIS COMPANY FROM THE FINAL SET. 11.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND P ERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUAL REPORT OF THIS COMPANY, WHICH IS AVAILABLE IN THE PAPER BOOK, THAT IT HAS O NLY ONE SEGMENT. THERE IS A MENTION ON PAGE 38 OF THE ANNUAL REPORT THAT : IN THE PREVIOUS YEAR THE COMPANY WAS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND SERVICES COMPRISING BOTH ON-SITE AND OFFSHORE OPERA TIONS. DURING THE ITA NO.1453/DEL/2014 19 CURRENT YEAR, THE COMPANY ADDED TWO MORE DIVISIONS: MEDIA DIVISION AND IPTB DIVISION. WHEN WE CONSIDER THE FUNCTIONA L PROFILE OF THE ASSESSEE COMPANY UNDER THE SOFTWARE DEVELOPMENT SEG MENT, WE FIND GOLDSTONE TECHNOLOGIES LTD. TO BE NOWHERE CLOSE TO IT. THIS COMPANY IS ALSO ENGAGED IN PROVIDING SERVICES COMPRISING ON-SI TE AND OFFSHORE OPERATIONS. APART FROM THAT, IT ADDED TWO MORE NEW DIVISIONS DURING THE CURRENT YEAR, BEING, MEDIA DIVISION AND IPTB DIVISI ON. BY NO STANDARD THIS COMPANY ON ENTITY LEVEL CAN BE CONSIDERED AS C OMPARABLE WITH THE ASSESSEE COMPANY. IN SO FAR AS THE EXPORT FILTER A PPLIED BY THE TPO FOR REJECTING THIS COMPANY IS CONCERNED, WE FIND THAT I T FAILS ON GEOGRAPHICAL FACTORS. THE SUM AND SUBSTANCE OF OUR ABOVE DISCUS SION IS THAT GOLDSTONE TECHNOLOGIES LTD. IS NOT COMPARABLE WITH THE ASSESSEE COMPANY AND HAS BEEN RIGHTLY EXCLUDED BY THE AUTHOR ITIES BELOW. VJIL CONSULTING LTD., THINK E-GLOBAL SERVICES LTD., AND RS SOFTWARE (INDIA) LTD. 12.1. WE HAVE NOTICED ABOVE THAT THE TPO REJECTE D 15 COMPANIES FROM THE ASSESSEES LIST OF COMPARABLES AND ADDED TWO NE W COMPANIES BY CARRYING OUT FRESH SEARCH DURING THE COURSE OF PROC EEDINGS BEFORE HIM. ITA NO.1453/DEL/2014 20 WHEN THIS POSITION WAS CONFRONTED, THE ASSESSEE ALS O CAME OUT WITH THE ABOVE THREE NEW COMPANIES FULFILLING THE FILTERS AP PLIED BY THE TPO. THE ASSESSEE REQUESTED THE TPO TO CONSIDER THESE CO MPANIES ALSO AS COMPARABLE, WHICH IS EVIDENT FROM PAGE 251 OF THE P APER BOOK, BEING REPLY DATED 28.12.2012 OF THE ASSESSEE TO SHOW CAUS E NOTICE ISSUED BY THE TPO. THE TPO DID NOT AT ALL COMMENT ON THE INC LUSION OR OTHERWISE OF THESE THREE COMPANIES IN HIS ORDER. THE ASSESSE E OBJECTED TO THE NON- INCLUSION OF THESE THREE COMPANIES BEFORE THE DRP A S WELL. THERE IS NO MENTION OF THE ASSESSEES OBJECTIONS ABOUT THESE TH REE COMPANIES IN THE DIRECTION GIVEN BY THE DRP. AS SUCH, WE FIND THAT THE ASSESSEE DID URGE THE INCLUSION OF THESE THREE COMPANIES IN THE LIST OF COMPARABLES BEFORE THE TPO AS WELL AS THE DRP, BUT, BOTH OF THEM CHOSE NOT TO COMMENT ON THEIR COMPARABILITY. UNDER SUCH CIRCUMSTANCES, WE D IRECT THE AO/TPO TO DETERMINE THE COMPARABILITY OR OTHERWISE OF THE ABO VE THREE COMPANIES AND THEN TAKE STEPS FOR INCLUDING THEM IN THE LIST OF COMPARABLES, IF FOUND TO BE COMPARABLE. ITA NO.1453/DEL/2014 21 13.1. THE SECOND ISSUE TAKEN UP BY THE ASSESSEE IN ITS APPEAL IN RESPECT OF THE ALP OF THE INTERNATIONAL TRANSACTION OF `PROVISION OF SOFTWARE DEVELOPMENT SERVES, IS ABOUT NOT ALLOWING RISK ADJUSTMENT. THE ASSESSEE MADE A CLAIM BEFORE THE TPO FOR GRANTI NG RISK ADJUSTMENT, WHICH WAS JETTISONED FOR THE FAILURE ON PART OF THE ASSESSEE TO BACK SUCH CLAIM WITH SUITABLE MATERIAL. THE ASSESSEE CONTES TED SUCH DENIAL OF RISK ADJUSTMENT BEFORE THE DRP, GIVING SOME DETAILS, WHI CH WAS AGAIN NEGATIVED. NOW, THE ASSESSEE IS BEFORE US MAKING A PITCH FOR THE GRANT OF SUCH ADJUSTMENT. 13.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD. THE TPO HAS REFERRED TO SEVERAL TRIBUNAL DECISIONS IN WHICH RISK ADJUSTMENT HAS BEEN DENIED TO THE ASSESS EE. AT THE SAME TIME, THE LD. AR HAS ALSO DRAWN OUR ATTENTION TOWAR DS SOME OF THE TRIBUNAL DECISIONS, IN WHICH SUCH AN ADJUSTMENT HAS BEEN ALLOWED. IN FACT, THERE CANNOT BE A GENERAL RULE OF ALLOWING OR NOT ALLOWING RISK ADJUSTMENT. RISK IS NOTHING BUT A POSSIBLE ADVERSE PERCEPTION IN THE GIVEN CIRCUMSTANCES, WHICH MAY OR MAY NOT FINALLY F RUCTIFY. GENERALLY, ITA NO.1453/DEL/2014 22 RISKS AND REWARDS GO SIDE BY SIDE. HIGHER THE RISK , MORE THE PROFIT; AND VICE VERSA . LEVEL OF RISK DEPENDS ON THE FACTS AND CIRCUMSTA NCES OF EACH CASE. WHERE THE ASSESSEE SUCCEEDS IN ABLY DEMONSTR ATING THAT THE COMPARABLES FINALLY SELECTED BORE RELATIVELY MORE R ISK THAN IT, THEN THERE SHOULD BE NO DENIAL OF THE RISK ADJUSTMENT. IF, HO WEVER, THE ASSESSEE FAILS IN SPECIFICALLY POINTING OUT THE EXTRA RISKS UNDERTAKEN BY THE COMPARABLES, THEN, OF COURSE, THERE CANNOT BE ANY Q UESTION OF GRANTING RISK ADJUSTMENT. UNDER THE TRANSFER PRICING REGIME , ONUS IS ALWAYS ON THE ASSESSEE TO SHOW THE REASONS FOR CLAIMING ANY S EPARATE ADJUSTMENT BY POINTING OUT THE DIFFERENCES BETWEEN IT AND THE COM PARABLES. RISK ADJUSTMENT CAN BE ALLOWED PROVIDED THE ASSESSEE PLA CES ON RECORD SOME APPROPRIATE MATERIAL TO DEMONSTRATE THAT THE RISK U NDERTAKEN BY THE COMPARABLE COMPANIES WERE RELATIVELY MORE THAN IT, WARRANTING DOWNWARD ADJUSTMENT IN THEIR PROFIT RATES. FURTHER , THE VARIATION IN SUCH RISKS, IF ANY, SHOULD BE CAPABLE OF QUANTIFICATION ON SOME REASONABLE AND LOGICAL BASIS. 13.3. THE LD. AR STATED BEFORE US THAT THE ASSES SEE WAS NOT HAVING ANY RISK AT ALL INASMUCH AS ITS SERVICES WERE TO BE COM PENSATED BY THE AE ITA NO.1453/DEL/2014 23 WITH AN APPROPRIATE MARK-UP IN COMPARISON WITH THE FULL-FLEDGED RISK BEARING COMPARABLE COMPANIES. WE ARE NOT AGREEABL E WITH SUCH A GENERALIZED AND BALD STATEMENT MADE ON BEHALF OF TH E ASSESSEE. THE MERE FACT OF THE ASSESSEE BEING A CAPTIVE UNIT REND ERING SOFTWARE DEVELOPMENT SERVICES TO ITS AE ALONE, CANNOT MAKE I T A NO-RISK ENTITY. SEVERAL RISKS ARE ATTACHED TO SUCH ENTITIES DEALING WITH A SINGLE CUSTOMER. IF SINGLE CUSTOMER, ON WHOM THE ENTERPRISES ENTIRE SURVIVAL DEPENDS, CLOSES DOWN ITS BUSINESS, THE POSSIBILITY OF REALIZ ATION OF DEBTS FOR THE SERVICES ALREADY RENDERED, BECOMES A POTENTIAL RISK . FURTHER, THE FEAR OF TERMINATION OF AGREEMENT BETWEEN SUCH AN ENTERPRISE AND THE SINGLE CUSTOMER OR THE POSSIBILITY OF CLOSURE OF BUSINESS BY SUCH CUSTOMER, VOLUNTARILY OR DUE TO REASONS BEYOND HIS CONTROL, ALSO POSE A GRAVE THREAT TO THE EXISTENCE OF SUCH AN ENTERPRISE. IN THAT SENSE OF THE MATTER, AN ENTERPRISE SERVING A SINGLE CUSTOMER, ASSUMES MA RKED RISKS. AS THE ASSESSEE IS WHOLLY DEPENDENT ON ITS AE FOR SECURING BUSINESS, ITS ENTIRE EXISTENCE ALSO DEPENDS ON THE SAME AE. IF SUCH AE RUNS OUT OF BUSINESS OR ITS BUSINESS IS REDUCED, THE ASSESSEE IS BOUND T O BEAR SEVERE JOLTS. SINCE THE LD. AR HAS FAILED TO OBJECTIVELY DEMONSTR ATE THE RELATIVELY ITA NO.1453/DEL/2014 24 HIGHER RISKS UNDERTAKEN BY THE COMPARABLES ON AN OV ERALL BASIS, WE ARE DISINCLINED TO GRANT ANY RISK ADJUSTMENT. 14. NO OTHER ASPECT OF THE COMPUTATION OF ALP OF THE INTERNATIONAL TRANSACTION OF `PROVISION OF SOFTWARE DEVELOPMENT SERVICES HAS BEEN CHALLENGED BY THE ASSESSEE IN THE PRESENT APPEAL. T HE IMPUGNED ORDER IS ERGO SET ASIDE ON THE QUESTION OF DETERMINATION OF THE ALP OF THE `SOFTWARE DEVELOPMENT SERVICES SEGMENT AND THE MAT TER IS REMITTED TO THE FILE OF AO/TPO FOR COMPUTING ALP OF THE INTERNA TIONAL TRANSACTION OF THIS SEGMENT AFRESH IN CONSONANCE WITH OUR ABOVE DIRECTIONS. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REA SONABLE OPPORTUNITY OF BEING HEARD. 15.1. GROUND NOS. 5 AND 8 ARE IN RESPECT OF INTE RNATIONAL TRANSACTION OF `PURCHASE OF CAPITAL GOODS. THE FACTUAL MATRIX A PROPOS THIS ISSUE IS THAT THE ASSESSEE REPORTED AN INTERNATIONAL TRANSAC TION OF PURCHASE OF FIXED ASSETS WITH TRANSACTED VALUE OF RS.33,50,51, 611/-. THE TPO REQUIRED THE ASSESSEE TO SUBMIT BOOK VALUE OF THE GOODS SO IMPORTED IN THE BOOKS OF AE ALONG WITH THE DETAILS OF COSTING M ETHODOLOGY APPLIED. ITA NO.1453/DEL/2014 25 THE ASSESSEE WAS ALSO CALLED UPON TO FILE COPY OF I NVOICES ALONG WITH THE MARKET PRICE OF THE SAME OR SIMILAR GOODS AT THE TI ME OF PURCHASE. THE ASSESSEE SUBMITTED VIDE ITS REPLY DATED 3.1.2013 TH AT IT OPERATES ON A COST PLUS BASIS WHEREIN IT RECHARGES ALL ITS OPERATING C OSTS INCLUDING DEPRECIATION TO ITS AE ALONG WITH A MARK UP. HOWEV ER, THE SPECIFIC INFORMATION CALLED FOR BY THE TPO, WAS NOT SUBMITTE D. IN THE ABSENCE OF SUCH DETAILS, THE TPO COMPUTED THE ALP OF THIS INTE RNATIONAL TRANSACTION AT NIL. AS REGARDS THE ADJUSTMENT U/S 92CA, THE TPO REQUIRED THE AO TO CALCULATE PROPER DEPRECIATION ON FIXED ASSETS AS PE R THE PROVISIONS OF THE ACT. THE DRP DIRECTED THE ASSESSEE TO SUBMIT ITEM- WISE PARTICULARS FOR THE CLAIM MADE BY IT WITH ALL THE DOCUMENTS/EVIDENC E/PROOF SHOWING THE VALUE OF ASSETS AS APPEARING IN THE AES BOOKS TO T HE SATISFACTION OF THE TPO. IN CASE OF FAILURE ON THE PART OF THE ASSESSE E TO COMPLY WITH THE ABOVE DIRECTIONS, THE DRP DIRECTED THAT THE ALP OF THE RELEVANT ASSETS BE TAKEN AS NIL. THE ASSESSEE SUBMITTED CERTAIN DETAI LS ON SAMPLE BASIS BEFORE THE TPO. THE AO, IN THE FINAL ORDER, MADE A N ADDITION OF RS.32.07 CRORE BY DETERMINING THE ALP OF THIS TRANS ACTION AT RS.1.43 CRORE, AGAINST THE TRANSACTED VALUE OF RS.33.50 CRO RE. THEREAFTER, ITA NO.1453/DEL/2014 26 RECTIFICATION APPLICATION WAS FILED U/S 154 OF THE ACT WHICH WAS DISPOSED OF BY THE AO VIDE HIS ORDER DATED 27.03.2014 REDUCI NG THE INCOME WITH `COST OF OLD FIXED ASSETS BY RS.12.20 CRORE AND AD DING DEPRECIATION OF RS.3.72 CRORE. ANOTHER RECTIFICATION APPLICATION W AS FILED, WHICH WAS ALSO DISPOSED OF BY THE AO VIDE HIS ORDER DATED 26. 9.2014, REDUCING THE TOTAL INCOME TO RS.25.48 CRORE FROM RS.40.74 CRORE. THE ASSESSEE IS AGGRIEVED AGAINST THE ADDITION MADE ON ACCOUNT OF T HIS INTERNATIONAL TRANSACTION. 15.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PE RUSED THE RELEVANT MATERIAL ON RECORD. IT IS NOTICED THAT THE ASSESSE E PURCHASED CERTAIN FIXED ASSETS FROM ITS AE WITH THE DECLARED VALUE OF RS.33 .50 CRORE. IN OUR CONSIDERED OPINION THE ASSESSEE RIGHTLY REPORTED PU RCHASE OF FIXED ASSETS WITH THE TRANSACTED VALUE AS AN INTERNATIONAL TRANS ACTION, SINCE THE SAME IS COVERED WITHIN THE DEFINITION GIVEN IN SUB-SECTI ON (1) OF SECTION 92B, WHICH PROVIDES THAT 'INTERNATIONAL TRANSACTION' MEA NS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR L EASE OF TANGIBLE OR ITA NO.1453/DEL/2014 27 INTANGIBLE PROPERTY, OR ............... SECTION 92(1) STIPULATES THAT: ` ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SH ALL BE COMPUTED HAVING REGARD TO THE ARM'S LENGTH PRICE. THE MANN ER OF COMPUTATION OF ARM'S LENGTH PRICE IS SET OUT IN SECTION 92C. SUB-S ECTION (1) PROVIDES THAT THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIO NAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE METHODS GIVEN IN THE PROVI SION, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION ETC. AMONGST OTHERS, THERE IS COMPARABL E UNCONTROLLED PRICE (CUP) METHOD AND TNMM. THE PRIMARY ONUS OF PROVI NG THAT THE INTERNATIONAL TRANSACTION IS AT ALP, IS ALWAYS ON T HE ASSESSEE. 15.3. REVERTING TO THE FACTS OF THE INSTANT CASE , WE FIND THAT THE ASSESSEE APPLIED TNMM AS THE MOST APPROPRIATE METHO D FOR SHOWING THAT THIS INTERNATIONAL TRANSACTION WAS AT ALP. TH E TPO HELD THAT THE CORRECT METHOD TO BE APPLIED WAS CUP AND AS SUCH TH E ASSESSEE WAS CALLED UPON TO GIVE UNCONTROLLED COMPARABLE INSTANC ES OF THE PURCHASE OF SIMILAR ASSETS, WHICH THE ASSESSEE FAILED TO DO. TH IS LED THE TPO TO TREAT THE ALP OF THIS INTERNATIONAL TRANSACTION AT NIL. NORMALLY, IF THE ITA NO.1453/DEL/2014 28 ASSESSEE FAILS TO GIVE ANY COMPARABLE INSTANCE, THE N IT BECOMES THE DUTY OF THE TPO TO SEARCH SOME COMPARABLE UNCONTROLLED I NSTANCES AT HIS OWN AND ACCORDINGLY DETERMINE THE ALP OF THE INTERNATIO NAL TRANSACTION. IN OUR VIEW, BOTH THE ASSESSEE AS WELL THE TPO WENT WR ONG BY NOT DOING WHAT WAS REQUIRED TO BE DONE BY THEM. 15.4. ONCE THE ALP OF AN INTERNATIONAL TRANSACTI ON OF PURCHASE OF FIXED ASSETS IS DETERMINED, THEN THE DIFFERENCE BETWEEN T HE TRANSACTED VALUE AND THE ALP DOES NOT DIRECTLY LEAD TO THE TRANSFER PRICING ADJUSTMENT. AT THIS JUNCTURE, IT IS PERTINENT TO NOTE THE LANGUAGE OF SECTION 92(1) WHICH PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIO NAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARM'S LENGTH PRICE. IT DOES NOT SAY THAT THE TOTAL INCOME IS TO BE COMPUTED IN ACCORDANCE WI TH THE ALP. IT IS RIGHTLY SO BECAUSE THE INTERNATIONAL TRANSACTIONS W HICH HAVE NO DIRECT BEARING ON THE TOTAL INCOME, CANNOT GIVE RISE TO A DDITION ON ACCOUNT OF DIFFERENCE BETWEEN THEIR TRANSACTED VALUE AND ALP. SINCE THE TRANSACTION OF PURCHASE OF FIXED ASSETS IS A CAPITA L TRANSACTION, THIS, IN ITSELF, DOES NOT AFFECT THE TOTAL INCOME OF THE AS SESSEE. IT IS ONLY THE OFF- ITA NO.1453/DEL/2014 29 SHOOT OF SUCH TRANSACTION IN THE CAPITAL FIELD, BEI NG DEPRECIATION ALLOWANCE ON SUCH ALP OF THE TRANSACTION, WHICH AFF ECTS THE TOTAL INCOME. TO ILLUSTRATE, IF A FIXED ASSET IS PURCHAS ED BY AN ENTERPRISE FROM ITS AE FOR A SUM OF RS.100 AND RATE OF DEPRECIATION ON SUCH ASSET IS 10%, THEN THE ENTERPRISE WILL CHARGE DEPRECIATION AMOUNT ING TO RS.10 IN ITS PROFIT AND LOSS ACCOUNT. IF THE ALP OF SUCH TRANSAC TION IS DETERMINED AT RS. 80, THEN THE DIFFERENCE OF RS.20 CANNOT BE CONS IDERED AS INCOME. RATHER, THE AMOUNT OF DEPRECIATION WILL BE RESTRICT ED TO RS.8 INSTEAD OF RS.10, THEREBY INCREASING THE TOTAL INCOME BY RS. 2 . WHEN WE ADVERT TO THE FACTS OF THE EXTANT CASE, IT IS FOUND THAT THE TPO HAS RIGHTLY HELD TO THE EFFECT THAT IT IS THE AMOUNT OF DEPRECIATION ON THE PURCHASE OF SUCH FIXED ASSETS, WHICH WILL BE CONSIDERED FOR MAKING A DDITION AND NOT THE DIFFERENCE BETWEEN THE TRANSACTED VALUE AND THE ALP DETERMINED AT NIL. 15.5. ORDINARILY AN INTERNATIONAL TRANSACTION OF PURCHASE OF FIXED ASSETS BY AN ASSESSEE ENGAGED IN A MANUFACTURING OR TRADIN G BUSINESS IS REQUIRED TO BE DETERMINED ON CUP METHOD, WHICH IS U SUALLY THE MOST APPROPRIATE METHOD IN SUCH CIRCUMSTANCES. THE TNMM ON ENTITY LEVEL ITA NO.1453/DEL/2014 30 CANNOT BE APPLIED, BECAUSE THE TRANSACTION OF PURCH ASE OF FIXED ASSETS CAN HAVE NO RELATION WITH THE TRANSACTION OF PURCHA SE OF RAW MATERIAL FROM AE OR SALES OF GOODS TO AES. RULE 10A OF THE I T RULES, DEFINES `TRANSACTION AS INCLUDING `A NUMBER OF CLOSELY LIN KED TRANSACTIONS. THE HONBLE DELHI HIGH COURT IN ITS JUDGMENT OF MARCH, 2015 IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. HAS HELD THAT THE RELATED TRANSACTIONS SHOULD BE CONSIDERED JOINTLY F OR DETERMINING THEIR ALP. HOWEVER, IN ORDER TO CONSIDER MORE THAN ONE I NTERNATIONAL TRANSACTION AS ONE, IT IS SINE QUA NON THAT SUCH TRANSACTIONS MUST BE CLOSELY AND NOT REMOTELY LINKED. EVERY TRANSACTION DONE BY AN ENTERPRISE IS SOMEHOW OR THE OTHER LINKED WITH THE CARRYING ON OF THE BUSINESS. BUT IN ORDER TO BE ELIGIBLE FOR PROCESSING TWO OR MORE TRANSACTIONS JOINTLY FOR DETERMINING THEIR ALP, IT IS ESSENTIAL THAT THEY SH OULD BE CLOSELY LINKED. IF TWO TRANSACTIONS ARE NOT CLOSELY LINKED, THEN TH EY CANNOT BE CONSIDERED JOINTLY. CONSIDERING THE ABOVE CASE OF A MANUFACTUR ER OR A TRADER, IT CANNOT BE HELD THAT THE TRANSACTION OF PURCHASE OF FIXED ASSETS IS CLOSELY LINKED WITH THE PURCHASE OF RAW MATERIAL OR SALE OF FINISHED GOODS ETC. IN ITA NO.1453/DEL/2014 31 SUCH A SCENARIO, IT BECOMES IMPORTANT TO EXAMINE TH E TRANSACTION OF PURCHASE OF FIXED ASSETS INDEPENDENT OF OTHER TRANS ACTIONS. 15.6. HOWEVER, THE ABOVE RULE OF SCRUTINIZING INT ERNATIONAL TRANSACTION OF PURCHASE OF FIXED ASSET AS INDEPENDENT OF ALL OT HER TRANSACTIONS IS NOT UNIVERSAL. IT HAS ITS OWN EXCEPTIONS AS WELL. THE INSTANT CASE IS A GLARING EXAMPLE OF EXCEPTION TO THE ABOVE RULE. IT IS SO F OR THE REASON THAT THE ASSESSEE IS GETTING REMUNERATION FROM ITS AE AT COS TS INCURRED PLUS A PARTICULAR MARK-UP. THE COST BASE INCLUDES NOT ONLY DIRECT BUT ALL THE INDIRECT COSTS. THE AMOUNT OF DEPRECIATION ALLOWAN CE ON FIXED ASSETS, INCLUDING THOSE PURCHASED FROM AE, IS ALSO COMPENSA TED WITH THE SAME MARK-UP. THUS WE CAN SAY THAT DEPRECIATION ALLOWAN CE AND REMUNERATION TO THE ASSESSEE ON SUCH DEPRECIATION A RE INSEPARABLE TRANSACTIONS. THE INCOME IN THE SHAPE OF REMUNERAT ION TO THIS EXTENT DIRECTLY DEPENDS UPON THE AMOUNT OF DEPRECATION ALL OWANCE. WHEN THE ASSESSEE IS GETTING MARK-UP OF 13%, THE AMOUNT OF D EPRECATION AT RS.10 IN OUR ABOVE HYPOTHETICAL EXAMPLE WILL FETCH REMUNE RATION OF RS.11.30. IF THE AMOUNT OF DEPRECIATION IS REDUCED TO NIL, TH E AMOUNT OF INCOME TO ITA NO.1453/DEL/2014 32 THAT EXTENT WILL ALSO BE NIL, BECAUSE THE MARK-UP C AN BE APPLIED ONLY IF THERE IS DEPRECIATION COST TO THE ASSESSEE. IN OTHE R WORDS, THE TRANSACTIONS OF DEPRECIATION ON ONE HAND AND THE RESULTANT REVEN UE ON THE OTHER, GO HAND IN HAND. IN SUCH A CASE, WHERE THE INCOME IS D IRECTLY BASED ON THE COSTS INCURRED INCLUDING DEPRECIATION, THEN THESE T WO TRANSACTIONS BECOME CLOSELY LINKED TRANSACTIONS, ELIGIBLE FOR PROCESSING UNDER THE TP PROVISIONS ON A COMBINED BASIS. IT IS ILLOGICAL TO COMPUTE THE ALP OF THE TRANSACTION OF PURCHASE OF FIXED ASSETS AND CON SEQUENTLY REDUCE OR NULLIFY THE AMOUNT OF DEPRECIATION ALLOWANCE DE HORS THE CONSIDERATION OF INTERNATIONAL TRANSACTION OF THE REVENUE FROM A E, WHICH IS EQUAL TO DEPRECIATION AS CLAIMED WITH MARK-UP. BOTH THE TR ANSACTIONS OF CLAIM OF DEPRECIATION ALLOWANCE AND REVENUE OF DEPRECIATION WITH MARK-UP HAVE TO BE SEEN JOINTLY. THE TPO IN THE PRESENT CASE HA S SIMPLY REDUCED THE AMOUNT OF DEPRECATION ALLOWANCE TO NIL WITHOUT SIMU LTANEOUSLY CONSIDERING THE REVENUE SIDE OF THIS TRANSACTION. I F WE CONSIDER THESE CLOSELY LINKED TRANSACTIONS OF DEDUCTION FOR DEPREC IATION ALLOWANCE AND REVENUE DUE TO DEPRECIATION IN UNISON, THE POSITION WHICH FOLLOWS IS THAT NO FURTHER ADDITION CAN BE MADE ON ACCOUNT OF TRANS FER PRICING ITA NO.1453/DEL/2014 33 ADJUSTMENT DUE TO ONE-SIDED CONSIDERATION OF DEPREC IATION ALLOWANCE AT NIL. RATHER, THE DETERMINATION OF ALP OF THE INTER NATIONAL TRANSACTION OF PURCHASE OF FIXED ASSETS, IN THE FACTS AND CIRCUMST ANCES OF THE INSTANT CASE, IS TAX NEUTRAL. AS SUCH, WE ORDER FOR THE DEL ETION OF ADDITION MADE BY DISALLOWING OR REDUCING THE AMOUNT OF DEPRECIATI ON ON THE ASSETS PURCHASED FROM AE. THIS GROUND IS ALLOWED. 16. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 24.04.201 5. SD/- SD/- [C.M. GARG] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 24 TH APRIL, 2015. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.