M/s. ST-Ericsson India Private Limited, New Delhi V. Addl. CIT, New Delhi

ITA 1672/DEL/2014

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6615 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 11 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-02-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 06-02-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 21-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NEERAJ KUMAR SENIOR
• Assessee Lawyers: S D KAPILA R R MAURYA; SANJAY KUMAR S; PANKAJ ROHTA
• Keywords: Business income; Depreciation; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Rule of consistency; Revenue expenditure; Capital expenditure
• Section: 92C; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.1672/DEL./2014 (ASSESSMENT YEAR : 2009-10) ST-ERICSSON INDIA PRIVATE LIMITED, VS. ADDL.CIT, RA NGE 9, D 28, SOUTH EXTENSION, PART I, NEW DELHI. NEW DELHI 110 049. (PAN : AAMCS1022K) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI S.D. KAPILA, R.R. MAURYA & SANJAY KUMAR, ADVOCATES AND SHRI PANKAJ ROHTA, CA REVENUE BY : SHRI NEERAJ KUMAR, SENIOR DR DATE OF HEARING : 07.02.2017 DATE OF ORDER : 22.02.2017 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, ST-ERICSSON INDIA PVT. LTD. (HEREINA FTER REFERRED TO AS THE ASSESSEE COMPANY) BY FILING TH E PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 16/18. 01.2014, PASSED BY THE AO IN CONSONANCE WITH THE ORDERS PASSED BY T HE LD. DRP/TPO UNDER SECTION 143 (3) READ WITH SECTION 144 C OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2009-10 ON THE GROUNDS INTER ALIA THAT :- ITA NOS.1672/DEL./2014 2 1. THE ORDER PASSED BY THE LEARNED JOINT DIRECTOR OF INCOME TAX, TRANSFER PRICING-II (2},NEW DELHI ('THE TPO'), DRAFT AND FINAL ASSESSMENT ORDER PASSED BY ADDITIONAL COMMISSIONER OF INCOME TAX, RANGE - 9, N EW DELHI ('THE AO') PURSUANT TO THE DIRECTIONS OF THE HON'BLE DISPUTE RESOLUTION PANEL - III ('THE DRP'), ARE IN BAD IN LAW AND VOID AD-INITIO. 2. THE AO FOLLOWING THE ORDER OF THE TPO AND DRP HAS ERRED IN LAW AND ON THE FACTS OF THE CASE IN DETERMINING THE TOTAL INCOME OF THE APPELLANT AT RS.213,195,622/- AS AGAINST RETURNED INCOME OF RS.122,498,921/- AND THEREBY MADE AN UPWARD ADJUSTMENT OF INR 90,696,701/-. PART I - TRANSFER PRICING GROUNDS 3. THAT ON FACTS OF THE CASE AND IN LAW, THE DRP/ TPO/AO HAVE ERRED IN REJECTING CERTAIN COMPANIES AN D ADDING CERTAIN COMPANIES TO THE FINAL SET OF ALLEGE D COMPARABLE COMPANIES ON AN AD-HOC BASIS, THEREBY RESORTING TO CHERRY PICKING OF COMPARABLE COMPANIES FOR BENCHMARKING THE INTERNATIONAL TRANSACTION PERTAINI NG TO IC DESIGN AND SOFTWARE DEVELOPMENT SERVICES ('IMPUG NED TRANSACTION'). 4. THAT ON FACTS OF THE CASE AND IN LAW, THE DRP ER RED AND VITIATED THE PRINCIPLE OF NATURAL JUSTICE BY NO T GIVING DUE COGNIZANCE TO THE DETAILED ANALYSIS AND TECHNIC AL ARGUMENTS SUBMITTED BY THE APPELLANT IN RESPECT OF CERTAIN COMPANIES INTER-ALIA ICRA TECHNO ANALYTICS PRIVATE LIMITED, INDUS NETWORKS LIMITED, QUINTEGRA SOLUTIONS LIMITED, SIP TECHNOLOGIES AND EXPORTS LIMITED, BLUE STAR INFOTECH LIMITED AND K PIT CUMMI NS INFOSYSTEMS LIMITED. 5. THAT ON FACTS OF THE CASE AND IN LAW, THE DRP AN D TPO/AO HAVE ERRED BY FAILING TO MAKE APPROPRIATE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN WORKING C APITAL EMPLOYED BY THE APPELLANT VIS-A-VIS ALLEGED COMPARA BLE COMPANIES. ITA NOS.1672/DEL./2014 3 6. THAT ON FACTS OF THE CASE AND IN LAW, THE DRP/TPO/AO HAVE FAILED TO CONSIDER THE FOREIGN EXCHANGE GAIN/LOSS AS OPERATING IN NATURE AND CONSEQUENTLY TREATED IT AS NON-OPERATING ITEM WHILE CALCULATING THE OPERATING MARGIN OF THE APPELLANT A S WELL OF THE ALLEGED COMPARABLE COMPANIES. 7. THAT ON FACTS OF THE CASE AND IN LAW, THE DRP HA S GROSSLY ERRED IN GIVING A DIRECTION TO RECTIFY THE ARITHMETICAL ERRORS IN THE COMPUTATION OF THE OPERA TING MARGINS OF ALLEGED COMPARABLE COMPANIES IN COMPLIAN CE WITH THE INCOME TAX ACT ('THE ACT'). FURTHER, THE T PO HAS MADE ERRORS WHILE COMPUTING THE OPERATING MARGI N OF THE APPELLANT AND THE ALLEGED COMPARABLE COMPANI ES. 8. THAT ON FACTS OF THE CASE AND IN LAW, THE DRP/ TPO/AO HAVE ERRED IN CONDUCTING A FRESH ECONOMIC ANALYSIS BY USING ARBITRARY FILTERS FOR IDENTIFYING COMPANIES COMPARABLE TO THE APPELLANT. THE ARBITRAR Y FILTERS APPLIED BY THE TPO AND CONFIRMED BY THE DRP /AO INTER-ALIA INCLUDE THE FOLLOWING: REJECTING COMPANIES HAVING TURNOVER LESS THAN INR 5 CRORES; REJECTING COMPANIES HAVING DIFFERENT ACCOUNTING YEAR THAN THAT OF THE APPELLANT; REJECTING COMPANIES HAVING EXPORT REVENUE LESS THAN 75 PERCENT OF THE OPERATING REVENUE. REJECTION OF COMPANIES IDENTIFIED BY THE APPELLANT ON ACCOUNT OF HAVING PECULIAR ECONOMIC CIRCUMSTANCES WHICH ARE NOT IN LINE WITH THE INDUSTRY TREND - COMPANIES WHICH SHOWED DIMINISHING REVENUE TREND; REJECTING COMPANIES HAVING EMPLOYEE COST. GREATER THAN 25 PERCENT OF THE OPERATING COST; AND 9. THAT ON FACTS OF THE CASE AND IN LAW, THE DRP/TPO/AO HAVE ERRED IN LAW AND IN FACTS BY REJECT ING COMPANIES NAMELY MAARS SOFTWARE INTERNATIONAL LIMIT ED AND ZYLOG SYSTEMS LIMITED ON ACCOUNT OF HAVING SIGNIFICANT ONSITE REVENUE AS A COMPARABILITY CRITE RIA. ITA NOS.1672/DEL./2014 4 10. THAT ON FACTS OF THE CASE AND IN LAW, THE DRP/TPO/AO HAVE ERRED IN LAW AND IN FACTS BY SELECT ING CERTAIN COMPANIES WHICH ARE EARNING SUPER NORMAL PROFITS AS COMPARABLE TO THE APPELLANT. 11. THAT ON FACTS AND IN LAW, THE DRP AND TPO/AO HAVE FAILED TO MAKE APPROPRIATE ADJUSTMENTS TO ACCO UNT FOR VARYING RISK PROFILES OF THE APPELLANT VIS-A-VI S THE ALLEGED COMPARABLES AND IN THE PROCESS INTER-ALIA NEGLECTED THE INDIAN TRANSFER PRICING REGULATIONS, INTERNATIONAL GUIDELINES ON TRANSFER PRICING AND JU DICIAL PRECEDENCE. 12. THAT ON FACTS AND IN LAW, THE DRP AND TPO/AO HAVE ERRED BY NOT CONSIDERING THAT THE ADJUSTMENT T O THE ARM'S LENGTH PRICE, IF ANY, SHOULD BE LIMITED TO TH E LOWER END OF THE 5 PERCENT RANGE AS THE APPELLANT HAS THE RIGHT TO EXERCISE THIS OPTION UNDER THE SECOND PROVISO TO SECTION 92C(2) OF THE ACT. 13. THAT ON FACTS OF THE CASE AND IN LAW, THE DRP/TPO/AO HAVE ERRED IN USING SINGLE YEAR DATA FOR FINANCIAL YEAR (FY') 2008-09 OF ALLEGED COMPARABLE COMPANIES WITHOUT CONSIDERING THE FACT THAT THE SAM E WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF COMPL YING WITH THE TRANSFER PRICING DOCUMENTATION REQUIREMENT S AND DISREGARDING THE APPELLANT'S CLAIM FOR USE OF MULTIPLE YEAR DATA FOR COMPUTING THE ARM'S LENGTH P RICE. 14. THAT ON FACTS AND IN LAW, THE DRP/AO HAS ERRED IN CONFIRMING THAT TPO HAS DISCHARGED HIS STATUTORY ON US BY ESTABLISHING THAT THE CONDITIONS SPECIFIED IN CL AUSE (A) TO (D) OF SECTION 92C (3) OF THE ACT HAVE BEEN SATI SFIED BEFORE DISREGARDING THE ARM'S LENGTH PRICE DETERMIN ED BY THE APPELLANT AND PROCEEDING TO DETERMINE THE ARM'S LENGTH PRICE. PART II - CORPORATE TAX GROUNDS 15. THAT THE DRP AND AO HAS ERRED ON FACTS AND IN LAW IN TREATING THE SOFTWARE EXPENSES AMOUNTING TO RS.384,651 AS CAPITAL IN NATURE. ITA NOS.1672/DEL./2014 5 15.1. THAT THE ORP AND AO HAS ERRED IN LAW AND IN FACTS, IN PROPOSING THAT EXPENDITURE ON TRAINING OF EMPLOYEES AMOUNTING TO RS.3,809,220 LEADS TO ENDURI NG BENEFIT TO THE APPELLANT AND IS CAPITAL IN NATURE. 15.2. WITHOUT PREJUDICE TO THE ABOVE AND ASSUMING WITHOUT ACCEPTING THAT THE ABOVE REVENUE EXPENDITUR E IS TO BE CAPITALIZED, THE DRP AND AO HAS ERRED IN NOT ALLOWING DEPRECIATION ON THE SAME. 16. THE DRP AND AO HAS ERRED ON FACTS AND IN LAW IN NOT GRANTING DEPRECIATION ON GOODWILL AMOUNTING TO RS.13,893,062 WHICH WAS CLAIMED BY THE APPELLANT DURING THE COURSE OF ASSESSMENT PROCEEDINGS IN ACCORDANCE WITH THE DECISION OF HON'BLE SUPREME COU RT IN THE CASE OF SMIFS SECURITIES LTD. PART III - GENERAL GROUNDS 17. THAT ON FACTS OF THE CASE AND IN LAW, THE AO HA S ERRED IN LEVYING INTEREST UNDER SECTION 234B, 234C AND 2340 OF THE ACT WHILE COMPLETELY DISREGARDING THE PROVISIONS OF THE ACT AND THE JUDICIAL PRECEDENCE I N THIS REGARD. 18. THAT ON FACTS OF THE CASE AND IN LAW, THE AO HA S GROSSLY ERRED IN INITIATING PENALTY PROCEEDINGS UND ER SECTION 271(1)(C) OF THE ACT. 2. BRIEFLY STATED FACTS OF THIS CASE ARE : ASSESSEE , ST-ERICSSON INDIA PVT. LTD. IS ENGAGED INTO IC (INTEGRATED CIRC UIT) DESIGN DEVELOPMENT, VERIFICATION, MAINTENANCE AND SOFTWARE DEVELOPMENT RELATED TO COMMUNICATION DEVICES. IN OTHER WORDS, THE ASSESSEE IS A CONTRACT IC DESIGN AND SOFTWARE DEVELOPMENT SERVICE S PROVIDER, REMUNERATED ON A COST PLUS MARK-UP BASIS FOR CARRYI NG OUT SERVICES TOWARDS INTEGRATED DESIGN DEVELOPMENT, VERIFICATION AND ITA NOS.1672/DEL./2014 6 MAINTENANCE OF SOFTWARE DEVELOPMENT. ASSESSEE REND ERS THESE SERVICES ONLY TO ST-ERICSSON (STE GROUP) IN ACCORDA NCE WITH THE GUIDELINES PROVIDED BY THE STE GROUP. 3. DURING THE YEAR UNDER ASSESSMENT, THE ASSESSEE E NTERED INTO FOLLOWING INTERNATIONAL TRANSACTION WITH ITS ASSOCI ATED ENTERPRISES (AE) :- S.NO. TYPE OF INTERNATIONAL TRANSACTION METHOD SELECTED TOTAL VALUE OF TRANSACTION (RS.) MAM PLI 1. PROVISION OF IC DESIGN AND SOFTWARE DEVELOPMENT TNMM OP/OC 625,272,668 4. ASSESSEE BY ADOPTING TRANSACTIONAL NET MARGIN ME THOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH OPERATIN G PROFIT / OPERATING COST (OP/OC) AS PLI BENCHMARKED ITS INTER NATIONAL TRANSACTION RELATING TO SOFTWARE DEVELOPMENT SERVIC ES BY SELECTING 20 COMPARABLES WITH THE AVERAGE WORKING CAPITAL ADJ USTED PLI OF 3.11% AND RISK ADJUSTED MARGIN OF (-) 9.06% AS AGAI NST THE OPERATING PROFIT MARGIN OF THE ASSESSEE COMPANY OF 11.17% AND HELD ITS TRANSACTION AT ARMS LENGTH. 5. TPO, ON THE BASIS OF TP STUDY PUT FORTH BY THE A SSESSEE AND AFTER APPLYING FILTERS, FINALLY SELECTED 17 COMPARA BLES HAVING THE AVERAGE OP/TC OF 25.40%, OUT OF WHICH 10 COMPARABLE S WERE OUT OF ASSESSEES 20 COMPARABLES AND 7 WERE IDENTIFIED BY THE TPO ITA NOS.1672/DEL./2014 7 HIMSELF. ON THE BASIS OF 17 COMPARABLES IDENTIFIED BY THE LD. TPO HAVING AVERAGE OP/TC AT 25.40% PROPOSED TO DETERMIN E THE ADJUSTMENT AT RS.10,12,17,069/-. 6. ASSESSEE FILED OBJECTIONS BEFORE THE LD. DRP RAI SING OBJECTIONS FOR INTRODUCING WRONG FILTERS; FOR WRONG INCLUSION OF 7 COMPARABLES AND WRONG EXCLUSION OF 2 COMPARABLES AN D AGAINST DENYING THE WORKING CAPITAL ADJUSTMENT TO THE ASSES SEE. HOWEVER, THE LD. DRP UPHELD THE ORDER PASSED BY THE TPO EXCE PT EXCLUDING 1 COMPARABLE, NAMELY, BODHTREE CONSULTING LIMITED. O N THE BASIS OF DIRECTIONS ISSUED BY LD. DRP, THE LD. TPO DRAWN THE FINAL SET OF COMPARABLES FOR BENCHMARKING THE ASSESSEES INTERNA TIONAL TRANSACTION AND BY RECORDING THE OPERATING MARGIN ( OP/TC) OF THESE COMPARABLES WHICH ARE AS UNDER :- SL.NO. COMPARABLES OP/OC(%) 1. AKSHAY SOFTWARE TECHNOLOGIES LTD. 8.1 2. AZTECSOFT LTD. (CONSOLIDATED) 27.37 3. CAT TECHNOLOGIES LTD. 34.43 4. CG VAK SOFTWARE & EXPORTS LTD. -2.03 5. GOLDSTONE TECHNOLOGIES (SEG.) 10.28 6. INFOSYS TECHNOLOGIES LIMITED 40.74 7. LARSEN & TURBO INFOTECH LIMITED 21.2 8. LGS GLOBAL LTD. 18.05 9. MINDTREE LIMITED 27.36 10. PERSISTENT SYSTEMS LIMITED 37.77 11. R S SOFTWARE (I) LIMITED 10.15 12. SASKEN COMMU NICATION TECH. LTD. 29.41 13. TATA CONSULTANCY SERVICES LTD. 31.44 14. TATA ELXSI LTD. 16.89 15. THINK SOFT GLOBAL 18 16. THIRDWARE SOLUTIONS 37.27 AVERAGE OP / TC 22.90% ITA NOS.1672/DEL./2014 8 AND THEREBY COMPUTING THE ALP OF THE ASSESSEE WITH AVERAGE OP/OC MARGIN OF THE AFORESAID 16 COMPARABLES AT 22. 90% AS UNDER:- PARTICULARS AMOUNT IN INR OPERATING COT 579,337,908 ARMS LENGTH OP/TC MARGIN (%) 22.90% ARMS LENGTH MARGIN (RS.) 132,668,381 ARMS LENGTH PRICE 712,006,289 PRICE CHARGED BY THE ASSESSEE 625,272,668 105% OF PRICE CHARGED IN INTERNATIONAL TRANSACTION 656,536,301 ADJUSTMENT TO BE MADE 86,733,621 7. FEELING AGGRIEVED, THE ASSESSEE HAS COME UP BEFO RE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 8. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. GROUNDS NO.1 & 2 9. GROUNDS NO.1 & 2 ARE GENERAL AND ACADEMIC IN NAT URE, HENCE NEED NO SPECIFIC ADJUDICATION. GROUND NO.7 IS NOT PRESSED. GROUND NO.5 10. LD. AR FOR THE ASSESSEE CONTENDED THAT THE ASSE SSEE IS ENTITLED FOR WORKING CAPITAL ADJUSTMENT TO ACCOUNT FOR DIFFERENCES IN WORKING CAPITAL EMPLOYED BY THE ASSESSEE VIS--VIS COMPARABLE COMPANIES AND RELIED UPON UNITED HEALTH GROUP INFORMATION ITA NOS.1672/DEL./2014 9 SERVICES (P.) LTD. VS. ACIT (2014) 50 TAXMANN.COM 177 (DELHI TRIB.) AND MARUBENI-ITOCHU STEEL INDIA (P.) LTD. VS. DCIT (2016) 67 TAXMANN.COM 52 (DELHI TRIB.) . 11. HOWEVER, ON THE OTHER HAND, LD. SENIOR DR FOR T HE REVENUE RELIED UPON THE DETAILED REASONS GIVEN BY LD. TPO A ND DRP FOR DENYING THE WORKING CAPITAL ADJUSTMENT TO THE ASSES SEE COMPANY. 12. THE LD. TPO DENIED THE WORKING CAPITAL ADJUSTME NT TO THE ASSESSEE FOR THE REASONS INTER ALIA THAT THERE USED TO BE UNRELIABLE AND INADEQUATE DATA IN CASE OF COMPARABLE COMPANY; THAT WORKING CAPITAL ADJUSTMENT CAN BE GIVEN ON THE BASIS OF DAI LY OR AT LEAST MONTHLY AVERAGE PAYABLES, RECEIVABLES AND INVENTORY AND NOT ON THE BASIS OF YEAR END FIGURES; THAT THE ISSUE OF WO RKING CAPITAL IS RELEVANT WHEN THERE IS A SITUATION OF INVENTORY REM AINING TIED UP OR RECEIVABLE BEING HELD UP; THAT OUT OF THE THREE COM PONENTS OF WORKING CAPITAL I.E. PAYABLES, RECEIVABLES AND INVE NTORY, ONLY ONE COMPONENT IS EFFECTED ON ACCOUNT OF TRANSACTIONS WI TH AE VIZ. RECEIVABLES. LD. DRP HAS UPHELD THE ORDER PASSED B Y TPO REGARDING WORKING CAPITAL ADJUSTMENT BY AND LARGE O N THE SAME GROUND TAKEN BY THE TPO. 13. IDENTICAL ISSUE HAS ALREADY BEEN DEALT WITH BY THE ITAT, DELHI BENCH-I IN THE CASES CITED AS UNITED HEALTH GROUP INFORMATION SERVICES (P.) LTD. AND MARUBENI-ITOCHU STEEL INDIA ITA NOS.1672/DEL./2014 10 (P.) LTD. (SUPRA). OPERATIVE PART DEALING WITH THE ISSUE IN QUESTION IN MARUBENI-ITOCHU STEEL INDIA (P.) LTD. (SUPRA) IS REPRODUCED FOR READY PERUSAL AS UNDER :- 16.1 GROUND NO. 5 RELATES TO NON-GRANTING OF WORKI NG CAPITAL ADJUSTMENT. THE ASSESSEE REQUESTED THE TPO TO ALLOW WORKING CAPITAL ADJUSTMENT, WHICH WAS REFUSED . THE LD. CIT(A) TOO, DID NOT CONCUR WITH THE SUBMISS IONS ADVANCED ON BEHALF OF THE ASSESSEE IN THIS REGARD. 16.2 WE ARE NOT INCLINED TO ACCEPT, IN PRINCIPLE, T HE VIEW CANVASSED BY THE AUTHORITIES BELOW THAT THE ASSESSEE CANNOT BE ALLOWED A WORKING CAPITAL ADJUSTMENT. SUCH AN ADJUSTMENT IS RESTRICTED TO INVENTORY, TRADE RECEIVABLES AND TRADE PAYABLES. IF A COMPANY CARRIES HIGH TRADE RECEIVABLES, IT WOULD ME AN THAT IT IS ALLOWING ITS CUSTOMERS RELATIVELY LONGER PERIOD TO PAY THEIR AMOUNTS, WHICH WILL RESULT INTO HIGHER INTEREST COST AND THE RESULTANT LOW NET PROFIT. SIM ILARLY, BY CARRYING HIGH TRADE PAYABLES, A COMPANY BENEFITS FROM A RELATIVELY LONGER PERIOD AVAILABLE TO IT FOR PAYING BACK TO ITS SUPPLIERS, WHICH REDUCES THE INTEREST C OST AND INCREASES PROFITS. IN ORDER TO NEUTRALIZE DIFFERENC ES ON ACCOUNT OF INVENTORY, TRADE PAYABLES AND TRADE RECEIVABLES, IT BECOMES ESSENTIAL TO ALLOW WORKING CAPITAL ADJUSTMENT FOR BRINGING THE CASE OF THE ASS ESSEE AT PAR WITH OTHER FUNCTIONALLY COMPARABLE ENTITIES. WE, THEREFORE, AGREE IN PRINCIPLE WITH THE GRANT OF WOR KING CAPITAL ADJUSTMENT. 14. KEEPING IN VIEW THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE FACT THAT THE IDENTICAL ISSUE HAS ALREADY BEEN DEALT WITH BY THE COORDINATE BENCH, WE ARE OF THE CONSIDERED VIEW THA T THE WORKING CAPITAL ADJUSTMENT IS REQUIRED TO BE PROVIDED FOR B RINGING THE COMPARABLES AND THE ASSESSEE AT PAR FOR BENCHMARKIN G THE INTERNATIONAL TRANSACTIONS OTHERWISE RATIONALE BEHI ND THE ITA NOS.1672/DEL./2014 11 COMPARABILITY FOR THE PURPOSE OF BENCHMARKING WOULD GET FRUSTRATED. HOWEVER, IN ORDER TO PROVIDE THE WORKI NG CAPITAL ADJUSTMENT TO THE ASSESSEE VIS--VIS COMPARABLES, A SSESSEE SHALL PROVIDE THE COMPLETE AUDIT PERTAINING TO THE WORKIN G CAPITAL DEPLOYED TO IDENTIFY THE DIFFERENCE TO THE MARGINS EARNED BY THE ASSESSEE AND THE COMPARABLES. AND THE ASSESSEE SHA LL ALSO BE AT LIBERTY TO BRING ON RECORD THE EVIDENCE TO DEMONSTR ATE THE DIFFERENCE IN WORKING CAPITAL DEPLOYED FOR WORKING OUT FURTHER DIFFERENCE IN THE MARGIN EARNED BY ASSESSEE VIS--V IS COMPARABLES. SO, WE SET ASIDE THE ORDER PASSED BY TPO/DRP DENYIN G THE WORKING CAPITAL ADJUSTMENT TO THE ASSESSEE TO DECID E AFRESH BY THE TPO BY PROVIDING AN OPPORTUNITY OF BEING HEARD TO T HE ASSESSEE. GROUND NO.6 15. LD. TPO AS WELL AS LD. DRP HAVE TREATED FOREIGN EXCHANGE GAIN/LOSS AS NON-OPERATING IN NATURE BY RELYING UPO N NOTIFICATION OF CBDT ISSUED ON 18.09.2013, WHICH IS A NOTIFICATION ON SAFE HARBOUR RULES. LD. DRP HAS CATEGORICALLY HELD AS UNDER :- HOWEVER, THE POSITION HAS CHANGED SINCE THE NOTIFICATION OF CBDT ISSUED ON 18.09.2013. THIS IS THE NOTIFICATION ON 'SAFE HARBOUR RULES'. RULE 10TA(J)( K) AND (L) DEFINE THE CONCEPT OF 'OPERATING EXPENSE', 'OPERATING REVENUE' AND 'OPERATING PROFIT' RESPECTIVELY. ACCORDING TO THIS RULE, LOSS OR INCOM E ARISING ON ACCOUNT OF FOREIGN CURRENCY FLUCTUATIONS ARE EXCLUDED FROM THE CALCULATION OF 'OPERATING EXPENSE ' AND 'OPERATING INCOME' RESPECTIVELY. THEREFORE, THE ITA NOS.1672/DEL./2014 12 TPO WAS CORRECT IN EXCLUDING FOREX ITEMS FROM THE CALCULATION OF OPERATING PROFIT. THIS OBJECTION OF THE ASSESSEE IS REJECTED. 16. HOWEVER, AS IS APPARENT FROM THE DATE OF NOTIFI CATION OF THE RULE RELIED UPON BY THE LD. DRP DATED 18.09.2013, T HE SAME IS NOT APPLICABLE TO THE CASE OF THE ASSESSEE WHICH IS QUA ASSESSMENT YEAR 2009-10. THIS IDENTICAL ISSUE HAS ALSO BEEN D EALT WITH BY THE COORDINATE BENCH OF THE TRIBUNAL IN CASE CITED AS WESTFALIA SEPARATOR INDIA (P.) LTD. VS. ACIT (2014) 52 TAXM ANN.COM 381 (DELHI TRIB.) BY MAKING FOLLOWING OBSERVATIONS :- 4.8 THE LD. AR RELIED ON RULE 10T(J) TO CONTEND TH AT LOSS ARISING ON ACCOUNT OF FOREIGN CURRENCY FLUCTUA TIONS CANNOT BE INCLUDED IN THE OPERATING EXPENSE. WE AR E NOT PERSUADED TO GIVE ANY MILEAGE TO THE LD. AR ON THIS COUNT FOR THE SIMPLE REASON THAT RULE 10T IS A PART OF SAFE HARBOR RULES NOTIFIED ON 18.09.2013 WHICH ARE NOT APPLICABLE TO THE ASSESSMENT YEAR UNDER CONSIDERATI ON. 17. SO, IN VIEW OF THE MATTER, ORDER PASSED BY TPO/ DRP IN NOT CONSIDERING THE FOREIGN EXCHANGE GAIN / LOSS AS OPE RATING IN NATURE IS NOT TENABLE IN THE EYES OF LAW, HENCE HEREBY SET ASIDE. LD. TPO IS DIRECTED TO TREAT THE FOREIGN EXCHANGE GAIN / LO SS AS OPERATING IN NATURE IN CALCULATING THE OPERATING MARGIN OF THE A SSESSEE AS WELL AS FINAL COMPARABLE COMPANIES. SO, GROUND NO.6 IS DET ERMINED IN FAVOUR OF THE ASSESSEE. ITA NOS.1672/DEL./2014 13 GROUNDS NO.3, 4, 8, 9, 10, 11, 12, 13 & 14 18. FIRST OF ALL, ASSESSEE CHALLENGED THE FILTERS A PPLIED BY TPO/DRP IN CHOOSING THE COMPARABLE COMPANIES INTER ALIA THAT :- (I) TURNOVER FILTER OF > RS.5 CRORES (II) RPT FILTER OF > 25% OF SALES (III) EMPLOYEES COST < 25% OF TOTAL COST 19. WE WOULD LIKE TO DISCUSS THE OBJECTIONS RAISED BY ASSESSEE FOR APPLYING THE AFORESAID FILTERS BY THE TPO/DRP S PECIFICALLY WHILE DISCUSSING THE INCLUSION AND EXCLUSION OF THE COMPARABLES FROM THE FINAL LIST OF COMPARABLE ADOPTED BY THE TP O FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS. 20. THE LD. DR FOR THE REVENUE, AT THE VERY OUTSET, CONTENDED THAT BEFORE GOING INTO THE SELECTION OR REJECTION O F THE COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTION BY T PO, FIRST OF ALL THE ISSUE THAT SINCE THE TPO HAS NOT BENCHMARKED TH E INTERNATIONAL TRANSACTION WITH PROPER FAR ANALYSIS, THE MATTER IS REQUIRED TO BE RESTORED TO THE TPO FOR FRESH BENCHMARKING IN THE L IGHT OF THE FAR OF THE ASSESSEE WHO IS A HIGH END SERVICE PROVIDER. 21. FIRST OF ALL, WE WOULD LIKE TO EXAMINE THE ISSU E AS TO WHETHER THE LD. DR FOR THE REVENUE IS EMPOWERED TO DEPART F ROM THE VIEW TAKEN BY THE LD. TPO IN DECIDING THE NATURE OF THE SERVICES BEING PROVIDED BY THE ASSESSEE VIS--VIS COMPARABLES WITH OUT FILING THE APPEAL BEFORE THE TRIBUNAL. ITA NOS.1672/DEL./2014 14 22. UNDISPUTEDLY, THE ASSESSEE IS ENGAGED IN IC DES IGN AND SOFTWARE DEVELOPMENT RELATED TO THE COMMUNICATION D EVISES. ASSESSEE IS A CONTRACT IC DESIGN AND SOFTWARE DEVEL OPMENT SERVICES PROVIDER WHICH IS REMUNERATED ON A COST PLUS MARK-U P BASIS FOR CARRYING OUT SERVICES TOWARDS INTEGRATED DESIGN DEV ELOPMENT, VERIFICATION, MAINTENANCE AND SOFTWARE DEVELOPMENT AND IS RENDERING THESE SERVICES ONLY TO ST-ERICSSON (STE G ROUP). 23. THE LD. DR FOR THE ASSESSEE CONTENDED THAT THE ASSESSEE IS NOT INTO SOFTWARE DEVELOPMENT RATHER ASSESSEE IS EN GAGED IN DEVELOPMENT, VERIFICATION AND MAINTENANCE AND INTEG RATED SERVICE DESIGN AND SOFTWARE DEVELOPMENT TO COMMUNICATION SE RVICES WHICH IS A HIGH END JOB WHICH CAN ONLY BE BENCHMARKED QUA INTERNATIONAL TRANSACTION WITH PROPER FAR ANALYSIS AND FURTHER CO NTENDED THAT THE ERROR COMMITTED BY TPO CANNOT BE PERPETUATED. 24. BARE PERUSAL OF THE PROFILE OF THE ASSESSEE COM PANY AND AGREEMENT DATED 03.08.2008 ENTERED INTO BETWEEN THE ASSESSEE AND STE GROUP APPARENTLY GOES TO PROVE THAT THE ASSESSE E IS A DESIGNER AND NOT A SOFTWARE DEVELOPER. IN OTHER WORDS, THE ASSESSEE IS A IC DESIGNER, SO CANNOT BE A SOFTWARE DEVELOPER AS IS C ATEGORICALLY MENTIONED IN PARA 2 OF THE AGREEMENT (SUPRA). LD. DR FOR THE REVENUE ALSO RELIED UPON THE JUDGMENT CITED AS CIT VS. JANSAMPARK ADVERTISING & MARKETING (P.) LTD (2015 ) 56 ITA NOS.1672/DEL./2014 15 TAXMANN.COM 286 (DELHI) AND ITO VS. SMT. GURINDER KAUR 288 ITR 207. 25. HOWEVER, ON THE OTHER HAND, LD. AR RAISED FIRST OBJECTION THAT SINCE REVENUE HAS NOT FILED ANY APPEAL AGAINST THE FINDINGS RETURNED BY THE TPO QUA NATURE OF THE SERVICES BEIN G PROVIDED BY THE ASSESSEE, THE REVENUE IS NOT ENTITLED TO RACK U P THIS ISSUE AT THIS STAGE NOR THE REVENUE IS ENTITLED TO TAKE SHELTER U NDER RULE 27 OF THE INCOME-TAX (APPELLATE TRIBUNAL) RULES, 1963 AND RELIED UPON THE JUDGMENT OF THE HONBLE APEX COURT IN CASE OF COMMISSIONER OF CUSTOMS, MUMBAI VS. TOYO ENGINEERING INDIA LTD. - (2006) 7 SCC 592. 26. IN TOYO ENGINEERING INDIA LIMITED (SUPRA), THE HONBLE APEX COURT HAS HELD THAT IN CASE, PLEA IS NOT RAISE D BEFORE ADJUDICATING AUTHORITY AND THE FIRST APPELLATE AUTH ORITY, SUCH NEW PLEA CANNOT BE TAKEN BEFORE THE APPELLATE TRIBUNAL. SO, WHEN UNDISPUTEDLY THIS PLEA HAS NOT BEEN TAKEN BY THE RE VENUE BEFORE THE FIRST APPELLATE AUTHORITY, THE SAME CANNOT BE A LLOWED TO RAISE BEFORE THE TRIBUNAL. 27. FURTHERMORE, COORDINATE BENCH OF THE TRIBUNAL I N CASE OF ACIT VS. TECHBOOKS ELECTRONICS PVT. LTD. - (2016) 6 5 TAXMAN 241 (DEL) ALSO EXAMINED THE IDENTICAL ISSUE AND ARRIVED AT T HE CONCLUSION THAT EVEN RULE 27 OF ITAT RULES DOES NOT COME TO THE ITA NOS.1672/DEL./2014 16 RESCUE OF THE LD. DR FOR CHALLENGING THE CORRECTNES S OF THE ORDER OF AO/TPO IN APPEAL BEFORE THE TRIBUNAL BECAUSE, IN SU CH CASE, WHEN REVENUE IS OTHERWISE DEBARRED FROM FILING CROSS APP EAL OR CROSS OBJECTION ON A PARTICULAR POINT AND IN CASE, NO RIG HT TO FILE APPEAL OR CROSS OBJECTION IS AVAILABLE TO THE RESPONDENT ON A PARTICULAR POINT THEN THE REVENUE CANNOT BE ALLOWED TO TAKE SHELTER UNDER RULE 27 INDIRECTLY. 28. IDENTICAL ISSUE HAS ALSO BEEN DEALT WITH BY THE HONBLE DELHI HIGH COURT IN CASE OF CIT, CENTRAL II VS. DIVINE INFRACON PVT. LTD. IN ITA 771/2014 AND DIVINE INFRACON PVT. LTD. VS. CIT, CENTRAL II IN ITA 185/2015 ORDER DATED 13.08.2015 , THE OPERATIVE PART OF WHICH IS EXTRACTED AS UNDER FOR READY PERUS AL :- 11. THE AFORESAID PASSAGES WERE REFERRED TO BY A DIVISION BENCH OF THIS COURT IN CIT VS. EDWARD KEVENTER (SUCCESSORS) PVT. LTD (SUPRA) AND THE COUR T FURTHER REITERATED THE PRINCIPLE THAT A PARTY WHO H AS NOT APPEALED CANNOT BE PERMITTED TO RAISE A GROUND, WHI CH WILL WORK ADVERSELY TO THE APPELLANT. 12. INDISPUTABLY, THE REVENUE COULD ALSO NOT TAKE RECOURSE TO RULE 27 OF THE INCOME TAX (APPELLATE TRIBUNAL) RULES, 1963. BY VIRTUE OF THE SAID RULE, A RESPONDENT BEFORE THE TRIBUNAL CAN SUPPORT THE DECI SION APPEALED AGAINST NOT ONLY ON THE GROUNDS DECIDED IN FAVOUR OF THE RESPONDENT BUT ALSO ON GROUNDS DECIDE D AGAINST IT. HOWEVER, RULE 27 OF THE SAID RULES WOUL D NOT EXTEND TO PERMITTING THE RESPONDENT TO EXPAND THE S COPE OF AN APPEAL AND ASSAIL THE DECISION ON ISSUES, WHICH ARE NOT SUBJECT MATTER OF THE APPEAL. IN CIT V S. EDWARD KEVENTER (SUCCESSORS) PVT. LTD (SUPRA), THIS COURT HAD REITERATED THAT IT WOULD NOT BE OP EN TO A ITA NOS.1672/DEL./2014 17 RESPONDENT TO TRAVEL OUTSIDE THE SCOPE OF THE S UBJECT MATTER OF THE APPEAL UNDER THE GUISE OF INVOKING R 27. 29. IN THE GIVEN CIRCUMSTANCES, THE JUDGMENT CITED AS IN CASES OF CIT VS. JANSAMPARK ADVERTISING & MARKETING (P.) LTD AND ITO VS. SMT. GURINDER KAUR (SUPRA) RELIED UPON BY THE LD. DR ARE NOT APPLICABLE TO THE FACTS AND CIRCUMSTANCES OF THE CA SE. 30. SO, WE ARE OF THE CONSIDERED VIEW THAT THE ASSE SSEE BEING A HARDWARE DESIGNER, A CAPTIVE SERVICE PROVIDER INVOL VED AT THE DESIGN AND DEVELOPMENT STAGE ONLY WITH A LIMITED SC OPE OF WORK AND IS NOT INVOLVED IN THE PROCESS OF CONCEPTUALIZA TION OF ANY PRODUCTS OR WORKS AND WORKS ONLY ON THE SPECIFICATI ON PROVIDED BY THE STE GROUP FOR THE IMPLEMENTATION OF IC DESIGN, ITS MAINTENANCE, VERIFICATION AND SOFTWARE DEVELOPMENT. SO, THE ROLE OF STE IS THAT OF A CONTRACT CAPTIVE DESIGN CENTRE AND AS SUCH, THE FINDINGS OF THE TPO IN THIS REGARD CANNOT BE INTERF ERED WITH. 31. NOW, WE WOULD LIKE TO EXAMINE THE EXCLUSION OR INCLUSION OF THE COMPARABLES CHALLENGED BY THE ASSESSEE FOR BENC HMARKING THE INTERNATIONAL TRANSACTIONS ONE BY ONE. 32. TO CUT SHORT THE ARGUMENT, THE LD. AR FOR THE A SSESSEE CONTENDED THAT HE CHALLENGES THE INCLUSION OF CAT T ECHNOLOGIES, INFOSYS TECHNOLOGY LTD., TATA CONSULTANCY SERVICES LIMITED, TATA ITA NOS.1672/DEL./2014 18 ELEXI LIMITED AND THIRDWARE SOLUTIONS AND SOUGHT TH EIR EXCLUSION FROM THE FINAL LIST OF COMPARABLES. COMPARABLES SOUGHT TO BE EXCLUDED : CAT TECHNOLOGIES 33. ASSESSEE SOUGHT THE EXCLUSION OF THIS COMPANY F OR WANT OF FUNCTIONALLY COMPARABILITY, IT BEING ENGAGED IN PRO VIDING INTEGRATING SOLUTION IN THE DOMAIN AREA OF HR BPO. ASSESSEE ALSO CHALLENGED ITS EXCLUSION AS COMPARABLE ON THE GROUN D THAT THE COMPANY ADMITS 1 TRANSACTION WITH 5 OF ITS SUBSIDIA RIES/ASSOCIATES BUT DOES NOT QUANTIFY IT AND IN THE ABSENCE OF QUAN TITATIVE DETAILS, IT CANNOT BE SAID THAT IT PASSES THE RPT FILTER. 34. TPO, HOWEVER, RETAINED THIS COMPANY AS COMPARAB LE ON THE GROUND THAT SUBSTANTIVE INCOME IS FROM THE SOFTWARE DEVELOPMENT AND CONSULTING AND INCOME FROM TRAINING AND MEDICAL TRANSCRIPTION (BPO) IS MINIMAL, WHICH FACT IS QUITE APPARENT FROM SCHEDULE IX FORMING PART OF THE PROFIT & LOSS ACCOUNT, AVAILABL E AT PAGE 770 OF THE PAPER BOOK VOL.-II. HOWEVER, TPO HAS COMPUTED AT ENTITY LEVEL. 35. HOWEVER, DURING THE COURSE OF ARGUMENT, THE LD. AR FOR THE ASSESSEE STATED THAT THIS COMPANY MAY BE RETAINED A S A COMPARABLE AFTER DISPOSING OF THE OBJECTION AS TO RPT FILTERS. SO, IN THE GIVEN ITA NOS.1672/DEL./2014 19 CIRCUMSTANCES, WE RESTORE THIS ISSUE TO THE TPO TO DECIDE AFRESH AFTER INCLUSION OF THIS COMPARABLE BY DISPOSING THE OBJECTION AS TO RPT FILTERS FOR BENCHMARKING THE INTERNATIONAL TRAN SACTIONS AFTER PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE ASSE SSEE. INFOSYS TECHNOLOGIES LTD. 36. ASSESSEE CHALLENGED THE INCLUSION OF THIS COMPA RABLE ON GROUND OF FUNCTIONAL DISPARITY; THAT INFOSYS TECHNO LOGIES LIMITED IS INTO SELLING SOFTWARE PRODUCT; THAT IT INCURRED SUBSTANTIAL R&D EXPENDITURE AND IS DEVELOPING INTANGIBLES; THAT THI S COMPARABLES RISK PROFILE IS DIFFERENT WHICH AFFECTS ITS PROFITA BILITY. HOWEVER, TPO OVERRULED ALL THE OBJECTIONS AND INCLUDED THE S AME IN THE FINAL LIST OF COMPARABLES BY RELYING UPON THE DECISION RE NDERED BY ITAT, DELHI IN CASE OF ST MICRO (2011-TII-63-ITAT-DEL-TP). 37. ASSESSEE IN ORDER TO HIGHLIGHT THE DISSIMILARIT IES BETWEEN THE ASSESSEE COMPANY AND INFOSYS TECHNOLOGIES LIMITED A ND TCS, REFERRED TO THE CHART ANNEXURE 1 ANNEXED WITH ITS SYNOPSIS WHICH HAS NOT BEEN CONTROVERTED BY THE REVENUE, WHI CH IS REPRODUCED AS UNDER FOR READY PERUSAL :- S. NO. BASIC / PARTICULAR INFOSYS TECHNOLOGIES LTD. TCS ST ERICSSON 1. RESERVE & SURPLUS 17, 523 CRORES 13,248 CRORES 3 .77 CRORES 2. CURRENT LIABILITIES 1507 CRORES 3501 CRORES 35. 98 CRORES 3. OPERATING INCOME RS.6,212 CRORES (PG 65/ ANNUAL REPORT (AR) 5139 CRORES (PG 105 / AR) 6.47 CRORES (PG 435 / ANNUAL ITA NOS.1672/DEL./2014 20 REPORT) 4. OP / TC 40.74% 11.17% 5. RISK PROFILE OPERATES AS A FULL FLEDGED RISK TAKING ENTREPRENEUR OPERATES AS A FULL FLEDGED RISK TAKING ENTREPRENEUR OPERATES AS A CAPTIVE SERVICE PROVIDER BEARING LIMITED RISK. 6. NATURE OF SERVICES DESIGN, DEVELOPMENT, RE-ENGINEERING, MAINTENANCE, SYSTEMS INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION, TESTING AND INFRASTRUCTURE MANAGEMENT SERVICES (PG 71 OF AR) IT INFRASTRUCTURE SERVICES, BUSINESS PROCESS OUTSOURCING, IT ENABLES SERVICES, ENGINEERING AND INDUSTRIAL SERVICES (PG 22 / AR) CONTRACT BASED SOFTWARE DEVELOPMENT SERVICES TO AES. 7. OWNERSHIP OF BRANDED / PROPRIETARY PRODUCTS DEVELOPES / OWN PROPRIETARY PRODUCTS FINACLE, INFOSYS ACTIVE DESK, INFOSYS I PROW E, INFOSYS MCONNECT OWNS CONTRACT RIGHTS, IPR, DISTRIBUTION RIGHTS THE COMPANY DOES NOT WON ANY BRANDED / PROPRIETARY PRODUCTS. 8. O NSITE SERVICES TYPICALLY, ONSITE SERVICES COMMAND HIGHER BILLABLE RATES AND CONSEQUENTLY IT WOULD NOT BE APPROPRIATE TO COMPARE THE APPELLANT WHICH EARNS ITS ENTIRE INCOME FROM OFFSHORE SERVICES WITH INFOSYS WHICH EARNS MORE THAN HALF OF ITS SERVICE, INCOME FROM ONSITE SERVICES. (PG ONSITE REVENUE 51 PERCENT (PG 76 / AR) THE COMPANY PROVIDES ONLY OFFSHORE SERVICES (I.E. REMOTELY FROM INDIA) ITA NOS.1672/DEL./2014 21 47 OF AR) 9. EXPENDITURE ON RESEARCH & DEVELOPMENT RS.267 CRORES (PG 20 OF AR) 42.31 CRORES (PG 139 / AR) NIL 10. PRODUCT LIABILITY RISK COMPARABLES PRODUCT LIABILITY RISK AND INDEMNITY CLAIM COMPARABLES PRODUCT LIABILITY RISK AND INDEMNITY CLAIM. NO RISK UNDERTAKEN BY THE COMPANY ON ACCOUNT OF INABILITY TO MATCH PRODUCTS TO DEMAND OR FAILURES OF CONTRACTS TO PERFORM (PG 380 / PB 1) 11. CUSTOMER CREDIT RISK COMPARABLES BEARS OF DUES FROM CUSTOMERS CREDIT RISK BEARS CUSTOMER CREDIT RISK NO RISK ON ACCOUNT OF COLLECTION AND BAD DEBT (PG 380 PB 1) 12. ACCOUNTING AND PROJECT MANAGEMENT RISK COMPARABLES MANAGE ACCOUNTING AND PROJECT MANAGEMENT RISK COMPARABLES MANAGE ACCOUNTING AND PROJECT MANAGEMENT RISK NO SUCH RISK (PG 380 / PB 1) 13. EXPENDITURE ON ADVERTISING / SALES PROMOTION AND BRAND BUILDING RS.79 CRORES (PG NO.69 OF AR) AS TCS IS PART OF THE TATA GROUP OF COMPANIES AND IS A SIGNATORY OF THE TATA BRAND EQUITY BRAND PROMOTION (BE-BP) AGREEMENT, IT IS GOVERNED BY STRICT STANDARDS IN ITS COMMUNICATION AS WELL AS USE OF THE TATA BRAND AND ENSURES COMPLIANCE WITH THE SAME -- ITA NOS.1672/DEL./2014 22 (PG 62 / AR) 14. DURATION OF SOFTWARE SERVICE CONTRACT INFO NOT AVAILABLE INFO NOT AVAILABLE ST ERICSSON HAS ENTERED INTO A LONG TERM CONTRACT WITH ITS AE 38. KEEPING IN VIEW THE RESERVED SURPLUS, CURRENT L IABILITIES, EXPENDITURE ON RESEARCH DEVELOPMENT, EXPENDITURE ON SALES PROMOTION AND BRAND BUILDING OF INFOSYS TECHNOLOGIE S LIMITED VIS- -VIS ST ERICSSON COMPANY HAVING SURPLUS OF RS.7523 CRORES AS AGAINST RS.3.77 CRORES OF THE ASSESSEE AND SIMILARL Y, INFOSYS TECHNOLOGIES LTD HAS EXPENDITURE OF RS.267 CRORES O N ITS R&D WHICH WOULD CERTAINLY AFFECT ITS PROFITABILITY AND IS A HIGHLY RISK TAKING COMPANY WHEREAS THE ASSESSEE COMPANY BEING A CAPTIVE SERVICE PROVIDER IS REMUNERATED ON A COST PLUS MARK UP BASIS FOR RENDERING SERVICES ONLY TO STE GROUP. 39. HONBLE HIGH COURT IN CASE CITED AS CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. (2013) 219 TAXMAN 26 (DELH I) UPHELD THE DECISION RENDERED BY THE TRIBUNAL BY MAKING FOL LOWING OBSERVATIONS :- 3. BEFORE THE TPO, THE RESPONDENT-ASSESSEE WAS ASKED TO RE-WORK THE LIST OF COMPARABLES AND THE SA ME WAS REDUCED TO 20. TPO ALSO DIRECTED INCLUSION OF INFOSYS TECHNOLOGIES LTD. IN THE SAID LIST. THE TPO IN THE FINAL ANALYSIS HAS TAKEN THE COMPARABLES AS UND ER:- S.NO. NAME OP/TC(%) 1. SATYAM COMPUTER SERVICE 30.07 ITA NOS.1672/DEL./2014 23 LTD. 2. L&T INFOTECH LTD.. 11.11 3. INFOSYS TECHNOLOGIES LTD. 40.08 4. ARITHMETIC MEAN 27.08 4. ONE OF THE COMPANIES WHICH WAS INCLUDED BY THE TPO WAS SATYAM COMPUTER SERVICES LTD. DISPUTE RESOLUTION PANEL EXCLUDED THE SAID COMPANY FROM THE COMPARABLES FOR OBVIOUS REASONS. 5. THE TRIBUNAL HAS OBSERVED THAT THE ASSESSEE WAS NOT COMPARABLE WITH INFOSYS TECHNOLOGIES LTD., AS INFOSYS TECHNOLOGIES LTD. WAS A LARGE AND BIGGER COMPANY IN THE AREA OF DEVELOPMENT OF SOFTWARE AND, THEREFORE, THE PROFITS EARNED CANNOT BE A BENCH MAR KED OR EQUATED WITH THE RESPONDENT, TO DETERMINE THE RE SULTS DECLARED BY THE RESPONDENT-ASSESSEE. IN PARAGRAPH 3 .3 THE TRIBUNAL HAS REFERRED TO THE DIFFERENCE BETWEEN THE RESPONDENT-ASSESSEE AND INFOSYS TECHNOLOGIES LTD. F OR THE SAKE OF CONVENIENCE, WE ARE REPRODUCING THE SAM E:- BASIC PARTICULAR INFOSYS TECHNOLOGIES LTD. AGNITY INDIA RISK PROFILE OPERATE AS FULL-FLEDGED RISK TAKING ENTREPRENEURS OPERATE AT MINIMAL RISKS AS THE 100% SERVICES ARE PROVIDED TO AES NATURE OF SERVICES DIVERSIFIED-CONSULTING, APPLICATION DESIGN, DEVELOPMENT, RE- ENGINEERING AND MAINTENANCE SYSTEM INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION AND BUSINESS PROCESS MANAGEMENT, ETC. (REFER PAGE 117 OF THE PAPER BOOK) CONTRACT SOFTWARE DEVELOPMENT SERVICES REVENUE RS.9,028 CRORES RS.16.09 CRORES OWNERSHIP OF BRANDED / PROPRIETARY PRODUCTS DEVELOPS/OWNS PROPRIETARY PRODUCTS LIKE FINACLE, INFOSYS ACTICE DESK, INFOSYS IPROWE, INFOSYS MCONNECT, ALSO, THE COMPANY DERIVES ITA NOS.1672/DEL./2014 24 SUBSTANTIAL PORTION OF ITS PROPRIETARY PRODUCTS (INCLUDING ITS FLAGSHIP BANKING PRODUCT SUITE FINACLE) ONSITE VS. OFFSHORE -AS MUCH AS HALF OF THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY INFOSYS ARE ONSITE (I.E., SERVICES PERFORMED AT THE CUSTOMERS LOCATION OVERSEAS). AND OFFSHORE (50.20%) (REFER PAGE 117 OF THE PAPER BOOK) THAN HALF OF ITS SERVICE, INCOME FROM ONSITE SERVICES. THE APPELLANT PROVIDES ONLY OFFSHORE SERVICES (I.E., REMOTELY FROM INDIA) EXPENDITURE ON ADVERTISING / SALES PROMOTION AND BRAND BUILDING RS.61 CRORES RS.NL (AS THE 100% SERVICES ARE PROVIDE TO AES) EXPENDITURE ON RESEARCH & DEVELOPMENT RS.102 CRORES RS.NIL OTHER 100% OFFSHORE (FROM INDIA) 6. LEARNED COUNSEL FOR THE REVENUE HAS SUBMITTED THAT THE TRIBUNAL AFTER RECORDING THE AFORESAID TAB LE HAS NOT AFFIRMED OR GIVEN ANY FINDING ON THE DIFFERENCE S. THIS IS PARTLY CORRECT AS THE TRIBUNAL HAS STATED T HAT INFOSYS TECHNOLOGIES LTD. SHOULD BE EXCLUDED FROM T HE LIST OF COMPARABLES FOR THE REASON LATTER WAS A GIA NT COMPANY IN THE AREA OF DEVELOPMENT OF SOFTWARE AND IT ASSUMED ALL RISKS LEADING TO HIGHER PROFITS, WHEREA S THE RESPONDENT - ASSESSEE WAS A CAPTIVE UNIT OF THE PAR ENT COMPANY AND ASSUMED ONLY A LIMITED RISK. IT HAS AL SO STATED THAT INFOSYS TECHNOLOGIES LTD. CANNOT BE COMPARED WITH THE RESPONDENT-ASSESSEE AS SEEN FROM THE FINANCIAL DATA ETC. TO THE TWO COMPANIES MENTIONED EARLIER IN THE ORDER I.E. THE CHART. IN THE GROUND S OF APPEAL THE REVENUE HAS NOT BEEN ABLE TO CONTROVERT OR DENY THE DATA AND DIFFERENCES MENTIONED IN THE TABULATED FORM. THE CHART HAS NOT BEEN CONTROVERTE D. ITA NOS.1672/DEL./2014 25 40. SO FOLLOWING THE DECISION RENDERED BY HONBLE J URISDICTIONAL HIGH COURT IN CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. (SUPRA) WHEREIN ON THE BASIS OF HIGH RISK PROFILE, NATURE O F SERVICES, NUMBER OF EMPLOYEES, OWNERSHIP OF BRANDED PRODUCTS AND GIA NT STATUS OF THE COMPANY, INFOSYS TECHNOLOGIES LTD. WAS EXCLUDED FROM THE LIST OF COMPARABLES AND AS SUCH, IN THE INSTANT CASE, TH IS IS NOT A VALID COMPARABLE. 41. MOREOVER, LD. DRP-II, DELHI FOR AY 2011-12 IN A SSESSEES OWN CASE IN THE SAME SET OF FACTS AND CIRCUMSTANCES ORDERED TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES V IDE ORDER DATED 07.08.2015, AVAILABLE AT PAGE 2618 OF THE PAPER BOO K VOL.VII. SO, BY APPLYING THE RULE OF CONSISTENCY, THIS COMPANY I S ALSO REQUIRED TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES F OR BENCHMARKING THE INTERNATIONAL TRANSACTION. TATA CONSULTANCY SERVICES LTD. (TCS) 42. ASSESSEE RAISED OBJECTIONS FOR INCLUSION OF THI S COMPARABLE ON THE GROUNDS INTER ALIA THAT IT IS FUNCTIONALLY I NCOMPARABLE BEING INTO IT INFRASTRUCTURE SERVICES, BUSINESS PROCESS O UTSOURCING, IT ENABLED SERVICES, ENGINEERING AND INDUSTRIAL SERVIC ES; THAT THIS COMPARABLE HAS SUPER NORMAL PROFIT; THAT THIS COMPA NY ALSO ENGAGED IN SALE OF EQUIPMENT AND SOFTWARE LICENSE T O THE TUNE OF RS.1,031.02 CRORES. HOWEVER, TPO OVERRULED THE OBJ ECTIONS RAISED ITA NOS.1672/DEL./2014 26 BY ASSESSEE ON THE GROUND THAT THIS COMPARABLE IS P ART OF SET OF SEVERAL COMPARABLES WHICH CONTAINS EVEN LOW MARGIN CASES AND THUS RETAINED THIS COMPARABLE IN THE FINAL LIST OF COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS. 43. THIS COMPARABLE WAS ORDERED TO BE EXCLUDED FRO M THE LIST OF COMPARABLES BY ITAT, DELHI BENCH I-2 IN SONY MOBILE COMMUNICATIONS INTERNATIONAL AB VS. DDIT (2016) 6 9 TAXMANN.COM 404 (DELHI TRIB.) BY FOLLOWING THE DECISION OF ITAT, MUMBAI BENCH IN CASE OF PETRO ARALDITE (P.) LTD. VS. DY.CIT (2013) 144 ITD 625 , IN THE IDENTICAL SET OF FACTS AND CIRCUMSTANCES, ON THE GROUND THAT ACQUISITION AND M ERGER ETC. HAS TAKEN PLACE AND THIS COMPANY HAS TOTAL INCOME OF RS .21535.75 CRORES AND SALE OF EQUIPMENT AND SOFTWARE LICENCE A T RS.668.25 CRORES, THUS CANNOT BE CONSIDERED AS A COMPARABLE W ITH THE ASSESSEE. 44. AGAIN, KEEPING IN VIEW THE FACT THAT TCS IS HAV ING RESERVE AND SURPLUS TO THE TUNE OF RS.13,248 CRORES HAVING OPERATING INCOME TO THE TUNE OF RS.5,139 CRORES, EXPENDITURE ON RESEARCH AND DEVELOPMENT TO THE TUNE OF RS.42.31 CRORES AND IS A HIGHLY RISK TAKING COMPANY AS AGAINST MEAGER SURPLUS AND OPERAT ING PROFIT OF THE ASSESSEE COMPANY, WE DO NOT FIND IT VALID COMPA RABLE. MOREOVER, THE ASSESSEE COMPANY IS A CAPTIVE SERVICE PROVIDER ITA NOS.1672/DEL./2014 27 BEING REMUNERATED ON A COST PLUS MARK-UP BASIS FOR RENDERING SERVICES TO ONLY STE GROUP. IN OTHER WORDS, TCS IS A GIANT COMPANY HAVING HUGE PROFIT AND CANNOT BE RETAINED A S A COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANS ACTION. SO, WE ORDER TO EXCLUDE THIS COMPANY AS A COMPARABLE. TATA ELXSI LIMITED 45. ASSESSEE RAISED OBJECTION BEFORE THE TPO/DRP TH AT THIS COMPANY IS NOT A VALID COMPARABLE AS THIS IS AN IT ENABLED AND SOFTWARE PRODUCT COMPANY. TPO/DRP OVERRULED THIS O BJECTION BY OBSERVING THAT IT CAN EASILY BE INCLUDED IN THE LIS T OF COMPARABLE AS IT IS PROVIDING SOFTWARE SERVICES AND ONLY VERTICAL S ARE DIFFERENT. 46. FROM THE ANNUAL REPORT OF THIS COMPANY, AVAILAB LE AT PAGE 1465 TO 1540 OF THE PAPER BOOK, WE CAN EASILY MAKE OUT THAT THIS COMPANY IS INTO SOFTWARE DEVELOPMENT SERVICES, PROD UCT DESIGN SERVICES, INNOVATION DESIGN ENGINEERING SERVICES, S YSTEM INTEGRATION AND SUPPORT SERVICES. BUT THE TPO HAS TAKEN SOFTWARE DEVELOPMENT SERVICES ONLY FOR THE PURPOSE OF COMPAR ABILITY WITH THE ASSESSEE. HOWEVER, PERUSAL OF THE DETAIL SEGME NT GOES TO PROVE THAT DESIGN AND DEVELOPMENT OF HARDWARE IS ALSO INC LUDED IN THE SOFTWARE SERVICES. IN OTHER WORDS, TATA ELEXI LTD. IS INTO SOFTWARE PRODUCE AS IS EVIDENT FROM THE ANNUAL REPORT AND AS SUCH, CANNOT BE ITA NOS.1672/DEL./2014 28 TAKEN AS A VALID COMPARABLE. SO, WE ORDER TO EXCLU DE THIS COMPANY FROM THE FINAL LIST OF COMPARABLES. THIRDWARE SOLUTIONS LIMITED 47. THIS IS AGAIN TPOS OWN COMPARABLE AND ASSESSEE SOUGHT TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES O N THE GROUND OF NON-COMPARABLE SERVICES I.E APPLICATION IMPLEMEN TATION, MANAGEMENT AND DEVELOPMENT SERVICES. TPO REJECTED OBJECTIONS RAISED BY THE ASSESSEE BY OBSERVING THAT SOFTWARE D EVELOPMENT, IMPLEMENTATION AND SUPPORT SERVICES ARE VARIOUS SUB -SEGMENTS OF SOFTWARE DEVELOPMENT SERVICES ONLY AND REQUIRE EMPL OYMENT OF SOFTWARE ENGINEERS AND RETAINED THIS COMPANY AS A C OMPARABLE FOR BENCHMARKING INTERNATIONAL TRANSACTIONS. 48. HOWEVER, PERUSAL OF THE ANNUAL REPORT OF THIS C OMPANY, AVAILABLE AT PAGE 1735 TO 1782 OF THE PAPER BOOK VO L.IV, GOES TO PROVE THAT THE SUBSTANTIAL REVENUE OF THIS COMPANY IS FROM SALES AND OPERATING SALES OF LICENCE; SOFTWARE SERVICES, EXPORT FROM SEZ UNIT, EXPORT FROM STPI UNIT AND REVENUE FROM SUBSCR IPTION. IT IS ALSO APPARENTLY CLEAR THAT SOFTWARE SERVICES SEGMEN T ACCOUNTS FOR RS.8.91 CRORES OUT OF THE TOTAL SALES OF RS.77 CROR ES WHEREAS SEGMENTAL RESULTS ARE NOT AVAILABLE. SO, WHEN THIS COMPANYS SUBSTANTIAL REVENUE IS FROM OTHER VARIOUS BUSINESS SEGMENTS LIKE ITA NOS.1672/DEL./2014 29 SALE OF LICENCE, SOFTWARE SERVICES AND SEGMENTAL RE SULTS ARE NOT AVAILABLE, THIS COMPANY CANNOT BE A VALID COMPARABL E FOR BENCHMARKING THE INTERNATIONAL TRANSACTION, HENCE O RDERED TO BE EXCLUDED. COMPARABLE SOUGHT TO BE INCLUDED : 49. LD. AR TO CUT SHORT HIS ARGUMENT SOUGHT TO INCL UDE ONLY ONE COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANS ACTION IE. SIP TECHNOLOGIES & EXPORTS LTD. SIP TECHNOLOGIES & EXPORTS LTD. 50. TPO HAS REJECTED THIS COMPANY AS A COMPARABLE O N THE GROUND THAT THIS COMPANY FAILS EXPORT SALES FILTER AND EMPLOYEE COST FILTER AS THE COMPANY HAS TURNOVER OF RS.1.25 CRORE S. 51. HOWEVER, LD. AR CONTENDED THAT THE TPO HAS ERRE D IN HOLDING THAT THE COMPANY HAS FAILED EMPLOYEE COST > 25% OF OPERATIVE COST AND THE EXPORT FILTER MORE THAN 75% OF OPERATIVE REVENUE. LD. AR DREW OUR ATTENTION TO THE P&L ACCO UNT AND RELEVANT SCHEDULED 10, 11, 12, 13 AND NOTES WHICH A PPARENTLY SHOWS THAT EMPLOYEE COST TO THE TOTAL COST IS 38% A ND THE ENTIRE REVENUE OF THIS COMPANY IS IN FOREIGN EXCHANGE FORM THE EXPORT OF SOFTWARE DEVELOPMENT SERVICES. ASSESSEE TABULATED THE P&L ITA NOS.1672/DEL./2014 30 ACCOUNT IN RESPONSE TO THE QUERIES RAISED BY TPO WH ICH IS EXTRACTED BELOW FROM THE SYNOPSIS FILED BY THE ASSESSEE AS UN DER :- PARTICULARS AMOUNT (PG. 1456 / VOL.III) SALES 1,24,87,209 FOREX GAIN 5,59,446 OPERATING REVENUE 1,30,46,655 SALARIES & ALLOWANCES 63,00,740 ADMINISTRATIVE & OTHER EXPENSES 1,21,18,448 LOSS IN VALUE OF INVESTMENTS WRITTEN OFF 1,10,74,94 3 DEPRECIATION 20,25,692 TOTAL COST 3,15,19,823 LESS : LOSS IN VALUE OF INVESTMENTS WRITTEN OFF 1,10,74,94 3 DONATION 6,000 LOSS ON SALE OF FIXED ASSETS 1,49,097 LOSS ON SALE OF CURRENT INVESTMENTS 38,16,711 OPERATING COST 1,64,73,072 OPERATING PROFIT -34,26,417 OP / OC -20.80% PARTICULARS REFERENCE AMOUNT (RS. IN MILLION) EMPLOYEE COST PAGE 1456/VOL. III 63,00 EMPLOYEE COST RATIO 38.25% EXPORT EARNING PAGE 1463/VOL. III 12.48 FOREX GAIN PAGE 1461/VOL. III 0.55 TOTAL EXPORTS 13.04 EXPORT EARNING RATIO 100.00% 52. FROM THE PERUSAL OF THE AFORESAID TABLE BASED U PON P&L ACCOUNT AND RELEVANT SCHEDULE AND NOTES, IT BECOMES APPARENTLY CLEAR THAT EMPLOYEE COST FILTER AND EXPORT RATIO AR E 38.25% AND 100% RESPECTIVELY SUFFICIENT TO PASS THE FILTERS AP PLIED BY THE TPO. ITA NOS.1672/DEL./2014 31 53. SO FAR AS QUESTION OF LOW TURNOVER OF A COMPANY TO BE ACCEPTED AS COMPARABLE IS CONCERNED, IT IS SETTLED PRINCIPLE OF LAW THAT TURNOVER SHOULD NOT BE THE SOLE CRITERIA TO CH OOSE A PARTICULAR COMPANY FOR COMPARABILITY RATHER FUNCTIONAL SIMILAR ITY IS A FUNDAMENTAL REQUIREMENT. RELIANCE IN THIS REGARD I S PLACED ON THE JUDGMENT CITED AS CHRYS CAPITAL (2015) 376 ITR 183 AND CIT VS. MCKINSY KNOWLEDGE CENTRE INDIA PVT. LTD. ITA NO.217/2014 ORDER DATED 27.03.2015 . 54. SINCE THIS COMPANY PASSES EMPLOYEE COST RATIO A ND EXPORT COST RATIO FILTER EMPLOYED BY THE TPO, THE TURNOVER FILTERS CANNOT BE A GROUND FOR REJECTION OF THIS COMPARABLE AS DISCUS SED IN THE PRECEDING PARA, SO WE HEREBY ORDER TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLE. GROUNDS NO.15, 15.1 & 15.2 55. ASSESSEE IN THE PROFIT AND LOSS ACCOUNT HAS DEB ITED AN AMOUNT OF RS.3,84,651/- BEING EXPENDITURE ON TIME B ASED LICENCES. AO TREATED THE SOFTWARE TIME BASED LICENCE EXPENSES OF RS.3,84,651/- AS CAPITAL IN NATURE AND THEREBY DIS ALLOWED THE SAME. HOWEVER, THE AO ALLOWED THE ASSESSEE TO DEPRECIATIO N THEREON @ 60% WHICH IS RS.2,30,791/- AND ADDED BACK THE REMAI NING AMOUNT ITA NOS.1672/DEL./2014 32 OF RS.1,53,860/- TO THE RETURNED INCOME. DRP ALSO AFFIRMED THE DECISION RENDERED BY AO. 56. LD. AR FOR THE ASSESSEE CONTENDED THAT SINCE ON E TIME REVENUE EXPENDITURE HAS BEEN INCURRED BY THE ASSESS EE THE SAME CANNOT BE DEFERRED AND RELIED UPON THE JUDGMENT OF HONBLE DELHI HIGH COURT IN CASE OF DIRECTOR OF INCOME-TAX VS. INFRASOFT LTD. (2013) 39 TAXMANN.COM 88 (DELHI) . HOWEVER, ON THE OTHER HAND, LD. DR FOR THE REVENUE BY RELYING UPON THE ORDER PA SSED BY AO/DRP CONTENDED THAT SINCE 60% DEPRECIATION HAS AL READY BEEN GIVEN TO THE ASSESSEE, THE CONTENTION OF THE ASSESS EE IS NOT SUSTAINABLE. 57. ASSESSEE HAS BROUGHT ON RECORD THAT ASSESSEE HA S INCURRED AN AMOUNT OF RS.3,84,651/- FOR RUNNING THE LICENCE ONL Y AND ANNUAL MAINTENANCE CHARGES FOR OPERATING, TROUBLE SHOOTING OF THE SOFTWARE AND NOT FOR PURCHASE/ACQUISITION OF THE SOFTWARE AN D THE PERIOD FOR RUNNING OF THESE LICENCES / AMC WAS MOSTLY ONE YEAR OR LESS THAN ONE YEAR. 58. IN THE GIVEN CIRCUMSTANCES, WHEN THE AFORESAID FIXED LICENCES WERE RENTED FOR A LIMITED PERIOD ONLY WHICH IS LESS THAN ONE YEAR, NO ENDURING BENEFIT ACCRUES TO THE ASSESSEE NOR ANY OWNERSHIP RIGHT VESTS IN THE ASSESSEE. ISSUE IN CONTROVERSY HAS AL READY BEEN DEALT ITA NOS.1672/DEL./2014 33 WITH BY THE HONBLE JURISDICTIONAL HIGH COURT IN DIRECTOR OF INCOME-TAX VS. INFRASOFT LTD. (SUPRA), THE RATIO OF WHICH IS THAT :- WHAT IS TRANSFERRED IS NEITHER THE COPYRIGHT IN TH E SOFTWARE NOR THE USE OF THE COPYRIGHT IN SOFTWARE, BUT WHAT IS TRANSFERRED IS THE RIGHT TO USE THE COPYRIG HTED MATERIAL OR ARTICLE WHICH IS CLEARLY DISTINCT FROM THE RIGHT IN THE COPYRIGHT WHICH IS TOO FOR ONLY LIMITE D PERIOD. 59. SO, THESE EXPENSES, TO OUR MIND, ARE IN THE NAT URE OF REVENUE EXPENSES INCURRED FOR THE PURPOSE OF BUSINESS. MOR EOVER, ONE TIME EXPENDITURE TO PURCHASE TIME BASED SOFTWARE LICENSE S CANNOT BE DEFERRED AND AS SUCH, ARE REVENUE EXPENSES TO RUN T HE BUSINESS. SO, THE AO IS DIRECTED TO RE-EXAMINE THE ISSUE ACCORDIN GLY AND AS SUCH, THIS GROUND IS DETERMINED IN FAVOUR OF THE ASSESSEE . 60. ASSESSEE DEBITED AN AMOUNT OF RS.38,09,220/- IN HIS PROFIT & LOSS ACCOUNT ON ACCOUNT OF TRAINING EXPENSES AND CL AIMED THE SAME AS REVENUE EXPENDITURE. HOWEVER, AO BEING NOT SATI SFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE CAME TO THE CONCL USION THAT THESE EXPENSES HAVE BEEN INCURRED FOR PROVIDING VARIOUS T RAINING WHICH IS IN THE NATURE OF GIVING ENDURING BENEFIT TO THE ASSESSEE AND ITA NOS.1672/DEL./2014 34 TREATED THE SAME AS CAPITAL EXPENDITURE AND THEN AD DED TO THE INCOME OF THE ASSESSEE. 61. HOWEVER, LD. AR FOR THE ASSESSEE CONTENDED THAT THE PAYMENT OF TRAINING EXPENSES IS IN THE NATURE OF RE VENUE EXPENSES AND RELIED UPON THE DECISION RENDERED BY HONBLE HI GH COURT OF DELHI IN JUDGMENT CITED AS COMMISSIONER OF INCOME-TAX-II VS. MUNJAL SHOWA LTD. (2010) 329 ITR 449 (DELHI). 62. THE RATIO OF THE JUDGMENT IN CASE OF COMMISSIONER OF INCOME-TAX-II VS. MUNJAL SHOWA LTD. (SUPRA) RENDERED BY HONBLE DELHI HIGH COURT IS THAT :- WHEN THE TRAINING OF THE PERSONNEL OF THE ASSESSEE WAS IMPERATIVE TO RUN THE BUSINESS AND IS IN THE NATURE OF TECHNICAL SUPPORT TO THE ASSESSEE IT WILL CERTAINLY ENHANCE THE PROFIT OF THE COMPANY ON WHICH IT WILL PAY THE TAXES, SUCH EXPENDITURE CANNOT BE TREATED AS CA PITAL IN NATURE RATHER THEY ARE REVENUE IN NATURE. 63. WE ARE OF THE CONSIDERED VIEW THAT IN THE LIGHT OF THE JUDGMENT IN CASE OF COMMISSIONER OF INCOME-TAX-II VS. MUNJAL SHOWA LTD. (SUPRA), THE AO IS DIRECTED TO RE-EXAMINE THE ISSUE AFRESH AFTER PROVIDING AN OPPORTUNITY OF BEING HEAR D TO THE ASSESSEE. ITA NOS.1672/DEL./2014 35 GROUND NO.16 64. ASSESSEE CLAIMED DEPRECIATION ON GOODWILL AMOUN TING TO RS.1,38,93,062/- DURING THE COURSE OF ASSESSMENT PR OCEEDINGS BY RELYING UPON DECISIONS RENDERED BY HONBLE SUPREME COURT IN CASE OF SMIFS SECURITIES LTD. (TS-639-SC-2012) (SUPREME COURT) BUT THE AO REMAINED SILENT ON THIS ISSUE. 65. HOWEVER, DRP BY APPLYING THE DECISIONS RENDERED BY HONBLE SUPREME COURT IN GOETZE (INDIA) LTD. (2006) 284 ITR 323 (SC) REJECTED THE CLAIM OF THE ASSESSEE ON THE GROUND TH AT ASSESSEE DID NOT CLAIM SUCH DEPRECIATION ON GOODWIL L IN ITS RETURN OF INCOME. HOWEVER, IT HAS NOT BEEN DISPUTED BY BO TH THE LD. REPRESENTATIVES OF THE PARTIES THAT THE JUDGMENT CI TED AS GOETZE (INDIA) LTD. AS RELIED UPON BY DRP IS NOT APPLICABLE TO THE FACTS AND CIRCUMSTANCES OF THE CASE AND WHEN THE ISSUE HA S BEEN RAISED DURING ASSESSMENT PROCEEDINGS, THOUGH NO DEPRECIATI ON WAS CLAIMED IN THE RETURN OF INCOME, AO WAS DUTY BOUND TO DECIDE THIS ISSUE. SO, WE HEREBY RESTORE THIS GROUND TO THE AO TO DECIDE AFRESH AFTER PROVIDING AN OPPORTUNITY OF BEING HEARD TO TH E ASSESSEE. ACCORDINGLY, THIS GROUND IS DETERMINED IN FAVOUR OF THE ASSESSEE. ITA NOS.1672/DEL./2014 36 GROUND NO.17 66. GROUND NO.17 NEEDS NO ADJUDICATION AS THE SAME IS CONSEQUENTIAL IN NATURE. GROUND NO.18 67. GROUND NO.18 IS PREMATURE, HENCE NEEDS NO ADJUD ICATION. 68. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, THE PRESENT APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PU RPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 22 ND DAY OF FEBRUARY, 2017. SD/- SD/- (R.S. SYAL) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 22 ND DAY OF FEBRUARY, 2017 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.