DCIT, New Delhi V. M/s. Intuit Technology Services Ltd., Bangalore

ITA 1892/DEL/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 6762 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 3 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I1
• Next Hearing Date: 26-04-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 02-04-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: AMRENDRA KUMAR
• Keywords: Business income; Depreciation; Transfer pricing; International transaction; Working capital adjustments; Wholly owned subsidiary; Unabsorbed depreciation; Revenue expenditure; Capital expenditure
• Section: 92B; 37(1); 32; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I, NEW DELHI BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER I.T.A. NO.1892/DEL/2013 (ASSESSMENT YEAR 2008-09) DCIT, CIRCLE 11(1), VS. M/S. INTUIT TECHNOLOGY NEW DELHI. SERVICES LTD., 7 -8 FLOOR, CAMPUS 4A, PRI TECH PARK, (ESOSPACE), BALANDUR, BANGALORE-560103 (KTK) GIR / PAN :AABCI3011M (APPELLANT) (RESPONDENT) APPELLANT BY :SHRI S.P. SINGH, AR SHRI VISHNU GOEL, ADV. MS. SOMYA SETH, CA RESPONDENT BY :SHRI AMRENDRA KUMAR, CIT DR DATE OF HEARING: 26.04.2016 DATE OF PRONOUNCEMENT: 25.07.2016 ORDER PER BEENA A. PILLAI, JM: THIS APPEAL HAS BEEN PREFERRED BY THE REVENUE AGAINST THE ORDER DATED 12.02.2013 PASSED BY LD. CI T(A) XX, NEW DELHI FOR THE ASSESSMENT YEAR 2008-09. 2. THE BRIEF FACTS OF THE CASE ARE AS UNDER: 2.1 THE ASSESSEE FILED ITS RETURN OF INCOME DECLARI NG TOTAL INCOME OF RS.14,53,161/- ON 26.09.2008. THE CASE W AS SELECTED FOR SCRUTINY AND NOTICE U/S 143(2) WAS ISS UED TO THE ASSESSEE. IN RESPONSE THERETO, REPRESENTATIVES OF THE 2 I.T.A.NO.1892/DEL/2013 ASSESSEE ATTENDED THE PROCEEDINGS AND FURNISHED REQ UISITE DETAILS / INFORMATION SOUGHT BY THE ASSESSING OFFIC ER. 2.2 DURING THE ASSESSMENT PROCEEDING, LD. A.O. OBSERVED THAT THE ASSESSEE IS ENGAGED IN THE BUSINE SS OF RENDERING SOFTWARE DEVELOPMENT TO ITS ASSOCIATED ENTERPRISES (AE) I.E. INTUIT INC. USA. THE ASSESSE E COMPANY MAINLY PROVIDES SOFTWARE DEVELOPMENT SERVIC ES WHICH INCLUDE DESIGN, RESEARCH, DEVELOPMENT AND PRODUCTION OF SOFTWARE FOR F.Y. AND DELIVER THE SAM E TO ITS AE. THE ASSESSING OFFICER OBSERVED THAT THE ASSESS EE HAD ENTERED INTO INTERNATIONAL TRANSACTION DURING THE Y EAR UNDER CONSIDERATION AND REFERENCE WAS MADE TO THE T PO-I (2), NEW DELHI FOR DETERMINATION OF ARMS LENGTH PR ICE (ALP) OF SUCH TRANSACTION U/S 92CA(1) OF THE ACT AN D ACCORDINGLY, THE ASSESSEE FILED ALL NECESSARY DETAI LS IN TERMS OF SECTION 92B BEFORE THE LD. TPO. 2.3 LD. TPO OBSERVED THAT THE INTUIT TECHNOLOGY SER VICES LTD. (ASSESSEE) IS A WHOLLY OWNED SUBSIDIARY OF M /S. INTUIT INC. USA. THE ASSESSEE HAD STARTED ITS OPER ATION IN THE SINCE OCTOBER 2004 AND IS A SOFTWARE DEVELOPMEN T CENTRE TO PROVIDE SOFTWARE DEVELOPMENT SERVICES TO ITS AES. THE BUSINESS OF THE ASSESSEE IS TO PROVIDE APPLICAT ION DEVELOPMENT SERVICES TO THE INTUIT GROUP. DURING T HE FINANCIAL YEAR UNDER CONSIDERATION, THE ASSESSEE HA D ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIO NS AS PER 3CEB REPORT: S.N. NATURE OF THE INTERNATIONAL TRANSACTION AMOUNT IN RS. 3 I.T.A.NO.1892/DEL/2013 1 SOFTWARE DEVELOPMENT SERVICES 420,395,071 2 PROVISION OF SUPPORT SERVICES 3,219,059 3 EXPENSES REIMBURSED 8,901,641 2.5 THE ASSESSEE HAS USED ENTITY LEVEL TRANSITIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) FOR DETERMINING THE ALP. THE ASSESSEE ADOPTE D OPERATING PROFIT TO TOTAL COST (OP/TC) TO CALCULATE THE PROFIT LEVEL INDICATOR (PLI) FOR CALCULATING MARGINS OF TH E COMPARABLES. THE ASSESSEE HAD CALCULATED ITS MARGI N AT 14.86%. 2.6 THE LD. TPO REJECTED THE TRANSFER PRICING STUDY CONDUCTED BY THE ASSESSEE BECAUSE, THE ASSESSEE USE D MULTIPLE YEAR DATA FOR BENCHMARKING THE TRANSACTION AND FOR ELIMINATING COMPANIES BASED ON QUALITATIVE ANAL YSIS INSTEAD OF APPLYING QUANTITATIVE FILTERS. THE LD. T PO CONDUCTED INDEPENDENT SEARCH FOR THE COMPARABLES BY USING QUANTITATIVE FILTERS LIKE TURNOVER FILTER, SO FTWARE DEVELOPMENT SERVICE FILTER, EXPORT EARNING FILTER, DIFFERENT FINANCIAL YEAR FILTER, EMPLOYEE COST FILTER, DIMINI SHING REVENUE FILTER, PERSISTENT LOSS FILTER, RELATED PAR TY FILTER AND ONSITE REVENUE FILTER. FURTHER, THE LD. TPO REJECTE D THE ADDITIONAL FILTERS USED BY THE TAXPAYER LIKE R&D FI LTER. THE TPO ISSUED A DETAILED SHOW CAUSE NOTICE TO THE ASSE SSEE INDICATING THE REASONS FOR REJECTION OF TP DOCUMENT ATION AND THE SEARCH FOR APPROPRIATE COMPARABLES BASED ON DIFFERENT FILTERS. THE ASSESSEE RESPONDED TO THE SH OW CAUSE NOTICE BY MAKING A DETAILED SUBMISSION BEFORE HIM. THE 4 I.T.A.NO.1892/DEL/2013 LD. TPO CONSIDERED THE OBJECTIONS RAISED BY THE ASS ESSEE IN HIS ORDER. 2.7 THE DRAFT ORDER U/S 144C WAS PASSED AND SERVED UPON THE ASSESSEE. THE ASSESSEE VIDE HIS SUBMISSIO N DATED 25.01.2012, STATED TO FILE AN APPEAL BEFORE L D. CIT(A) U/S 246A OF THE ACT. ACCORDINGLY, LD. A.O. PASSED THE FINAL ASSESSMENT ORDER ON 22.02.2012 ON THE BAS IS OF THE ORDER PASSED BY LD. TPO. 2.8 AGGRIEVED BY THE ASSESSMENT ORDER PASSED BY THE A.O., THE ASSESSEE PREFERRED APPEAL BEFORE LD. CIT( A). BEFORE LD. CIT(A), IT WAS SUBMITTED THAT THERE IS N O DISPUTE IN RESPECT OF MAM ADOPTED, I.E. TNMM AND TH E ASSESSEE HAD AGREED UPON OP/OC TO BE THE PLI. THE LD. TPO AGREED FOR AN ENTITY LEVEL ANALYSIS THAT WAS CA RRIED OUT BY THE ASSESSEE IN TP STUDY. THE ONLY ISSUE TH AT WAS DISPUTED BY THE ASSESSEE WAS IN RESPECT OF THE COMPARABLES SELECTED BY THE TPO. 2.9 LD. TPO USED 19 NEW COMPARABLES AND REJECTED TH E ENTIRE TP STUDY IN RESPECT OF COMPARABLES SELECTED BY THE ASSESSEE. IT WAS CLAIMED BY THE ASSESSEE THAT THE MARGIN CALCULATED IN CASE OF A FEW COMPARABLES WERE NOT CO RRECT. THEREFORE, LD. CIT(A) REMANDED THE ISSUE AND ASKED THE LD. TPO TO CALCULATE THE SAME IN RESPECT OF THE COMPARABLES SELECTED BY THE ASSESSEE BEING; (I) SAS KEN COMMUNICATION TECHNOLOGIES LTD., (II) KALS INFORMAT ION SYSTEMS LTD. AND (III) SOFTSOL INDIA LTD. THE LD. TPO IN HIS REMAND REPORT DATED 08.10.2012 STATED THAT THE CALCULATION OF OP/OC OF THESE COMPANIES WERE 13.44% , 5 I.T.A.NO.1892/DEL/2013 41.94% AND 25.59% RESPECTIVELY. HE SUBMITTED THAT T HESE FIGURES ARE BEFORE THE WORKING CAPITAL ADJUSTMENTS. THE ASSESSEE DID NOT ACCEPT THE CALCULATION MADE BY THE LD. TPO IN THE REMAND REPORT IN THE CASE OF SASKEN COMMUNICATION TECHNOLOGIES LTD. KALS INFORMATION SYSTEM AND SOFTSOL INDIA LTD. THE ASSESSEE OBJECTED TO THE USE OF CELESTIAL BIOLABS AS A COMPARABLE IN THIS CA SE. THE THREE COMPARABLES HAVE BEEN DISCUSSED AND DECIDED B Y THE LD. CIT(A) IN PARAS 3.6 TO 3.7 OF HIS ORDER, W HICH ARE AS UNDER: 3.6 THE APPELLANT HAS STATED THAT THE TPO HAS USED SEGMENTAL INFORMATION IN THIS CASE. WHILE DRAWING T HE SEGMENTAL, AN AMOUNT OF RS.13,44,913/ - REMAINS UNALLOCATED WHEN THE SEGMENTAL ACCOUNTS ARE RECONCILED WITH THE PROFIT & LOSS ACCOUNT OF THE COMPANY. IT HAS TO BE STATED THAT THE APPELLANT CHALLENGED THIS COMPANY ON THE BASIS OF FUNCTIONS PERFORMED BY THIS COMPANY ALSO. THE ASSESSEE HAS ALSO POINTED OUT THAT IN THE AY 2009-10, THE TPO HIMSELF HAS REJECTED THIS COMPANY BECAUSE OF SEGMENTALS ARE NOT DRAWN CORRECTLY. HOWEVER, THE CORRECT CALCULATION OF MARGIN OF THE COMPANY IS GIV EN BELOW AFTER ALLOCATING THE UNALLOCATED EXPENSES ON THE RATIO OF REVENUE OF EACH SEGMENT. THE REVISED CALCULATION IS GIVEN IN THE TABLE-3 BELOW: KALS SEGMENTAL MARGIN CALCULATION ASSESSMENT YEAR 2007- 08: PARTICULARS SOFTWARE SEGMENT TRAINING SEGMENT TOTAL REFERENCE SEGMENT REVENUE A 20,540,68 1,441,904 21,982,589 PAGE 19 OF THE ANNUAL REPORT SEGMENT PROFIT B 6,069,175 (1,568,659) 4,500,516 PAGE 19 OF THE ANNUAL REPORT TOTAL SEGMENTAL COST C=A-B 14,471,510 3,010,563 17,482,073 SEGMENT REVENUE LESS 6 I.T.A.NO.1892/DEL/2013 SEGMENT EXPENSES ADD UNALLOCATED COST D 1,256,696 88,217 1,344,913 TOTAL COST E=C+D 15,728,206 3,098,780 18,826,986 REVISED F=A-E 4,812,479 (1,656,876) 3,155,603 OP/OC% G=F/E 30.60% -53.47% 16.767% TOTAL COST AS PER P & L AFTER EXCLUDING INTEREST ON CAR LOAN A 18,826,986 PAGE 14 AND 17 OF ANNUAL REPORT TOTAL COST AS PER SEGMENTAL ACCOUNTS B 17,482,073 PLEASE SEE ABOVE REMAINING COST NOT CALCULATED TO SEGMENTAL ACCOUNTS C=A- B 1,344,913 ALLOCATED IN THE PROPORTION OF REVENUE D=E4- G4 1,256,696 3.7 THE APPELLANT HAD ALSO SUBMITTED THAT DISPUTE RESOLUTION PANEL (DRP), IN MANY CASES, HAS TAKEN TH E MARGIN OF THIS COMPANY AT 30.92%. IN VIEW OF THE ABOVE, I HOLD THAT THE MARGIN OF THIS COMPANY SHOUL D BE TAKEN AT 30.92% . 3.8 SOFTSOL INDIA LTD.: THE APPELLANT HAD OBJECTED TO THE CALCULATION OF TH E MARGIN M THIS CASE BECAUSE OF THE OTHER INCOME WHIC H CONSTITUTES THE RENTAL INCOME. THE TPO IN HIS REMAN D REPORT HAS CONSIDERED THIS AND RECALCULATED THE MARGIN AT 25.59% AS AGAINST 42.15% IN THE TP ORDER. I HAVE EXAMINED THE ISSUE AND HOLD THAT THE CALCULATI ON AS CORRECTED BY THE TPO SHOULD BE TAKEN IN THIS CAS E. 2.10 IN CASE OF THE COMPARABLES SELECTED BY THE TPO BEING CELESTIAL BIOLABS, LD. CIT(A) UPHELD THE OBJECTION S RAISED BY THE ASSESSEE AND REJECTED THIS COMPANY FROM THE FINAL SET OF COMPARABLES. 2.11 THE ASSESSEE HAD RAISED ISSUE REGARDING DISALLOWANCE OF REGISTRATION FEE AND STAMP DUTY EXP ENSES OF THE LEASE DEED BEFORE LD. CIT(A). LD. CIT(A) RE LIED UPON THE DECISION OF VARIOUS HIGH COURTS MORE PARTICULAR LY, LIST 7 I.T.A.NO.1892/DEL/2013 IN PARA 4.4 OF HIS ORDER AND HELD THAT THE EXPENDIT URE SHOULD BE TREATED AS REVENUE IN NATURE AND SHOULD B E ALLOWED AS DEDUCTION U/S 37(1) OF THE ACT. 3. AGGRIEVED BY THE ORDER OF LD. CIT(A), THE REVENU E IS IN APPEAL BEFORE US NOW ON THE FOLLOWING GROUNDS OF APPEAL: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING ADDITI ON OF RS.3,39,43,014/- MADE ON ACCOUNT OF ALP BY THE TPO. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) HAS ERRED IN DELETING ADDITIO N OF RS.23,54,580/- MADE ON ACCOUNT OF REGISTRATION FEES AN STAMP DUTY EXPENSE FOR LEASE DEED. 3.1 IN RESPECT OF GROUND NO.1, RAISED, THE ONLY ISS UE FOR CONSIDERATION IS RELATING TO THE MARGIN UPHELD BY T HE LD. CIT(A) IN RESPECT OF COMPARABLES WHICH ARE AS UNDER : COMPARABLES SELECTED BY THE ASSESSEE: I) KALS INFORMATION SYSTEM II) SASKEN COMMUNICATION TECHNOLOGIES LTD. III) SOFTSOL INDIA LTD. 3.2 BASICALLY, THE ASSESSEE IS DISPUTING THE INCORR ECT MARGINS TAKEN BY THE LD. TPO IN THESE COMPARABLES A ND THUS, LD. TPO HAS NOT CONSIDERED THE WORKING CAPITA L ADJUSTMENT IN RESPECT OF THESE COMPARABLES. APART F ROM THESE, LD. CIT(A) HAD EXCLUDED THE NEW COMPARABLES WHICH WAS CELESTIAL BIOLABS, AS THIS COMPARABLE HAS BEEN REJECTED BY THE DRP IN MANY CASES. BEFORE DEALING WITH THESE COMPARABLES, IT IS NECESSARY SINE QUA NON TO DISCUSS THE FUNCTIONAL PROFILE OF THE ASSESSEE. 8 I.T.A.NO.1892/DEL/2013 3.3 FROM THE TP STUDY, IT IS OBSERVED THAT THE ASSE SSEE IS A WHOLLY OWNED SUBSIDIARY OF INTUITE INC. USA (AE). THE ASSESSEE STARTED ITS OPERATION IN OCT. 2004, AND IT S ROLE WAS TO MANAGE THE PARENT RELATIONSHIP WITH THE 3 RD PARTIES CALL CENTERS LOCATED IN INDIA. THE MAIN BUSINESS O F THE ASSESSEE IS TO PROVIDE APPLICATION DEVELOPMENT SERV ICES TO THE INTUITE GROUP. 3.4 PROFILE OF THE GROUP: THE INTUIT GROUP, FOUNDED IN 1983, HAS NEARLY 8,200 EMPLOYEES WITH MAJOR OFFICES IN 16 STATES ACROSS TH E U.S., AND OFFICES IN CANADA. IT IS A LEADING PROVIDER OF BUSINESS AND FINANCIAL MANAGEMENT SOLUTIONS FOR SMALL BUSINE SSES, ACCOUNTING PROFESSIONALS AND CONSUMERS PRIMARILY IN THE USA. IT OFFERS FINANCIAL SOFTWARE AND WEB-BASED FIN ANCIAL SERVICES FOR CONSUMERS AND SMALL BUSINESSES. INTUIT PROVIDES SOFTWARE FOR ONLINE TAX PREPARATION AND FI LING AND ONLINE MORTGAGES. INTUIT ALSO OFFERS A BROAD ARRAY OF TOOLS TO HELP BUSINESSES PROCESS PAYROLL, MANAGE EMPLOYEES, ADMINISTER BENEFIT PROGRAMS AND OFFER RETIREMENT PL ANS. ITS FLAGSHIP PRODUCTS AND SERVICES, SUCH AS QUICK B OOKS, TURBOTAX, PROSERIES ETC SIMPLIFY SMALL BUSINESS MANAGEMENT, TAX PREPARATION AND FILING, AND PERSONA L FINANCE. INTUIT CONTINUES TO EXPAND ITS TAX PREPARATION OFFERINGS, PROVIDING POWERFUL AND EASY-TO-USE PRODU CTS AND SERVICES TO TAXPAYERS AND ACCOUNTING PROFESSION ALS. FOR INDIVIDUAL TAXPAYERS, INTUIT OFFERS TURBOTAX S OFTWARE 9 I.T.A.NO.1892/DEL/2013 AND TURBOTAX FOR THE WEBSM, FOR ONLINE TAX PREPARAT ION AND FILING SERVICE. 3.5 THE ASSESSEE RECEIVED COST + REMUNERATION FOR M INTUITE GROUP IN LIEU OF SERVICES RENDERED AS PER T HE AGREEMENT ENTERED WITH THE AE. THE ASSESSEE OPERAT ES AS CAPITAL SERVICE PROVIDER AND IS NOT EXPOSED TO MARK ET COMPETITION. THE ASSESSEE, DURING THE YEAR UNDER CONSIDERATION HAD TRANSACTED WITH INTUITE INC. USA AND INTUITE CANADA LTD. FOR PROVIDING BUSINESS AND FINA NCIAL MANAGEMENT SOLUTION FOR SMALL BUSINESS, ACCOUNTING PROFESSIONAL AND CONSUMERS. THE ASSESSEE, BASED ON DETAILED SPECIFICATIONS FOR ITS AE PROVIDE APPLICAT ION DEVELOPMENT SERVICES WHICH INCLUDES I) DEVELOPMENT OF NEW VERSION; II) ENHANCEMENT AND REALIZE AES SUSTE NANCE PRODUCT; III) DEVELOPMENT OF NEW PRODUCTS; IV) TECH NICAL CONSULTANCY OF AE; V) DEBUGGING; VI) BRIDGING GAP A ND VII) RECTIFYING ERRORS AND REMOVE DEFECTS. 3.6 THUS, THE ASSESSEE IS A TECHNOLOGY DIVERSION COMPANY, PROVIDING APPLICATION DEVELOPMENT AND SUPP ORT SERVICES. THE SALE AND PROFITABILITY GROWTH OF THE ASSESSEE DEPENDS UPON DEMAND OF IT INDUSTRY. IT IS FURTHER OBSERVED FROM THE TP STUDY THAT ASSESSEE DOES NOT F ACE UPON RISK IN RESPECT OF CREDIT / MARKETING OF THE P RODUCTS. SINCE IT RECEIVES THE PAYMENTS IN US$, IT BEAR THE RISK AND IT INVOLVES IN EMPLOYMENT OF QUALIFIED PERSONNEL AS WELL AS ASSESSEE IS EXPOSED TO EMPLOYEE RISK. THERE IS NO INTANGIBLE ASSETS WHICH IS OWNED BY THE ASSESSEE EX CEPT FOR COMPUTER SOFTWARE WORTH RS.84,56,451/-. THUS, 10 I.T.A.NO.1892/DEL/2013 ASSESSEE IS A LOW RISK BEARING COMPANY IN RESPECT F INTERNATIONAL TRANSACTION ENTERED INTO WITH ITS AES . 3.7 ON THE BASIS OF ABOVE FUNCTIONAL PROFILE OF THE ASSESSEE, WE SHALL NOW DISCUSS THE COMPARABLE DISPU TED BY THE REVENUE DUE TO ITS EXCLUSION. THESE COMPARAB LES WERE SELECTED BY THE TPO TO BE INCLUDED IN THE FINA L LIST OF COMPARABLES. BEFORE THE LD. TPO, THE ASSESSEE HAD OBJECTED TO THE INCLUSION OF THIS COMPARABLE FOR TH E REASON THAT IT IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE . THE LD. TPO HOWEVER, BRUSHED ASIDE THE OBJECTIONS RAISED BY THE ASSESSEE BY STATING THAT THE OBJECTIONS OF FUNCTION AL DISSIMILARITY HAS BEEN DEALT WITH IN DETAIL IN THE T.P. ORDER FOR ASSESSMENT YEAR 2007-08. AS REGARDS THE OBJECTI ON RAISED IN RESPECT OF THE EMPLOYEE COST FILTER ISSUE , THE TPO LD. REJECTED THE OBJECTIONS RAISED BY ASSESSEE BY O BSERVING THAT THE EMPLOYEE COST FILTER IS ONLY A TRIGGER TO KNOW THE FUNCTIONALITY OF THE COMPANY. 4. BEFORE US, THE LD. A.R. CONTENDED THAT THIS COMP ANY IS NOT FUNCTIONALLY COMPARABLE, AS THE COMPANY IS INTO BIO-INFORMATICS SOFTWARE PRODUCT / SERVICES AND THE SEGMENTAL BREAK UP IS NOT PROVIDED. IT WAS SUBMITTE D THAT :- (I) THIS COMPANY IS ENGAGED IN THE DEVELOPMENT OF PRODUCTS (IN THE FIELD OF BIO-TECHNOLOGY, PHARMACEU TICALS, ETC. AND THEREFORE, IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE 11 I.T.A.NO.1892/DEL/2013 (II) THIS COMPANY HAS BEEN HELD TO BE FUNCTIONALLY INCOMPARABLE TO SOFTWARE SERVICE PROVIDERS BY THE D ECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN FOLLOW ING CASES FOR ASSESSMENT YEAR 2007-08: (A) 3DPLM SOFTWARE SOLUTIONS LTD. (SUCCESSOR OF DELMIA SOLUTIONS PRIVATE LTD.) IT (TP) A NO.1303/BANG/2012 (B) M/S. AT&T GLOBAL BUSINESS SERVICES INDIA PVT. LTD. IT(TP)A NO.1604/BANG/2012 (C) INTERWOVEN SOFTWARE SERVICES INDIA (P) LTD. IT (T) A NO.1669/BANG/2012 (D) MERCEDES-BENZ RESEARCH & DEVELOPMENT INDIA PVT. LTD. IT (TP)A NO.1336/BANG/2012. (E) LG SOFT INDIA PVT. LTD. IN I.T.A.NO. 112/BANG/2011 (F) CSR INDIA PVT. LTD. IN IT(TP)A NO.1119/BANG/2011 (G) TRANSWITCH INDIA PVT. LTD. IN I.T.A.NO. 6083/DEL/2010. (III) A CO-ORDINATE BENCH OF THIS TRIBUNAL IN ITS ORDER IN THE CASE OF TRIOLOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. IN I.T.A.NO. 1054/BANG/2011 HAS HAD OBSERVED ABOUT THI S COMPANY AS UNDER: .AS EXPLAINED EARLIER, IT IS A DIVERSIFIED COMPAN Y AND THEREFORE, CANNOT BE CONSIDERED AS COMPARABLE FUNCTIONALLY WITH THE ASSESSEE. THERE HAS BEEN NO ATTEMPT TO IDENTIFY, ELIMINATE AND MAKE ADJUSTMENT OF THE PROFIT MARGINS SO THAT THE DIFFERENCE IN FUNCTI ONAL COMPARABILITY CAN BE ELIMINATED. BY NOT RESORTING TO SUCH A PROCESS OF MAKING ADJUSTMENTS, THE TPO HAS RENDERED THIS COMPANY AS NOT QUALIFYING FOR COMPARABILITY. WE, THEREFORE, ACCEPT THE PLEA OF T HE ASSESSEE IN THIS REGARD. (IV) LD. A.R. SUBMITTED THAT THE FACTS PERTAINING TO THIS COMPANY HAS NOT CHANGED FROM ASSESSMENT YEAR 2007-0 8 TO ASSTT YEAR 2OO8-09 AND THEREFORE THIS COMPANY CA NNOT 12 I.T.A.NO.1892/DEL/2013 BE CONSIDERED FOR THE PURPOSE OF COMPARABILITY IN T HE INSTANT CASE AND HENCE OUGHT TO BE REJECTED. 5. ON THE CONTRARY, THE LD. D.R. SUPPORTED THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLE COMPANIES. LD. D.R. SUBMITTED THAT THE DECISIONS C ITED AND RELIED ON BY THE ASSESSEE ARE FOR ASSESSMENT YE AR 2007-08 AND THEREFORE THERE CANNOT BE AN ASSUMPTION THAT IT WOULD CONTINUE TO BE APPLICABLE FOR THE PER IOD UNDER CONSIDERATION I.E. ASSESSMENT YEAR 2008-09. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD, WHILE IT IS TRUE THAT THE DECISIONS CITED AND RELIED ON BY THE LD. A.R. WERE WITH RESPECT TO THE IMMEDIATELY PREVIOUS ASSES SMENT YEAR AND THERE CANNOT BE ON ASSUMPTION THAT IT WOUL D CONTINUE TO BE APPLICABLE FOR THIS YEAR AS WELL. T HE SAME PARITY OF REASONING IS APPLICABLE TO THE LD. TPO WH O SEEMS TO HAVE SELECTED THIS COMPANY AS A COMPARABLE BASED ON THE REASONING GIVEN IN THE TPOS ORDER FOR THE EARL IER ASSESSMENT YEAR IN ASSESSEES OWN CASE. IT IS EVID ENTLY CLEAR THAT THE LD. TPO HAS NOT CARRIED OUT ANY INDEPENDENT FAR ANALYSIS FOR THIS COMPANY FOR THIS YEAR VIZ. ASSESSMENT YEAR 2008-09. TO THAT EXTENT, IN O UR CONSIDERED VIEW, THE SELECTION PROCESS ADOPTED BY T HE LD. TPO FOR INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES IS DEFECTIVE AND SUFFERS FROM INFIRMITY . 13 I.T.A.NO.1892/DEL/2013 6.1 APART FROM RELYING ON THE AFORE CITED JUDICIAL DECISIONS, THE ASSESSEE HAS BROUGHT ON RECORD SUBST ANTIAL FACTUAL EVIDENCE TO ESTABLISH THAT THIS COMPANY IS FUNCTIONALLY DISSIMILAR AND DIFFERENT FROM THE ASSE SSEE BEFORE US. EVEN THE LD. CIT(A) HAS DISCUSSED AT PA RA 3.8.2 6.2 WE DO NOT FIND ANY INFIRMITY IN THE FINDINGS OF LD. CIT(A). WE THUS DIRECT THE LD. TPO TO EXCLUDE THIS COMPARABLE FORM THE LIST OF COMPARABLES. 6.3 IN RESPECT OF THE MARGINS CALCULATED IN RESPECT OF SASKEN COMMUNICATION TECHNOLOGIES LTD., KALAS INFORMATION SYSTEMS LTD. AND SOFTSOL INDIA LTD., TH E LD. CIT(A) HAD DIRECTED TO GRANT WORKING CAPITAL ADJUST MENTS. IN THE REMAND REPORT, THE LD. A.O. DID NOT FOLLOW T HE DIRECTIONS OF LD. CIT(A). 6.4 LD. CIT(A) THUS ACCEPTED THE MARGINS SUBMITTED BY THE ASSESSEE, WHICH IS IN ACCORDANCE WITH THE MARGI NS CONSIDERED BY DRP IN MANY CASES. 6.5 WE HAVE PERUSED THE SUBMISSIONS ADVANCED BY BOT H THE PARTIES. WHEN THE ASSESSEE HAS BROUGHT FORWARD BUSINESS LOSSES AS WELL AS UNABSORBED DEPRECIATION, THE ACT SPECIFIES A SEQUENCE IN WHICH THESE ALLOWANCES SHALL BE SET OFF. THE RELEVANT PROVISIONS OF THE ACT ARE AS UNDER: SECTION 32 (2): WHERE IN THE ASSESSMENT OF THE ASSESSEE, FULL EFFEC T CANNOT BE GIVEN TO ANY ELEMENTS UNDER SUBSECTION (1) IN ANY 14 I.T.A.NO.1892/DEL/2013 PREVIOUS YEAR, OWING TO THERE BEING NO PROFITS OR G AINS CHARGEABLE FOR THE PREVIOUS YEAR, OR OWING TO THE P ROFITS OR GAINS CHARGEABLE BEING LESS THAN THE ELEMENTS, THEN , SUBJECT TO THE PROVISIONS OF SUBSECTION (2) OF SECT ION 72 AND SECTION (3) OF SECTION 73, THE ALLOWANCE OR THE PAR T OF THE ELEMENTS TO WHICH EFFECT HAS NOT BEEN GIVEN, AS THE CASE MAY BE, SHALL BE ADDED TO THE AMOUNT OF THE ALLOWAN CE OF DEPRECIATION FOR THE FOLLOWING PREVIOUS YEAR AND DE EMED TO BE PART OF THAT ELEMENTS, OR IF THERE IS NO SUCH RE LEVANCE FOR THAT PREVIOUS YEAR, OR DEEMED TO BE THE ALLOWANCE F OR THAT PREVIOUS YEAR, AND SO ON FOR THE SUCCEEDING PREVIOU S YEARS. SECTION 72 (2) : WHERE ANY ALLOWANCE OR PART THEREOF, UNDER SUBSECTI ON OF SUBSECTION (2) OF SECTION 32 OR SUBSECTION (4) OF S ECTION 35, TO BE CARRIED FORWARD, EFFECT SHALL FIRST BE GIVEN TO THE PROVISIONS OF THIS SECTION. 6.6 A COMBINED READING OF THE ABOVE SECTIONS IT IS CLEAR THAT WHILE COMPUTING TOTAL INCOME OF AN ASSESSEE, C ARRY FORWARD UNABSORBED DEPRECIATION CAN BE SET OFF IN F UTURE YEARS ONLY AFTER SETTING OFF THE BROUGHT FORWARD BU SINESS LOSSES. FURTHER THE PROVISION IS CLEAR THAT CARRY F ORWARD UNABSORBED DEPRECIATION CAN BE SET OFF NOT ONLY AGA INST INCOME FROM PROFITS AND GAINS FROM BUSINESS AND PROFESSION, BUT ALSO AGAINST INCOME FROM ANY OTHER HEAD INCLUDING INCOME FROM OTHER SOURCES. 15 I.T.A.NO.1892/DEL/2013 6.7 IN THE PRESENT CASE BEFORE US THE ASSESSEE HAS BROUGHT FORWARD BUSINESS LOSSES AS WELL AS UNOBSERV ED DEPRECIATION. THE ACT SPECIFIES THE SEQUENCE IN WHI CH THESE ALLOWANCES CAN BE SET OFF. SECTION 72 (3) IMP LIES THAT, THE SET OFF OF UNOBSERVED DEPRECIATION AS PER SECTION 32 (2) AGAINST BUSINESS INCOME SHALL BE GIVEN EFFEC T TO ONLY AFTER SETTING OFF THE BROUGHT FORWARD BUSINESS LOSS ES. FROM THE CALCULATION MADE BY THE LD.AO, IT IS OBSERVED T HAT THE LD.AO HAS ADJUSTED THE AMOUNT OF UNOBSERVED DEPRECIATION FROM THE BUSINESS INCOME BEFORE MAKING ADJUSTMENT FOR BROUGHT FORWARD BUSINESS LOSSES. THE CIRCULAR RELIED UPON BY THE LD.AR IS NOT APPLICABLE TO THE PRESENT CASE UNDER CONSIDERATION AS IT IS APPLICABL E WHERE THE SET OFF EACH TO BE MADE AGAINST THE PROFITS OF A STP/EOU/SEZ UNIT, BEFORE THE DEDUCTION UNDER SECTIO N 10 A/10 B OF THE INCOME TAX ACT IS ALLOWED. 6.8 WE ACCORDINGLY DIRECT THE LD.AO TO ALLOW THE SE T OFF AS PER LAW. ACCORDINGLY THIS GROUND RAISED BY THE A SSESSEE STANDS ALLOWED. GROUND NO. 2 : 7. THE ASSESSEE IN ITS RETURN OF INCOME HAD CLAIMED DEDUCTION OF RENT AND RATES EXPENSES OF RS.13,,42,8 41 /- UNDER SECTION 37 (1) OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE LD. AO CALLED FOR THE DE TAILS 16 I.T.A.NO.1892/DEL/2013 OF THE RATES AND TAXES EXPENDED AS DEBITED IN THE P &L ACCOUNT. THE ASSESSEE FURNISHED THE REQUISITE DETAI LS WIDE LETTER DATED 21 ST OF DECEMBER 2011. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE STAMP DUTY AND REGISTRATION EXPENSES OF THE LEASE DEED SHOULD NOT BE CAPITALISED. THE ASSESSEE RELIED UPON VARIOUS JUDIC IAL PRONOUNCEMENTS IN SUPPORT OF ITS CONTENTION THAT TH E EXPENSES INCURRED TOWARDS STAMP DUTY AND REGISTRATI ON OF THE LEASE DEED EAST TO BE CONSIDERED AS REVENUE EXPENDITURE. 7.1 THE LD. AO DISAGREEING WITH THE SUBMISSIONS MAD E BY THE ASSESSEE HELD THAT SINCE THE PREMISES WERE T AKEN ON LEASE FOR 6 TO 9 YEARS WHICH WILL GIVE ENDURING BENEFITS TO THE ASSESSEE IS THE EXPENSES INCURRED TOWARDS ST AMP DUTY AND REGISTRATION CANNOT BE ALLOWED AS REVENUE EXPENDITURE. THE LD. AO HELD THAT SUCH EXPENDITURE HAVE TO BE CAPITALISED WITH THE BLOCK OF ASSETS ON WHICH THE ASSESSEE IS ENTITLED FOR DEPRECIATION OF 10%. ACCOR DINGLY THE LD. AO ALLOW DEPRECIATION AT THE RATE OF 10% AN D DISALLOWED THE BALANCE AMOUNT OF RS.23,54,580/-. 7.2 AGGRIEVED BY THE ASSESSMENT ORDER THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT (A). THE LD. CIT (A) AFTER CONSIDERING THE SUBMISSIONS AND THE JUDICIAL DECISIONS RELIED UPON BY THE ASSESSEE ALLOWED THE C LAIM OF CLAIM OF EXPENSES INCURRED BY THE ASSESSEE BY WAY O F STAMP DUTY AND REGISTRATION CHARGES ON THE LEASE DE ED TO BE REVENUE IN NATURE. 17 I.T.A.NO.1892/DEL/2013 7.3 AGGRIEVED BY THE ORDER OF THE LD. CIT (A) THE R EVENUE IS IN APPEAL BEFORE US NOW. 7.4 THE LD. DR PLACED HIS RELIANCE UPON THE ORDER P ASSED BY THE LD.AO AND LD.AR PLACED IS RELIANCE UPON THE ORDER PASSED BY THE LD. CIT (A). 7.5 WE HAVE PERUSED THE ORDERS PASSED BY THE AUTHORITIES BELOW AND THE JUDGMENTS RELIED UPON BY THE LD. CIT (A). SECTION 37 (1) OF THE ACT, DEDUCTION IS ALLOWABLE IN RESPECT OF ANY EXPENDITURE NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASS ESSEE, LAID OUT ON EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS OR PROFESSION OF THE ASSESSEE. IT IS OBSERVED THAT THE LD. CIT (A) HAS PLACED HIS RELIAN CE UPON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CAS E OF CIT VS. CINCETIA PVT. LTD REPORTED IN 137 ITR 652, WHICH HAS BEEN FOLLOWED SUBSEQUENTLY BY HONBLE MADRAS HIG H COURT IN THE CASE OF SHREE KRISHNA TILES AND POTTER IES MADRAS PVT. LTD. VS. CIT REPORTED IN 173 ITR 311. HONBLE MADRAS HIGH COURT IN SRIKRISHNA TILES (SUPRA), HAS DISAGREED WITH THE DECISION OF HONBLE KARNATAKA HI GH COURT IN THE CASE OF HOTEL RAJ MAHAL VS. CIT REPORT ED IN 152 ITR 218. IT HAS BEEN HELD BY HONBLE MADRAS HIG H COURT THAT HONBLE KARNATAKA HIGH COURT WHILE DEALI NG THE ISSUE HAS REALLY NOT DISCUSS THE MATTER IN DETA IL BUT HELD THAT WENT FOR THE 1 ST TIME THE ASSESSEE ENTERS INTO A LEASE DEED SECURING LEASE HOLDING RIGHTS FOR A LONG PERIOD, THE EXPENDITURE INCURRED ON STAMP DUTY, REGISTRATIO N AND 18 I.T.A.NO.1892/DEL/2013 LEGAL FEES ETC SHOULD BE TREATED AS EXPENDITURE OF CAPITAL NATURE. THE HONBLE BOMBAY HIGH COURT AND HONBLE MADRAS HIGH COURT HAS HELD THAT: . THE PERIOD OF THE LEASE COULD NOT BE REGARDED A S DECISIVE OF THE CIRCUMSTANCES AS TO WHETHER THE ASS ET OR ADVANTAGE SECURED WAS AN ENDURING NATURE. 7.6 WHILE HOLDING SO HONBLE BOMBAY HIGH COURT PLA CED ITS RELIANCE ON CIT VS. HOECHST PHARMACEUTICALS LTD REPORTED IN 113 ITR 877 AND CIT VS. BOMBAY CYCLE & MOTOR AGENCY LTD., REPORTED IN 118 ITR 42. 7.7 RESPECTFULLY FOLLOWING THE AFORE STATED DECISIO NS OF HONBLE HIGH COURTS, WE ARE OF THE CONSIDERED OPINI ON THAT THE LD. CIT (A) WAS RIGHT IN ALLOWING THE CLAI M OF THE ASSESSEE TO TREAT THE STAMP DUTY AND REGISTRATION EXPENSES AS REVENUE EXPENDITURE. 7.8 ACCORDINGLY THE GROUND NO. 2 RAISED BY THE REVE NUE STANDS DISMISSED. 8. IN THE RESULT APPEAL FILED BY THE REVENUE STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH JULY, 2016 SD./- SD./- (PRAMOD KUMAR) (BEENA A. PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATE:25.07.2016 SP. 19 I.T.A.NO.1892/DEL/2013 COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT (A)-, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DELHI. TRUE COPY. BY ORDER (ITAT, NEW DELHI) S.NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON SR. PS/PS 2 DRAFT PLACED BEFORE AUTHOR SR. PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/AM 5 APPROVED DRAFT COMES TO THE SR. PS/PS 25/7/16 SR. PS/PS 6 KEPT FOR PRONOUNCEMENT 25/7 SR. PS/PS 7 FILE SENT TO BENCH CLERK 26/7 SR. PS/PS 8 DATE ON WHICH THE FILE GOES TO HEAD CLERK 9 DATE ON WHICH FILE GOES TO A.R. 10 DATE OF DISPATCH OF ORDER