Appeal Details
Counselvise Citation
[2015] 140 COUNSELVISE.COM (IT) 97185 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
7 year(s) 3 month(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
09-09-2015
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
I1
Next Hearing Date
09-07-2015
Assessment Year
2003-2004
Appeal Filed On
09-06-2008
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I NEW DELHI BEFORE SHRI S.V. MEHROTRA: ACCOUNTANT MEMBER AND SHRI C.M. GARG: JUDICIAL MEMBER ITA NO. 2297 & 2298/DEL/2008 ASSTT. YR: 2003-04 & 2004-05 ALCATEL-LUCENT TECHNOLOGIES VS. DCIT CIRCLE 4(1), (FORMERLY LUCENT TECHNOLOGIES NEW DELHI. INDIA PVT. LTD.,), NEW DELHI. PAN: AAACA5745 K ITA NO. 2244 & 2245/DEL/2008 ASSTT. YR: 2003-04 & 2004-05 DCIT CIRCLE 4(1), VS. ALCATEL-LUCENT TECHNOLOGIE S NEW DELHI. NEW DELHI. ( APPELLANT ) (RESPONDENT) ASSESSEE BY : SHRI HIMANSHU SHEKAR SINHA ADV. REVENUE BY : SHRI PARVINDER KAUR SR. DR DATE OF HEARING : 09/07/2015. DATE OF ORDER : 09/09/2015. O R D E R PER S.V. MEHROTRA , A.M: THESE ARE CROSS APPEALS, PREFERRED BY THE ASSESSEE AS WELL AS THE REVENUE AGAINST SEPARATE ORDERS, BOTH DATED 31-3-2008, PA SSED BY THE LD. CIT(APPEALS)- XX, NEW DELHI IN APPEAL NOS. 98/2007-08 & 152/2007- 08, RELATING TO ASSESSMENT YEARS 2003-04 & 2004-05, RESPECTIVELY. ALL THESE AP PEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLIDATED ORDER, F OR THE SAKE OF CONVENIENCE. ITA NO. 2297/DEL/08 (ASSESSEES APPEAL FOR AY 2003- 04) : FOLLOWING GROUNDS ARE RAISED: 2 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE ORDERS PASSED BY THE LD. DEPUTY COMMISSIONER OF INCOME-TAX ('LD. AO') AND THE LD. COMMISSIONER OF INCOME TAX (APPEALS) [CIT(A)]. ARE BAD IN LAW AND VOID AB- INITIO. 2. THAT THE LD. CIT(A) GROSSLY ERRED ON FACTS AND I N LAW BY CONCLUDING THAT THE REFERENCE MADE BY THE LD. AO TO THE LD. TRANSFER PRICING OFFICER (LD. TPO), UNDE R SECTION 92CA(3) OF THE INCOME TAX ACT, 1961 ('ACT') WAS VALIDLY MADE. THE LD. CIT(A) COMPLETELY FAILED TO APPRECIATE THAT THE L.D. AO HAD NOT RECORDED ANY REASONS UNDER SECTION 92CA OF THE ACT WHICH MADE IT EXPEDIENT AND NECESSARY FOR HIM TO MAKE A REFERENCE UNDER THAT PROVISION. 3. THAT THE LD. CIT(A) GROSSLY ERRED ON FACTS AND I N LAW IN CONFIRMING AN ADJUSTMENT OF RS 11,00,92,376 OUT OF THE TOTAL ADJUSTMENT OF RS 11,26,75,000 MADE BY THE LD. TRANSFER PRICING OFFICER (TPO) TO THE ARM'S LENGTH PRICE ON PROVIDING OF SOFTWARE SERVICES AND OTHER SERVICES DECLARED BY THE APPELLANT IN RESPECT OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY IT W ITH OVERSEAS ASSOCIATED ENTERPRISES (AES). 4. THAT THE LD. CIT(A) GROSSLY ERRED ON FACTS AND IN LAW IN: (A) REJECTING THE 'TNMM' ANALYSIS UNDERTAKEN BY THE APPELLANT USING MULTIPLE YEAR DATA TO SUBSTANTI ATE THAT ITS INTERNATIONAL TRANSACTIONS WITH ITS AES AR E AT ARM'S LENGTH, AND IN INAPPROPRIATELY USING DATA/ INFORMATION NOT AVAILABLE AT THE TIME OF DOCUMENTATION; (B) REJECTING THE FINAL SET OF COMPANIES SELECTED BY THE APPELLANT AS COMPARABLES WITHOUT HAVING MATERIAL INFORMATION IN POSSESSION TO PROVE THAT THE ANALYSI S 3 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT UNDERTAKEN BY THE APPELLANT IS INCORRECT AND HENCE WARRANTS A FRESH DETERMINATION OF THE ARM'S LENGTH PRICE BY THE LD. TPO; (C) RESORTING TO ARBITRARY REJECTION OF CERTAIN CO MPANIES SELECTED BY THE APPELLANT AS COM PARABLES ON ERRONEOUS AND INCONSISTENT REASONS; (D) RESORTING TO ARBITRARY ADDITION OF CERTAIN COM PANIES AS COMPARABLES, WITHOUT UNDERTAKING A DETAILED STEP - BY-STEP SCIENTIFIC SEARCH, AND FURTHER, WITHOUT APPRECIATING THE FACT THAT THOSE COMPANIES WERE NOT ONLY FUNCTIONALLY INCOMPARABLE BUT SOME WERE ALSO CHARACTERIZED BY PRESENCE OF RELATED PARTY TRANSACTIONS; (E) FAILING TO APPRECIATE THAT THE APPELLANT (BEIN G A CAPTIVE SERVICE PROVIDER) OPERATES IN A NEAR RISK-F REE ENVIRONMENT AND CONSEQUENTLY THE OPERATING PROFIT MARGINS EARNED BY COMPARABLE COMPANIES (WHICH, BEING ENTREPRENEURS IN THEIR OWN RIGHT ARE EXPOSED TO ALL THE RISKS ASSOCIATED WITH THEIR BUSINESS) NEED TO BE SUBJECTED TO A DOWNWARD ADJUSTMENT SO AS TO MAKE THEM COMPARABLE WITH THE OPERATING PROFIT MARGIN EARNED BY THE APPELLANT (WHICH, IN THE ABSENCE OF A NY SIGNIFICANT RISKS, WOULD TYPICALLY BE MUCH LOWER); AND (F) FAILING TO APPRECIATE THAT SINCE THE OPERATING PROFIT MARGIN EARNED BY THE APPELLANT (8.80 PERCENT) IS MORE THAN THE OPERATING PROFIT MARGIN EARNED BY SEVERAL COM PARABLES (FORMING PART OF THE FINAL SET DERIVED BY THE LD. CIT(A) HIMSELF VIDE ANNEXURE V O F HIS IMPUGNED ORDER), THE APPELLANT'S 'INTERNATIONAL TRANSACTIONS' WITH ITS 'ASSOCIATED ENTERPRISES' ARE AT ARM'S LENGTH. 4 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT 5. THAT THE LD. CIT(A) GROSSLY ERRED IN LAW AND ON FACTS BY CONFIRMING THE ACTION OF THE LD. AO OF NOT PROVI DING ANY REASONS FOR NOT ACCEPTING THE APPELLANT'S OBJECTION S TO THE ORDER OF THE LD. TPO AS SUBMITTED IN THE DETAILED R EPLY DATED MARCH 9, 2006, AND SIMPLY PROCEEDING TO PASS AN ORDER U/S 143(3) ON MARCH 28, 2006 RATIFYING THE PO SITION TAKEN BY LD. TPO, WITHOUT INDEPENDENT APPLICATION O F MIND. 6. THAT THE LD. CIT(A) GROSSLY ERRED IN LAW AND ON FACTS BY CONFIRMING THE ACTION OF THE LD. TPO/AO OF DENYI NG THE BENEFIT OF (+1-) 5 PERCENT MENTIONED IN THE PROVISO TO SECTION 92C(2) OF THE ACT TO THE APPELLANT. 7. THAT THE LD. CIT(A) ERRED IN FACTS AND IN LAW IN CONFIRMING THE ACTION OF THE LD. AO OF REDUCING THE DEDUCTION CLAIMED BY THE APPELLANT UNDER SECTION 10 A OF ACT TO RS 12,56,84,892 AS AGAINST RS 12,60,73,272 T HEREBY REDUCING THE DEDUCTION BY RS 3,88,340 ON ERRONEOUS AND UNTENABLE GROUNDS. 8. THAT THE LD. CIT(A) ERRED IN FACTS AND IN LAW IN NOT APPRECIATING THAT OTHER INCIDENTAL SERVICES ARE INE XTRICABLY LINKED WITH IT-ENABLED SERVICES PROVIDED BY THE APP ELLANT TO ITS CUSTOMER, AND ARE COVERED BY NOTIFICATION SO /890(E) DATED SEPTEMBER 26, 2000, WHICH IS WIDE ENOUGH TO I NCLUDE ALL SUCH BACK-OFFICE OPERATIONS AND SUPPORT SERVICE S. 9. THAT THE LD. CIT(A) ERRED IN FACTS AND IN LAW IN CONFIRMING THE ACTION OF LD. AO OF DISALLOWING A SU M OF RS 53,08,491 REPRESENTING THE ACCRUED LIABILITY ON ACC OUNT OF LEAVE ENCASHMENT BY INVOKING THE PROVISIONS OF SECT ION 43B(F) OF THE ACT. 10. THAT THE LD. CIT (A) ERRED IN LAW IN NOT FOLLOW ING THE DECISION OF HON'BLE CALCUTTA HIGH COURT IN THE CASE OF 5 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT EXIDE INDUSTRIES LTD & ANR VS UOI, (2007) 292 ITR 4 70 WHEREIN THE HON'BLE HIGH COURT STRUCK DOWN THE PROV ISION OF SECTION 43B(F) BY HOLDING IT INVALID AND ULTRA V IRES. 2. FOR A.Y. 2003-04, THE ASSESSEE HAD FILED RETURN DECLARING TOTAL INCOME OF RS. 4,12,10,285/-. THE AO DETERMINED THE TOTAL INCOME A T RS. 19,12,29,580/-, AFTER MAKING FOLLOWING ADDITIONS: UNDER STATEMENT OF VALUE OF TRANSACTIONS WITH AES 11,26,75,000 DISALLOWANCE U/S 43B LEAVE ENCASHMENT 53,08,491 DISALLOWANCE U/S 43B- PF DUES ETC. 97,50,204 DISALLOWANCE ON A/C OF FOREX LOSS 1,25,85,932 19,12,29,580 3. BRIEF FACTS OF THE CASE ARE THAT IN THE RELEVAN T ASSESSMENT YEAR THE ASSESSEE WAS A SUBSIDIARY OF LUCENT TECHNOLOGIES INTERNATIO NAL INC., USA WITH 0.33% SHARE BEING HELD BY LUCENT TECHNOLOGIES ASIA PACIFI C (HK) LTD. THE ASSESSEE WAS ENGAGED, INTER ALIA, IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE, SUB-CONTRACTING AND EXPORT SYSTEM ENGINEERING SERVICES, TECHNICAL E NGINEERING SERVICES, TECHNICAL SERVICES INCLUDING SYSTEMS INSTALLATION MAINTENANCE (BOTH HARDWARE AND SOFTWARE DEVELOPMENT AND TRAINING). THE ASSESSEE WAS PRIMARI LY UNDERTAKING CONTRACT SOFTWARE DESIGNING AND DEVELOPMENT FOR LUCENT GROUP AND, THUS, FUNCTIONING AS A CAPTIVE SOFTWARE DEVELOPMENT CENTRE FOR ITS AES. BR IEF FACTS AS REGARDS THE ADDITION OF RS. 11,26,75,000/- WERE LIKE THIS: 3.1. THE MAJOR INTERNATIONAL TRANSACTIONS REPORTED IN FORM 3CEB WERE AS UNDER: 6 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT S. NO. INTERNATIONAL TRANSACTIONS METHOD VALUE (IN THOUSAND RUPEES) 1 PURCHASE OF FIXED ASSETS TNMM 146.45 2 SALE OF SOFTWARE SERVICES AND OTHER SERVICES RENDERED TNMM 12,21,686 3.1.1. IT WAS POINTED OUT BY ASSESSEE THAT THE PURC HASES OF FIXED ASSETS WERE CLUBBED WITH THE TOTAL OPERATION OF THE ASSESSEE BE CAUSE THESE WERE PROPRIETARY PRODUCTS AND THEIR COMPARABLES WERE NOT EASILY AVA ILABLE IN THE MARKET AND FURTHER FORMED A VERY SMALL PART OF THE TOTAL OPERATIONS. 3.2. IN THE T.P. DOCUMENT FOR DETERMINING THE ALP O F THE INTERNATIONAL TRANSACTIONS, THE ASSESSEE SELECTED TNMM AS THE MOS T APPROPRIATE METHOD AND PLI WAS TAKEN AT OP/TC. ON THESE ASPECTS THERE IS NO DI SPUTE BETWEEN THE ASSESSEE AND THE DEPARTMENT. LD. TPO NOTICED FROM THE TP DOCUMEN T THAT ASSESSEE PREPARED A LIST OF COMPARABLES COMPRISING OF 43 COMPANIES, TH E OP/TC OF WHICH WERE ARRIVED AT 13.89% WHEREAS THE ASSESSEES PLI WAS 8.80%, WHI CH WAS WITHIN 5% OF THE ALP. 3.3. LD. TPO EXAMINED THE COMPARABLES SELECTED BY A SSESSEE AND NOTICED THAT SOME OF THEM WERE NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AND, THEREFORE, ISSUED A SHOW CAUSE NOTICE REQUIRING THE ASSESSEE T O SHOW CAUSE AS TO WHY THE FOLLOWING 9 COMPARABLES BE NOT DISREGARDED: (1) ESCOSOFT TECHNOLOGIES LIMITED (2) IKF TECHNOLOGIES LTD., (3) ORG INFORMATICS LTD. (4) PSI DATA SYSTEMS LTD. (5) SUNDARAM TELEMATICS LTD. (6) THEMAX SYSTEMS & SOFTWARE LTD. 7 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT (7) ZENITH GLOBAL CONSULTANTS LTD. (8) ZENSAR TECHNOLOGIES LTD. (9) MINDTECH INDIA LTD. 3.4. FURTHER, HE GAVE A LIST OF 44 COMPANIES WHICH WERE SOUGHT TO BE CONSIDERED FOR BEING USED AS COMPARABLES. AFTER CON SIDERING THE ASSESSEES REPLY, LD. TPO REJECTED 7 COMPANIES FROM THE COMPAR ABLES SELECTED BY THE ASSESSEE IN ITS TP REPORT FOR THE FOLLOWING REASONS : S. NO. NAME OF THE COMPANY REASONS FOR EXCLUSION 1 ESCOSOFT TECHNOLOGIES LTD. THE COMPANY HAS EXPERTISE IN APPLICATION DEVELOPMENT, FACILITIES MANAGEMENT, ERP, EMS, E-BUSINESS AND IT OUTSOURCING. THE FUNCTIONS OF THE COMPANY ARE VARIED AND NOT COMPARABLE TO THOSE OF THE ASSESSEE. 2 ORG INFORMATICS LTD. THE OBJECT OF THE COMPANY IS RELATED TO MANUFACTURE OF MICROPROCESSOR BASED SYSTEM, COMPUTER PERIPHERALS LIKE LINE PRINTERS, MAGNETIC TAPE AND DISK DRIVES ETC. THESE FUNCTIONS ARE NOT COMPARABLE TO THOSE OF THE ASSESSEE. 3. PSI DATASYSTEMS LTD. THE COMPANY HAS DOMAIN EXPERTISE IN BANKING, INSURANCE AND ENGINEERING SECTORS AND OFFERS APPLICATION DESIGN, DEVELOPMENT, TESTING & MAINTENANCE ACTIVITIES ETC. THERE ARE OTHER ACTIVITIES RELATED TO KNOWLEDGE MANAGEMENT, CRM ETC. THE VARIETY OF FUNCTIONS MAY GET UNACCEPTABLE FOR COMPARISON. 4. SUNDARAM TELEMATICS LTD. THE COMPANY IS A LEADING MANUFACTURER OF COMPUTER PERIPHERALS LIKE KEYBOARDS, PRINTERS ETC. THE COMPANY ALSO DEALS IN EMBEDDED SOFTWARE. ACCORDINGLY, THIS CANNOT BE COMPARED WITH THE ASSESSEE COMPANY. 5. THERMAX SYSTEMS & THE ASSESSEE COULD NOT PROVIDE ANY DETAILS REGARDING THE ACTIVITIES EXCEPT A GENERAL 8 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT SOFTWARE LIMITED COMMENT ABOUT THE BUSINESS OF SOFTWARE DEVELOPMENT. 6 ZENITH GLOBAL CONSULTANTS LIMITED THE COMPANY PROVIDES CUSTOMIZED TRAINING SOFTWARE AND IS FOCUSED IN THE AREA OF E- LEARNING. THE FUNCTION OF SOFTWARE DEVELOPMENT IS NOT SIMILAR TO THAT OF LTI. 7. ZENSAR TECHNOLOGIES LIMITED THE COMPANY HAS EXPERTISE IN AREAS OF E- BUSINESS, KNOWLEDGE MANAGEMENT, HRM ETC. AND IS NOT COMPARABLE TO THE FUNCTIONS OF LTI. 3.5. LD. TPO ALSO INTRODUCED FOLLOWING FIVE ADDITIO NAL COMPANIES: (I) AFTECH INFOSYS LTD. (II) HCL TECHNOLOGIES (III) HEWLEFT PACKARD GLOBALSOFT LTD. (IV) PATNI COMPUTER SYSTEMS LTD. 3.6. ACCORDINGLY, FOR 41 COMPANIES TPO ARRIVED AT R EVISED AVERAGE OP/TC MARGIN OF 23.54%. AFTER CONSIDERING THE ASSESSEE S UBMISSION THAT IT WAS A RISK MITIGATED COMPANY, BEING CAPTIVE SERVICE PROVI DER, ALLOWED 20% DEDUCTION OUT OF THE MEAN OP/TC DETERMINED AT 23.54 % AND THUS ARRIVED AT A MEAN OP/TC AT 18.83%, APPLYING THE SAME, THE ALP WAS DETERMINED AT RS. 13,34,361,000 AS AGAINST THE DECLARED VALUE OF RS. 122,16,86,000/- AND, THEREFORE, THERE WAS UPWARD REVISION OF THE INCOME BY RS. 11,26,75,000/-. 3.7. ALL THESE ADDITIONS WERE ASSAILED BEFORE LD. C IT(A). AS REGARDS THE ADDITION ON ACCOUNT OF ALP, LD. CIT(A) EXAMINED THE COMPARABLES FINALLY SELECTED BY TPO AND FINALLY CONCLUDED THAT A TOTAL OF 18 COMPANIES OUT OF LIST OF 48 COMPANIES, WERE FOUND TO BE COMPARABLE T O THE ASSESSEE, OUT OF WHICH IN 17 CASES THERE WAS AGREEMENT BETWEEN THE A SSESSEE AND THE TPO. ONLY ONE COMPANY FINDS PLACE IN THE FINAL LIST WHIC H WAS INCLUDED BY THE 9 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT TPO. THUS, OUT OF THE FIVE COMPANIES, INCLUDED BY L D. TPO, THE LD. CIT(A) ACCEPTED ONLY ONE. THESE WERE REJECTED ON THE GROUN D THAT THEY HAD SUBSTANTIAL RELATED PARTY TRANSACTIONS. 3.8. LD. CIT(A) HAD RETAINED ONLY AFTEK INFOSYS LTD . 18 COMPANIES HAD BEEN REJECTED BY LD. CIT(A), THOUGH THERE WAS AGREE MENT BETWEEN THE ASSESSEE AND THE TPO REGARDING THEIR COMPARABILITY WITH THE ASSESSEE. LD. CIT(A) ALSO CONFIRMED THE REJECTION OF 7 COMPANIES WHICH WERE CONSIDERED BY THE ASSESSEE IN ITS TP DOCUMENTATION BUT WERE RE JECTED BY LD. TPO IN THE TP ORDER ON THE BASIS OF FINAL SET OF 18 COMPANIES, THE OP/.TC MARGINS OF THE REVISED COMPARABLE SET WAS COMPUTED AT 18.60%. LD. CIT(A) WHILE APPLYING THE ABOVE ARMS LENGTH MARGIN ALSO DENIED THE 20% RISK ADJUSTMENT ( TO THE MEAN MARGIN OF THE OP/TC OF THE COMPARABLE S), ALLOWED BY TPO TO THE ASSESSEE ON ACCOUNT OF THE RISK FREE NATURE OF ITS SOFTWARE DEVELOPMENT SERVICES AS COMPARED TO THE FULL FLEDGED RISK BEARI NG COMPARABLE COMPANIES. LD. CIT(A) REDUCED THE QUANTUM OF TP ADJUSTMENT OF RS. 25,82,624/- AND FINALLY SUSTAINED THE TP ADJUSTMENT AT RS. 11,00, 9 2,,376/-. 3.9. AS REGARDS OTHER ADDITIONS MADE BY AO ON CORPO RATE ISSUES, WE WILL CONSIDER THE SAME AFTER DISPOSING OF THE GROUNDS RA ISED BY ASSESSEE IN REGARD TO TP ISSUES. 4. THE ASSESSEE HAS RAISED TP ISSUES FROM GROUND NO . 1 TO 6 OUT OF WHICH GROUND NO. 1 IS GENERAL AND, THEREFORE, DOES NOT RE QUIRE ANY ADJUDICATION. GROUND NOS. 2,3 AND 5 WERE NOT PRESSED AT THE TIME OF HEARING. ACCORDINGLY, THE SAME ARE REJECTED. THE ASSESSEE HAS, THEREFORE, PRIMARILY ASSAILED THE FINDING OF LD. CIT(A) IN REGARD TO SUSTAINING ONE C OMPARABLE INCLUDED BY LD. TPO IN THE LIST OF COMPARABLE VIZ. AFTEK INFOSYS LT D. AND EXCLUSION OF 7 COMPARABLES SELECTED BY ASSESSEE. 10 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT 5. AFTEK INFOSYS LTD .: AS REGARDS AFTEK INFOSYS LTD., LD. COUNSEL POINTED OUT THAT THIS COMPANY EARNS A MAJOR PORTION OF ITS REVENUE FROM SOFTWARE PRODUCTS. HE POINTED OUT THAT AS PER THE A NNUAL REPORT FOR THE YEAR ENDING JUNE 2002, IT EARNED RS. 26.63 CRORES FROM T HE EXPORT OF SOFTWARE PRODUCTS. 5.1. LD. COUNSEL SUBMITTED THAT A COMPARISON OF THE FUNCTIONAL AND RISK PROFILE OF THE ASSESSEE VIS A VIS AFTEK INFOSYS LTD ., AS GIVEN IN THE SYNOPSIS, WAS AS UNDER: BASIS/ PARTICULAR AFTEC INFOSYS LTD. APPELLANT RISK PROFILE OPERATE AS FULL FLEDGED RISK TAKING ENTREPRENEURS OPERATES AT MINIMAL RISKS AS THE 100% SERVICES AS PROVIDED TO ITS AE NATURE OF SERVICES THE COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS SOFTWARE DEVELOPMENT SERVICES ONLY REVENUE FROM PRODUCTS RS. 30.79 CRORES NIL- AS THE COMPANY IS A SOFTWARE DEVELOPMENT COMPANY. OWNERSHIP PROPRIETARY PRODUCTS THE COMPANY OWNS PROPRIETY PRODUCTS SUCH AS JADOOGAR AND POWER SAFE ENGAGED IN CONTRACT SOFTWARE DEVELOPMENT EXPENDITURE ON ADVERTISING/ SALES PROMOTION AND BRAND BUILDING RS. 0.051 CRORES NIL (AS ALL THE SOFTWARE DEVELOPMENT SERVICES ARE RENDERED TO THE AES ONLY) 5.2. LD. COUNSEL POINTED OUT THAT SEGMENTAL ACCOUNT AS REGARDS THE EXPENSES INCURRED ON SOFTWARE DEVELOPMENT SERVICES ASPECTS IS NOT AVAILABLE IN THE ANNUAL REPORT. 5.3. LD. COUNSEL SUBMITTED THAT THE MATTER CAN BE RESTORED BACK TO THE FILE OF TPO FOR EXAMINATION OF FACTUAL ASPECTS. 11 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT 5.4. LD. DR SUBMITTED THAT THE MATTER MAY BE RESTOR ED TO THE FILE OF LD. CIT(A) TO FIND OUT CORRECT POSITION. 5.5. HAVING HEARD BOTH THE PARTIES, WE FIND THAT LD . TPO HAD INCLUDED THIS COMPANY ON ACCOUNT OF IT DEALING IN SOFTWARE ACTIV ITY AFTER POINTING OUT THAT ASSESSEE HAD NOT BEEN ABLE TO ESTABLISH HOW THE COM PANY WAS FUNCTIONALLY DIFFERENT. THUS, IT IS EVIDENT THAT THE FUNCTIONAL DIFFERENCES, AS POINTED OUT BY LD. COUNSEL FOR THE ASSESSEE IN SYNOPSIS, HAVE N OT BEEN CRITICALLY EXAMINED WITH REFERENCE TO THE ANNUAL REPORT AND, THEREFORE, WE RESTORE THIS MATTER TO THE FILE OF AO TO FIND OUT THE FACTUAL ASPECTS ON THIS COUNT AND, IF, THE COMPANY IS FOUND TO BE ONLY A SOFTWARE PRODUCT COMP ANY, THEN THE SAME CANNOT BE COMPARED WITH THE ASSESSEE COMPANY, WHICH IS PRIMARILY A DESIGNING AND DEVELOPING SOFTWARE ON CONTRACT BASIS FOR ITS AE. THIS ISSUE IS ALLOWED FOR STATISTICAL PURPOSES. 6. INFOSYS TECHNOLOGIES LTD. IN THE LIST OF 41 COMPARABLES, FINALLY SELECTED BY LD. CIT(A), INFOSYS TECHNOLOGIES LTD. W AS INCLUDED, INTER ALIA, POINTING OUT THAT THERE WAS AGREEMENT BETWEEN TPO A ND THE ASSESSEE ON THIS COMPARABLE. 6.1. LD. COUNSEL POINTED OUT THAT THE COMPARISON OF THE FUNCTIONAL AND RISK PROFILE OF THE ASSESSEE VIS A VIS INFOSYS TECHNOLOG IES LTD., IS AS UNDER: BASIS/ PARTICULAR INFOSYS TECHNOLOGIES LTD. APPELLANT RISK PROFILE OPERATE AS FULL FLEDGED RISK TAKING ENTREPRENEURS OPERATES AT MINIMAL RISKS AS ALL THE SOFTWARE DEVELOPMENT SERVICES ARE RENDERED TO THE AES ONLY. 12 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT NATURE OF SERVICES DIVERSIFIED- CONSULTING, APPLICA TION DESIGN, DEVELOPMENT, RE-ENGINEERING AND MAINTENANCE, SYSTEM INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION AND BUSINESS PROCESS MANAGEMENT ETC. SOFTWARE DEVELOPMENT SERVICES. REVENUE FROM PRODUCTS RS. 3,623 CRORES RS. 112.17 CRORES OWNERSHIP OF BRANDED /PROPRIETARY PRODUCTS DEVELOPS/ OWNS PROPRIETY PRODUCTS LIKE FINACLE. ALSO, THE COMPANY DERIVES SUBSTANTIAL PORTION OF ITS REVENUE FROM SALE OF ITS PROPRIETARY PRODUCTS (INCLUDING ITS FLAGSHIP BANKING PRODUCT SUITE FINACLE). AS PER THE ANNUAL REPORT OF THE COMPANY, IT AHS INTANGIBLES ASSETS WORTH APPROX. RS. 30,75 CRORES FOR THE PERIOD ENDED MARCH 31,2003. NO INTELLECTUAL PROPERTY RIGHTS (IPR OR IPRS) EXPENDITURE ON ADVERTISING/ SALES PROMOTION AND BRAND BUILDING RS. 30.55 CRORES NIL (AS ALL THE SOFTWARE DEVELOPMENT SERVICES ARE RENDERED TO THE AES ONLY) EXPENDITURE ON RESEARCH AND DEVELOPMENT 14.44 CRORES NIL 6.2. HE FURTHER POINTED OUT THAT THIS HAS BEEN EXCL UDED BY THE ITAT IN VARIOUS DECISIONS, A LIST OF WHICH HAS BEEN GIVEN I N THE SYNOPSIS. 6.3. HAVING HEARD BOTH THE PARTIES, WE FIND CONSIDE RABLE FORCE IN THE SUBMISSION OF LD. COUNSEL FOR THE ASSESSEE, BECAUSE OF THE DIVERSIFIED FUNCTIONS PERFORMED BY INFOSYS TECHNOLOGIES LTD., A ND ALSO ON ACCOUNT OF OWNERSHIP OF BRANDED/ PROPRIETARY PRODUCTS, IT CANN OT BE COMPARED WITH THE ASSESSEE BECAUSE DIFFERENCE IN FUNCTIONS PERFORMED, ASSET BASE AND RISK ASSUMED BY BOTH THE COMPANIES. 6.4. WE MAY OBSERVE THAT MERELY BECAUSE THE ASSESSE E IN THE TP STUDY HAD INCLUDED THE COMPARABLE, WHICH WAS ACCEPTED BY TPO, IT DOES NOT FOLLOW THAT THE ASSESSEE CANNOT RESILE FROM ITS ORIGINAL C LAIM AT A LATER STAGE OF 13 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT PROCEEDING , IF IT CAN DEMONSTRATE THAT A COMPANY H AS TO BE EXCLUDED BECAUSE ITS FAR ANALYSIS CLEARLY SHOWS THAT IT IS NOT COMPA RABLE TO THE LISTED PARTY. ACCORDINGLY, WE DIRECT EXCLUSION OF THIS COMPARABLE . 7. SATYAM COMPUTERS SERVICES LTD .: LD. CIT(A) HAD INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES ON THE GROUND TH AT THERE WAS AGREEMENT BETWEEN TPO AND THE ASSESSEE. 7.1. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT ON ACCOUNT THE FINANCIAL DATA OF THIS COMPANY BEING WHOLLY UNRELIABLE, IT CA NNOT BE TAKEN AS COMPARABLE. HE HAS RELIED ON VARIOUS DECISIONS, WHE REIN THIS COMPARABLE HAS BEEN EXCLUDED. 7.2. AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE PARTIES, WE ARE IN AGREEMENT WITH LD. COUNSEL FOR THE ASSESSEE THAT DU E TO UNRELIABLE FINANCIAL DATA OF SATYAM COMPUTERS SERVICES LTD., WHICH IS I N PUBLIC DOMAIN NOW, THE COMPANY CANNOT BE CONSIDERED AS A COMPARABLE TO THE ASSESSEE. 8. XANSA INDIA LTD. : LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS COMPANY COULD NOT BE INCLUDED IN THE FINAL SET OF C OMPARABLES BECAUSE IT HAS A SIGNIFICANT RPT/ SALES RATIO OF 100.45%. 8.1. LD. COUNSEL VERY FAIRLY CONTENDED THAT NO PLEA WAS TAKEN BEFORE LD. CIT(A) ON THE BASIS OF RPT, BUT NOW THIS OBJECTION HAS BEEN TAKEN AS ANNUAL REPORT IS AVAILABLE AND, THEREFORE, THE MATTER MAY BE RESTORED BACK TO THE FILE OF LD. CIT(A) IN ORDER TO ARRIVE AT PROPER CONCLUSI ON. 8.2. HAVING HEARD BOTH THE PARTIES, WE RESTORE THIS ISSUE TO THE FILE OF LD. CIT(A) FOR DECISION AFRESH IN ACCORDANCE WITH LAW. WE ORDER ACCORDINGLY. 9. GEODESIC INFORMATION SYSTEMS LTD .: LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS COMPANY HAS BEEN INCLUDED IN TH E FINAL SET OF COMPARABLES BY LD. CIT(A) OBSERVING THAT THERE WAS AGREEMENT BETWEEN THE 14 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT TPO AND THE ASSESSEE. HE SUBMITTED THAT THIS COMPA NY IS A SOFTWARE PRODUCT DEVELOPMENT COMPANY, OFFERING PRODUCTS SUCH AS ITS INTEROPERABLE INSTANT MESSAGING PLATFORM KNOWN AS MUNDU TO VARIOUS CUST OMERS ACROSS THE WORLD. IN THIS REGARD HE REFERRED TO THE ANNUAL REP ORT FOR F.Y. 2002-03. HE FURTHER POINTED OUT THAT THIS COMPANY OWNS INTELLEC TUAL PROPERTY RIGHTS FOR ITS PRODUCTS, WHICH IS ALSO EVIDENT FROM THE ANNUAL REP ORT. 9.1. LD. COUNSEL POINTED OUT THAT APART FROM OWNING SOFTWARE PRODUCTS IT ALSO OWNS VARIOUS TRADEMARKS. HE HAS GIVEN COMPARIS ON OF THE FUNCTIONAL AND RISK PROFILE OF THE ASSESSEE VIS A VIS GEODESIC INFORMATION SYSTEMS LTD. IN THE SYNOPSIS, AS UNDER: BASIS/ PARTICULAR AFTEC INFOSYS LTD. APPELLANT RISK PROFILE OPERATE AS FULL FLEDGED RISK TAKING ENTREPRENEURS OPERATES AT MINIMAL RISKS AS ALL THE SOFTWARE DEVELOPMENT SERVICES ARE RENDERED TO THE AES ONLY. NATURE OF SERVICES THE COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS SOFTWARE DEVELOPMENT SERVICES OWNERSHIP PROPRIETARY PRODUCTS THE COMPANY OWNS PROPRIETY PRODUCTS SUCH MUNDU AND IMAROUND ENGAGED IN CONTRACT SOFTWARE DEVELOPMENT. 9.2. LD. CIT(A) CONFIRMED THE TPOS ACTION OBSERVIN G THAT THE ANNUAL REPORT FOR THE FY 2002-03 SUBMITTED BY THE ASSESSEE CLEARLY SHOWED THAT THE FINANCIAL DATA OF THE COMPANY IS AVAILABLE WHICH CO NFIRMED THAT THE OP/TC RATIO WAS 74.55%. SINCE THIS COMPARABLE WAS CHOSEN BY ASSESSEE, THEREFORE, LD. CIT(A) REJECTED THE ASSESSEES CONTENTION. 9.3. HOWEVER, NOW LD. COUNSEL FOR THE ASSESSEE HAS POINTED OUT THAT THIS COMPANY AS ENGAGED IN DEVELOPMENT OF SOFTWARE PRODU CTS AND OPERATED AS 15 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT FULL FLEDGED RISK TAKING ENTREPRENEUR HAVING IPR AN D TRADE MARK. THESE ASPECTS WERE NOT CONSIDERED BY LD. TPO. 9.4. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES. WE FIND THAT THE ISSUES RAISED BEFORE US NEEDS TO BE EXAMINED BY LD. TPO BECAUSE ASSESSEE ITSELF HAD TAKEN INTO CONSIDERATION THIS C OMPARABLE. WE, ACCORDINGLY, RESTORE THIS ISSUE TO THE FILE OF TPO FOR DECISION AFRESH IN ACCORDANCE WITH LAW. 10. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE FOLLOWING COMPARABLES, WHICH WERE SELECTED BY ASSESSEE, WERE NOT INCLUDED BY TPO AND CONFIRMED BY LD. CIT(A): - ECOSOFT TECHNOLOGIES LTD. - COMPUDYNE WINFOSYSTEMS LTD. - ORIENT INFORMATION TECHNOLOGY LTD. 10.1. LD. COUNSEL POINTED OUT THAT ECOSOFT TECHNOLO GIES LTD. WAS REJECTED SINCE DATA FOR CURRENT YEAR WAS NOT AVAILABLE. HE S UBMITTED THAT NOW THE CURRENT YEARS DATA IS AVAILABLE, SO MATTER MAY BE RESTORED BACK TO THE FILE OF LD. CIT(A). 10.2. AFTER HEARING BOTH THE PARTIES WE FIND THAT L D. CIT(A) HAS SIMPLY REJECTED THIS COMPARABLE OBSERVING THAT TPO HAD EXC LUDED IT FOR FUNCTIONAL DISSIMILARITY. HE FURTHER SUBMITTED THAT THE LAST A NNUAL REPORT PLACED ON THE RECORD OF THE ASSESSEE PERTAINED TO FY 2001-02 BUT NO SUBSEQUENT FINAL DATA WAS AVAILABLE. HE FURTHER OBSERVED THAT IT HAD 4 OV ERSEAS SUBSIDIARIES IN UK, US, MAURITIUS AND SINGAPORE. RPT INFORMATION WAS NO T AVAILABLE. ACCORDINGLY, THIS WAS REJECTED ON ACCOUNT OF NON-AV AILABILITY OF FINANCIAL DATA. 16 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT 10.3. AS FAR AS OBSERVATION OF LD. CIT(A) CONFIRMIN G THE TPOS ACTION ON THE BASIS OF FUNCTIONAL PROFILE ARE CONCERNED, WE F IND THAT THE COMPARABLE ECOSOFT TECHNOLOGIES LTD. HAD EXPERTISE IN APPLICAT ION DEVELOPMENT, FACILITIES MANAGEMENT, ERP, EMS, E-BUSINESS AND IT OUTSOURCING. THE ASSESSEE WAS ALSO ENGAGED IN THE BUSINESS OF DEVELO PMENT OF SOFTWARE, SUB- CONTRACTING AND EXPORTS SYSTEM ENGINEERING SERVICES , TECHNICAL SERVICES INCLUDING SYSTEMS INSTALLATION MAINTENANCE. THEREFO RE, THIS COMPARABLE COULD NOT BE EXCLUDED ON THE GROUND THAT THE FUNCTI ONS OF THE COMPARABLE WERE DIFFERENT AS COMPARED TO ASSESSEE BECAUSE ESSE NTIALLY BOTH WERE IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE. 10.4. IN VIEW OF ABOVE DISCUSSION, WE RESTORE THIS ISSUE TO THE FILE OF LD. CIT(A) FOR DECISION AFRESH, BECAUSE NOW THE CURRENT YEARS DATA IS AVAILABLE. 11. AS REGARDS COMPUDYNE WIN , LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT SEGMENTAL ACCOUNTS ARE AVAILABLE IN ANNUAL REP ORT AND THE FINDINGS OF LD. CIT(A) WERE NOT FACTUALLY CORRECT. 11.1. HAVING HEARD BOTH THE PARTIES, WE FIND THAT L D. CIT(A) HAS REJECTED THIS COMPARABLE, TAKING NOTE OF THE FACT THAT THE D ETAILS OF RELATED PARTIES TRANSACTIONS ARE NOT AVAILABLE AND HAS OBSERVED AS UNDER: THERE WAS AGREEMENT BETWEEN THE APPELLANT AND THE TPO REGARDING INCLUSION OF THIS COMPANY AS A COMPARABLE . IT HAS BEEN SUBMITTED BY THE APPELLANT THAT THERE IS NO IN FORMATION REGARDING RELATED PARTY TRANSACTION AVAILABLE. A PE RUSAL OF THE ANNUAL REPORT 2002-03 REVEALS THAT THE ENTERTAINMEN T DIVISION OF THIS COMPANY CATERING TO ANIMATION AND VISUAL EF FECTS FOR MOVIES, TELEVISION AND GAMES IS THE MOST PRODUCTIVE UNIT OF THE COMPANY. THOUGH, THERE IS A SOFTWARE DEVELOPMENT UN IT, THE SEGMENTAL RESULTS OF THE SAME ARE NOT AVAILABLE AND ITS CONTRIBUTION IS INSIGNIFICANT. SINCE THE MAIN FOCUS OF THE COMPANY IS IN THE DIFFERENT INDUSTRIAL SEGMENT NAME LY ENTERTAINMENT SECTOR, THE FUNCTION PROFILE OF THIS COMPANY IS 17 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT DIFFERENT FROM THE APPELLANT. THEREFORE, THE COMPAN Y IS TO BE REJECTED AS A COMPARABLE. 11.2. FROM THE ABOVE OBSERVATION IT IS EVIDENT THAT LD. CIT(A) HAS NOT CONSIDERED THE SEGMENTAL RESULTS OF THE SOFTWARE DE VELOPMENT UNIT. THE ASSESSEE HAS FILED THE ANNUAL REPORT OF THIS COMPAR ABLE FOR FY 2002-03 IN THE PAPER BOOK, WHEREIN WE FIND THAT IN THE ENTERTAINME NT DIVISION AND ANALYSIS SPECIFIC SEGMENTAL DETAILS REGARDING SOFTWARE DEVEL OPMENT, REVENUE EARNING AND SEGMENT-WISE RESULTS HAVE BEEN GIVEN. THEREFORE , THE OBSERVATION OF LD. CIT(A) IS NOT CORRECT. WE, ACCORDINGLY, RESTORE TH IS ISSUE TO THE FILE OF AO FOR FRESH ADJUDICATION, AFTER AFFORDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE AS PER LAW. 12. ORIENT INFORMATION : LD. COUNSEL FOR THE ASSESSEE POINTED OUT THAT THE LD. CIT(A) HAS REJECTED THIS COMPARABLE BY OBS ERVING AS UNDER: THERE IS NO AGREEMENT BETWEEN THE APPELLANT AND TH E TPO REGARDING INCLUSION OF THIS COMPANY AS A COMPARABLE . HOWEVER, THE APPELLANT AHS SUBMITTED THAT THE DETAI LS PERTAINING TO RELATED PARTY TRANSACTION ARE NOT AVA ILABLE. A PERUSAL OF THE ANNUAL REPORT FOR THE FY 2002-03 SUB MITTED BY THE APPELLANT, HOWEVER REVEALS THAT THE FINANCIAL R ESULTS BARE AVAILABLE ONLY ON A CONSOLIDATED BASIS INCLUDING TH E RESULTS OF ITS SUBSIDIARIES. FURTHER, THE PROFIT BEFORE TAX OF RS. 0.09 CRORES AGAINST THE CONSOLIDATED TURNOVER OF RS. 69.27 CROR ES DO NOT REFLECT THE PROFITABILITY OF THE FUNCTIONALLY SIMIL AR COMPANY AS CONSOLIDATION OF RESULTS TRANSFORM THE RISK PROFILE OF THE COMPANY. IN THE ABSENCE OF SEGMENTAL RESULTS AND DU E TO THE POSSIBILITY OF RELATED PARTY TRANSACTION, THIS COMP ANY IS REJECTED AS A COMPARABLE. 12.1. LD. COUNSEL POINTED OUT THAT ALL THE THREE RE ASONS GIVEN FOR REJECTION ARE NOT CORRECT AS IS EVIDENT FROM THE ANNUAL REPOR T OF THIS COMPANY FILED FROM PAGES 74 TO 135 OF THE PB. HE POINTED OUT THAT THIS COMPANY EARNED 18 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT REVENUE FROM SOFTWARE SERVICES AS IS EVIDENT FROM P &L A/C. FURTHER, THE NECESSARY DETAILS RELATING TO RPT WERE ALSO GIVEN I N THE ANNUAL REPORT AND, THEREFORE, THE MATTER SHOULD BE RESTORED TO THE FIL E OF CIT(A) FOR DECISION AFRESH IN RESPECT OF THIS COMPARISON. 12.2. HAVING HEARD BOTH THE PARTIES, WE FIND THAT T HE FINANCIAL DETAILS AS MENTIONED IN THE TPOS ORDER ARE AVAILABLE IN THE A NNUAL REPORT FILED BY ASSESSEE AND, THEREFORE, THE MATTER NEEDS TO BE EXA MINED AFRESH BY LD. CIT(A). ACCORDINGLY, WE SET ASIDE THIS ISSUE TO THE FILE OF CIT(A) FOR DECISION AFRESH. 13. APROPOS GROUND NO. 4(E), REGARDING ADJUSTMENT O N ACCOUNT OF RISK ENVIRONMENT IN WHICH THE ASSESSEE OPERATES AS COMPA RED TO ITS COMPARABLES, BRIEF FACTS ARE THAT BEFORE TPO, THE ASSESSEE HAD P OINTED OUT THAT SINCE IT IS A CAPTIVE SERVICE PROVIDER AND DOES NOT BEAR ANY RISK RELATED TO MARKET RISK, PRODUCT RISK, TECHNOLOGY RISK, RISK OF PROJECT COST OVER RUNS ETC. SOME ADJUSTMENT HAD TO BE MADE WHILE MAKING ANY COMPARIS ON. LD. TPO ALLOWED AN AD HOC BENEFIT OF 20% AND ADJUSTED THE PLI ACCOR DINGLY. 13.1. LD. CIT(A) HELD THAT TPO HAD COMMITTED AN ERR OR BY ALLOWING DOWNWARD ADJUSTMENT OF 20% IN AN AD HOC FASHION, WI THOUT FOLLOWING ANY SCIENTIFIC METHODOLOGY, INTER ALIA, OBSERVING AS UN DER: 9.4.2 THE APPELLANT HAD ALSO MADE A PASSING REFERE NCE IN THE TP REPORT THAT THE RISKS ASSUMED BY THE UNCONTR OLLED COMPARABLE COMPANIES WERE SIGNIFICANTLY HIGHER THAN .THE RISKS ASSUMED BY THE APPELLANT. THOUGH THE APPELLAN T HAD RETAINED THE OPTION TO MAKE ADJUSTMENT TO REFLECT T HE RISK DIFFERENCES, THE OPTION WAS NEITHER EXERCISED DURIN G THE TP PROCEEDINGS NOR DURING THE APPELLATE PROCEEDINGS. S INCE THE ONUS WAS ON THE APPELLANT TO PROPOSE THE NECESS ARY ADJUSTMENT BY FOLLOWING A SCIENTIFIC METHODOLOGY, I N THE ABSENCE OF THE SAME, NO ADHOC ADJUSTMENT IS REQUIRE D TO BE 19 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT ALLOWED FOR COMPUTATION OF THE ARM'S LENGTH MARGIN. A POSSIBLE METHODOLOGY FOR RISK ADJUSTMENT WOULD BE T O USE THE CAPITAL ASSET PRICING MODEL (CAPM) WHICH QUANTI FIES THE RELATIONSHIP BETWEEN RETURN AND RISK. FAILURE O N THE PART OF THE APPELLANT TO COME UP WITH ANY RISK ADJU STMENT METHODOLOGY, THE TPO'S ADHOC ADJUSTMENT IS WITHOUT ANY BASIS. 13.2. HAVING HEARD BOTH THE PARTIES, WE ARE OF THE OPINION THAT NO INTERFERENCE IS CALLED FOR IN THE ORDER OF LD. CIT( A) ON THIS COUNT BECAUSE ASSESSEE FAILED TO PROPOSE THE NECESSARY ADJUSTMENT BY FILING A SCIENTIFIC METHODOLOGY DURING TP PROCEEDINGS OR DURING APPELLA TE PROCEEDINGS. THE ONUS FOR QUANTIFICATION WAS ON ASSESSEE ON THE RISK ASSUMED BY COMPARABLES VIS A VIS TESTED PARTY. ACCORDINGLY, THIS GROUND IS REJECTED. 14. GROUND NO. 4(F): THIS GROUND HAS NOT BEEN PRES SED, HENCE REJECTED. 15. GROUND NO. 5: THIS GROUND HAS NOT BEEN PRESSED , HENCE REJECTED. 16. GROUND NO. 6: THIS GROUND HAS NOT BEEN PRESSED , HENCE REJECTED. 17. GROUND NO. 7: BRIEF FACTS APROPOS GROUND NO. 7 ARE THAT ASSESSEE HAD CLAIMED EXEMPTION U/S10A AMOUNTING TO RS. 12.60 CRO RES. THE AO NOTICED THAT WHILE COMPUTING EXEMPTION U/S 10A THE ASSESSEE HAD TAKEN THE TOTAL TURNOVER AT RS. 114.18 CRORES AS AGAINST RS. 127.41 CRORES IN THE P&L A/C. THE REASON FOR VARIANCE WAS THAT THE SERVICE RECE IPTS AGGREGATING TO RS. 9,99,34,000/- WERE NOT INCLUDED IN THE TOTAL TURNOV ER. 17.1. AFTER CONSIDERING THE ASSESSEES SUBMISSIONS HE CONCLUDED THAT SERVICE RECEIPTS WOULD FORM PART OF THE TOTAL TURNO VER OF THE BUSINESS AS SUCH INCOME HAD BEEN GENERATED BY CARRYING OUT THE MAIN BUSINESS ACTIVITY OF THE ASSESSEE COMPANY, EVEN IF IT WAS NOT ELIGIBLE FOR T AX HOLIDAY. HE, ACCORDINGLY, RECOMPUTED ALLOWABLE DEDUCTION U/S 10A AT RS. 11,63,73,564/-. 20 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT 17.2. LD. CIT(A) EXAMINED THE DETAILS OF SERVICE PR OVIDED BY THE ASSESSEE AND CATEGORIZED THEM IN TWO PARTS (A) I.T. SUPPORT SERVICES; HR SUPPORT SERVICES; ACCOUNT ING AND FINANCIALS, IT NETWORK AND SOFTWARE SUPPORT SERVICES = RS. 9,44 ,16,872/-. (B) PR, SUPPLY CHAIN, CT HEAD AND SMG = RS. 55,17,672/- . 17.3. HE OBSERVED THAT AS FAR AS THE SERVICE CLUBBE D UNDER (A) CATEGORY WERE CONCERNED, THEY WERE ELIGIBLE FOR AND QUALIFIED F OR EXPORT TURNOVER AS THEY WERE COVERED BY THE NOTIFICATION DATED 26-9-2000 IS SUED BY THE CBDT FOR ALLOWING DEDUCTION FOR CERTAIN IT ENABLED SERVICES. HOWEVER, AS FAR AS SERVICES COVERED UNDER CATEGORY (B) WERE CONCERNED, HE OBSERVED THAT NONE OF THESE SERVICES WERE EITHER RELATED TO EXPORT OR COVERED BY THE NOTIFICATION AS IT ENABLED SERVICES ELIGIBLE FOR DEDUCTION U/S 1 0A. HE OBSERVED THAT ASSESSEE FAILED TO BRING ANY EVIDENCE ON RECORD TO PROVE THAT THESE SERVICES WERE RELATED TO EXPORT OR COULD BE CATEGORIZED AS I T ENABLED SERVICES. HE, ACCORDINGLY, DIRECTED SUM OF RS. 55,17,672/- TO BE EXCLUDED FROM EXPORT TURNOVER AND TO INCLUDE RS. 9,44,16,872/- IN THE EX PORT TURNOVER. 17.4. LD. COUNSEL SUBMITTED THAT AS PER NOTIFICATIO N NO. 890 DATED 26-9- 2000, ANY KIND OF SUPPORT SERVICES ARE COVERED UNDE R IT ENABLED SERVICES. 17.5. HAVING HEARD BOTH THE PARTIES, WE FIND THAT I T IS NOT DISPUTED THAT PR, SUPPLY CHAIN, CT HEAD AND SMG WERE INCIDENTAL SERVI CES TO IT ENABLED SERVICES AND, THEREFORE IN VIEW OF NOTIFICATION NO. 890(E) DATED 26-9-2000, THESE SERVICES BEING PART OF BACK OFFICE OPERATIO N AND SUPPORT SERVICES ARE ELIGIBLE TO BE CONSIDERED AS PART OF EXPORT TURNOVE R. IN THE RESULT, THIS GROUND IS ALLOWED. 21 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT 17.6. BRIEF FACTS APROPOS GROUND NO. 9 ARE THAT THE ASSESSEE HAD CLAIMED RS. 53,08,491/- AS LEAVE ENCASHMENT. HOWEVER, IN VIEW O F CLAUSE (F) OF SECTION 43B, THE AO DISALLOWED THE ASSESSEES CLAIM AS THE SAME HAD ACTUALLY NOT BEEN PAID BY THE ASSESSEE. THE ASSESSEE HAD MERELY MADE A PROVISION FOR PAYMENT OF LEAVE ENCASHMENT. 17.7. IN APPEAL, BEFORE LD. CIT(A) THE ASSESSEE HAD PLACED RELIANCE ON THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF EXIDE INDUSTRIES LTD. V. UNION OF INDIA (2007) 164 TAXMAN 9 (CAL). THE LD . CIT(A) REJECTED THE ASSESSEES CONTENTION, INTER ALIA, OBSERVING THAT T HE DECISION OF HONBLE CALCUTTA HIGH COURT WAS NOT APPLICABLE BECAUSE THE SAID DECISION WAS NOT RENDERED BY THE JURISDICTIONAL HIGH COURT. HE, THER EFORE, RELIED ON THE ENACTED PROVISIONS OF LAW IN CLAUSE (F) OF SECTION 43B OF THE ACT. 17.9. LD. DR FILED BEFORE US THE COPY OF ORDER OF H ONBLE SUPREME COURT POINTING OUT THAT THE DECISION OF THE HONBLE CALCU TTA HIGH COURT IN THE CASE OF EXIDE INDUSTRIES LTD. (SUPRA) HAS BEEN STAYED BY THE HONBLE SUPREME COURT VIDE ORDER DATED 8-9-2008 IN SPECIAL LEAVE T O APPEAL (CIVIL) CC 12060/2008. 17.10. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT MERELY BECAUSE THE DECISION HAS BEEN STAYED DOES NOT MEAN THAT THE SAM E LOSES ITS PRECEDENTIAL VALUE AND STILL REMAINS BINDING. IN THIS REGARD LD . COUNSEL RELIED ON THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF PIJUSH KANTI CHOWDHURY V. STATE OF WEST BENGAL & OTHERS DATED 14 -5-2007. 17.11. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH T HE PARTIES. ADMITTEDLY, THERE IS NO DECISION OF HONBLE JURISDICTIONAL HIGH COURT ON THIS ISSUE. THE DECISION OF HONBLE CALCUTTA HIGH COURT HAVING BEEN STAYED BY HONBLE SUPREME COURT, CANNOT BE FOLLOWED KEEPING IN VIEW T HE SPECIFIC MANDATE OF 22 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT SECTION 43B. AS FAR AS THE DECISION OF HONBLE CALC UTTA HIGH COURT IN THE CASE OF PIJUSH KANTI CHOWDHURY (SUPRA) IS CONCERNED , THE SAID DECISION WAS RENDERED WITH REFERENCE TO THE PROCEEDINGS WHICH TO OK PLACE IN WEST BENGAL. ONCE THE DECISION OF HONBLE CALCUTTA HIGH COURT HA S BEEN STAYED, THE SPECIFIC MANDATE OF SECTION HAS TO BE FOLLOWED. IN VIEW OF ABOVE DISCUSSION, THIS GROUND IS DISMISSED. 18. IN THE RESULT, ASSESSEES APPEAL FOR AY 2003-04 IS PARTLY ALLOWED. ITA NO. 2244/DEL/2008 (REVENUES APPEAL): 19. FOLLOWING GROUNDS HAVE BEEN TAKEN: 1. THE ORDER OF THE LD. CIT (A) IS ERRONEOUS & CO NTRARY TO FACTS & LAW. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LEARNED CIT (A) HAS ERRED IN REDUCING ADDITION ON A CCOUNT OF UPWARD ADJUSTMENT OF ARM'S LENGTH PRICE BY RS. 25,82,624/- IGNORING THE SPECIFIC FINDINGS OF AOITP O. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LEARNED CIT (A) HAS ERRED IN DELETING DISALLOWANCE OF RS.1 ,25,85,932/- MADE ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION LOSS WITHOUT CONSIDERING THE FACT THAT THE SAME IS AMBIGUOUSLY A NOTIONAL LOSS. 20. GROUND NO. 2: THIS GROUND HAS BEEN TAKEN BY THE DEPARTMENT BECAUSE OF THE RELIEF PROVIDED BY LD. CIT(A) ON ACCOUNT OF TP ADJUSTMENT. 20.1. IN VIEW OF OUR FINDINGS IN THE ASSESSEES APP EAL, THE AO WILL HAVE TO CARRY OUT FRESH COMPUTATION AND WILL, ACCORDINGLY, DETERMINE THE ALP. THEREFORE, THIS GROUND AT PRESENT DOES NOT REQUIRE ANY ADJUDICATION. 23 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT 21. GROUND NO. 3:BRIEF FACTS ARE THAT DURING THE YE AR, THE ASSESSEE HAD DEBITED ITS P&L A/C BY RS. 1,25,85,932/- ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION LOSS. THE AO SHOW CAUSED THE ASSESSEE A S TO WHY THIS SHOULD NOT BE DISALLOWED AS THE SAME WAS A NOTIONAL ENTRY AND NO ACTUAL LOSS HAD OCCURRED. THE ASSESSEE REPLIED AS UNDER: THE FOREX LOSS HAS ARISEN DUE TO APPRECIATION IN TH E VALUE OF RUPEE VS. DOLLAR DURING THE YEAR. THE ASSESSEE CON VERTS THE DOLLAR INVOICES INTO RUPEES AT THE PREVAILING EXCHA NGE RATE ON THE DATE OF THE INVOICE. WHEN THE REMITTANCES AR E RECEIVED, THEY ARE CONVERTED INTO RUPEES AT THE PRE VAILING EXCHANGE RATE ON THE DATE OF REALIZATION. OUT OF THE TOTAL FOREX LOSS RS.16,41,732/- PERTAINS TO SERVICES AND RS.1,09,44,200/- PERTAINS TO SOFTWARE EXPORTS. 21.1. THE AO, HOWEVER, DID NOT ACCEPT THE ASSESSEE S CONTENTION, INTER ALIA, OBSERVING AS UNDER: THE CLAIM OF DEDUCTION ON ACCOUNT OF FOREIGN EXCHA NGE LOSS IS IN THE NATURE OF AN ANTICIPATED LOSS AND NO T ACTUAL LOSS SUFFERED DURING THE YEAR OF ASSESSMENT. THE CL AIM FOR DEDUCTION PUT FORWARD BY THE ASSESSEE AGAINST PROFI TS EARNED DURING THE YEAR IS NOT SUSTAINABLE ON THE GR OUND THAT THERE IS NO STATUTORY STIPULATION FOR MAKING SUCH A PROVISION IN THE ACCOUNTS AND, THEREFORE, THERE IS NO QUESTIO N OF THE AMOUNT BEING ALLOWED AS A DEDUCTION. EVEN THOUGH TH E METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE WAS MERCANTILE THE AMOUNT OF RS.1,25,85,932 NOT BEING A N 24 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT ACTUAL LOSS BUT AN ANTICIPATED LOSS CANNOT BE ALLOW ED AS A DEDUCTION. ADMITTEDLY, THERE IS NO SETTLEMENT OF THE OUTSTANDI NG CONTRACTS DURING THE ACCOUNTING YEAR. WHETHER THE OUTSTANDING CONTRACTS WILL RESULT IN A LOSS OR NOT WILL BE KNOWN ONLY WHEN THE OUTSTANDING CONTRACTS ARE SETTL ED. THE POSSIBILITY THAT THERE MAY BE A FAVOURABLE FLUCTUAT ION CANNOT BE RULED OUT AND PERHAPS WHEN THE LIABILITY IS ACTUALLY DISCHARGED ASSESSEE MAY ACTUALLY EARN A PR OFIT. ASSESSEE HAS SIMPLY DEBITED THE P&L A/C BASED ON A NOTIONAL LOSS WITHOUT ACTUALLY INCURRING ANY LOSS O WING TO FOREIGN EXCHANGE FLUCTUATION. PROVISIONS OF SEC 37( 1) ARE CATEGORICAL IN STATING THAT ANY EXPENSE ACTUALLY IN CURRED DURING THE YEAR, ALONE, CAN BE ALLOWED AS DEDUCTION . THEREFORE CLAIM OF DEDUCTION ON ACCOUNT OF FOREIGN EXCHANGE LOSS, AMOUNTING TO RS 1,25,85,932 IS HEREB Y DISALLOWED . 21.2. LD. CIT(A) ALLOWED THE ASSESSEES CLAIM FOLLO WING THE DECISION OF THE ITAT SPECIAL BENCH IN THE CASE OF ONGC LTD. VS. DCI T 83 ITD 51 (DELHI ITAT)(SB) AND THAT OF THE JURISDICTIONAL HIGH COURT OF DELHI IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA (P) LTD. (2007) 162 TAXMAN 60 (DELHI) WHICH HAS BEEN AFFIRMED BY THE HONBLE SUPREME COUR T IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA (P) LTD. (2009) 179 TAX MAN 326 (SC), WHEREIN IT HAS BEEN HELD AS UNDER: AS-11 DEALS WITH GIVING OF ACCOUNTING TREATMENT FOR THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES. IN CA SE OF THE REVENUE ITEMS FALLING UNDER SECTION 37(1), PARA 9 O F AS-11, WHICH DEALS WITH RECOGNITION OF EXCHANGE DIFFERENCE S, NEEDS TO BE CONSIDERED. UNDER THIS PARA, EXCHANGE DIFFERENCES ARISING ON FOREIGN CURRENCY TRANSACTION S HAVE 25 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT TO BE RECOGNIZED AS INCOME OR AS EXPENSE IN THE PER IOD IN WHICH THEY ARISE. THE IMPORTANT POINT TO BE NOTED I S THAT AS-11 STIPULATES EFFECT OF CHANGES IN EXCHANGE RATE VIS-A- VIS MONETARY ITEMS DENOMINATED IN A FOREIGN CURRENC Y TO BE TAKEN INTO ACCOUNT FOR GIVING ACCOUNTING TREATMENT ON THE BALANCE SHEET DATE. THEREFORE, AN ENTERPRISE HAS TO REPORT THE OUTSTANDING LIABILITY RELATING TO IMPORT OF RAW MATERIALS USING CLOSING RATE OF EXCHANGE. ANY DIFFERENCE, LOS S OR GAIN ARISING ON CONVERSION OF THE SAID LIABILITY AT THE CLOSING RATE, SHOULD BE RECOGNIZED IN THE PROFIT AND LOSS A CCOUNT FOR THE REPORTING PERIOD. [PARA 18] IN CONCLUSION, IT MAY BE STATED THAT IN ORDER TO FI ND OUT IF AN EXPENDITURE IS DEDUCTIBLE, THE FOLLOWING FACTORS HA VE TO BE TAKEN INTO ACCOUNT (I) WHETHER THE SYSTEM OF ACCOUN TING FOLLOWED BY THE ASSESSEE IS MERCANTILE SYSTEM, WHIC H BRINGS INTO DEBIT THE EXPENDITURE AMOUNT FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED BEFORE IT IS ACTUALLY DISBURSED A ND BRINGS INTO CREDIT WHAT IS DUE, IMMEDIATELY IT BECOMES DUE AND BEFORE IT IS ACTUALLY RECEIVED;(II) WHETHER THE SAM E SYSTEM IS FOLLOWED BY THE ASSESSEE FROM THE VERY BEGINNING AND IF THERE WAS A CHANGE IN THE SYSTEM, WHETHER THE CHANG E WAS BONA FIDE; (III ) WHETHER THE ASSESSEE HAS GIVEN TH E SAME TREATMENT TO LOSSES CLAIMED TO HAVE ACCRUED AND TO THE GAINS THAT MAY ACCRUE TO IT; (IV ) WHETHER THE ASS ESSEE HAS BEEN CONSISTENT AND DEFINITE IN MAKING ENTRIES IN T HE ACCOUNT BOOKS IN RESPECT OF LOSSES AND GAINS; (V) W HETHER THE METHOD ADOPTED BY THE ASSESSEE FOR MAKING ENTRI ES IN THE BOOKS BOTH IN RESPECT OF LOSSES AND GAINS AS PE R NATIONALLY ACCEPTED ACCOUNTING STANDARDS; (VI ) WHE THER THE SYSTEM ADOPTED BY THE ASSESSEE IS FAIR AND REAS ONABLE OR IS ADOPTED ONLY WITH A VIEW TO REDUCE THE INCIDE NCE OF TAXATION. 21.3. RESPECTFULLY FOLLOWING THE DECISION OF HONBL E SUPREME COURT, THIS GROUND IS DISMISSED. 26 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT 21.4. IN THE RESULT, DEPARTMENTAL APPEAL IS DISMISS ED. ITA NO. 2298/DEL/08 ( ASSESSEES APPEAL FOR AY 2004 -05): 22. FOLLOWING GROUNDS ARE RAISED: 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE ORDERS PASSED BY THE LD. DEPUTY COMMISSIONER OF INCOME-TAX ('LD. AO') AND THE LD. COMMISSIONER OF INCOME TAX (APPEALS) [CIT(A)], ARE BAD IN LAW AND VOID AB-INITIO. 2. THAT THE LD. CIT(A) GROSSLY ERRED ON FACTS AND I N LAW BY CONCLUDING THAT THE REFERENCE MADE BY THE L.D. A O TO THE LD. TRANSFER PRICING OFFICER (LD. TPO), UNDER SECTI ON 92CA(3) OF THE INCOME TAX ACT, 1961 ('ACT') WAS VAL IDLY MADE. THE LD. CIT(A) COMPLETELY FAILED TO APPRECIAT E THAT THE LD. AO HAD NOT RECORDED ANY REASONS UNDER SECTI ON 92CA OF THE ACT WHICH MADE IT EXPEDIENT AND NECESSA RY FOR HIM TO MAKE A REFERENCE UNDER THAT PROVISION. 3. THAT THE LD. CIT(A) GROSSLY ERRED ON FACTS AND I N LAW IN CONFIRMING AN ADJUSTMENT OF RS 13,03,09,390 OUT OF THE TOTAL ADJUSTMENT OF RS 13,22,71,294 MADE BY THE LD. TRANSFER PRICING OFFICER (TPO) TO THE ARM'S LENGTH PRICE ON PROVIDING OF SOFTWARE SERVICES AND OTHER SERVICES D ECLARED BY THE APPELLANT IN RESPECT OF THE INTERNATIONAL TR ANSACTIONS ENTERED INTO BY IT WITH OVERSEAS ASSOCIATED ENTERPR ISES (AES). 4. THAT THE LD. CIT(A) GROSSLY ERRED ON FACTS AND IN LAW IN: (A) REJECTING THE 'TNMM' ANALYSIS UNDERTAKEN BY TH E APPELLANT USING MULTIPLE YEAR DATA TO SUBSTANTIATE THAT ITS INTERNATIONAL TRANSACTIONS WITH ITS AES ARE AT ARM' S LENGTH, AND IN INAPPROPRIATELY USING DATA/ INFORMATION NOT AVAILABLE AT THE TIME OF DOCUMENTATION; 27 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT (B) REJECTING THE FINAL SET OF COMPANIES SELECTED B Y THE APPELLANT AS COM PARABLES WITHOUT HAVING MATERIAL INFORMATION IN POSSESSION TO PROVE THAT THE ANALYSI S UNDERTAKEN BY THE APPELLANT IS INCORRECT AND HENCE WARRANTS A FRESH DETERMINATION OF THE ARM'S LENGTH PRICE BY THE LD. TPO; (C) RESORTING TO ARBITRARY REJECTION OF CERTAIN COM PANIES SELECTED BY THE APPELLANT AS COMPARABLES ON ERRONEO US AND INCONSISTENT REASONS; (D) FAILING TO APPRECIATE THAT THE APPELLANT (BEING A CAPTIVE SERVICE PROVIDER) OPERATES IN A NEAR RISK-FREE ENVI RONMENT AND CONSEQUENTLY THE OPERATING PROFIT MARGINS EARNE D BY COMPARABLE COMPANIES (WHICH, BEING ENTREPRENEURS IN THEIR OWN RIGHT ARE EXPOSED TO ALL THE RISKS ASSOCIATED W ITH THEIR BUSINESS) NEED TO BE SUBJECTED TO A DOWNWARD ADJUST MENT SO AS TO MAKE THEM COMPARABLE WITH THE OPERATING PR OFIT MARGIN EARNED BY THE APPELLANT (WHICH, IN THE ABSEN CE OF ANY SIGNIFICANT RISKS, WOULD TYPICALLY BE MUCH LOWE R); AND (E) FAILING TO APPRECIATE THAT SINCE THE OPERATING PROFIT MARGIN EARNED BY THE APPELLANT (6.6 PERCENT) IS MOR E THAN THE OPERATING PROFIT MARGIN EARNED BY SEVERAL COMPA RABLES (FORMING PART OF THE FINAL SET DERIVED BY THE LD. C IT(A) HIMSELF VIDE ANNEXURE II OF HIS IMPUGNED ORDER), TH E APPELLANT'S 'INTERNATIONAL TRANSACTIONS' WITH ITS ' ASSOCIATED ENTERPRISES' ARE AT ARM'S LENGTH. 5. THAT THE LD. CIT(A) GROSSLY ERRED IN LAW AND ON FACTS BY CONFIRMING THE ACTION OF THE LD. AO OF NOT PROVI DING ANY REASONS FOR NOT ACCEPTING THE APPELLANT'S OBJEC TIONS TO THE ORDER OF THE LD. TPO AS SUBMITTED IN THE DETAIL ED REPLY DATED DECEMBER 18, 2006, AND SIMPLY PROCEEDING TO P ASS AN ORDER U/S 143(3) ON DECEMBER 26, 2006 RATIFYING THE POSITION TAKEN BY LD. TPO, WITHOUT INDEPENDENT APPLICATION OF MIND. 28 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT 6. THAT THE LD. CIT(A) GROSSLY ERRED IN LAW AND ON FACTS BY CONFIRMING THE ACTION OF THE LD. TPO/AO OF DENYI NG THE BENEFIT OF (+/-) 5% MENTIONED IN THE PROVISO TO SEC TION 92C(2) OF THE ACT TO THE APPELLANT. 7. THAT THE LD. CIT(A) ERRED IN FACTS AND IN LAW IN CONFIRMING THE ACTION OF THE LD. AO OF REDUCING THE DEDUCTION CLAIMED BY THE APPELLANT UNDER SECTION 10 A OF ACT TO RS 17,30,35,950 AS AGAINST RS 17,65,26,357 T HEREBY REDUCING THE DEDUCTION BY RS 34,90,407 ON ERRONEOUS AND UNTENABLE GROUNDS. 8. THAT THE LD. CIT(A) ERRED IN FACTS AND IN LAW IN NOT APPRECIATING THAT OTHER INCIDENTAL SERVICES ARE INE XTRICABLY LINKED WITH IT-ENABLED SERVICES PROVIDED BY THE APP ELLANT TO ITS CUSTOMER, AND ARE COVERED BY NOTIFICATION SO /890(E) DATED SEPTEMBER 26, 2000, WHICH IS WIDE ENOUGH TO I NCLUDE ALL SUCH BACK-OFFICE OPERATIONS AND SUPPORT SERVICE S. 23. GROUND NO. 1: THIS GROUND HAS NOT BEEN PRESSED, HENCE REJECTED. 24. GROUND NO. 2: THIS GROUND HAS NOT BEEN PRESSED, HENCE REJECTED. 25. GROUND NO. 3: THIS GROUND HAS NOT BEEN PRESSED, HENCE REJECTED. 26. GROUND NO. 4: THE MAIN DISPUTE IS IN REGARD TO FOLLOWING COMPARABLES SELECTED BY TPO: - BANGALORE SOFTSELL - INFOSYS TECHNOLOGIES LTD. - SATYAM COMPUTER - INTERTEC COMMUNICATIONS - CHERRYSOFT TECHNOLOGIES LTD. - FUTURE SOFTWARE LTD. - MAHINDRA CONSULTING LTD. 29 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT - BRISTAL.COM. INDIA LTD. ? - XCELVISION TECHNOLOGIES LTD. - BANGALORE SOFTSL 27. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES. 28. BANGALORE SOFTSELL : THE ASSESSEE HAS OBJECTED TO THE INCLUSION OF TH IS COMPARABLE ON THE GROUND THAT COMPANY HAS A SIGNIFI CANT RPT OF 34.94%, THEREBY FAILING THE RPT THRESHOLD OF 10% AS APPLIED BY THE LD. CIT(A). FURTHER SUBMISSION IS THAT THE COMPANY HAS ABNORMAL LY HIGH NFA/ SALES RATIO OF 487.51%, THEREBY RENDERING IT FUNCTIONALLY INCOMPARABLE TO THE ASSESSEE. FURTHER, THIS COMPANY IS ALSO ENGAGED IN THE DEVELOPMENT OF SOFTWARE PRODUCTS AND OWNS A SOFTWARE PRODUCT NAMED LEMIT. THE CONTENTION IS THAT SINCE THE COMPANY IS ENGAGED IN THE SOFTWARE PRODUCT DEVELOPMENT, IT CANNOT BE COMPARED WITH A SOFTWARE SERVICE PROVIDER. THE ASSESSEES COUNSEL ALSO POINTED OUT THAT THIS COMPA NY HAS A SIGNIFICANT AMP EXPENDITURE TO SALES OF 6.17% AS COMPARED TO THE ASSESSEE, WHICH DOES NOT INCUR ANY AMP EXPENDITURE. LD. CIT(A) DID NOT EXCLU DE THIS COMPARABLE OBSERVING THAT THERE WAS AGREEMENT BETWEEN THE TPO AND ASSESSEE REGARDING THIS COMPANY BEING A COMPARABLE. HE HAS FURTHER OBS ERVED THAT THE ASSESSEE HAD SUBMITTED THAT THERE WAS NO RELATED PARTY TRANS ACTION. HOWEVER, NOW LD. COUNSEL HAS SUBMITTED THAT IT HAS SIGNIFICANT PARTY TRANSACTION. THEREFORE, WE RESTORE THIS ISSUE TO THE FILE OF LD. CIT(A) TO FI ND OUT THE CORRECT POSITION IN THIS REGARD AND IF THE ASSESSEES CONTENTION REGARD ING RPT IS FOUND TO BE CORRECT THEN THIS COMPARABLE HAS TO BE EXCLUDED. WE ORDER ACCORDINGLY. 29. INFOSYS TECHNOLOGIES LTD. : FOLLOWING THE REASONING FOR AY 2003/04, WE DIRECT THIS COMPARABLE TO BE EXCLUDED FROM THE L IST OF COMPARABLES. 30 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT 30. SATYAM COMPUTERS LTD. : FOLLOWING THE REASONING FOR A.Y. 2003-04, DUE TO LACK OF RELATABLE FINANCIAL DATA, THIS COMP ARABLE IS EXCLUDED FROM THE LIST OF COMPARABLES 31. INTERTEC COMMUNICATIONS : LD. CIT(A) HAS OBSERVED THAT THERE WAS AGREEMENT BETWEEN THE ASSESSEE AND TPO REGARDING EX CLUSION OF THIS COMPANY HAS A COMPARABLE. HE FURTHER OBSERVED THAT ASSESSEE POINTED OUT THAT THERE WAS NO INFORMATION REGARDING RELATED PAR TY TRANSACTION AVAILABLE. 31.1. LD. COUNSEL POINTED OUT THAT THE REVENUE WAS DERIVED FROM SALE OF SOFTWARE PRODUCTS AS MENTIONED IN THE REVENUE RECO GNITION POLICY OF ITS ANNUAL REPORT. 31.2. HAVING HEARD BOTH THE PARTIES, WE FIND THAT T HE SEGMENTAL ACCOUNTS ARE NOT AVAILABLE IN THE ANNUAL REPORT AND, THEREFORE, THE ASSESSEES PLEA IS NOT VERIFIABLE FROM THE ANNUAL REPORT. WE, ACCORDINGLY, CONFIRM THE ORDER OF LD. CIT(A), BECAUSE THERE IS NO DISPUTE AS REGARDS THE FUNCTIONAL PROFILE IS CONCERNED. 32. CHERRYSOFT TECHNOLOGIES LTD.; FUTURE SOFTWARE L TD., MAHINDRA CONSULTING LTD., AND XCEL VERSION TECHNOLOGIES LTD . ALL THESE FOUR COMPARABLES HAVE BEEN EXCLUDED BECAUSE THE FINANCIA L DATA WAS NOT AVAILABLE AT THAT PARTICULAR TIME. LD. COUNSEL POIN TED OUT THAT NOW THE FUNCTIONAL DATA IS AVAILABLE OF ALL THE FOUR COMPAN IES AND, THEREFORE, WE RESTORE ALL THESE FOUR COMPARABLES TO THE FILE OF L D. CIT(A) FOR VERIFICATION OF THE DETAILS FROM THE ANNUAL REPORTS AND THEN ARRIVE AT HIS CONCLUSION. 33. GROUND NOS. 7 & 8: FOLLOWING OUR ORDER FOR AY 2 003-04 WE HOLD THAT THE SERVICES PROVIDED BY THE ASSESSEE BEING PART O F BACK OFFICE OPERATION AND SUPPORT SERVICES ARE ELIGIBLE TO BE CONSIDERED AS PART OF EXPORT TURNOVER, IN VIEW OF NOTIFICATION NO. 890(E) DATED 26-9-2000. GROUNDS ARE ALLOWED. 31 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT ITA 2245/DEL/2008 (REVENUES APPEAL FOR AY 2004-05) : 34. SOLE EFFECTIVE GROUND RAISED IS AS UNDER: 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LEARNED CIT (A) HAS ERRED IN REDUCING ADDITION ON A CCOUNT OF UPWARD ADJUSTMENT OF ARM'S LENGTH PRICE BY RS. 19,61,904/- IGNORING THE SPECIFIC FINDINGS OF AO/TP O. 35. IN VIEW OF OUR FINDINGS IN THE ASSESSEES APPEA L FOR AY 2003-04, THE AO WILL HAVE TO CARRY OUT FRESH COMPUTATION AND WIL L, ACCORDINGLY, DETERMINE THE ALP. THEREFORE, THIS GROUND AT PRESEN T DOES NOT REQUIRE ANY ADJUDICATION. 36. IN THE RESULT, DEPARTMENTAL APPEAL IS DISMISSED . ORDER PRONOUNCED IN OPEN COURT ON 09/09/2015. SD/- SD/- (C.M. GARG.) (S.V. MEHROTRA JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 09-09-2015. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT(A) 4. CIT 5. DR (ITAT) 32 ITA 2297 & 2298/DEL/08 - & 2244 & 2245/DEL/08 ALCATEL LUCENT TECHNOLOGIES INDIA P. LTD. VS. DCIT - + DATE INITIAL 1. DRAFT DICTATED ON 14 - 08.2015 PS 2. DRAFT PLACED BEFORE AUTHOR 14 .08.2015 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.
