Sageezza India Pvt. Ltd., CHENNAI V. DCIT, CHENNAI

ITA 3323/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7435 (ITAT-CHENNAI)
• Duration Of Justice: 3 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-03-2017
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 11-01-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 08-12-2016
• Court: TRIBUNAL
• Department Lawyers: MILIND MADHUKAR BHUSARI
• Assessee Lawyers: S VIDYAC A
• Keywords: Business income; Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI , . ! '# BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A.NO.3323/MDS./2016 / ASSESSMENT YEAR : 2012-13 M/S.SAGGEZZA INDIA P LTD., 9E, 9 TH FLOOR, IIR MADRAS RESEARCH PARK, KANAGAM ROAD, TARAMANI, CHENNAI 600 013. VS. DCIT, CORPORATE CIRCLE 6(1), CHENNAI. [PAN AAJCS 2643 H] ( $% / APPELLANT) ( &'$% /RESPONDENT) / APPELLANT BY : MS.S.VIDYA,C.A /RESPONDENT BY : MR.MILIND MADHUKAR BHUSARI, CIT DR / DATE OF HEARING : 11 - 01 - 201 7 !' / DATE OF PRONOUNCEMENT : 22 - 03 - 2017 ( / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL OF THE ASSESSEE ARE DIRECTED AGAINST AS SESSMENT ORDER DATED 27.10.2016 FOR A.Y 2012-13, CONSEQUENT TO THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (DRP)-2, BANGALORE, DATED 26.09.2016 U/S. 143(3) R.W.S.1443 AND 92CA(3) OF THE ACT. ITA NO. 3323/MDS./2016 :- 2 -: 2. THE ONLY GRIEVANCE OF ASSESSEE IN ITS APPEAL I S WITH REGARD TO REJECTING THE ADJUSTMENT MADE BY THE ASSESSEE FOR T HE NON-OPERATIONAL EXPENSES. 3. ASSESSEES APPEAL HAS BEEN FILED LATE BY 03 DAY S. CONDONATION PETITION HAS BEEN FILED. WE HAVE GONE THROUGH THE CONDONATION PETITION STATING THAT THE DELAY WAS OCCURRED ON THE REASON THAT THE DIRECTOR OF THE COMPANY WAS OUT OF STATION AND AS SOON AS HE CAME, THE APPEAL WAS FILED WITH THREE DAYS DELAY. IN OUR OPINION, THE REASONS EXPLAINED BY THE LD. AR FOR FILING THE APPEAL BELAT EDLY IS BONAFIDE. ACCORDINGLY, THE DELAY IS CONDONED. 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE COMPANY IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND IT ENABLED SERVICES. THE ASSESSEE FILED ITS RETURN OF INCOME F OR ASSESSMENT YEAR 2012-13 ON 13.09.2012 DECLARING A LOSS OF ` 7,30,694/- AFTER CLAIMING REFUND OF ` 14,96,700/-. AS THE COMPANY WAS HAVING INTERNATIONA L TRANSACTIONS, A REFERENCE WAS MADE TO TPO U/S.92CA OF THE ACT. THE TPO PASSED AN ORDER U/S.92CA DATED 27.01.2016 MAKIN G AN UPWARD ADJUSTMENT OF ` 2,64,00,000/- TO THE EXPENSES INCURRED BY THE ASSES SEE COMPANY DISREGARDING THE ADJUSTMENTS MADE BY THE AS SESSEE TO ARRIVE AT THE OPERATING EXPENSES. ITA NO. 3323/MDS./2016 :- 3 -: 4.1 THE LD. TPO OBSERVED THAT ADOPTING TNMM AS THE MOST APPROPRIATE METHOD TO SUBSTANTIATE THE ARMS LENGTHINESS OF THE IR TRANSACTION WITH THE ASSOCIATED ENTERPRISES, THE ASSESSEE HAS SHORT-LIST ED EIGHT COMPARABLE COMPANIES WHOSE MARGIN IS 38% AS AGAINST THE ASSESS EES MARGIN OF 57% AFTER MAKING SUITABLE ADJUSTMENT FOR THE NON-OPERAT ING COSTS AS PRESCRIBED IN THE ACT. HENCE THE APPELLANT HOLDS THE TRANSACTI ON TO BE WITHIN ARMS LENGTH. IT WAS ALLEGED THAT THE APPELLANT HAD ADOPT ED THREE YEARS WEIGHTED MARGIN WHICH IS NOT IN COMPLIANCE WITH RULE 10B(IV) AND FURTHER ALLEGED THAT THE ASSESSEE HAS CHOSEN COMPANIES WHICH ARE NOT OF COMPARABLES TO IT. HOWEVER THE TPO HAS REJECTED THE ENTIRE ADJUSTMENT OF NON-OPERATING COSTS TO ARRIVE AT THE PLI CALCULATION AND COMPARISONS WE RE MADE BEFORE GIVEN EFFECT TO THE NON-OPERATING COSTS. ALSO ECONOMIC AD JUSTMENTS MADE BY THE APPELLANT WERE ALSO NOT ACCEPTED. FURTHER, THE LD. TPO HAS ALSO REJECTED THE COMPARABLE SELECTED BY THE ASSESSEE ALLEGEDLY STAT ING THAT THEY DID NOT MEET CERTAIN CRITERIA AS DISCUSSED IN THE ORDER DAT ED 21.01.2116. THE REASONS OF REJECTION IN THE SHOW CAUSE NOTICE DATED 21.12.2015 AND PROPOSED UPWARD ADJUSTMENT WAS REPRODUCED BELOW:- GEOMETRIC LTD FAILS THE RPT FILTE INFO SYS LTD EXTRA ORDINARY EVENT: INFOSYS CONSULTING INC MERGED WITH INFOSYS LTD DURING FY 11-12 WIPRO EXTRA ORDINARY EVENT: WIPRO ACQUIRED THE OIL & GAS IT PRACTICE OF SCIENCE APPLICATIONS INTERNATIONAL CORPORATION MC, DELEWARE, USA TECH MAHINDRA FAILS THE RPT FILTE TCS FAILS THE RPT FILTE ITA NO. 3323/MDS./2016 :- 4 -: 4.2 ACCORDINGLY, AN INDEPENDENT SEARCH CONDUCTED B Y THE TPO REJECTING THE TP STUDY MADE BY THE ASSESSEE, HAS APPLIED THE FOLLOWING FILTERS TO DETERMINE FUNCTIONALLY SIMILAR COMPARABLES: 1 ALL INDUSTRIES SERVICES IT, SOFTWARE & CONSULTANCY 2 FINANCIALS NOT AVAILABLE 3 SALES ABOVE RS.1 CRORE 4 (TRADING +RENTAL)/SALES) * 100<30% SELECTED 5 CONSECUTIVE LOSSES WERE REJECTED 6 RPT IS MORE THAN 25% WHERE REJECTED 7 EXPORT T URNOVER ABOVE 75% ARE SELECTED 8 FUNCTIONALLY DISSIMILAR 4.3 THE LEARNED TPO REJECTED THE CONTENTIONS OF TH E ASSESSEE IN THE SHOW CAUSE NOTICE DATED 21.12.2015 ON THE GROUND THAT: THE ABOVE CONTENTION OF THE ASSESSEE IS NOT ACCEPT ABLE BECAUSE IN THE EVENT OF SUCH PROJECTS GENERATING REVENUE ONLY IN THE FUTURE, THE EXPENSES TOWARDS THE SAME SHOULD HAVE BEEN CAPI TALIZED AS WORK-IN PROGRESS TILL SUCH TIME WHICH IS NOT SO I N THE CASE OF THE ASSESSEE. 4.4 THE LEARNED TPO PROCEEDED TO TREAT THE EMPLOYEE COST AND CONSULTANCY CHARGES AS OPERATING COST AND ESTIMATED THE PROFIT LEVEL INDICATOR (PLI) AS 18.95%. 4.5 ACCORDINGLY, ARMS LENGTH PRICE OF THE TRANSA CTION WAS DETERMINED AT RS.15.86 CRORES AND AS THE MARGIN OF THE APPELLANT COMPANY DID NOT FALL WITHIN THE 5% RANGE OF THE ALP, AN ADJUSTMENT OF R S. 2,64,00,000/- WAS MADE. 4.6 FURTHER, THE APPELLANT ALSO SUBMITTED ITS ALTE RNATIVE ANALYSIS UNDER CUP AS DURING THE FINANCIAL YEAR THE ASSESSEE HAD C ARRIED OUT JOBS BOTH FOR ITA NO. 3323/MDS./2016 :- 5 -: AE AND NON-AE CLIENTS. THE LEARNED TPO REJECTED THE SAME FOR THE REASON THAT, THE ASSESSEES CORROBORATIVE ANALYSIS UNDER T HE CUP METHOD DURING THE COURSE OF THE ASSESSMENT IS NOT ACCEPTABLE BECAUSE, THE ASSESSEE HAS NOT SUBMITTED ANY AGREEMENT WITH THE NON-AE THAT WOULD DETAIL ITS FUNCTIONS AND THE METHOD OF REMUNERATION. IN THE ABSENCE OF SUCH INFORMATION WHEREIN THE FUNCTIONS, ASSETS AND RISKS ARE ASSUMED BY THE ASSE SSEE AND THE NON-AE IS NOT ASCERTAINABLE, THE COMPARABILITY OF THE SAME WI TH THE TRANSACTIONS OF THE ASSESSEE CANNOT BE AFFIRMED. ALSO SINCE THE ASSESSE E ITSELF HAS ADOPTED TNMM AS THE MAM IN ITS TP STUDY AND IN THE FORM NO3 CEB THE REASONS FOR A CHANGE IN THE METHOD DURING THE COURSE OF THE PROCE EDINGS WITHOUT ANY REASONING IS NOT ACCEPTABLE. 4.7 THE LEARNED TPO HAS STATED THAT THE APPELLANT HAS NOT SUBMITTED ANY AGREEMENT WITH THE NON-AE DETAILING ITS FUNCTIONS A ND THE METHOD OF REMUNERATION AND FOR THE SAME REASON THE TPO HAS NO T ACCEPTED THE COMPARABILITY OF THE SAME WITH THE TRANSACTIONS OF THE APPELLANT COMPANY. THE TPO HAS ALSO STATED THAT THE CHANGE IN METHOD D URING THE COURSE OF PROCEEDING FROM TNML TO CUP HOWSOEVER REASONABLE MA Y BE IS NOT ACCEPTABLE. THE APPELLANT HAS ALSO STATED FOR THE PROVISIONS OF ADJUSTMENT ON ACCOUNT OF EMPLOYEE AND CONSULTANCY COST, THOUGH GENERALLY ENTERPRISE HAS INSUFFICIENT CONTROL OVER THE EXPECTED FUTURE B ENEFITS ARISING FROM A TEAM OF SKILLED STAFF AND FROM TRAINING TO CONSIDER THAT THESE ITEMS MAY BE IDENTIFICATION OF INTANGIBLE ASSETS. IT WAS STATED THAT THE NON-OPERATIVE EXPENSES SUCH AS THESE INCURRED IN THE TRAINING OF EMPLOYEES WHO ARE NOT ASSOCIATED WITH THE PROJECT EXECUTED AND BUILT SHOU LD BE TREATED AS NON- ITA NO. 3323/MDS./2016 :- 6 -: OPERATIVE. THE LEARNED TPO REJECTED THIS SUBMISSION FOR THE FOLLOWING REASONS: I) THE FINANCIALS DO NOT THROW ANY LIGHT ON THE ASS ESSEES CLAIM. ASSESSEES DID NOT CHOOSE TO FILE ITS DIRECTORS REP ORT TO VERIFY ANY SUCH COMMENTS. II) FURTHER THE ASSESSEE HAS LISTED THE PROJECTS AL ONGSIDE WHICH THE SAID ADJUSTMENT IS CLAIMED. HOWEVER, THE ASSESSEE HAS NO T BEEN ABLE TO FURNISH INFORMATION ON WHETHER THESE ARE PROJECTS F OR THE AE OR THE NON-AE. THE LEARNED TPO HAS COME UP WITH HIS OWN CO MPARABLES AS FOLLOWS: NAME OF THE COMPANY MARGIN (OPIOC) EVOKE TECHNOLOGIES LTD 11.71 MINDTREE LTD 15.01 R.S. SOFTWARE INDIA LTD 15.31 LARSEN & TOUBRO INFOTECH 23.82 PERSISTENT SYSTEMS LTD 24.59 THIRDWARE SOLUTIONS LTD. 28.18 GOLDSTCINE TECHNOLOGIES LTD 10.88 CTIL LIMITED 15.83 SPRY RESOURCES INDIA LTD 25.18 AVERAGE 18.95 4.8 THEREFORE, THE ALP, AS ALLEGEDLY, DID NOT FALL WITHIN THE 5% RANGE OF THE INTERNATIONAL TRANSACTION, AN UPWARD ADJUSTMENT OF ` 2,64,00,000/- WAS PROPOSED TO THE VALUE OF INTERNATIONAL TRANSACTION WHICH WAS THEN CONFIRMED ITA NO. 3323/MDS./2016 :- 7 -: BY THE ITO WHO HAD PASSED THE DRAFT ASSESSMENT ORDE R UNDER SECTION 143 (3) READ WITH SECTION 92CA DATED 14.03.20 16 AND AD DING THE SAME AMOUNT TO THE ASSESSEES TOTAL INCOME FOR THE RELEVANT ASS ESSMENT YEAR. THE ASSESSEE FILED THE DETAILED OBJECTIONS TO THE ABOV E DRAFT ASSESSMENT ORDER BEFORE THE DISPUTE RESOLUTION PANEL, BANGALORE. THE DRP, VIDE ORDER DATED 26.09.2016, HAS GIVEN DIRECTIONS REJECTING INTER-AL IA, THE OBJECTIONS BY THE ASSESSEE. CONSEQUENTLY, THE AO PASSED THE ASSESSMENT ORDER ON 27.10.2016. AGAINST THIS ASSESSEE IS IN APPEAL BEFO RE US. 5. BEFORE US, THE LD.A.R SUBMITTED THAT THE TRANSFER PRICING OFFICER HAD PASSED THE ORDER ON 27/01/2016 PROPOSING AN UPWARD ADJUSTMENT OF RS 2.64 CRORES TO THE VALUE OF INTERNATIONAL TRANSACTI ONS. LD.A.R FURTHER SUBMITTED THAT THE ASSESSEE HAD ADOPTED TNMM AS THE MAM TO BENCHMARK ITS TRANSACTIONS WITH THE AE. HOWEVER, THE APPELLAN T HAD ADOPTED 3 YEARS WEIGHTED MARGIN WHICH IS NOT IN COMPLIANCE OF WITH RULE 10B(4). THE APPELLANT HAD ALSO CLAIMED CERTAIN ECONOMIC ADJUSTM ENTS WHICH WERE NOT FOUND TO BE ACCEPTABLE. THE TPO HAD REJECTED THE CL AIM OF REDUCTION OF EXTRA ORDINARY EXPENSES WHILE ARRIVING AT THE PLI ON THE FOLLOWING GROUNDS: 1. THE FINANCIALS DO NOT THROW LIGHT ON THE ASSESSE ES CLAIM. THIS COST IS NOT A DISTINCT LINE ITEM IN THE FINANCIALS. 2. THERE WERE NO COMMENTS MADE IN THE FINANCIALS AS TO WHETHER SUCH AN EVENT HAS A MATERIAL IMPACT ON THE PROFITABILITY OF THE YEAR UNDER CONSIDERATION. 3. ASSESSEE DID NOT CHOOSE TO FILE ITS DIRECTORS R EPORT TO VERIFY SUCH COMMENTS. ITA NO. 3323/MDS./2016 :- 8 -: 4. FURTHER THE ASSESSEE HAS LISTED THE PROJECTS ALO NGSIDE WHICH HE SAID ADJUSTMENT IS CLAIMED. HOWEVER THE ASSESSEE HAS NOT BEEN ABLE TO FURNISH I NFORMATION ON WHETHER THESE ARE PROJECTS FOR THE A.E OR NON-AE. IN THE ABSENCE OF ANY OF THE INFORMATION, AND IN TH E ABSENCE OF THE RELEVANT DATA NOT BEING VISIBLE IN THE FINANCIALS O F THE ASSESSEE, SUCH A CLAIM CANNOT BE ENTERTAINED 5.1 ACCORDING TO LD.A.R, THE MONTH WISE DETAILS O F SALARY COST FOR THE A.Y UNDER REVIEW AND AY 2013-14 TOGETHER WITH THE MONTH WISE REVENUE FOR BOTH THE YEARS IS FURNISHED BEFORE THE AUTHORITIES. FROM THE SAID ANNEXURE, IT IS EVIDENT THAT THE APPELLANT HAD PROCURED WORK ORD ERS DURING THE AY UNDER REVIEW AND HAD RECRUITED EMPLOYEES TO PROVIDE TRAIN ING TO THEM FOR THE NEW PROJECTS. DURING MARCH 2012, THE APPELLANT HAD PAID AN AMOUNT OF ` 173 LAKHS AS AGAINST THE AVERAGE COST OF ` 66.54 LAKHS PER MONTH. FROM AY 2013- 14, THERE HAS BEEN A STEADY INCREASE IN THE REVENUE OF THE COMPANY ON ACCOUNT OF THE NEW PROJECTS. MOREOVER, THERE HAS NO T BEEN ANY REVISION IN THE PRICING PATERN OF THE APPELLANT WITH ITS ASSOCI ATE COMPANY IN ANY OF THE YEARS. THE SAME WAS NOT DISPUTED BY THE AO IN THE C OURSE OF THE ASSESSMENT PROCEEDINGS FOR THE AY 2013-14 AND 2014- 15. HENCE, LD.A.R PLEADED THAT THE COST CLAIMED BY THE APPELLANT IS A N EXTRA ORDINARY COST AND THE SAME HAS TO BE EXCLUDED FROM THE OPERATING COST WHILE ARRIVING AT THE PLI MARGIN. 6. ON THE OTHER HAND, LD.D.R SUBMITTED THAT IN THE ASSESSEE COMPANY ANNUAL REPORT, NO SUCH SPECIAL REFERENCE HAS BEEN M ADE WITH REGARD TO ITA NO. 3323/MDS./2016 :- 9 -: EXTRAORDINARY NATURE OF SUCH EXPENSES IMPACT THE P ROFITS OF THE COMPANY. IT IS SUBMITTED THAT NO COMPANY IN SOFTWARE SECTOR WOU LD RELY ON THE BARE MINIMUM MANPOWER TO RUN ITS BUSINESS. HE SUBMITTED THAT ACCORDING TO NASSCOM, THE ATTRITION RATE IN IT INDUSTRY RANGE BE TWEEN 15% TO 18%. CONSIDERING THIS FACT GIVEN BY NASSCOM, THERE IS N OT ANYTHING EXTRAORDINARY IN MANPOWER RECRUITED BY THE ASSESSEE AS ALL OVER T HE INDUSTRY ADDITIONAL RECRUITMENT OF 30% TO 40% WAS BEING DONE TO DEAL WITH THE ISSUE OF ATTRITION AND HIGH GROWTH. FURTHER, SUCH MANPOWER H AS TO BE ALWAYS KEPT TRAINED SO THAT THEY CAN HANDLE VARIOUS PROJECTS, W HENEVER REQUIRED. SO AFTER RECRUITMENT THEIR TRAINING STARTS AND THEY ARE TRAI NED TO HANDLE NEW PROJECTS OR TO TAKE OVER THE EXISTING PROJECTS. THE PROJECTS WHICH ARE IN FINAL STAGES OF ALLOTMENT ARE ALSO STARTED IN ADVANCE AND THE MANPO WER IS DEPLOYED FOR THE SAME AS NOBODY WOULD LIKE TO KEEP THE MAN POWER ID LE. SO EVEN IF THE FINAL OUTPUT OF THE MANPOWER GETS DELIVERED IN FUTURE, TH IS IS FUNCTIONAL MODEL OF THE BUSINESS. SO THERE IS NOTHING EXTRA ORDINARY IN THE CASE OF THE ASSESSEE, WHICH REQUIRES ADJUSTMENT IN ITS PLI. FURTHER, THE ADJUSTMENT , IF ANY, HAS TO BE DONE IN THE MARGIN OF THE COMPARABLES TO BRING T HEM AT PAR WITH THE ASSESSEE. HOWEVER, THE COMPARABLES SELECTED FOR DET ERMINATION OF ALP WILL ALSO BE SIMILARLY SITUATED. NOTHING HAS BEEN BROUGH T ON RECORD BY THE ASSESSEE TO SHOW THAT IT WAS AT A DISADVANTAGEOUS P OSITION VIS A VIS THE COMPARABLES IN THIS REGARD. CONSIDERING THE ABOVE FACTS AND CIRCUMSTANCES, THE RECRUITMENT CHARGES AND SALARY PAID TO SUCH EMP LOYEES DURING THE YEAR UNDER CONSIDERATION CANNOT BE TREATED AS NON-OPERAT ING IN NATURE. HENCE, THE CONTENTION OF THE ASSESSEE MAY NOT BE ACCEPTED . ITA NO. 3323/MDS./2016 :- 10 - : 6.1 FURHTER, LD.D.R SUBMITTED THAT THE ASSESSEE HA D ALSO CLAIMED CERTAIN EXPENDITURE INCURRED FOR CERTAIN INTERIOR MODIFICAT ION AND CONSULTANCY CHARGES PAID TO C.A, WHICH IS NOT OPERATING EXPENSE S. ACCORDING TO LD.D.R, THE ASSESSEE DID NOT RAISE THE ISSUE BEFORE THE TPO AND DID NOT SUBMIT ANY DETAILS IN THIS REGARD. THESE EXPENSES ARE RELATED TO ROUTINE EXPENDITURE AND OPERATING IN NATURE. FURTHER, ADJUSTMENT, IF ANY, H AS TO BE DONE IN THE MARGINS OF THE COMPARABLES TO BRING THEM AT PAR WIT H THE ASSESSEE. HOWEER, NOTHING HAS BEEN BROUGHT ON RECORD BYTHE ASSESSEE T O SHOW THAT IT WAS AT A DISADVANTAGEOUS POSITION VIS A VIS THE COMPARABLES IN THIS REGARD. THEREFORE, LD.D.R PLEADED THAT THE CONSULTANCY CHARGES AND INT ERIOR MODIFICATION PAID DURING THE ASSESSMENT YEAR CANNOT BE TREATED AS NON -OPERATING IN NATURE. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE ASSESSEE HEREIN ENGAGED IN PROVIDING WIDE RANGE OF INFORMATION TECHNOLOGY SOLUTIONS TO A GLOBAL CLIENTELE IN A COS T EFFECTIVE MANNER. IN THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE E NGAGED IN INFORMATION TECHNOLOGY AND ENGINEERING SOLUTIONS AND SERVICES I NCLUDE CUSTOMER COMMUNICATION MANAGEMENT APPLICATIONS, SPECIFICALLY ASSESSEE ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND CARRIED OU T THE JOB DURING THE FINANCIAL YEAR BOTH TO THE A.E AND NON-A.E CUSTOMER S. THE ASSESSEE HAS EMPLOYED AN AVERAGE 250 PERSONALS EMPLOYEED FOR TH E SERVICES RENDERED OF WHICH 90 PERSONALS WERE RECRUITED FOR FUTURE PROJEC T REQUIREMENTS IN THE SUBSEQUENT ASSESSMENT YEARS. SINCE THE ASSESSEE IS A SOFTWARE DEVELOPMENT, THE MAIN COST OF THE ASSESSEE IS MANPO WER COST, RENT, ITA NO. 3323/MDS./2016 :- 11 - : COMMUNICATION EXPENSES AND TRAVELLING EXPENSES, WHI CH NORMALLY VARIES IN PROPORTION TO THE TURNOVER. USUALLY, THE ASSESSEE K EEPS MANPOWER MORE THAN 10% OF THE REQUIREMENTS AS THE ADDITIONAL MANP OWER REQUIRES AS AND WHEN ADDITIONAL ORDERS RECEIVED BY ASSESSEE AND ALS O AS THE ASSESSEE ANTICIPATES NEW JOB ORDER AND IT WAS VERY DIFFICULT TO GET THE NEW TRAINED SOFTWARE PERSONAL AT A SHORT DURATION SO AS TO EXE CUTE THE JOB ORDER IN TIME, AS THE TRAINING OF PERSONAL REQUIRES TIME. IN THE A SSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE ENTERED INTO INTERNATIO NAL TRANSACTIONS IN RESPECT OF SOFTWARE SERVICE WITH A.E VIZ., M/S.SAGGEZZA INC . AND VALUE OF COMMERCIAL TRANSACTION WITH THAT A.E AT ` 13,22,91,197/-. ORIGINALLY, THE ASSESSEE APPLIED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD TO ARRIVE THE ALP BY MAKING COMPARISON OF OP ERATING PROFIT EARNED DURING THE YEAR WITH THE A.E VIZ. M/S.SAGGEZZA INC. , USA. LATER, THE ASSESSEE ADOPTED THE CUP METHOD TO BENCHMARK THE TR ANSACTIONS WHICH WAS REJECTED BY THE TPO ON THE REASON THAT THE ASSESSEE HAS NOT FURNISHED THE RELEVANT AGREEMENT WITH THE NON-A.E. THE LD. TPO A LSO REJECTED THE TP STUDY CONDUCTED BY THE ASSESSEE, AS THE ASSESSEE HA D ADOPTED THREE YEARS WEIGHTED MARGIN, WHICH IS NOT IN COMPLIANCE OF WITH RULE 10B(4), THE ASSESSEE HAD CLAIMED CERTAIN ECONOMIC ADJUSTMENTS, WHICH WERE NOT APPRECIATED BY THE TPO. EVEN, THE COMPARABLES SELEC TED BY THE COMPANY WAS REJECTED BY THE LD. TPO AND PROPOSED UPWARD ADJ USTMENTS BY THE TPO. THE TPO CONSIDERED 8 COMPARABLES AND THEIR ARITHMET IC MEAN WORKED OUT AT 18% WHILE COMPUTING THE PROFIT LEVEL INDICATOR (PLI ). THE LD. TPO CONSIDERED THE EMPLOYEE SALARY COST AND CONSULTANCY CHARGES AS OPERATING ITA NO. 3323/MDS./2016 :- 12 - : COST. AGAINST THE CLAIM OF ASSESSEE, THE NON-OPERA TING COST, IT WAS SUBMITTED BY THE ASSESSEE THAT THESE EXPENSES WERE INCURRED TOWARDS PRODUCTS BEING DEVELOPED FOR FUTURE USE. ACCORDING TO LD. TPO, THE REVENUE FROM THE PROJECT IS GENERATED ONLY IN FUTURE AND TH IS EXPENDITURE TO BE CAPITALIZED AS WORK-IN-PROGRESS. THE LD. TPO HAS TR EATED IT AS OPERATING COST AND COMPUTED THE OPERATING MARGIN OF THE ASSESSEE ( -) 0.81%. THUS, THE TPO ARRIVED AT ALP AND MADE UPWARD ADJUSTMENTS AT ` 2.64 CRORES. NOW, THE MAIN CONTENTION OF THE LD.A.R IS THAT IMPUGNED MAN POWER AND CONSULTANCY CHARGES ARE NON-OPERATING COST, IT CANN OT BE CONSIDERED AS WORK-IN-PROGRESS. 7.1 THE LD.D.R DREW OUR ATTENTION IS THAT THERE IS NO COMMENT MADE IN THE FINANCIALS OF THE ASSESSEE AS TO WHETHER SUCH A N EVENT HAS A MATERIAL IMPACT ON THE PROFITABILITY OF THE YEAR UNDER CONSI DERATION AND THE ASSESSEE HAS NOT FILED ITS DIRECTORS REPORT TO VERIFY ANY S UCH COMMENTS. HENCE, THE TPO CONSIDERED THE EMPLOYEE SALARY COST AND CONSULT ANCY CHARGES AS PART OF THE OPERATING COST AND PLI COMPUTED. IN OUR OPINION , THIS CANNOT BE A REASON TO REJECT THE CLAIM OF ASSESSEE. THIS IMPUG NED EXPENDITURE ON EMPLOYEES AND CONSULTANCY CHARGES, WHICH IS NOT REL ATING TO THE PROJECT EXECUTED AND BILLED IN THE ASSESSMENT YEAR UNDER CO NSIDERATION. AS SUCH, IT CANNOT BE CONSIDERED AS OPERATIVE EXPENSES. FURTHE R, SUCH EXPENSES WERE NOT INCURRED WITH REFERENCE TO ANY SPECIFIC PROJECT AND IT CANNOT BE CONSIDERED AS WORK-IN-PROGRESS. IT IS ADMITTED THA T THE ASSESSEE IS IN SECOND YEAR OPERATION AND COMPARISON OF FINANCIALS WITH BI G UNDERTAKING, WHO ARE IN PIONEER IN THE SIMILAR KIND OF BUSINESS, IS NOT APP ROPRIATE AS THE ASSESSEE ITA NO. 3323/MDS./2016 :- 13 - : WAS NOT IN ADVANTAGEOUS POSITION AS THESE COMPARABL ES. IT HAS TO BE NOTED THAT THE ASSESSEE HAS NOT EXERCISED SUFFICIENT CONT ROL OVER THE EXPECTED FUTURE BENEFITS ARISING FROM A TEAM OF SKILLED STAF F AND FROM TRAINING SO AS TO CONSIDER THAT THESE ITEMS MEET THE IDENTIFICATION O F INTANGIBLE ASSETS. THE ASSESSEE HAS SUBMITTED THAT THE EMPLOYEE COST HAS I NCREASED FROM 46% TO 61% OF THE TOTAL SALES DURING THE FINANCIAL YEAR 20 11-12 WHILE IT HAS STABILIZED AT 68% - 69%, WITH INCREASE IN VOLUME IN THE SUBSEQUENT YEARS. IN OUR OPINION, THE ASSESSEES BUSINESS MODULE CANN OT BE STRAIGHTWAY COMPARED WITH OTHER COMPARABLES, UNLESS THE EXTRAOR DINARY ITEM OF EXPENDITURE EXCLUDED WHILE COMPARING SO AS TO ARRIV E AT CORRECT MARGIN OF PROFIT. IT WAS BROUGHT TO OUR NOTICE THAT TPO HAD A CCEPTED THE PRICING PATTERN OF THE ASSESSEE IN THE SUCCEEDING ASSESSME NT YEAR NAMELY 2013-14 & 2014-15 AND THERE WAS TRANSFER PRICING ADJUSTMENT IN THESE ASSESSMENT YEARS. IT IS ALSO BROUGHT TO OUR NOTICE THAT THERE IS A STEADY INCREASE IN REVENUE GENERATED BY THE ASSESSEE IN THE SUBSEQUENT ASSESSMENT YEAR ON ACCOUNT OF NEW PROJECT WITHOUT ANY CHANGE IN PRICI NG PATTERN OF THE PROJECT WITH THE SAME A.E. IN SUCH CIRCUMSTANCES, IT IS NO T APPROPRIATE TO IGNORE THE EXTRAORDINARY ITEMS OF EXPENDITURE IN THE FORM OF E MPLOYEE SALARY COST AND CONSULTANCY CHARGES INCURRED BY THE ASSESSEE IN THE ASSESSMENT YEAR UNDER CONSIDERATION. HENCE, WE ARE OF THE OPINION THAT A N ADJUSTMENT HAS TO BE GIVEN TOWARDS THIS, WHILE COMPUTING THE ALP AS ONCE THE ADJUSTMENT IS MADE, THE PLI WOULD BE HIGHER THAN THAT OF COMPARAB LE ARRIVED AT 26%. IN OUR OPINION THERE CANNOT BE ANY UPWARD ADJUSTMENT OF ` 2.64 CRORES TO THE ITA NO. 3323/MDS./2016 :- 14 - : VALUE OF INTERNATIONAL TRANSACTION IN THE ASSESSMEN T YEAR UNDER CONSIDERATION. ACCORDINGLY, THE GROUND TAKEN BY TH E ASSESSEE IS ALLOWED. 8. SINCE, WE HAVE ALLOWED THE MAIN GROUND IN THE APPEAL OF ASSESSEE, THERE IS NO QUESTION OF LEVY OF PENALTY U/S.271(1)( C) OF THE ACT FOR FURNISHING INACCURATE PARTICULARS OF INCOME OR CONCEALMENT OF INCOME. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS A LLOWED. ORDER PRONOUNCED ON 22 ND MARCH, 2017, AT CHENNAI. SD/ - SD/ - ( . ) ( G.PAVAN KUMAR ) ! / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER #$ / CHENNAI %& / DATED: 22 ND MARCH, 2017. K S SUNDARAM &'(()*( +* / COPY TO: ( 1 . / APPELLANT 3. ( ,(- . / CIT(A) 5. */0 (1 / DR 2. / RESPONDENT 4. ( , / CIT 6. 02(3 / GF