Nortel Networks India Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 427/DEL/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 74197 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 1 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-02-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2008-2009
• Appeal Filed On: 23-01-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction; Rule of consistency; Working capital adjustments; Wholly owned subsidiary; Non-deduction of tax; Revised return
• Section: 10B; 144

Judgement Text

ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I NEW DELHI BEFORE SHRI R.P. TOLANI AND SHRI SHAMIM YAHYA ITA NOS. 4765/DEL/2011 & 427/DEL/2013 ASSTT. YRS: 2007-08 & 2008-09 NORTEL NETWORKS INDIA P. LTD. VS. ADDL. CIT, RAN GE-13, C-227, GROUND FLOOR, WESTEND MARG, NEW DELHI. PURVANCHAL COMPLEX, NEW DELHI. PAN: ( APPELLANT ) ( RESPONDENT ) APPELLANT BY : SHRI VIJAY IYER ADV. SHRI MANONEET DALAL SHRI SALIL KAPOOR ADV. SHRI SUMIT KHADRIA RESPONDENT BY : SHRI PEEYUSH JAIN CIT (DR) O R D E R PER R.P. TOLANI, J.M: : THESE ARE THE TWO ASSESSEES APPEALS AGAINST THE A SSESSMENT ORDERS FRAMED PURSUANT TO DRP DIRECTIONS U/S 144C, PERTAIN ING TO ASSESSMENT YEARS 2007-08 AND 2008-09. APPEALS INVOLVE ISSUES OF T.P. ADJUSTMENTS AS WELL AS CORPORATE ADDITIONS. 2. VARIOUS ISSUES ARE RAISED, WHICH IN EFFECT ASSAIL T HE T.P. ADJUSTMENTS ON FOLLOWING EFFECTIVE GROUNDS: 1. DISREGARDING THE ECONOMIC ANALYSIS UNDERTAKEN B Y THE ASSESSEE FOR ESTABLISHING THE ARMS LENGTH PRICE OF THE INTERNAT IONAL TRANSACTIONS ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 2 RELATED TO PROVISION OF MARKETING AND SALES SUPPORT SERVICES WITHOUT PROPER JUSTIFICATION. 2. THAT ON THE FACTS AND THE CIRCUMSTANCE OF THE CA SE AND IN LAW, THE LEARNED TPO/ DRP HAVE ERRED IN SELECTION OF CERTAIN COMPARABLES, WHICH ARE FUNCTIONALLY NON COMPARABLE WITH THE ASSESSEE A ND APPLIED CERTAIN ARBITRARY FILTERS FOR THE PURPOSE OF RE-DETERMINING THE ALP OF INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF MARKETING AND AFTER SALES SUPPORT SERVICES TO ASSOCIATED ENTERPRISES, W HICH IS NOT IN ACCORDANCE WITH THE PROVISIONS OF ACT READ WITH RUL ES. 3. THAT THE TPO/ AO HAS ERRED IN DETERMINING THE AR MS LENGTH MARGIN/ PRICE BY USING DATA RELATED TO THE FINANCIAL YEAR 2 006-07 (FOR AY 2007- 08) ONLY, WHICH WAS NOT AVAILABLE TO THE ASSESSEE A T THE TIME OF COMPLYING WITH THE TP DOCUMENTATION REQUIREMENTS. 4. THAT THE TPO/ AO HAS FAILED TO MAKE APPROPRIATE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN THE WORKING CAPITAL EMPL OYED BY THE APPELLANT VIS--VIS THE COMPARABLES. 5. THAT THE TPO/ AO HAS ERRED BY NOT MAKING SUITABL E ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE ASSESSEE VIS--VIS THE COMPARABLES. 3. BRIEF FACTS ARE: NORTEL NETWORKS INDIA PRIVATE LIMI TED (NORTEL INDIA), A WHOLLY OWNED SUBSIDIARY OF NORTEL NETWOR KS MAURITIUS LIMITED (NNML).ITS FUNCTIONS INVOLVE INSTALL, MAINTAIN, REPAIR, SELL AND SUPPLY PLANT, EQUIPMENT AND APPARATUS FOR THE PURPOSE OF C OMMUNICATION OF ALL ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 3 KINDS. THE ASSESSEE IS ALSO ENGAGED IN PROVIDING MA RKETING AND AFTER SALES SUPPORT SERVICES TO NORTEL GROUP. 3.1 IN THE ORDERS FOR AY 2007-08 AND AY 2008-09, THE TP O HAS ACCEPTED THE ARMS LENGTH PRICE OF ALL THE INTERNATIONAL TRA NSACTIONS UNDERTAKEN BY THE ASSESSEE, EXCEPT ONE, NAMELY, PROVISION OF MARKETI NG AND AFTER SALES SUPPORT SERVICES AND CONSIDERED THIS TRANSACTION T O BE NOT AT ARMS LENGTH. 3.2 THE BRIEF FACTS IN RESPECT OF IMPUGNED TRANSACTION ARE THAT ASSESSEE ENTERED INTO A SERVICE AGREEMENT FOR THE PROVISION OF MARKETING AND AFTER SALES SUPPORT SERVICES FROM JULY 1, 2000 ON A COST PLUS MARK-UP BASIS. BY THIS AGREEMENT, ASSESSEE PROVIDES MARKETING AND AFT ER SALES SUPPORT SERVICES TO AES IN RELATION TO SALE OF TELECOMMUNICATION EQU IPMENTS, SOFTWARE AND OTHER IT PRODUCTS TO CUSTOMERS IN INDIA. 3.3 THE ASSESSEE CONSIDERED TNMM AS THE MOST APPROPRIAT E METHOD AND HAS BENCHMARKED THE TRANSACTION TAKING OPERATING PR OFIT/ OPERATING COST (OP/OC) AS PLI. LD TPO THOUGH ACCEPTED ASSESSEES TNMM METHOD AS APPROPRIATE METHOD FOR THE ALP, HOWEVER REWORKED TH E SAME BY APPLYING INAPPLICABLE COMPARABLES AS UNDER. COMPARABLES FOR AY 2007-08 4. IN ITS TRANSFER PRICING ANALYSIS, THE ASSESSEE HAS CONSIDERED SEVEN COMPARABLE COMPANIES, WHOSE AVERAGE UNADJUSTED MARG IN COMES TO 11.57%, TPO HELD TWO OUT OF SEVEN AS NOT COMPARABLE. THE C APITAL TRUST LIMITED WAS HELD AS NOT A COMPARABLE BECAUSE OF LOW REVENUE AS AND CYBER MEDIA EVENTS LIMITED BECAUSE OF RELATED PARTY TRANSACTION EXCEEDING 25% AND HAVING DIMINISHING REVENUE. TPOS REPORT WAS ACCEPT ED BY AO AND INCORPORATED IN DRAFT ASSESSMENT ORDER. 4.1. ASSESSEE BEFORE THE DRP DROPPED ITS OBJECTIONS ON R EJECTION OF CYBER MEDIA AS COMPARABLE BUT INSISTED FOR CONSIDERATION OF CAPITAL TRUST ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 4 LIMITED COMPARABLE. DRP HOWEVER UPHELD TPOS ORDER O N THE GROUND THAT THE TURNOVER OF THE COMPANY IN THE RELEVANT SEGMENT FOR THE YEAR ENDING MARCH 2007 IS RS. 25 LAKH AND CANNOT BE COMPARED WI TH THE COMPANY WHOSE REVENUE FROM BUSINESS SUPPORT SERVICES IS MOR E THAN RS. 134 CRORES. 4.2. DRP IN ITS DIRECTIONS HELD THAT: THOUGH IN THE SERVICE INDUSTRY THOUGH THERE IS NO DISCERNIBLE LINK BETWEEN TURNOVER AND MARGINS BUT COMPANIES WITH VER Y LOW SALES BASE MAY NOT LEAD TO A PROPER COMPARABILITY AS THE DATA OF THESE COMPANIES ARE NOT RELIABLE DUE TO THEIR LOW COST / SALE BASE. FURTHER, THE RELIABILITY OF THE FINANCIAL DATA FOR COMPANIES HAV ING VERY SMALL TURNOVER ARE TO BE EXCLUDED BECAUSE MARGINS EARN BY THESE COMPANIES FLUCTUATE TO EXTREMES BECAUSE OF THE NARROW BASE. SUCH COMPANIES LACK COMPETITIVE STRENGTHS, LACK OPERATIONAL EFFICI ENCIES AND ALSO LACK HUMAN RESOURCES, WHICH IS MAIN STRENGTH OF THE SERV ICE SECTOR. THEREFORE, COMPANY WITH A SMALL TURNOVER OF RS. 25 LACS CANNOT BE COMPARED AS COMPARABLE . RECENTLY ITAT DELHI IN THE CASE OF HAWORTH INDIA PRIVATE LIMITED (2011-TII-64-ITAT-DEL -TP) HELD THAT A COMPARABLE HAVING A SMALL TURNOVER OF (RS. 1 8.78 LACS) CANNOT BE CONSIDERED EVEN IF SEGMENTAL INFORMATION IS AVAI LABLE PARTICULARLY WHEN THE MAIN ACTIVITY IS DIFFERENT. THIS DECISION ALSO PERTAINS TO MSS AND SQUARELY APPLIES TO THE FACTS OF THIS CASE. AGGRIEVED ASSESSEE IS BEFORE US. 5. LD. COUNSEL FOR THE ASSESSEE SHRI VIJAY IYER MAD E FOLLOWING SUBMISSIONS, (I) LOW TURNOVER WILL NOT MAKE ACCOUNTS UNRELIABLE - IT IS SUBMITTED THAT DRP ALSO OBSERVED THAT IN SERVICE IN DUSTRY TURNOVER WILL NOT HAVE EFFECT ON MARGINS OF THE COMPARABLE C OMPANIES. HOWEVER, FINANCIAL DATA OF VERY SMALL COMPANIES ARE NOT RELIABLE AS IT LACK COMPETITIVE STRENGTHS, LACK OPERATIONAL EFFICI ENCIES. IT IS ALSO SUBMITTED THAT DRP WRONGLY NOTED THAT THERE FINANCI AL DATA FOR COMPANIES HAVING SMALL TURNOVER ARE NOT RELIABLE. I T IS PERTINENT TO ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 5 MENTION THAT CAPITAL TRUST LIMITED IS LARGE COMPAN Y WITH TURNOVER OF RS. 13.92 CRORES, THE ASSESSE HAS USED IT SEGMEN TAL PROFITS FOR COMPARABILITY ANALYSIS. THE SMALL SIZE OF SEGMENTA L REVENUE FROM A PARTICULAR STREAM WILL NOT MAKE COMPANIES FINANCIAL UNRELIABLE. WHILE USING TNMM FOR DETERMINING OF ALP, DIFFERENCE SUCH AS TURNOVER ARE NEUTRALISED BY USE OF COMPARABLES WITH WIDE RANGE OF TURNOVER. A RISK MITIGATED CONTRACT SERVICE PROVIDER, LIKE TH E ASSESSEE, IS NOT DEPENDENT ON SCALE OR SIZE OF OPERATIONS. THEREFORE , A TURNOVER CRITERION SHOULD NOT BE APPLICABLE IN THE CASE OF T HE ASSESSEE WHICH OPERATES ON A COST PLUS PRICING MODEL. (II) SEGMENTAL INFORMATION AVAILABLE - CAPITAL TRUST LIMITED HAS MAINTAINED A FOREIGN CONSULTANCY FEE SEGMENT AS PER ACCOUNTING STANDARDS(AS) 17 AS A SEPARATE LINE OF BUSINESS WHICH REINFORCES THE FACT THAT THE MANAGEMENT OF THE CAPITAL TRUST L IMITED CONSIDERS THE FOREIGN CONSULTANCY SEGMENT AS A SIGNIFICANT AN D SEPARATE BUSINESS ACTIVITY AND THE SAME HAS BEEN CONSIDERED BY THE AS SESSEE FOR THE PURPOSE OF THE ANALYSIS. (III) FUNCTIONAL COMPARABILITY IS KEY CRITERIA FOR TNMM - CAPITAL TRUST LIMITED OFFERS CONSULTANCY SERVICES TO FOREIG N BANKS WHICH IS AKIN TO MARKET SUPPORT SERVICES. FURTHER, WHILE US ING TNMM, BROADER COMPARABILITY CAN BE CONSIDERED FOR THE COMPANIES T HAT ARE CONSIDERED AS COMPARABLE WHILE BENCHMARKING. TURNOVER FILTER W AS NOT APPLIED BY EITHER ASSESSEE OR TPO WHILE SELECTING COMPARABL E COMPANIES, A COMPANY CANNOT BE ARBITRARILY REJECTED ON THE BASIS OF A TURNOVER ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 6 5.1. LD. COUNSEL DID NOT PRESS THE GROUNDS ABOUT AN Y OTHER COMPARABLES AND CONTENDS THAT BY INCLUSIONOF CAPITAL TRUST LTD. ITS GRIEVANE WILL BE RESOLVED. 6. LD. DR SUPPORTED THE ORDER OF TPO, AO AND DRP DI RECTIONS. 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. APROPOS CAPITAL TRUST COMPARAB LE, THE TPO HAS OBSERVED THAT PRIMARY BUSINESS OF THIS COMPANY IS A UTOMOBILES SALES AND SERVICE. WE ARE OF THE CONSIDERED VIEW THAT A COMPA NY CANNOT BE EXCLUDED FROM THE COMPARABLES MERELY FOR THE REASON OF HAVIN G LOW TURNOVER. IT IS TO BE APPRECIATED THAT NO TURNOVER FILTER WAS APPLIED BY EITHER OF THE PARITIES. THE COMPARABLE HAS BEEN EXCLUDED BECAUSE THE TOTAL TURNOVER OF THIS COMPARABLE IS RS. 13.92 CRORES. THE ANALYSIS NEEDS TO BE CARRIED OUT ON THE BASIS OF FUNCTIONAL PROFILE AND NOT ON AN ARBITRARY OR ADHOC CRITERIA. FROM THE FACTS ON RECORD AND ARGUMENT ADVANCED BEFORE US, IT EMERGES THAT THE FUNCTIONAL PROFILE OF CAPITAL TRUST LIMITEDS CONSU LTANCY SEGMENT IS SIMILAR TO THAT OF NORTEL INDIA THE SAME NEEDS TO BE INCLUD ED IN THE FINAL COMPARABLES FOR WORKING THE ALP. THE AO WILL ACCORDINGLY APPLY THIS COMPARABLE WHILE WORKING OUT THE ALP, THIS GROUND OF ASSESSEE IS ALL OWED. COMPARABLES FOR AY 2008-09 6. IN TP ANALYSIS, THE ASSESSEE HAS APPLIED TEN COMPAR ABLE COMPANIES, THEIR AVERAGE UNADJUSTED MARGIN WAS WORKED OUT AT 6 .60% USING MULTIPLE YEAR DATA. TPO ASKED ASSESSEE TO PROVIDE UPDATED AN ALYSIS USING THESE TEN COMPANIES, ASSESSEE WHILE UPDATING APPLIED ONLY FIV E COMPANIES AS COMPARABLE. TPO ACCEPTED ALL FIVE COMPANIES PROPOSE D BY ASSESSEE, HOWEVER, DISAGREED WITH ASSESSEES REQUEST TO EXCLU DE SAKET PROJECTS AS ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 7 COMPARABLE. BESIDE TPO CARRIED OUT FRESH ANALYSIS AND APPLIED FIVE NEW COMPARABLES. A. BEFORE DRP ASSESSEE OBJECTED TO INCLUSION OF SAKET PROJECTS LIMITED AND THREE COMPARABLE COMPANIES IDENTIFIED B Y TPO, NAMELY, CHOKSI LABORATORIES LTD, RITES LTD, WAPCOS (INDIA) LTD. D RP REJECTING ASSESSES CONTENTIONS, UPHELD THE INCLUSION OF ALL FOUR COMPA RABLE COMPANIES. 7. LD. COUNSEL SHRI VIJAY IYER CONTENDS THAT ; (I) LD. TPO IN AY 2008-09 CHERRY PICKED COMPARABLES AND CHOSE COMPARABLES WHICH ARE FUNCTIONALLY DIFFERENT. COMPA RABLE SELECTED BY THE TPO ARE DIFFERENT FROM THE COMPARABLES SELECTED BY THE TPO IN PREVIOUS YEARS AND SUBSEQUENT YEARS, ESPECIALLY WHE N THERE IS NO CHANGE IN THE ASSESSEES BUSINESS. POSITION OF THE LEARNED TPO IN EARLIER AND SUBSEQUENT ASSESSMENT YEARS I.E. WHETHER THESE COMPANIES WERE CONSIDERED AS COMPARABLE OR NOT IN CASE OF THE APPELLANT S NO COMPANIES SELECTED AS COMPARABLE BY THE LEARNED TPO IN AY 2008-09 POSITION OF THE APPELLANT AY 2006-07 AY 2007-08 AY 2009- 10 1 IDC (INDIA) LTD YES YES YES 2 EDUCATIONAL CONSULTANTS LTD YES YES NO 3 ICRA MANAGEMENT CONSULTING SERVICES LTD NA YES NO 4 ITDC LTD (SEGMENTAL) NA NA NO 5 IN HOUSE PRODUCTIONS LTD (SEGMENTAL) ACCEPTED AS COMPARABLE BY THE APPELLANT NA NA NO 6 SAKET PROJECTS LTD REJECTED AS NO NO NO ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 8 POSITION OF THE LEARNED TPO IN EARLIER AND SUBSEQUENT ASSESSMENT YEARS I.E. WHETHER THESE COMPANIES WERE CONSIDERED AS COMPARABLE OR NOT IN CASE OF THE APPELLANT S NO COMPANIES SELECTED AS COMPARABLE BY THE LEARNED TPO IN AY 2008-09 POSITION OF THE APPELLANT AY 2006-07 AY 2007-08 AY 2009- 10 (SEGMENTAL) 7 CHOKSI LABORATORIES LTD NO NO NO 8 INDUS TECHNICAL & FINANCIAL CONSULTANTS LTD NO NO NO 9 RITES LTD (SEGMENTAL) NO NO NO 10 TECHNICOM- CHEMIE (INDIA) LTD NO NO NO 11 WAPCOS (INDIA) LTD (SEGMENTAL) COMPARABLE BY THE APPELLANT ON ACCOUNT OF DIFFERENCES IN NATURE OF SERVICES PROVIDED VIS--VIS THE APPELLANT NO NO NO (II) LD. COUNSEL PLEADS TO APPLY THE THEORY OF CONS ISTENCY IN INCOME-TAX PROCEEDINGS AS HELD IN BRINTONS CARPETS ASIA (P.) LTD. [2011] 12 TAXMANN.COM 148/46 SOT 289 (PUNE-TRIB.) ( URO) HELDING THAT THE PRINCIPLE OF RES JUDICATA WAS INAPPLICABLE TO INCOME- TAX MATTERS, AS LONG AS THE FACTS ARE DIFFERENT IN DIFFERENT AYS. OTHERWISE, THE RULE OF CONSISTENCY IS RELEVANT TO INCOME-TAX MATTERS AND AO CANNOT IGNORE THE SAME. (III) IT IS FURTHER PLEADED THAT COMPANIES ENGAGED IN PROVIDING HIGH- END CONSULTANCY AND ENGINEERING SERVICES SHOULD NOT BE ACCEPTED AS NORTEL INDIA IS ENGAGED IN ADMINISTRATIVE SUPPORT S ERVICES. IT HELPS TO FACILITATE COMMUNICATION BETWEEN ITS AES AND THIRD PARTY VENDORS IN INDIA AND ENSURES THAT THE SUPPLIERS MANUFACTURERS THE PRODUCTS ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 9 ACCORDING TO THE QUALITY AND DESIGN REQUIREMENTS SP ECIFIED BY THE AES. THUS THE APPLICATION OF HIGH END CONSULTANCY A ND ENGINEERING SERVICES IS AGAINST THE TP PROVISIONS. (IV) IT IS SUBMITTED THAT CHOKSI, RITES AND WAPCOS OPERATE IN ENGINEERING CONSULTANCY INDUSTRY, THE RISKS AND RET URNS VARY SIGNIFICANTLY FROM THOSE OF THE SUPPORT SERVICES CO MPANY OPERATING ON A COST PLUS MODEL. BESIDES, ENGINEERING CONSULTANCY BEING A HIGH RISK ACTIVITY, THE RETURNS FROM SUCH BUSINESS SHALL BE C OMPARATIVELY HIGHER TO THE ROUTINE MARKETING ACTIVITIES OF THE APPELLAN T. THE BUSINESS DYNAMICS OF THE INDUSTRY ARE SUCH THAT COMPANIES EN GAGED IN ENGINEERING CONSULTANCY ARE PRONE TO HIGH LIABILITY IN CASE OF ANY FAILURE TO IMPLEMENT, DESIGN AND COMPLETE PROJECTS IN TIME. HENCE, SUCH COMPANIES ARE BY ITS NATURE OF BUSINESS EXPOSE D TO HIGHER RISKS. THE HIGH RISK PROFILES OF ENGINEERING COMPANIES REN DER THE COMPANY'S FINANCIAL RESULTS NON-COMPARABLE TO THE MARGINS EAR NED BY THE APPELLANT FROM ITS SUPPORT ACTIVITIES WHICH IS ADMI NISTRATIVE IN NATURE. ACCORDINGLY, COMPANIES ENGAGED IN PROVIDING HIGH-EN D CONSULTANCY AND ENGINEERING SERVICES, AS SELECTED BY THE TPO, A RE NOT COMPARABLE TO NORTEL INDIA. (V) IN FINE, ASSESSESSS COUNSEL CONTENDS THAT THES E COMPANIES SHOULD NOT BE CONSIDERED AS COMPARABLES FOR FOLLOWI NG REASONS : (A) CHOKSI LABORATORIES LIMITED: THIS COMPANY IS A COMMERCIAL TESTING AND ANALYSIS LABORATORY BASED IN INDORE, MADHYA PRADESH. THE COMPANY IS ENGAGED IN ANALYSING (FOR CLIENTS OR AS A REGULATORY REQUIREMENT) FOOD AND AG RICULTURAL ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 10 PRODUCTS, CEMENT AND BUILDING MATERIALS, CHEMICALS, DRUGS AND PAINTS. OTHER SERVICES RENDERED BY THE COMPANY ARE CALIBRATION SERVICES, CONSULTANCY AND POLLUTION CONTROL. (B) RITES LIMITED: THE COMPANY PROVIDES PRE-PROJECT PLANNING SERVICES IN THE FIELDS OF ENGINEERING DESI GN, CONSTRUCTION AND PROJECT MANAGEMENT FOR RAILWAY TRA CKS AND ELECTRIFICATIONS TOGETHER WITH TRAFFIC AND SOFTWARE CONSULTANCY ASSIGNMENTS TO MALAYSIA RAILWAYS. HENCE, THE NATUR E OF SERVICES PROVIDED BY RITES LIMITED ARE HIGHLY TECHN ICAL AND COMPLICATED AND REQUIRES A POOL OF TECHNICALLY COMP ETENT AND QUALIFIED PERSONNEL POSSESSING THE REQUIRED SKILLS AND VAST EXPERIENCE FOR EFFICIENTLY RENDERING SUCH SERVICES. (C) WAPCOS: WAPCOS RENDERS CONSULTANCY SERVICES RELATING TO WATER, POWER AND INFRASTRUCTURE SECTORS . SERVICES OFFERED INCLUDE MARKET INTELLIGENCE, FEASIBILITY ST UDIES, PLANNING/ PROJECT FORMULATION, FIELD AND GEO-TECHNI CAL INVESTIGATIONS, ENGINEERING DESIGN, CONTRACT MANAGE MENT, QUALITY ASSURANCE & MANAGEMENT AND HUMAN RESOURCE DEVELOPMENT. IT ALSO EXECUTES TURNKEY PROJECTS ON A REGULAR BASIS. (VI) SIMILAR ISSUE HAS BEEN CONSIDERED IN DETAIL BY DELHI ITAT IN CASE OF DY. CIT V. MCI COM INDIA (P.) LTD. [2012] 2 5 TAXMANN.COM 520/53 SOT 290 (DELHI-TRIB.) WHERE IT IS HELD THAT MARKETING SUPPORT SERVICES CANNOT BE COMPARED WITH TURNKEY ENGINEERING SERVICES. WE AGREE WITH THE VIEW OF THE FIRST APPELLATE AUTHORITY THAT EIL, RITES, WAPSOS AND TCE ARE ENGINEERING COMPANIES AND PROVIDE END-TO-END SOLUTI ONS AND ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 11 WHEREAS THE ASSESSEE COMPANY PROVIDES MARKETING SUP PORT SERVICES TO THE PARENT COMPANY, WHICH IS IN THE NAT URE OF SUPPORT SERVICE AND HENCE NOT FUNCTIONALLY COMPARABLE. - THIS DECISION WAS ALSO FOLLOWED IN THE CASE OF H& M HENNES&MAURITZ INDIA PVT. LTD. V. DY. CIT [ITA NO. 4704 OF 2012 AND ACTIS ADVISERS PVT. LTD. VS ACIT [ITA NO. 6390/ DEL/2012] - ACCORDINGLY, IT IS SUBMITTED THAT CHOKSI, RITES A ND WAPCOS CANNOT BE CONSIDERED AS COMPARABLE TO THE APPELLANT AND SHOULD BE REJECTED AS COMPARABLE COMPANIES. 9.1. APROPOS SAKET PROJECTS LIMITED IT IS PLEADED T O BE REJECTED FOR FOLLOWING REASONS: (I) THIS COMPANY IS RESPONSIBLE FOR HOLDING EVEN MA NAGEMENT PROJECTS. THE COMPANY IN ITS EVENT MANAGEMENT SEGME NT EARNS REVENUE BY SELLING EVENT FEE, THROUGH SPONSORSHIPS, OR PROVIDING SPACE ON RENT. THE COMPANY HOLDS EVENT AND IS NOT PROVIDI NG ANY SERVICES AND THEREFORE IS FUNCTIONALLY DIFFERENT. THE ASSESS EE IS A COMPANY WHICH PROVIDES BUSINESS SUPPORT SERVICES AND CANNOT BE COMPARED. (II) UNRELIABLE SEGMENTAL INFORMATION: ON REVIEWIN G THE ANNUAL REPORT OF SAKET PROJECTS FOR FY 2007-08 (NOW AVAILA BLE IN THE PUBLIC DOMAIN) IT IS OBSERVED THAT THE ADMINISTRATIVE/COMM ON COSTS WERE NOT ALLOCATED APPROPRIATELY AMONGST THE SEGMENTS MAKING THE RESULTS OF SAKET PROJECTS UNRELIABLE. (III) THE TPO/DRP HAS ERRED IN ACCEPTING COMPANIES WHICH ARE EARNING SUPER NORMAL PROFITS AS COMPARABLES: THE AP PELLANT SUBMITTED THAT MARGINS EARNED BY SAKET PROJECTS LIMITED IS 15 9% WHICH IS ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 12 SUPERNORMAL AND HENCE, SUPERNORMAL PROFIT MAKING CO MPANIES SHOULD BE EXCLUDED FROM THE COMPARABLE SET AS THEY HAVE A TENDENCY TO SKEW THE RESULTS AND CANNOT BE CONSIDERED AS REPRESENTAT IVE OF THE INDUSTRY. RELIANCE IS PLACED ON FOLLOWING ITAT DECISIONS: - ITAT PUNE BENCH IN THE CASE OF E-GAIN COMMUNICAT ION PVT. LTD. 118 ITD 243 (PUNE), WHILE REVIEWING THE COMPAR ABILITY ANALYSIS OF SOME COMPANIES, HELD AS UNDER: A CURSORY LOOK AT THE CHART IN THE ASSESSMENT ORDE R OF 20 COMPATIBLES WOULD REVEAL THAT THE MARGIN OF PROFIT SHOWN BY THIRDWARE SOLUTIONS LTD. AND WTI ADVANCED TECHNOLOG Y IS EXTRAORDINARY AT 67.65 PER CENT AND 54.72 PER CENT RESPECTIVELY. THEREFORE, IT WAS NECESSARY FOR THE TAX AUTHORITIES TO EXAMINE WHETHER THESE ENTITIES HAVE RIGHTLY BEEN TAKEN AS C OMPARABLES FOR APPLICATION OF MOST APPROPRIATE METHOD. . - ITAT CHANDIGARH SPECIAL BENCH IN THE CASE OF QUAR K SYSTEMS PRIVATE LIMITED (132 TTJ 1) WHILE REVIEWING THE COM PARABILITY ANALYSIS OF SUPER PROFIT COMPANIES, HELD AS UNDER: ..EVEN IF THE TAXPAYER OR ITS COUNSEL HAD TAKEN D ATAMATICS AS COMPARABLE IN ITS IP AUDIT, THE TAXPAYER IS ENTITLE D TO POINT OUT TO THE TRIBUNAL THAT ABOVE ENTERPRISE HAS WRONGLY BEEN TAKEN AS COMPARABLE. IN FACT THERE ARE VAST DIFFERENCES BETW EEN TESTED PARTY AND DATAMATICS. THE CASE OF DATAMATICS IS LIKE THAT OF IMERCIUS TECHNOLOGIES REPRESENTING EXTREME POSITIONS. IF IM ERCIOUS TECHNOLOGIES HAS SUFFERED HEAVY LOSSES AND, THEREFO RE, IT IS NOT TREATED AS A COMPARABLE BY THE TAX AUTHORITIES, THE Y ALSO HAVE TO CONSIDER THAT DATAMATICS HAS EARNED EXTRAORDINARY P ROFIT AND HAS A HUGE TURNOVER. - ITAT DELHI BENCHES IN THE CASE OF ADOBE SYSTEMS I NDIA PRIVATE LIMITED HELD THE FOLLOWING ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 13 5. WE FIND THAT TPO HAS REJECTED THE ASSESSEES CO NTENTION WITH REGARD TO INCLUSION OF THESE THREE SUPERNORMAL PROFIT COMPANIES WITHOUT ANY COGENT REASON 9.2. IT IS PLEADED THAT THE TPO/DRP HAVE FOLLOWED A N INCORRECT APPROACH OF SELECTING SAKET PROJECTS LIMITED AS COMPARABLES FOR DETERMINING THE ALP OF THE IMPUGNED INTERNATIONAL TRANSACTIONS. THE IMPUGNED TP ADJUSTMENTS ARE UNJUSTIFIED IN VIEW OF THE FACTS, CIRCUMSTANCES AND ARGUMENTS, THEY DESERVE TO BE DELETED. 8. LD. CIT (DR) SUPPORTED THE ORDERS OF AUTHORITIES BE LOW AND RELIED ON THE FOLLOWING JUDGMENTS: - M/S BAYER MATERIAL SCIENCE P. LTD. VS. ADDL. CIT ITA NO.7977/MUM/2010 ORDER DATED 16-12-2011. - ITA NO. 7894/MUM/2010 M/S SYMANTEC SOFTWARE SOLUT IONS PVT. LTD. VS. ACIT ORDER DATED 31-5-2011. - ITA NO. 1082/HYD/2010 DCIT VS. M/S DELOITTE CONSU LTING INDIA PVT. LTD. ORDER DATED 22-7-2011. FOR THE PROPOSITION THAT THE COMPARABLES CANNOT BE EXCLUDED MERELY ON THE BASIS OF TURN OVER OR SOME MARGINAL DIFFERENCE OF F UNCTIONALITY. 10.1. LD. DR FURTHER CONTENDS THAT DETERMINATION OF ALP IS A WORK OF ESTIMATE AND THE ASSESSEE IS IN TECHNICAL CONSULTAN CY SERVICE, SO ARE THE FUNCTIONS OF CHOKSI, RITES AND WAPCOS, WHICH HAVE B EEN HELD AS COMPARABLES ON REASONABLE BASIS. THEREFORE, THE TPO AND DRP RIGHTLY APPLIED THESE COMPARABLES. 10.2. LD. DR OBJECTED TO EXCLUSION OF SAKET PROJECTS LTD AS COMPARABLES ON THE GROUND THAT RULE 10B DOES NOT PROVIDE THE BASIS TO EXCLUDE AN ENTITY OR ELIMINATE IT FROM THE LIST FROM COMPARABLES SOLELY ON THE BASIS OF HIGH PROFIT MAKING. BESIDES, SAKET PROJECTS LIMITED HAS BEEN AP PLIED BY THE ASSESSEE IN ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 14 ITS TP STUDY ON THE BASIS OF DATA AVAILABLE FOR PRE VIOUS TWO YEARS. IT IS ONLY DURING THE TIME OF UPDATION THAT ASSESSEE FURNISHED REASONS TO EXCLUDE SAKE PROJECTS LTD AS AN AFTERTHOUGHT. 11. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. APROPOS THE ISSUE OF COMPARABI LITY AND THE EXCLUSION OF CHOKSI, RITES AND WAPCOS, DELHI TRIBUNAL IN THE CAS ES OF M/S MCI COM INDIA P. LTD. AND M/S VERIZON INDIA P. LTD. HAS HEL D THAT COMPANIES LIKE EIL, RITES, WAPSOS AND TCE ARE ENGINEERING COMPANIES WHI CH PROVIDE END TO END SOLUTIONS AND THEREFORE THEY CANNOT BE COMPARED WITH ASSESSEES WHO PROVIDE MARKETING SUPPORT SERVICES TO THE PARENT CO MPANY. THEY WERE HELD TO BE FUNCTIONALLY NOT COMPARABLE WITH THEE ENGINEE RING COMPANIES. 11.1. FOLLOWING THE ORDERS OF COORDINATE BENCHES OF ITAT IN THE CASES OF M/S MCI COM INDIA P. LTD.; M/S VERIZON INDIA P. LTD . (SUPRA); ESTEL IN ITA NO.584/BANGLORE/06AND OUR OWN DECISION IN CASE OF A CTIS ADVISERS PVT. LTD. ITA NO. 6390/DEL/2012, WE HOLD THAT CHOKSI, RITES A ND WAPCOS BEING FUNCTIONALLY DIFFERENT CANNOT BE APPLIED AS APPROPR IATE COMPARABLE TO THE ASSESSEE. THEREFORE, THEY ARE TO BE EXCLUDED FROM T P ADJUSTMENT WHILE DETERMINING THE ALP. 11.2. ON ISSUE OF EXCLUSION OF SAKET PROJECTS LTD, WE ARE OF THE VIEW THAT SPECIFIC CHARACTERISTICS OF SERVICES PROVIDED, ASSE TS EMPLOYED, RISK ASSUMED I.E. THE FAR OF THE COMPARABLE IS DECISIVE AND INCL USION OR EXCLUSION OF COMPARABLES. THE HIGHER OR LOWER RATE OF PROFIT IS NOWHERE PRESCRIBED AS THE DETERMINATIVE FACTOR IN THIS BEHALF. ONLY IF THE HI GHER OR LOWER PROFIT RATE RESULTS ON ACCOUNT OF EFFECT OF FACTORS GIVEN IN RU LE 10B(2)READ WITH SUB- RULE (3), THAT SUCH CASE SHALL MERIT OMISSION THEN ONLY IT CAN BE CONSIDERED. HIGHER PROFITS ACHIEVED DUE TO FACTORS NOT MENTIONE D IN THE RULE THEN SUCH CASE SHALL BE CONTINUED TO FIND PLACE IN THE LIST O F COMPARABLES. SIMILAR VIEW ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 15 HAS BEEN APPROVED BY VARIOUS COORDINATE ITAT BENCHE S IN THE CASES LIKE EXXON MOBIL COMPANY INDIA (P.) LTD.- (2011-TTJ-68-I TAT-MUMTP) AND DCIT VS. M/S. B.P. INDIA SERVICES (P.) LTD. ITA N O.4425/MUM/ 2010. 11.3. ON ISSUE OF COMPARABILITY OF SAKET PROJECTS LIMITED , WE ARE IN AGREEMENT WITH THE LD DR THAT NO COMPARABLE CAN BE REJECTED MERELY ON THE BASIS OF HIGH MARGINS IF IT IS FUNCTIONALLY COMPARA BLE TO THE ASSESSEE OR THERE IS MINER VARIATION IN FUNCTIONAL SIMILARITY. THE CA SE OF SAKET PROJECTS LTD. HAS FUNCTIONAL DISSIMILARITY AS IT IS ORGANIZING EV ENTS WITH VARIOUS KINDS OF SPONSORSHIPS. THE COMPANY IN THIS DIVISION IS EARNI NG REVENUE FROM SELLING EVENT FEES AND OFFERING SPACE FOR RENT WHICH CANNOT BE COMPARABLE WITH PROVISION OF MARKETING AND SALES SUPPORT SERVICES. BESIDES SEGMENTAL ALLOCATION OF EXPENSES WERE NOT RELIABLE. IN VIEW O F THESE FACTS, WE HOLD THAT SAKET PROJECTS LTD. HAS BEEN RIGHTLY HELD AS N OT AN APPROPRIATE COMPARABLE. WE DIRECT LD. AO TO WORK OUT THE ALP IN A.Y. 2008-09 ACCORDINGLY. 11.4. APROPOS WORKING CAPITAL ADJUSTMENTS FOR AY 2007-08 AND AY 2008- 09, ASSESSEE CONTENDS THAT WORKING CAPITAL HAS AN I MPACT ON THE PROFITABILITY OF THE COMPANY, THUS MORE ACCOUNTS RECEIVABLE IN CA SE OF A COMPANY WOULD MEAN RELATIVELY LOWER PROFIT. THEREFORE, COMPANIES COULD BE CONSIDERED AS FULLY COMPARABLE IF THEY HOLD THE SAME LEVEL OF ACC OUNT RECEIVABLE AND ACCOUNT PAYABLE. 11.5. THE TPO HAS, HOWEVER, REJECTED THE CLAIM OF WORKING CAPITAL ADJUSTMENT WHICH HAS BEEN UPHELD BY THE DRP, FOR TH E REASON THAT THE ASSESSEE HAD NOT MADE ANY CLAIM FOR WORKING CAPITAL ADJUSTMENT IN ITS TP STUDY AND THAT IT IS NOT POSSIBLE TO MAKE ACCURATE ADJUSTMENT AS IT IS DIFFICULT TO FIND THE ACCOUNT RECEIVABLE/PAYABLE AT DIFFERENT POINTS OF TIME DURING THE YEAR. ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 16 11.6. LD. COUNSEL FOR THE ASSESSEE RELIED ON ARGUMENTS R AISED BEFORE DRP WHICH ARE AS UNDER: WE WISH TO SUBMIT THAT IN COMPARING THE MARGINS EA RNED BY THE COMPARABLE COMPANIES VIS--VIS THE ASSESSEE, THE D IFFERENCES ON ACCOUNT OF WORKING CAPITAL EMPLOYED SHOULD ALSO BE FACTORED INTO. THEREFORE, TO IMPROVE THE RELIABILITY OF THE RESULT S, THE COMPARABLE COMPANIES REPORTED FINANCIAL DATA IS REQUIRED TO B E ADJUSTED FOR CERTAIN DIFFERENCES. DETAILED WORKING HAS BEEN PRO VIDED TO THE TPO VIDE SUBMISSION DATED 21 SEPTEMBER 2010 AND WAS ALS O PLACED ON RECORD BEFORE DRP. RELIANCE IN THIS REGARD IS PLACED ON THE FOLLOWING FINDINGS OF THE BELOW MENIONTED DECISIONS DEMAG CRANES AND COMPONENTS INDIA (P.) LTD. V. DY. CIT [2012] 17 TAXMANN.COM 190/49 SOT 610 (PUNE - TRIB.) WORKING CAPITAL IS A FACTOR WHICH INFLUENCES THE P RICE IN THE OPEN MARKET AND THEREFORE THE NET PROFIT MARGIN OF THE B USINESS SEGMENT OF THE ASSESSEE WHICH IS TARGETED BY THE TPO/AO/DRP. H ENCE, IN PRINCIPLE, IT WAS HELD THAT THE TPO/AO/DRP FAILED T O ENTERTAIN THE OBJECTIONS OF THE ASSESSEE ON THE WORKING CAPITAL ADJUSTMENTS ISSUE. CAPGEMINI INDIA (P.)LTD. V. ASSTT.CIT [2013] TAXMAN N.COM 5 (MUM.) WORKING CAPITAL ADJUSTMENTS ARE REQUIRED AS THESE DO IMPACT THE PROFITABILITY OF THE COMPANIES. A COMPANY WITH SUBS TANTIAL WORKING CAPITAL CANNOT BE COMPARED WITH ONE WHICH HAS LOW L EVEL OF WORKING CAPITAL. THE AVERAGE OF OPENING AND CLOSING LEVEL O F WORKING CAPITAL CAN BE COMPARED FOR THE PURPOSE OF MAKING ADJUSTMEN T. THIS WOULD GIVE A REPRESENTATIVE LEVEL OF WORKING CAPITAL LEVE L. WORKING CAPITAL ADJUSTMENT CANNOT BE DENIED TO THE ASSESSEE SIMPLY BECAUSE IT DID NOT CLAIM SUCH ADJUSTMENT IN ITS TP STUDY. WORKING CAPI TAL ADJUSTMENT IMPROVES THE COMPARABILITY. VODAFONE INDIA SERVICES P. LTD. (FORMERLY 3GLOBAL S ERVICES P. LTD.) V. DY. CIT ITA NO. 7140/MUM/2012 AND 7097/MUM/2012 THE TRIBUNAL HELD THAT UNDER THE PROVISIONS OF RUL E 10B(2)(D) THE COMPARABILITY HAS TO BE JUDGED WITH RESPECT TO VARI OUS FACTORS SUCH AS ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 17 MARKETING CONDITIONS, GEOGRAPHICAL LOCATIONS, COST OF LABOUR AND CAPITAL IN THE MARKET, ACCOUNTS RECEIVABLE/PAYABLE AFFECT THE COST OF WORKING CAPITAL. THE MORE ACCOUNTS RECEIVABLE WOULD MEAN MORE CAPITAL BLOCKED WITH DEBTORS WHICH MAY ALSO MEAN HI GHER SALE PRICES. THEREFORE, WORKING CAPITAL ADJUSTMENT IS APPROPRIAT E TO IMPROVE THE COMPARABILITY. THE TRIBUNAL ALSO STATED THAT WHILE MAKING THE WORKING CAPITAL ADJUSTMENT GUIDELINES FRAMED BY OEC D MUST BE FOLLOWED. 11.7. LD. COUNSEL HAS ADVERTED TO OECD GUIDELINES TO THE EFFECT THAT THE ACCOUNT RECEIVABLE/PAYABLE ON THE LAST DATE DO NOT GIVE A REPRESENTATIVE LEVEL OF WORKING CAPITAL FOR THE WHOLE YEAR, AVERAGE MAY BE USED IF IT REFLECTS THE BETTER LEVEL OF WORKING CAPITAL OVER THE YEAR. IN O UR VIEW, WORKING CAPITAL ADJUSTMENTS ARE REQUIRED TO BE MADE BECAUSE THESE D O IMPACT THE PROFITABILITY OF THE COMPANY. RULE 10B(2)(D) ALSO P ROVIDES THAT THE COMPARABILITY HAS TO BE JUDGED WITH RESPECT TO VARI OUS FACTORS INCLUDING THE MARKET CONDITIONS, GEOGRAPHICAL CONDITIONS, COST OF LABOUR AND CAPITAL IN THE MARKET. ACCOUNTS RECEIVABLE/PAYABLE EFFECT THE COST OF WORKING CAPITAL. WORKING CAPITAL ADJUSTMENT CANNOT BE DENIED TO THE ASSESSEE ONLY ON THE GROUND THAT IT HAD NOT MADE ANY CLAIM IN THE TP STU DY IF IT IS POSSIBLE TO MAKE SUCH ADJUSTMENT. 11.8. IN OUR CONSIDERED VIEW, WORKING CAPITAL ADJUSTMENTS ARE REQUIRED AS THEY WILL IMPROVE THE PARAMETERS OF COMPARABILITY. WE, THEREFORE, DIRECT THE AO/TPO TO MAKE THE WORKING CAPITAL ADJUSTMENT AFTER NECESSARY EXAMINATION IN THE LIGHT OF THE OBSERVATIONS MADE A BOVE AND AFTER ALLOWING ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE . CORPORATE TAX GROUNDS: 11.9. ONE COMMON GROUND IN BOTH THE AYS IS TO THE E FFECT THAT THE AO HAS ERRED IN RECOGNIZING EXCESS REVENUE TO THE EXTENT O F INR 141,189,248 FOR AY 2007-08 AND INR 443,044,781FOR AY 2008-09, ON AC COUNT OF THE PROJECT ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 18 WITH BHARAT SANCHAR NIGAM LIMITED (BSNL) ON FOLLO WING ISSUES. A. THAT THE AO HAS ERRED IN RE-COMPUTING THE TOTAL EST IMATED REVENUE UNDER THE BSNL PROJECT THEREBY ENHANCING THE REVENU E TO BE RECOGNIZED DURING THE SUBJECT YEAR. B. THAT THE AO HAS ERRED IN RE-COMPUTING THE TOTAL EST IMATED COST UNDER THE BSNL PROJECT, THEREBY ARRIVING AT A HIGHE R PERCENTAGE OF COMPLETION UNDER BSNL PROJECT UP TO THE END OF THE SUBJECT YEAR AND ENHANCING THE REVENUE TO BE RECOGNIZED DURING T HE SUBJECT YEAR. 11.10. BOTH THE PARTIES AGREED THAT FACTS AND ISSU ES INVOLVED WITH REGARD TO COMPUTATION OF REVENUE TO BE RECOGNIZED U NDER THE BSNL PROJECT IN AYS 2007-08 AND 2008-09 ARE SIMILAR TO THE FACTS AND ISSUES INVOLVED IN AY 2006-07. ITAT VIDE ITS ORDER DATED MARCH 2, 201 2, FOR AY 2006-07 IN ASSESSEES OWN CASE HAS SET ASIDE THIS ISSUE OF BS NL REVENUE AND REMANDED IT BACK TO THE FILE OF THE AO FOR RE-ADJUDICATION. 11.11. LD. COUNSEL FOR ASSESSEE FURTHER STATED THA T THE MATTER FOR AY 2006-07 HAS NOT YET BEEN RE-ADJUDICATED BY THE AO. SINCE THE RELEVANT DETAILS SUBMITTED BY THE ASSESSEE HAVE BEEN OVERLOO KED BY THE AO AND DRP IN THESE YEARS AND THE EARLIER YEARS REVENUE RECOGN ITION HAS IMPORTANT BEARING ON THE YEARS IN QUESTION. AFTER HEARING BOT H THE PARTIES AND PERUSING MATERIAL AVAILABLE ON RECORD, WE DEEM IT APPROPRIAT E TO SET ASIDE THE ORDERS OF THE AO ON THE ISSUES, I.E. REVENUE UNDER BSNL PR OJECT INCLUDING PERCENTAGE OF COMPLETION, AND REMAND IT BACK TO THE FILE OF THE AO FOR RE- ADJUDICATION. NEEDLESS TO SAY THAT THE ASSESSEE WIL L BE GIVEN ADEQUATE OPPORTUNITY OF BEING HEARD AND TO PROVIDE NECESSARY DETAILS/ WORKING IN THIS BEHALF. THE AO SHALL CONSIDER THE SAME AFRESH IN AC CORDANCE WITH LAW. THESE GROUNDS OF THE ASSESSEE ARE ALLOWED FOR STATI STICAL PURPOSES. ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 19 12. THE OTHER GROUND FOR AY 2007-08 AGITATES THAT T HE AO HAS ERRED IN MAKING AN ADDITION OF INR 25,596,609 ON ACCOUNT OF EXPENSES CLAIMED BY THE APPELLANT IN ITS REVISED RETURN OF INCOME RELEV ANT FACTS OF THIS GROUND ARE THAT THE ASSESSEE E-FILED THE ORIGINAL RETURN OF IN COME FOR THE SUBJECT AY ON OCTOBER 31, 2007, DECLARING A TAXABLE INCOME OF INR 527,189,641. THEREAFTER, THE ASSESSEE E-FILED ITS REVISED RETURN OF INCOME FOR THE SUBJECT AY ON MARCH 31, 2009, DECLARING A TAXABLE INCOME OF INR 374,063,124. REASONS FOR REVISION OF RETURN WERE SUBMITTED BY TH E ASSESSEE AT THE TIME OF FILING A COPY OF THE REVISED RETURN AS WELL AS VIDE LETTER DATED AUGUST 25, 2011. AO COMPLETED THE ASSESSMENT PROCEEDINGS FOR A Y 2007-08 ON THE BASIS OF THE REVISED RETURN AND MADE THE DRAFT ASSE SSMENT ORDER STARTING WITH THE BASE OF THIS REVISED RETURN OF INCOME WHICH IMP LIES RS. 374,063,124/-. HOWEVER, DUE TO SOME INADVERTENCE INSTEAD OF MENTIO NING THE REVISED INCOME FIGURE, LD. AO IN THE FIRST PARA OF THE DRAF T ASSESSMENT ORDER, MENTIONED THAT A RETURN DECLARING AN INCOME OF INR 527,189,641 WAS E-FILED AND THE REVISED RETURN WAS PROCESSED ON MARCH 15, 2 010. THUS WITHOUT GIVING DETAILS, BY INADVERTENT MISTAKE, FIGURE OF ORIGINAL RETURN HAS BEEN ADOPTED INSTEAD OF REVISED INCOME. SINCE FIGURE OF REVISED RETURN WAS NOT APPEARING HANDILY AT THE TIME OF HEARING, DRP COULD NOT VERIFY THE FIGURE OF REVISED INCOME I.E. INR 374,063,124 IS CORRECT OR N OT. TO ENSURE CORRECT FIGURE OF REVISED INCOME,IT DIRECTED THE AO TO MERE LY CHECK THIS FROM THE RECORDS. 12.1. AO HOWEVER WENT BEYOND THE DIRECTION AND STAR TED THE SCRUTINY ABOUT THE MERITS OF ADJUSTMENTS MADE IN THE REVISED RETUR N OF INCOME. ASSESSEE BY LETTER DATED 25-8-2011 OBJECTED TO AOS ACTION TO C ONDUCT FURTHER ENQUIRY AND SEEK EXPLANATIONS REGARDING ADJUSTMENTS MADE IN THE REVISED RETURN. IT ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 20 REQUESTED TO ABIDE BY DRP DIRECTION AND WITHOUT PRE JUDICE ALSO SUBMITTED THE REASONS FOR REVISION OF THE RETURN. AO HOWEVER OVERSTEPPED THE BINDING DIRECTION AND PASSED THE FINAL ASSESSMENT ORDER IN WHICH THE CLAIMS/ ADJUSTMENT OF EXPENSES IN REVISED RETURN WERE ADDED BACK. 12.2. THE LEARNED COUNSEL FOR THE ASSESSEE REFERRED TO THE PROVISIONS AND MADE FOLLOWING CONTENTIONS IN THIS REGARD: (I) SECTION 144(7) PROVIDES THAT THE DRP MAY, BEFOR E ISSUING ANY DIRECTIONS: - MAKE SUCH FURTHER ENQUIRY, AS IT THINKS FIT; OR - CAUSE ANY FURTHER ENQUIRY TO BE MADE BY ANY INCOM E-TAX AUTHORITY AND REPORT THE RESULTS OF THE SAME TO IT. (II) AS PER THE ABOVE PROVISIONS, THE DRP MAY BEFOR E ISSUING THE DIRECTIONS, EITHER MAKE ENQUIRY AT ITS OWN END OR D IRECT THE AO TO MAKE FURTHER ENQUIRY AND REPORT THE RESULTS OF THE SAME TO THE DRP, WHICH SHALL THEREAFTER BE INCORPORATED IN THE DIREC TIONS ISSUED BY THE DRP. HOWEVER, ONCE THE DIRECTIONS HAVE BEEN ISSUED BY THE DRP, THE ASSESSING OFFICER HAS NO POWERS, WHATSOEVER, TO CON DUCT ANY FURTHER SCRUTINY/ SEEK CLARIFICATIONS FROM THE ASSESSEE. WH ERE THE DRP SEEKS TO MAKE ANY ENHANCEMENT, IT CAN BE MADE IN THE DIRE CTIONS U/S 144C(5) AND THE DRP CANNOT DIRECT THE AO TO MAKE FU RTHER ENQUIRIES IN THE DIRECTIONS ISSUED U/S 144C(5) . THIS IS FURTHER SUPPORTED BY THE FACT THAT AS PER SUB-SECTION (13) OF SECTION 144 OF THE ACT, IT HAS BEEN CLEARLY PROVIDED THAT UPON RECEIPT OF THE DIRECTION S ISSUED BY THE DRP, THE ASSESSING OFFICER SHALL, IN CONFORMITY WITH THE DIRECTIONS, COMPLETE, NOTWITHSTANDING ANYTHING CONTRARY CONTAIN ED IN SECTION 153 ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 21 OR SECTION 153B, THE ASSESSMENT WITHOUT PROVIDING A NY FURTHER OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 13.1. LD. COUNSEL FURTHER CONTENDS THAT FROM THE FACTS, C IRCUMSTANCES, DRP DIRECTIONS AND PROVISIONS OF SECTION 144(7) CONSIDE RED TOGETHER, AO HAD NO POWERS, WHATSOEVER, TO GO BEYOND THE DIRECTION AND CONDUCT FURTHER SCRUTINY/ SEEK CLARIFICATIONS FROM THE ASSESSE. IN THE ABSENC E OF DRP DIRECTIONS AO CANNOT ENHANCE THE DRAFT INCOME IN THE GARB OF MISI NTERPRETING THE DRP DIRECTIONS. THUS THE ASSESSING OFFICER'S ACTION IS UNSUSTAINABLE BOTH ON JURISDICTION AS WELL AS ON MERITS. 14. LD. DR SUPPORTED THE ORDER OF AO. 15. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE DRP DIRECTION FOR AO WAS S IMPLICITER TO THE EFFECT TO VERIFY THE FIGURE OF REVISED INCOME. THE FACT OF REVISED RETURN AND INCOME IS ACCEPTED BY AO AND HAS NOT BEEN QUESTIONED IN DR AFT ASSESSMENT ORDER. WHILE FRAMING THE DRAFT, AO MISTAKENLY ADOPTED THE ORIGINAL RETURN FIGURE INSTEAD OF REVISED INCOME FIGURE. DRP ALSO HAS NOT RAISED ANY OBJECTION ON THE MERITS OF REVISED RETURN. DUE TO NON VERIFICATI ON OF EXACT FIGURE AO WAS SIMPLY DIRECTED TO VERIFY THIS FIGURE FROM RECORD. IN VIEW OF THESE FACTS AND CIRCUMSTANCES, WE ARE OF THE CONSIDERED OPINION THA T THE DRP DIRECTED THE AO TO MERELY CHECK THE RECORDS REGARDING THE FIGURE OF REVISED INCOME, THERE IS NO DIRECTIONS OF ANY FURTHER ENQUIRY. THUS AO HAS ERRED IN EXCEEDING HER POWERS BY GOING BEYOND THE DIRECTIONS OF THE DRP A ND INSTEAD OF VERIFYING THE FIGURE WENT AHEAD TO REVIEW THE DRAFT ORDER. T HUS AO'S ACTION IN MAKING AN ADDITION OF INR 25,596,609 IN THIS BEHALF I.E. D ISALLOWING EXPENSES CLAIMED BY THE ASSESSEE IN ITS REVISED RETURN OF IN COME IS JUSTIFIED. ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 22 15.1. IN THE INTEREST OF JUSTICE WE WOULD ALSO LIKE TO AD VERT TO THE MERITS OF ASSESSEES CLAIM OF EXPENSES IN REVISED RETURN. IT MAY BE SEEN THAT DEDUCTION FOR EXPENSE TO THE EXTENT OF INR 25,596,609 WAS ALL OWABLE IN AY 2007-08, IN ACCORDANCE WITH PROVISIONS OF SECTION 40(A)(I) O F THE ACT, FOR SOME REASONS, ASSESSEE COULD NOT MAKE SUCH CLAIM IN THE ORIGINAL RETURN OF INCOME. LAW PROVIDES A RIGHT TO ASSESSEE TO FILE A REVISED RETURN ON DISCOVERY OF SUCH MISTAKE OR OMISSION, THUS ASSESSEE MADE A L AWFUL CLAIM OF EXPENSES OF RS. 25,596,609/-. AO OFFERED NO ADVERSE COMMENT IN THE DRAFT ORDER WHICH INDICATES THAT THE CLAIM WAS PROPER. HONBLE DELHI HIGH COURT IN THE CASE OF SMCC CONSTRUCTION (320 ITR 534) HELD THAT E VEN IF THERE WAS NO CLAIM IN THE RETURN OF THE YEAR IN WHICH THE EXPEND ITURE WAS INCURRED BY THE ASSESSEE, THE DEDUCTION CAN BE CLAIMED IN VIEW OF T HE PROVISIONS OF SECTION 40(A)(I) IN THE YEAR IN WHICH THE TAX HAS BEEN DED UCTED AT SOURCE AND PAID TO THE GOVERNMENT ACCOUNT. ACCORDINGLY, ON MERITS ALSO THE CLAIM OF IMPUGNED ADJUSTMENT OF EXPENSE IN REVISED RETURN IS ALLOWABL E, CONSEQUENTLY ON BOTH COUNTS WE ALLOW THIS GROUND OF THE ASSESSEE. 16. CLAIM OF WARRANTY EXPENSE FOR AY 2008-09 IS A GITATED BY THE ASSESSEE IN FOLLOWING TERMS: A. THAT THE LEARNED AO/HONBLE DRP OUGHT TO HAVE ALLOW ED DEDUCTION FOR WARRANTY PROVISION REVERSED/UTILIZED DURING THE SUBJECT AY AMOUNTING TO INR 239,217,774 ON THE BASI S THAT THE DEDUCTION FOR PROVISION FOR WARRANTY CLAIMED BY THE APPELLANT WAS DISALLOWED BY THE LEARNED AO IN THE YEARS IN WHICH IT WAS CREATED. B. CONSEQUENTLY, THE LEARNED AO/HON'BLE DRP OUGHT TO H AVE DELETED THE NET AMOUNT OF INR 7,703,953 OFFERED TO TAX BY T HE APPELLANT IN THE RETURN OF INCOME ON ACCOUNT OF WARRANTY ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 23 PROVISION/EXPENSES. 17. THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDS THAT THE WARRANTY IS PROVIDED IN RESPECT OF GSM TELECOM NETWORK EQUIPMEN T SUPPLIED TO BSNL FOR A PERIOD OF MINIMUM 12 MONTHS FROM THE DATE OF COMMISSIONING OF THE COMPLETE NETWORK IN A PARTICULAR SERVICE AREA. FURT HER, IN THE RETURN OF INCOME FILED FOR AY 2008-09, THE ASSESSEE MADE A NE T ADDITION OF INR 7,703,953 ON ACCOUNT OF THE WARRANTY PROVISION. THE AFORESAID ADDITION WAS MADE IN THE RETURN OF INCOME FOR AY 2008-09 ON THE BASIS THAT THE ASSESSEE HAD CLAIMED A DEDUCTION FOR PROVISION FOR WARRANTY CREATED BY IT IN AYS 2005-06 AND 2006-07, RESPECTIVELY AND HENCE, DID NO T CLAIM ANY DEDUCTION OF WARRANTY EXPENSES INCURRED IN AY 2008-09 AND ALS O OFFERED TO TAX REVERSALS OF THE WARRANTY PROVISION IN AY 2008-09 O UT OF THE PROVISION CREATED IN THE EARLIER YEARS 17.1. HOWEVER, THE AO DISALLOWED THE PROVISION FOR WARRA NTY CREATED IN THE FYS RELEVANT TO THE AYS 2005-06 AND 2006-07. IN THESE CIRCUMSTANCES, LD.COUNSEL FOR ASSESSEE SUBMITTED THAT IT IS IMPERA TIVE THAT A DEDUCTION FOR ACTUAL WARRANTY EXPENSES/ WARRANTY REVERSED DURING AY 2008-09 SHOULD BE ALLOWED TO THE ASSESSEE IN THIS YEAR. 18. LD. CIT(DR) IS HEARD, WHO SUPPORTED THE DIRECTIONS OF DRP. 19. AFTER HEARING THE RIVAL CONTENTIONS AND AFTER PERUS AL OF RECORD, WE ARE OF THE VIEW THAT THE FACTS INVOLVED WITH THE ISSUE OF PROVISION OF WARRANTY IN AY 2008-09 ARE SIMILAR TO AY 2006-07. AS A NORMAL RULE WHEN THE PROVISION FOR WARRANTY IS DISALLOWED IN EARLIER YEA RS, DEDUCTION THEN SHOULD BE ALLOWED IN THE YEAR WHEN ACTUAL EXPENSES ARE INC URRED. THE ISSUE OF ALLOWABILITY OF WARRANTY PROVISION IS REMANDED BACK TO AO BY THE ITAT IN AY 2006-07TO VERIFY THE CLAIM AND IT HAS BEEN INFOR MED THAT THIS EXERCISE IS YET TO BE CARRIED OUT. WE, THEREFORE, DEEM IT APPRO PRIATE TO REMAND THIS ISSUE ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 24 FOR AY 2008-09 AS WELL BACK TO THE AO FOR RE-ADJUDI CATION. IF THE AO DISALLOWS THE PROVISION FOR WARRANTY IN EARLIER YEA RS, DEDUCTION FOR THE ACTUAL WARRANTY EXPENSES INCURRED DURING THE SUBJECT YEAR SHOULD BE ALLOWED TO THE ASSESSEE. 20. LEGAL AND PROFESSIONAL FEES PAID TO KPMG/ BSR & CO RELATABLE TO AY 2008-09: 20.1. BRIEF FACTS OF THIS ISSUE ARE THAT LEGAL FEE EXPENS E OF INR 2,838,772 (TO BSR & CO./KPMG) WAS BOOKED AS YEAR-END PROVISION BY THE ASSESSEE ON THE BASIS OF ESTIMATE PROVIDED, THE SAME WAS REVERS ED AT THE BEGINNING OF THE SUBSEQUENT FINANCIAL YEAR. THE ACTUAL EXPENSE WAS T HEREAFTER BOOKED DURING A LATER YEAR ON THE BASIS OF INVOICE RECEIVED FROM BSR & CO/KPMG AND TAX WAS DULY DEDUCTED AND DEPOSITED AT THE TIME OF BOOK ING OF THE ACTUAL EXPENSE. THE AO DISALLOWED THE SAID PROVISION UNDER SECTION 40(A)(IA) ON ACCOUNT OF NON-DEDUCTION OF TAX ON THE BASIS THAT T HE LIABILITY HAD CRYSTALLIZED DURING THE YEAR AND AS PER SECTION 194 J, THE ASSESSEE WAS REQUIRED TO DEDUCT THE TAX. 21. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT REQUISITE TAX HAS ALREADY BEEN DEDUCTED AND DEPOSITED AT THE TIME OF BOOKING OF ACTUAL EXPENSES ON RECEIPT OF THE INVOICE. HENCE, THERE I S NO DEFAULT AT THE ASSESSEES END AND NO DISALLOWANCE IS WARRANTED IN SUCH A CASE. IT IS A TRITE LAW THAT THERE CANNOT BE A DOUBLE LEVY OF TAXES ON SAME INCOME. SINCE THE ASSESSEE DULY DEDUCTED AND DEPOSITED TDS ON THE BAS IS OF INVOICE RECEIVED FROM BSR & CO./KPMG, ANY DISALLOWANCE U/S 40(A)(IA) WILL LEAD TO A DOUBLE LEVY OF TAXES ON THE SAME INCOME. THE LEARNE D COUNSEL FOR THE ASSESSEE FURTHER CONTENDED THAT ACCRUAL OF INCOME , WHICH IS EVIDENCED BY THE RIGHT TO ENFORCE PAYMENT IN FAVOR OF AN IDENTIF IED RECIPIENT IS A PRIMARY CONDITION TO BE MET BEFORE DETERMINING APPLICABILIT Y OF THE WITHHOLDING TAX ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 25 PROVISIONS UNDER THE ACT. THE LEARNED COUNSEL FOR T HE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE HONBLE SUPREME COU RT IN THE CASE OF SHOORJI VALLABHDAS & CO. (1962) 46 ITR 144 (SC), WHEREIN HO NBLE SUPREME COURT HAS LAID DOWN THE PRINCIPLE THAT EVEN IN THE ACCRUA L SYSTEM THERE SHOULD BE A CLEAR RIGHT TO RECEIVE THE PAYMENT. THE ACCRUAL MU ST BE REAL. UNILATERAL CREDIT IN THE PAYERS BOOKS WOULD NOT CAUSE CHARGE OF TAX ON ANOTHER PERSON. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO HIGHLIGHT ED THAT IN THE CASE OF ED SASSOON & CO V CIT [1954] 26 ITR 27. 21.1. WITHOUT PREJUDICE TO THESE CONTENTIONS, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT SINCE THE TAX ON THE CORRES PONDING PROVISION HAS BEEN DULY DEDUCTED AND PAID BY THE ASSESSEE IN THE SUBSEQUENT YEAR UPON RECEIPT OF INVOICE FROM THE VENDOR, THERE IS NO DEF AULT AT THE ASSESSEES END AND NO DISALLOWANCE IS WARRANTED IN SUCH A CASE. TH ERE BEING A TIMING DIFFERENCE IN PAYMENT OF TAX ON THE AFORESAID AMOUN T AT MOST, INTEREST MAY BE RECOVERED FOR THE INTERIM PERIOD FROM THE ASSESS EE. 21.2. ALTERNATIVELY LEARNED COUNSEL FOR THE ASSESSEE SUBM ITTED THAT IF THIS DISALLOWANCE IS CONFIRMED THEN TO AVOID DOUBLE TAXA TION; APPROPRIATE DIRECTIONS MAY BE GIVEN TO THE AO TO ALLOW THE SAME IN THE LATER YEAR IN WHICH TDS HAS BEEN DEDUCTED AND DEPOSITED ON THESE EXPENSE, AS SAME HAS NOT BEEN CLAIMED IN THE RETURN OF INCOME FOR CORRES PONDING YEAR. 22. LD. DR FAIRLY CONTENDED THAT AS PER THE SCHEME OF T HE ACT, SUCH EXPENDITURE IS ALLOWABLE IN THE YEAR OF PAYMENT OF TDS , DEPARTMENT HAS NO OBJECTION ON ALTERNATE PROPOSITION OF LD. COUNSEL. 23. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN VIEW OF THE UNAMBIGUOUS LEG AL POSITION WE UPHOLD THE ORDER OF THE AO OF DISALLOWING THE LEGAL FEE EX PENSE OF INR 2,838,772 IN AY 2008-09. HOWEVER, IN ACCORDANCE WITH SECTION 40( A)(IA) OF THE ACT, WE ITA NOS. 4765/DEL/11 & 427/DEL/13 NORTEL NETWORKS INDIA P. LTD. 26 DIRECT THE AO TO ALLOW DEDUCTION FOR THE AFORESAID EXPENSE IN ASSESSMENT YEAR WHEN TAX WAS DEDUCTED AND DEPOSITED BY THE ASS ESSEE QUA THESE EXPENSES. LD. COUNSEL HAS SUBMITTED COPY OF THE INV OICES RECEIVED FROM BSR & CO./KPMG IN ASSESSMENT YEAR 2010-11 AND TDS CERTI FICATE EVIDENCING DEDUCTION AND DEPOSIT OF TDS THEREON WHICH IS CONTE NDED TO BE FILED BEFORE THE AO AND DRP. AO IS DIRECTED TO ALLOW DEDUCTION F OR THE AFORESAID EXPENSE OF INR 2,838,772 AFTER VERIFICATION IN ASS ESSMENT YEAR 2010-11. THIS GROUND OF APPEAL IS DISPOSED OFF ACCORDINGLY. 24. IN THE LAST GROUND FOR AYS 2007-08 AND 2008-09 ASSE SSEE HAS CHALLENGED INITIATION OF PENALTY U/S 271(1)(C),THI S GROUND BEING PREMATURE, IS DISMISSED ACCORDINGLY. 25. IN THE RESULT, ASSESSES APPEALS FOR AYS 2007-08 AND 2008-09 ARE PARTLY ALLOWED IN THE ABOVE TERMS. ORDER PRONOUNCED IN OPEN COURT ON 25-02-2014. SD/- SD/- ( SHAMIM YAHYA ) ( R.P. TOLANI ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 25-02-2014. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR