Sapient Corporation Pvt. Ltd., Gurgaon V. DCIT, New Delhi

ITA 5263/DEL/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4054 (ITAT-DELHI)
• Duration Of Justice: 5 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-05-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 02-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 25-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY SURI
• Assessee Lawyers: PALLAV CAS
• Keywords: Transfer pricing; International transaction; Revenue expenditure; Capital expenditure

Judgement Text

ITA NO. 5263/DEL/2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E NEW DELHI BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A. NO. 5263/DEL/2010 A.Y. : 2006-07 SAPIENT CORPORATION PVT. LTD., C/O PANKAJ VASANI, SAPIENT TOWER, DLF CYBER GREENS, DLF, PHASE-III, SECTOR-25A, GURGAON 122 022 VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 7(1), NEW DELHI (PAN : AAECS6286M) (APPELLANT ) (APPELLANT ) (APPELLANT ) (APPELLANT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) ASSEESSEE BY : SH. AJAY VOHRA, ADV., SH. NEERAJ JAIN, SH. ABHISHEK AGGRAWAL AND SH. PALLAV, CAS. DEPARTMENT BY : SH. SANJAY SURI, C.I.T. (D.R.) ORDER ORDER ORDER ORDER PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE ASSESSING OFFICER DATED 12.10.2010 AND PERTAINS TO ASSESSMENT YEAR 2006-07. 2. THE FIRST ISSUE RAISED IS THAT ASSESSING OFFICER HAS ERRED IN MAKING ADDITION OF ` 14,79,00,000/- ON ACCOUNT ALLEG ED DIFFERENCE IN ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION S OF SOFTWARE DEVELOPMENT SERVICES ON THE BASIS OF THE ORDER PASS ED U/S 92CA(3) OF THE ACT BY THE TRANSFER PRICING OFFICER. 3. THE ASSESSEE IN THIS CASE IS A SUBSIDIARY OF M/S SAPIENT CORPORATION, USA. THE COMPANY WAS INCORPORATED ON M ARCH, 9, 2000 ITA NO. 5263/DEL/2010 2 AND WAS SET UP UNDER THE SOFTWARE TECHNOLOGY PARK SC HEME OF THE GOVERNMENT OF INDIA. THE ASSESSEE RENDERS CUSTOMIZED SOFTWARE DEVELOPMENT SERVICES TO ASSOCIATED ENTERPRISES AND ALSO RENDERS POST SALES SUPPORT SERVICES. THE ASSESSEE IN THE RELEVA NT ASSESSMENT PREVIOUS YEAR HAS ENTERED INTO INTERNATIONAL TRANSA CTIONS WITH ASSOCIATED ENTERPRISES. IN THE TRANSFER PRICING D OCUMENTATION THE ASSESSEE DETERMINED THE ARMS LENGTH PRICE OF THE INT ERNATIONAL TRANSACTIONS OF SOFTWARE DEVELOPMENT AND RELATED SE RVICES BY APPLYING TNMM AS MOST APPROPRIATE METHOD. THE ASSESSEE HAD B ENCHMARKED ITS INTERNATIONAL TRANSACTIONS WITH 10 COMPARABLE CO MPANIES WITH AN AVERAGE OPERATING PROFIT RATIO (OP/TC) OF 9.31%. 3.1 THE FINAL LIST OF COMPARABLE COMPANIES IS AS UNDE R:- S.NO. NAME OF THE COMPANY FY OP/TC 1. BIRLASOFT LTD. 200503 -0.06% 2. DATAMATICS LTD. 200409 -6.09% 3. GOLDSTONE TECHNOLOGIES LTD. 200503 -1.50% 4. MAAARS SOFTWARE INTERNATIONAL LTD. 200603 3.18% 5. MELSTAR INFOTECH INTERNATIONAL LTD. 200503 -9.17% 6. PRITHVI INFORMATION SOLUTIONS LTD. 200603 12.48% 7. QUINTEGRA SOLUTIONS LTD. 200603 13.51% 8. RS SOFTWARE INDIA LTD. 200603 15.29% 9. VISUALSOFT TECHNOLOGIES LTD. 200503 15.99% 10. ZENITH INFOTECH LTD. 200603 49.47% MEAN 9.31% ITA NO. 5263/DEL/2010 3 THE OPERATING PROFIT MARGIN (OP/OC) OF THE ASSESSEE WAS COMPUTED AT 12.49%. SINCE THE (OP/TC) EARNED BY THE ASSESSEE ON TRANSA CTIONS WITH THE ASSOCIATED ENTERPRISE AT 12.49% WAS HIGHER THAN THE AVERAGE OPERATING PROFIT MARGIN EARNED ON SIMILAR TRANSACTIO NS WITH UNRELATED THIRD PARTIES AT 9.31% THE INTERNATIONAL TRANSACTIO N OF PROVISION OF SOFTWARE DESIGN AND DEVELOPMENT SERVICES WAS CONSID ERED TO BE AT ARMS LENGTH PRICE. THE TPO IN THE COURSE OF THE TRANSFER PRICING ASSESS MENT PROCEEDINGS REQUIRED THE ASSESSEE TO SUBMIT CURRENT YEAR DATA OF ALL COMPARABLE COMPANIES CONSIDERED IN TRANSFER PRICING STUDY REPO RT. SINCE AT THAT TIME, FINANCIALS OF DATAMATICS LIMITED WAS NOT AVAILA BLE, THE APPELLANT SUBMITTED CURRENT YEAR OPERATING RESULTS OF THE REMA INING 9 COMPANIES WITH AN OP/TC RATIO OF 12.05% AS FOLLOWS:- S.NO. NAME OF THE COMPANY FY OP/TC 1. BIRLASOFT LTD. 200503 -2.59% 2. GOLDSTONE TECHNOLOGIES LTD. 200603 0.95% 3. MAAARS SOFTWARE INTERNATIONAL LTD. 200603 4.50% 4. MELSTAR INFOTECH INTERNATIONAL LTD. 200503 1.79% 5. PRITHVI INFORMATION SOLUTIONS LTD. 200603 12.65% 6. QUINTEGRA SOLUTIONS LTD. 200603 13.71% 7. RS SOFTWARE INDIA LTD. 200603 15.10% 8. VISUALSOFT TECHNOLOGIES LTD. 200603 12.67% 9. ZENITH INFOTECH LTD. 200603 49.73% MEAN 12.05% ITA NO. 5263/DEL/2010 4 THE TPO IN HIS TRANSFER PRICING ORDER HAS FURTHER REJECTED 5 COMPARABLE COMPANIES IDENTIFIED BY THE ASSESSEE ON TH E FOLLOWING GROUND: S.NO. NAME OF COMPANY REASONS FOR REJECTION 1. BIRLASOFT LTD. DECREASING PROFITABILITY TREND AND SALES SINCE 3 YEARS. 2. GOLDSTONE TECHNOLOGIES LTD. DECREASING PROFITABI LITY TREND AND SALES SINCE 3 YEARS. 3. MAARS SOFTWARE INTERNATIONAL LTD. NOT COMPARABLE AS WAGES TO COST RATIO ONLY 0.24% AS AGAINST 65% OF THE ASSESSEE. 4. MELSTAR INFORMATION TECHNOLOGIES LTD. SEGMENTAL DATA NOT AVAILABLE, FOREX EARRING ONLY 30%. 5. RS SOFTWARE (INDIA) LTD. NEGATIVE NET WORTH. THE TPO BENCHMARKED THE OPERATING PROFIT MARGIN (OP/T C%) OF THE APPELLANT COMPANY WITH THE MARGIN OF THE FOLLOWING 4 HIGH PROFIT MAKING COMPANIES: S.NO. NAME OF THE COMPANY FY OP/TC 1. PRITHVI INFORMATION SOLUTIONS LTD. 200603 12.65% 2. VISUALSOFT TECHNOLOGIES LTD. 200603 12.67% 3. ZENITH INFOTECH LTD. 200603 49.73% 4. QUINTEGRA SOLUTIONS LTD. 200603 13.71% ARITHMETIC MEAN ARITHMETIC MEAN ARITHMETIC MEAN ARITHMETIC MEAN 22.19% 22.19% 22.19% 22.19% ACCORDINGLY, THE TRANSFER PRICING OFFICER IN THE OR DER PASSED UNDER SECTION 92CA(3) OF THE ACT COMPUTED AN ADJUSTMENT OF ` 14,79,00,000/- ITA NO. 5263/DEL/2010 5 ON ACCOUNT OF THE DIFFERENCE IN THE MARGIN OF THE COMPARABLE COMPANIES AND THE APPELLANT COMPANY. 4. AGAINST THE ABOVE ORDER, THE ASSESSEE IS IN APP EAL BEFORE US. 5. ASSESSEES SUBMISSIONS IN THIS REGARD ARE SUMMARIZ ED AS UNDER:- (I) THE TPO HAS CONSIDERED ZENITH INFOTECH EVEN TH OUGH WHEN IT EARNING SUPERNORMAL PROFITS AND DOES NOT SATISFY HIS OWN ADDITIONAL FILTERS: ZENITH INFOTECH HAS REMARKED AN ABNORMAL HIGH PROFIT MARGIN OF 49.73% DURING THE FINANCIAL YEAR 2005-06 A ND THERE HAS BEEN SHARP INCREASE IN PROFITABILITY AND SALES. THE OP/TC DURING THE YEAR IS SUMMARIZED AS FOLLOWS:- YEAR YEAR YEAR YEAR MAR MAR MAR MAR- -- -04 04 04 04 MAR MAR MAR MAR- -- -05 0505 05 MAR MAR MAR MAR- -- -06 06 06 06 MAR MAR MAR MAR- -- -07 07 07 07 SALES IN CRORES 18.28 21.90 35.37 66.97 % SALES IN INCREASE OVER BASE YEAR MAR 04 120% 193% 366% OP/TC 3.10% 22.27% 49.73% 87.88% % MARGINS INCREASE 719% 1605% 2835% OVER BASE YEAR MAR 04 IT MAY BE POINTED OUT THAT ZENITH INFOTECH IS PRE-DO MINANTLY SOFTWARE PRODUCT COMPANY, WHILE THE APPELLANT IS ENGAGED IN R ENDERING SOFTWARE DEVELOPMENT SERVICES. IT IS A MATTER OF COMMON KNOWLE DGE THAT A SOFTWARE PRODUCT COMPANY ENDS UP EARNING HIGHER MARG IN AS THEY ARE ENGAGED IN SELLING SOFTWARE PRODUCTS OWNED BY THEM. THE AFORESAID IS ALSO CORROBORATED FROM THE FACTS THAT WAGES TO COST RATIO OF ZENITH INFOTECH IS ONLY 37.5% (WHICH IS USUAL CASE IN THE CASE OF SOFTWARE PRODUCT COMPANY) AS OPPOSED TO 65% IN THE CASE OF TH E APPELLANT A ITA NO. 5263/DEL/2010 6 SOFTWARE SERVICE COMPANY. (REFER PAGE 852-855 OF THE SUPPLEMENTARY PAPER BOOK FOR BRIEF PRODUCT PROFILE OF ZENITH TAKE N FROM THE WEBSITE WWW.ZENITHINFOTECH.COM) THE DRP REJECTED THE CONTENTION OF THE APPELLANT OF E XCLUDING THE ABOVE COMPANY FROM THE SET OF COMPARABLE COMPANIES ON T HE GROUND THAT THE SAID COMPANY WAS INCLUDED IN THE LIST OF CO MPARABLE COMPANIES IN THE TRANSFER PRICING REPORT. RELIANCE IN THIS REGARD IS PLACED ON THE RULING OF THE HON'BLE CHANDIGARH ITA T, [ SPECIAL BENCH IN THE CASE OF QU ARK SYSTEMS PRIVATE LIMITED V. DCIT: 2010 38 SOT 307 WHILE REVIEWING THE COMPARABILITY ANALYSIS OF SUPER PROFIT COMPAL1LES PROVIDES AS UNDE R: ' ..... EVEN IF THE TAXPAYER OR ITS COUNSEL HAD TAK EN DATAMATICS AS COMPARABLE IN ITS IP AUDIT, THE TAXPAYER IS ENTITLED TO POINT OUT TO THE TRIBUNAL THAT ABOVE ENTERPRISE HAS WRONGLY BEEN TAKEN AS COMPARABLE. IN FACT THERE ARE VAST DIFFERENCES BETWE EN TESTED PARTY AND DATAMATICS. THE CASE OF DATAMATICS IS LIKE T HAT OF IMERCIUS TECHNOLOGIES' REPRESENTING EXTREME POSITION S. IF IMERCIOUS TECHNOLOGIES HAS SUFFERED HEAVY LOSSES AND , THEREFORE, IT IS NOT TREATED AS A COMPARABLE BY THE TAX AUTHORI TIES, THEY ALSO HAVE TO CONSIDER THAT DATAMATICS HAS EARNED EXTRAORD INARY PROFIT AND HAS A HUGE TURNOVER. (EMPHASIS SUPPLIED) RELIANCE IN THIS REGARD IS ALSO PLACED ON THE FOLLO WING DECISIONS WHEREIN A SUPER PROFIT MARGIN COMPANY HAS BEEN DIREC TED TO BE EXCLUDED: ADOBE SYSTEMS INDIA (P) LTD. V. ACIT: LT.A. NO. 5043 /DE1/2010 MENTOR GRAPHICS (NOIDA) PVT. LTD : 109 ITD 101 E-GAIN COMMUNICATION PVT. LTD. V. DCIT: 118 ITD 243 PHILIPS SOFTWARE CENTRE (P) LTD. V. ACIT: 119TTJ721 ITO V. SUNAY JEWELS PVT. LTD: ITA NO. 5758/MUM/2007 ITA NO. 5263/DEL/2010 7 FURTHER, ZENITH INFOTECH CANNOT BE TAKEN AS COMPARABL E ALSO FOR THE REASON THAT, (I) THE WAGES TO COST RATIO OF ZENITH INFOTECH IS 37.50% AS AGAINST THE WAGE TO COST RATIO OF THE APPLICANT AT 65% AND (II) FOREX EARNING OF SAID COMPANY IS _ONLY 39% OF THE TOTAL RE VENUE. IT MAY BE NOTED THAT THE TPO HAS HIMSELF HAD REJECTED MELSTAR IN FORMATION TECHNOLOGIES, INTER ALIA, ON THE BASIS OF LOW FOREX EARNINGS WITHOUT APPLYING THE SAME SELECTION CRITERIA WHILE CONSIDER ING ZENITH INFOTECH LTD. AS COMPARABLE COMPANY. COMPUTATION OF MARGIN OF COMPARABLE AFTER ELIMINATI NG ZENITH INFOTECH COMPUTATION OF MARGIN OF COMPARABLE AFTER ELIMINATI NG ZENITH INFOTECH COMPUTATION OF MARGIN OF COMPARABLE AFTER ELIMINATI NG ZENITH INFOTECH COMPUTATION OF MARGIN OF COMPARABLE AFTER ELIMINATI NG ZENITH INFOTECH THE AVERAGE OF OPERATING PROFIT OVER COST OF THE RE MAINING THREE COMPANIES AFTER ELIMINATING ZENITH INFOTECH SOFTWARE IS AS FOLLOWS: S. NO. NAME OF THE COMPANY FY OP/TC 1. PRITHVI INFORMATION SOLUTIONS 200603 12.65% LTD. 2. VISUALSOFT TECHNOLOGIES LTD. 200603 12.67% 3. QUINTEGRA SOLUTIONS LTD. 200603 13.71% ARITHMETIC MEAN ARITHMETIC MEAN ARITHMETIC MEAN ARITHMETIC MEAN 13.01 % 13.01 % 13.01 % 13.01 % SINCE THE OP/TC OF THE APPELLANT AT 12.49% IS WITHI N THE SAFE HARBOR RANGE OF (+/-)5% AS PER THE PROVISO TO SECTION 92C( 2) OF OP/TC MARGIN OF 3 COMPARABLE COMPANIES AT 13.01%, NO ADJUSTMENT IS W ARRANTED ON ACCOUNT OF DIFFERENCE IN ARM'S LENGTH PRICE OF THE I NTERNATIONAL TRANSACTION. (II) REJECTION ON THE BASIS OF ADDITIONAL FILTERS IN ADDITION TO THE FILTER OF WAGES/COST RATIO, THE TPO IN HIS ORDER HAS APPLIED THE FOLLOWING ADDITIONAL FILTERS: ITA NO. 5263/DEL/2010 8 A. FOREX EARNING B. DECLINING OPERATING RESULTS AND SALES C. NEGATIVE NETWORTH IT IS SUBMITTED THAT THAT THE ADDITIONAL FILTERS HAV E BEEN USED BY THE TPO TO SUIT HIS REQUIREMENT AND TO ARRIVE AT PREDETE RMINED RESULTS. IT WOULD BE APPRECIATED THAT REJECTION OF THE COMPANIES ON THE BASIS OF THE PROFIT MARGIN, RATHER THAN FUNCTIONAL OR ASSET P ROFILE, WOULD NOT MEET THE COMPARABILITY STANDARD REQUIRED IN APPLICATI ON OF THE 'TNMM' METHOD, WHICH IS SELECTED BY THE APPELLANT AS THE MOS T APPROPRIATE METHOD FOR BENCHMARKING. IT IS A SETTLED POSITION TH AT UNDER THE TRANSFER PRICING REGULATION, THE COMPARABILITY IS TO BE JUDGED WITH REFERENCE TO FUNCTIONS PERFORMED, ASSETS UTILIZED A ND RISK ASSUMED (FAR) AND THE AFORESAID FUNCTIONS PARAMETERS SUCH AS DECLINING OPERATING RESULTS AND SALES, ETC., ARE NOT THE RELE VANT CONSIDERATION. RELIANCE IN THIS REGARD IS PLACED ON THE FOLLOWING DECISIONS: A. MENTOR GRAPHICS (NOIDA) PRIVATE LIMITED: 109 ITD 101 B. E-GAIN COMMUNICATION PVT. LTD. 118 ITD 234 C. AZTEC SOFTWARE INDIA PVT. LIMITED: 107 ITD 141 D. SONY INDIA PVT. LIMITED: 114 ITD 448 E. PHILIPS SOFTWARE: 26 SOT 226 F. QUARK SYSTEMS PVT. LIMITED V. DCIT: ITA NO.1 00 & 115 /CHD/2009 G. DCIT VS INDO AMERICAN JEWELLERY LTD.: 131 TTJ 163 ' 6. ALTERNATIVELY THE ASSESSEE HAD MADE FRESH DATA BASE TO IDENTIFY COMPARABLES COMPANIES. ACCORDING TO WHICH THE AVERA GE PLI IS 12.60%. ASSESSEE HAS CLAIMED THAT SINCE THE OPERATIN G PROFIT RATIO OF THE ASSESSEE AT 12.49% IS WITHIN THE SAFE HARBOR O F (+/-) 5% PROVIDED IN SECTION 92(2) OF THE ACT WITH RESPECT TO THE AVE RAGE OF OPERATING PROFIT MARGIN OF THE ABOVE COMPARABLE COMPANIES, I.E. 12.49%, THE ITA NO. 5263/DEL/2010 9 INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSES SEE WITH ASSOCIATED ENTERPRISES, ARE, THEREFORE, CONSIDERED BEING AT AR MS LENGTH PRICE ON THE APPLYING TNMM. THE DRP HOWEVER, DID NOT DEAL WI TH THE AFORESAID FRESH SET OF COMPARABLE PLACED ON RECORD BY THE ASSE SSEE. 7, LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND HAS SUBMITTED THAT ZENITH INFOTECH WAS CHOSEN BY ASSES SEE ITSELF IN THE LIST OF COMPARABLES. HENCE, THE ASSESSEE CANNOT AGITATE A GAINST ITS INCLUSION. THE LD. DEPARTMENTAL REPRESENTATIVE FURT HER CLAIMED THAT ASSESSEE HAS RAISED PERFUNCTORY OBJECTION BEFORE TH E AUTHORITIES BELOW REGARDING EXCLUSION OF ZENITH INFOTECH IN THE COMPAR ABLE. HENCE THE MATTER WAS NOT DEALT WITH IN DETAIL BY THE TPO OR T HE DRP. IN THE REJOINDER, LD. COUNSEL OF THE ASSESSEE HAS SUBMITTED THAT ALL THE NECESSARY DOCUMENTATION IN THIS REGARD WERE BEFORE THE TPO AND THE DRP. LD. COUNSEL OF THE CLAIMED THAT IF LOSS MAKING COMPANIES WERE TAKEN OUT BY THE TPO FROM THE COMPARABLES, ZENITH I NFOTECH LTD. WHICH HAD SHOWN SUPER NORMAL PROFITS SHOULD ALSO BE EXCLUDED. LD. COUNSEL OF THE ASSESSEE FURTHER CLAIMED THAT THERE IS NO ESTOPPELS AGAINST THE ASSESSEE. NOW ASSESSEE HAS CLAIMED THA T ZENITH INFOTECH IS NOT COMPARABLE. LD. COUNSEL FURTHER CLAIMED THAT THERE CANNOT BE ANY MOTIVE TO THE ASSESSEE AS THE ENTIRE INCOME IS E XEMPT U/S 10A. 8. WE HAVE HEARD THE RIVAL CONTENTIONS IN LIGHT OF THE MATERIAL PRODUCED AND PRECEDENTS RELIED UPON. WE FIND THAT TPO IN HIS ORDER ITA NO. 5263/DEL/2010 10 HAS REJECTED THE FIVE COMPARABLES COMPANIES IDENTIFI ED BY THE ASSESSEE. THE TPO BENCHMARKED THE OPERATING PROFIT MARGIN BY THE ASSESSEE COMPANY WITH FOUR PROFIT MAKING COMPANIES, WHICH EXCLUDED ZENITH INFOTECH LTD. THE MARGIN OF THESE COMPANIES ARE AS UNDER:- S.NO. NAME OF THE COMPANY FY OP/TC 1. PRITHVI INFORMATION SOLUTIONS LTD. 200603 12.65% 2. VISUALSOFT TECHNOLOGIES LTD. 200603 12.67% 3. ZENITH INFOTECH LTD. 200603 49.73% 4. QUINTEGRA SOLUTIONS LTD. 200603 13.71% ARITHMETIC MEAN ARITHMETIC MEAN ARITHMETIC MEAN ARITHMETIC MEAN 22.19% 22.19% 22.19% 22.19% 8.1 NOW IT IS THE CONTENTION OF THE ASSESSEE THAT W HEN LOSS MAKING COMPANIES WERE TAKEN OUT FROM THE COMPARABLES BY THE T PO, THE SUPER PROFIT EARNING COMPANY, ZENITH INFOTECH LTD. SHOULD ALSO BE REMOVED FROM THE COMPARABLES. LD. COUNSEL OF THE ASSESSEE F URTHER CLAIMED THAT THIS COMPANY DOES NOT SATISFY TPOS OWN ADDITI ONAL FILTERS. IT HAS BEEN SUBMITTED THAT ZENITH INFOTECH LTD. HAS SH OWN ABNORMAL HIGH PROFIT MARGIN. IT HAS BEEN SUBMITTED THAT ZENIT H INFOTECH LTD. IS PREDOMINANTLY SOFTWARE PRODUCT COMPANY, WHILE THE ASS ESSEE IS ENGAGED IN RENDERING SOFTWARE DEVELOPMENT SERVICES. IT HAS BEEN SUBMITTED THAT SOFTWARE PRODUCT COMPANY ENDS UP EARN ING HIGHER MARGIN AS THEY ARE ENGAGED IN THE SELLING OF SOFTWA RE PRODUCTS OWNED BY THEM. UPON CAREFUL CONSIDERATION, WE FIND OURSEL VES IN AGREEMENT WITH THE ASSESSEES CONTENTION THAT WHEN THE LOSS M AKING COMPANIES ITA NO. 5263/DEL/2010 11 HAVE BEEN TAKEN OUT FROM THE LIST OF COMPARABLES BY THE TPO, ZENITH INFOTECH LTD. WHICH SHOWED SUPER PROFITS SHOULD ALS O BE EXCLUDED. THE FACT THAT ASSESSEE HAS HIMSELF INCLUDED IN THE LIST OF COMPARABLES, INITIALLY CANNOT ACT OF ESTOPPEL PARTICULARLY IN L IGHT OF THE FACT THAT ASSESSING OFFICER HAS ONLY CHOSEN THE COMPANIES WHI CH ARE SHOWING PROFITS AND HAS REJECTED THE OTHER COMPANIES WHICH SHOWED LOSS. IN THIS REGARD RELIANCE CAN BE PLACED UPON ITAT SPECIA L BENCH DECISION IN THE CASE OF QUARK SYSTEM VS. DCIT (2010) 38 SO T 307, WHICH SUPPORTS ASSESSEE CONTENTION OF REMOVAL OF ZENITH IN FOTECH FROM COMPARABLES, AS IT SHOWED SUPER PROFITS. FURTHERMOR E, IT IS NOTED THAT ZENITH INFOTECH IS PREDOMINATELY SOFTWARE PRODUCT C OMPANY, WHILE THE ASSESSEE IS ENGAGED IN RENDERING SOFTWARE DEVELOPME NT SERVICES. IT IS FOUND THAT SOFTWARE PRODUCT COMPANY SHOWS HIGHER MARG IN. THIS IS ALSO CORROBORATED BY THE FACT THAT WAGES TO COST RA TIO OF ZENITH INFOTECH IS ONLY 37.5% AS OPPOSED TO 65% OF ASSESSE E COMPANY. HENCE, WE ARE OF THE CONSIDERED OPINION THAT WHE N LOSS MAKING COMPANIES HAVE BEEN REMOVED FROM COMPARABLES BY THE TPO, ASSESSEE IS RIGHT IN CONTENDING THAT ZENITH INFOT ECH SHOULD ALSO BE REMOVED AS IT SHOWED SUPER PROFITS. AS SUBMITTED IN THE CHART IN PRECEDING PARAGRAPH THE AVERAGE OF OPERATING PROFIT OVER COST OF THE REMAINING THREE COMPANIES AFTER ELIMINATING ZENITH INF OTECH SOFTWARE IS AS FOLLOWS: S. NO. NAME OF THE COMPANY FY OP/TC 1. PRITHVI INFORMATION SOLUTIONS 200603 12.65% LTD. 2. VISUALSOFT TECHNOLOGIES LTD. 200603 12.67% 3. QUINTEGRA SOLUTIONS LTD. 200603 13.71% ARITHMETIC MEAN ARITHMETIC MEAN ARITHMETIC MEAN ARITHMETIC MEAN 13.01 % 13.01 % 13.01 % 13.01 % ITA NO. 5263/DEL/2010 12 SINCE THE OP/TC OF THE APPELLANT AT 12.49% IS WITHI N THE SAFE HARBOR RANGE OF (+/-)5% AS PER THE PROVISO TO SECTION 92C( 2) OF OP/TC MARGIN OF 3 COMPARABLE COMPANIES AT 13.01%, NO ADJUSTMENT IS W ARRANTED ON ACCOUNT OF DIFFERENCE IN ARM'S LENGTH PRICE OF THE I NTERNATIONAL TRANSACTION. 8.2 THE CONTENTION OF THE LD. DEPARTMENTAL REPRESENT ATIVE THAT ASSESSEE HAS NOT VIGOROUSLY AGITATED THE ISSUE OF I NCLUSION OF ZENITH INFOTECH BEFORE THE AUTHORITIES BELOW IS NOT ACCEP TABLE, AS ALL THE NECESSARY DOCUMENTS FOR ASSESSEES CONTENTION IN TH IS REGARD WERE BEFORE THE AUTHORITIES BELOW. 8.3 IN THE BACKGROUND OF THE AFORESAID DISCUSSION, WE DELETE THE ADDITION MADE BY THE ASSESSING OFFICER WITH REGARD TO ARMS LENGTH PRICE. 9. THE NEXT ISSUE RAISED IS THAT ASSESSING OFFICE R HAS ERRED IN MAKING DISALLOWANCE OF 1,18,31,549/- OUT OF EXPENDIT URE ON ADVERTISEMENT AND SALE PROMOTION AND RECRUITMENT AND TRAINING EXPENSES. AGGREGATING TO ` 1,57,75,411/- HOLDING T HAT SUCH EXPENSES WERE INCURRED FOR BETTER SALES AND TURNOVER AND CON TRIBUTION TO THE PROFITS OF THE BUSINESS AND HENCE BENEFIT OF WHICH EXPENDITURE ACCRUED TO THE ASSESSEE OVER THE YEARS. 10. ON THIS ISSUE THE ASSESSING OFFICER NOTED THAT AS PER THE PROFIT AND LOSS ACCOUNT THE ASSESSEE COMPANY HAS CLAIMED EX PENDITURE OF ` 1,29,25,617/- ON ACCOUNT OF RECRUITMENT AND TRAININ G EXPENDITURE AND ` 28,49,794/- ON ACCOUNT OF ADVERTISEMENT AND SALES PR OMOTION EXPENSES. ITA NO. 5263/DEL/2010 13 11. ASSESSING OFFICER WAS OF THE OPINION THAT THES E EXPENDITURES HAS GIVEN THE ASSESSEE BENEFIT SPREAD OVER A CERTAIN NU MBER OF YEARS. IN THIS REGARD, ASSESSEE HAS CONTENDED THAT INCOME TAX LAW DOES NOT PROVIDE CONCEPT OF DEFERRED REVENUE EXPENDITURE. ASSESSING OFFICER DID NOT ACCEPT THIS PROPOSITION AND HE HELD THAT TH E ABOVE SAID EXPENDITURE LEADS TO AN ENDURING BENEFIT TO THE ASS ESSEE COMPANY. ACCORDINGLY, ONLY 25% OF THE EXPENDITURE OF ` 39,43 ,852/- WAS ALLOWED AND THE BALANCE AMOUNT OF ` 1,18,31,559/- WAS DISALL OWED AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE COMPANY. 12. AGAINST THE ABOVE ORDER THE ASSESSEE IS IN APP EAL BEFORE US. 13. ASSESSEE HAS SUBMITTED THAT THE AFORESAID EXPEND ITURES ARE INCURRED ON REVENUE ACCOUNT AND DID NOT RESULT IN ANY ENDURING BENEFIT IN THE CAPITAL FIELD. FURTHER, THERE IS NO CONCEPT OF DEFERRED REVENUE EXPENDITURE UNDER THE INCOME TAX ACT AND EXPENSES A RE TO BE ALLOWED DEDUCTION IN FULL IN THE ORDER IN WHICH THEY ARE IN CURRED. IN THIS REGARD, ASSESSEE PLACED RELIANCE OF CATENA OF CAS E LAWS. IT HAS FURTHER BEEN SUBMITTED THAT THE LD. COMMISSIONER OF IN COME TAX (APPEALS) IN ASSESSEE CASE FOR A.Y. 04-05 VIDE ORDE R DATED 8.11.2007, DELETED THE SIMILAR DISALLOWANCE MADE BY THE ASSESSI NG OFFICER IN THAT YEAR. IT HAS BEEN CLAIMED THAT DEPARTMENT HAS ACC EPTED THE FINDINGS OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) WIT H RESPECT TO DISALLOWANCE OF RECRUITMENT AND TRAINING EXPENSES A ND ADVERTISEMENT EXPENSES AND DID NOT APPEAL TO THE TRIBUNAL ON THIS ACCOUNT. 14. LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON THE ORDERS OF THE ASSESSING OFFICER . 15. WE HAVE HEARD THE RIVAL CONTENTIONS IN LIGHT OF THE MATERIAL PRODUCED AND PRECEDENTS RELIED UPON. WE FIND THAT I T IS NOT THE CASE ITA NO. 5263/DEL/2010 14 HERE THAT THE EXPENSES ARE BOGUS AND NOT INCURRED. IT HAS ALSO NOT THE CASE THAT THE ENTIRE EXPENSES FALLS UNDER THE REALM OF CAPITAL EXPENSES. THE ASSESSING OFFICER IS OF THE OPINIO N THAT ONLY 25% OF THE EXPENDITURE SHOULD BE ALLOWED DURING THE YEAR A ND THE REST HAS TO BE ADDED TO THE INCOME OF THE ASSESSEE. WE FIND OU RSELVES IN AGREEMENT WITH THE CONTENTION OF THE LD. COUNSEL OF THE ASSESSEE THAT THERE IS NO CONCEPT OF DEFERRED REVENUE EXPENDITURE UNDER THE IT LAW. THE EXPENDITURE OF ACCOUNT OF RECRUITMENT AND TRAIN ING EXPENSES AND ADVERTISEMENT AND SALES PROMOTION EXPENSES CANNOT BE SAID TO BE CAPITAL EXPENDITURE. UNDER THESE CIRCUMSTANCES, ASS ESSING OFFICERS ACTION IN THIS REGARD IS NOT SUSTAINABLE. MOREOVE R, WE NOTE THAT SIMILAR DISALLOWANCE WERE DELETED BY THE LD. COMMISSIO NER OF INCOME TAX (APPEALS) IN THE ASSESSMENT YEAR 2004-05 AGAIN ST WHICH THE DEPARTMENT DID NOT FILE APPEAL BEFORE THE TRIBUNAL. 16. IN THE BACKGROUND OF THE AFORESAID DISCUSSION A ND PRECEDENT, WE DELETE THE DISALLOWANCE MADE IN THIS REGARD. 17. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 06/05/2011. SD/- SD/- [ [[ [RAJPAL YADAV RAJPAL YADAV RAJPAL YADAV RAJPAL YADAV] ]] ] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER DATE 06/05/2011 SRB COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: - -- - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ITA NO. 5263/DEL/2010 15 DEPUTY REGISTRAR, ITAT, DELHI BENCHES