Fluor Daniel India Pvt. Ltd., Gurgaon V. DCIT, New Delhi

ITA 5493/DEL/2010

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7150 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 1 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-01-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 01-11-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 06-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: HIMANSHU SHEKHAR SINHA
• Keywords: Related party transaction; Depreciation; Transfer pricing; Principle of natural justice; International transaction; Initiation of penalty proceedings; Revenue expenditure; Capital expenditure
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 92C; 271(1)(b); 139; 143(3); 92; 10B; 201; 144C; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : I - 2 NEW DELHI BEFORE SH. I.C. SUDHIR , JUDICIAL M EMBER AND SH. O.P. KANT , ACCOUNTANT MEMBER ITA NO. 5493 /DEL/ 2010 ASSESSMENT YEAR: 2006 - 07 M/S. FLOUR DANIEL INDIA PVT. LTD., 6 TH FLOOR, BUILDING NO. 8C, DLF CYBER CITY, DLF CITY PHASE - II, GURGAON VS. DCIT, CIRCLE 11 ( 1), ROOM NO. 313, 3 RD FLOOR, C.R. BUILDING, I.P. ESTATE, NEW DELHI PAN : AAACF0927G (APPELLANT) (RESPONDENT) APPELLANT BY SH. HIMANSHU SHEKHAR SINHA, ADVOCATE RESPONDENT BY SH. T.M. SHIVA KUMAR, CIT(DR) DATE OF HEARING 01.11.2016 DATE OF PRONOUNCEMENT 06.01.2017 ORDER PER O.P. KANT , A. M. : THIS APPEAL FILED BY THE ASSESSEE ARISES OUT OF THE ORDER DATED 30/09/2010 PASSED BY THE LEARNED ASSESSING OFFICER ( AO ' ) UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME - TAX ACT, 1961 ( FOR SHORT THE ACT ) FOR ASSESSMENT YEAR 2006 - 07 . THIS ORDER WAS PASSED BY THE ASSESSING OFFICER IN COMPLIANCE TO THE DIRECTIONS ISSUED BY THE DISPUTE RESOLUTION PANEL (DRP) DATED 21/09/2010. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE AS UNDER: 1.THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ORDER PASSED BY THE LD. ASSESSING OFFICER ( AO ) IS BAD IN LAW AND VOID AB - INITIO. 2 ITA NO. 5493/DEL/2010 AY: 2006 - 07 2. THAT ON FACTS AND CIRC UMSTANCES OF THE CASE AND IN LAW, THE REFERENCE MADE BY THE LD. AO' SUFFERS FROM JURISDICTIONAL ERROR AS THE LD. AO DID NOT RECORD ANY REASONS IN THE DRAFT ASSESSMENT ORDER BASED ON WHICH HE REACHED THE CONCLUSION THAT IT WAS EXPEDIENT AND NECESSARY TO R EFER THE MATTER TO THE LD. TRANSFER PRICING OFFICER ( TPO ) FOR COMPUTATION OF THE ARM S LENGTH PRICE, AS IS REQUIRED UNDER SECTION 92CA(1) OF THE INCOME TAX ACT, 1961 ( ACT ). 3. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, LD. A.O/LD. TPO/LD. DRP FAILED TO APPRECIATE THAT THERE WAS NO INTENTION OF SHIFTING OF PROFITS OUTSIDE INDIA BY THE APPELLANT. 4.THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/ LD. TPO/ LD. DRP ERRED IN DETERMINING THE ALP OF THE APPELLANT S INTERNATION AL TRANSACTION AT RS. 73,14,59,416 AS AGAINST RS. 63,96,88,383 DETERMINED BY THE APPELLANT AND RECOMMENDING AN ADDITION OF RS. 9,17,71,033 ON THAT ACCOUNT TO THE APPELLANT S INCOME. 5.THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/ L D. TPO/ LD. DRP ERRED WHILE MAKING AN AFORESAID ADDITION OF RS. 9,17,71,033 TO THE VALUE OF INTERNATIONAL TRANSACTIONS BY: (I) FAILING TO CONSIDER AND APPRECIATE THAT THE BUSINESS OF THE APPELLANT AND THE GROUP COMPANIES IS AFFECTED BY BUSINESS CYCLES AND THEREFORE MULTIPLE YEAR DATA SHOULD BE USED FOR COMPUTING THE ARM S LENGTH MARGIN UNDER RULE 10B(4) OF THE INCOME TAX RULES, 1962 ( RULES ); (II) REJECTING ONE OF THE COMPARABLES (HAVING LOW PROFIT MARGIN) SELECTED BY THE APPELLANT WITHOUT ANY REASONABLE BASIS. FURTHER THE LD. AO/ LD. TPO/LD. DRP CONTRADICTED ITS OWN STAND BY RETAINING ANOTHER COMPARABLE (HAVING ABNORMALLY HIGH PROFIT MARGIN AND ALSO HAVING SIGNIFICANT RELATED PARTY TRANSACTIONS) WHICH OUGHT TO HAVE BEEN EXCLUDED BASED ON THE RATIONALE US ED TO EXCLUDE THE AFORESAID LOW MARGIN COMPARABLE. (III) SELECTING THE PROFIT LEVEL INDICATOR (PLF) AS OPERATING PROFIT/TOTAL COST ( OP/OC ) AS AGAINST THE PLI CHOSEN BY THE APPELLANT AS OPERATING PROFIT/ OPERATING INCOME ( OP/OI ); AND (IV) REJECTING TH E CHARACTERIZATION OF THE APPELLANT AS IT ENABLED ENGINEERING SERVICE. 3 ITA NO. 5493/DEL/2010 AY: 2006 - 07 6. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/LD. TPO/LD. DRP FAILED PRIMARILY DUE TO IDLE CAPACITY AND ACCORDINGLY AN ADJUSTMENT TO ARM S LENGTH MARGIN WAS NE CESSITATED UNDER RULE 10B(3)(II) OF THE RULES. 7. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/ LD. TPO/ LD. DRP FAILED TO CONSIDER AND APPRECIATE THE FACT THAT AN ADJUSTMENT TO THE ARM S LENGTH MARGIN FOR DIFFERENTIAL WORKING CAPITA L HELD BY THE APPELLANT AS COMPARED TO EXTERNAL SERVICE PROVIDERS USED FOR ARM S LENGTH ANALYSIS WAS WARRANTED UNDER RULE 10B(3)(II) OF THE RULES. 8. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/ LD. TPO/LD. DRP ERRED IN DENYING THE BENEFIT OF 5% MARGIN ALLOWED UNDER THE PROVISO TO SECTION 92 C(2) OF THE ACT. 9. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/DRP ERRED IN HOLDING THAT THE AMOUNT OF RS. 3,69,91,451, PAID BY THE APPELLANT FOR USE OF SUB LICENSED SOFT WARE PACKAGES, IS CAPITAL EXPENDITURE AND NOT REVENUE EXPENDITURE DESPITE THE HON BLE DELHI HIGH COURT S ORDER TO THE CONTRARY ON THIS ISSUE IN RESPECT OF A.YS 2002 - 03 AND 2003 - 04 AND THERE BEING NO STAY ON THE OPERATION OF THE SAID ORDER OF THE JURISDICTI ONAL HIGH COURT. 10. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/LD. DRP ERRED IN NOT GRANTING DEPRECIATION ON THE CAPITALIZED ROYALTY UNDER SECTION 32 OF THE ACT. 11. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. DRP ERRED IN NOT EXAMINING THE VALIDITY OF INITIATION OF PENALTY PROCEEDINGS U/S 271(L)(C). THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER, DELETE, RESCIND, FORGO OR WITHDRAW ANY OF THE ABOVE GROUNDS OF APPEAL EITHER BEFORE OR DURING THE COURSE OF THE PROCEEDINGS BEFORE THE HON BLE TRIBUNAL IN THE INTEREST OF THE NATURAL JUSTICE. THE AFORESAID G ROUNDS ARE MUTUALLY EXCLUSIVE AND WITHOUT PREJUDICE TO EACH OTHER. 2. T HE FACTS IN BRIEF ARE THAT THE ASSESSEE COMPANY IS A SUBSIDIARY OF M/S. FLUOR DANIEL ENGINEERS AND CONSULTANTS LTD ., MAURITIUS AND INDO MAURITIAN A FFILIATES LTD . , MAURITIUS, WHICH AR E IN TURN SUBSIDIARIES OF FLUOR 4 ITA NO. 5493/DEL/2010 AY: 2006 - 07 CORPORATION , USA. THE FLUOR CORPORATION , USA IS AN ENGINEERING, PROCUREMENT, CONSTRUCTION AND MAINTENANCE COMPANY ENGAGED INTO FIVE INDUSTRY SEGMENTS , NAMELY , OIL AND GAS, INDUSTRIAL AND INFRASTRUCTURE, POWER, GLOBAL SERVICE S AND GOVERNMENT SERVICES. THE ASSESSEE FORMS A FUNCTIONAL PART OF THE OIL AND GAS STRATEGIC BUSINESS GROUP OF FLUOR CORPORATION AND IS ENGAGED IN THE BUSINESS OF PROVIDING ENGINEERING DESIGN SERVICES TO ITS A SSOCIATED E NTERPRISE (AES). THE AES , AFTER THE CONTRACT IS AWARDED TO THEM BY ULTIMATE CUSTOMER, SUB - CONTRACTS DIFFERENT TASKS SUCH AS ENGINEERING DESIGN, PROCUREMENT, COMMISSIONING ETC . TO DIFFERENT FLUOR GROUP C OMPANIES. THE ENGINEERING DESIGN ACTIVITIES SUBCONTRACTED TO THE ASSESSEE, AR E A PART OF TOTAL CONTRACT AWARDED TO ITS AE S BY AN UNRELATED THIRD - PARTY. FOR THESE ENGINEERING DESIGN SERVICES, THE ASSESSEE WAS REMUNERATED ON AN HOURLY RATE BASIS. THESE ENGINEERING DESIGN SERVICES PROVIDED BY THE ASSESSEE WERE PERFORMED WITH THE HELP OF SPECIFIC SOFTWARE ENGINEERING TOOLS FOR LAYOUT, DESIGN CALCULATION, DRAWING PREPARATION, SPECIFICATIONS AND DATA GENERATION ETC. T HESE SOFTWARE TOOLS WERE EVEN SHARED WITH THE OTHER GROUP COMPANIES/CLIENTS AND WORK WAS PERFORMED SIMULTANEOUSLY IN DIFFER ENT LOCATIONS. THE RETURN OF INCOME WAS FILED BY THE ASSESSEE ON 28/ 11/2006 DECLARING INCOME OF RS.11,54,91, 122/ - . THE RETURN WAS PROCESSED UNDER SECTION 143 (1) OF THE ACT. THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143(2 ) OF THE ACT WAS I SSUED BY THE ASSESSING OFFICER AND COMPLIED WITH. THE ASSESSING OFFICER MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ARM S LENGTH PRICE UNDER SECTION 92CA(3) OF THE ACT OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. THE ASSESSEE ADOPTED TRANSACTIONAL NET MARGIN METHOD ( TNMM ) AS THE MO ST APPROPRI ATE METHOD WITH THE PROFIT LEVEL I NDI CATOR (PLI) A S OPERATING PROFIT/OPERATING I NCOME (OP/OI) USING MULTIPLE YEAR DATA. THE TPO AFTER PROVIDING 5 ITA NO. 5493/DEL/2010 AY: 2006 - 07 OPPORTUNITY TO THE ASSESSEE EXAMINE D THE MATTER. HE REJECTED THE USE OF MULTIPLE YEAR DATA AND COMPUTED THE MARG INS OF THE ASSESSEE AS WELL AS COMPARABLE C OMPANIES USING SINGLE YEAR DATA . HE ALSO REJECTED OP/OI A S PLI AND ADOPTED OPERATING PROFIT/OPERATING COST (OP/ OC) A S THE MOST APPROPRIATE PLI . H E DETERMINED THE ARM S LENGTH MARGIN TO BE 27.48% VIS - - VIS 11.49% OF THE ASSESSEE AND PROPOSED AN ADJ USTMENT OF RS.15,76, 75,751/ - WHI CH WAS FURTHER RECTIFIED TO RS.9,17,71, 033/ - . IN VIEW OF THE ADJUSTMENT PROPOSED TO THE INTERNATIONAL TRANSACTION, THE ASSESSING OFFICER COMPUTED THE INCOME OF THE ASSESSE E IN THE DRAFT ASS ESSMENT ORDER . THE LEARNED DRP UPHELD THE APPROACH ADOPTED BY THE LEARNED TPO. THE ASSESSING OFFICER PASSED ORDER IN COMPLIANCE TO THE DIRECTION OF THE DRP. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL RAISING THE GROUNDS AS REPRODUCED ABOVE. 3. BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE DID NOT PRESS GROUND S NO. 2 AND 3 AND , THUS , THE SAME ARE DISMISSED AS INFRUCTUOUS. THE GROUND NO. 1 AND 4 ARE GENERAL IN NATURE AND , THUS , WE ARE NOT REQUIRED TO ADJUDICATE UPON SPECIFICALLY. THE GROUNDS NO. 6, 8 & 11 WERE ALSO NOT SPECIFICALLY PRESSED AND THUS THE SAME ARE DISMISSED AS INFRUCTUOUS. 4. ADDRESSING THE GROUND NO. 5(I) , THE LEARNED COUNSEL SUBMITTED THAT THE LIFE - CYCLE OF AN ENGINEERING PROJECT IN RELATION TO THE ASSESSEE WAS DIVIDED INTO TW O PHASES , I.E ., (I) BASIC ENGINEERING PHASE AND , (II) DETAIL AND PRODUCTION ENGINEERING PHASE. HE FURTHER SUBMITTED THAT PROJECTS OFTEN TAKE TWO OR THREE YEARS TO COMPLETE AND DURING THE INITIAL STAGE, THE WORK PERFORMED IS LIMITED TO BASIC ENGINEERING AND PROJECT PLANNING, WHICH INCLUDES PLANNING PROJECT PROCESSES, LAYOUT AND EQUIPMENT SPECIFICATIONS BASED ON THE PARAMETERS DEFINED AND FINALIZED BY THE CUSTOMERS. HE FURTHER SUBMITTED THAT THE PROJECT AT ITS PEAK, GET INTO DETAILED AND PRODUCTION ENGINEERING PHASE, WHEN THE ASSESSEE USES 6 ITA NO. 5493/DEL/2010 AY: 2006 - 07 SOFTWARE FOR EXECUTION OF ITS ENGINEERING DESIGN AND PROVIDES OUTPUT IN THE FORM OF DESIGNS AND DRAWINGS , WHICH ARE RESTORED IN HARDCOPY FORMAT FOR CUSTOMERS. THE LEARNED COUNSEL SUBMITTED THAT SINCE TH E ASSESSEE IS REMUNERATED ON AN HOURLY RATE BASIS, IT S REVENUE AND PROFIT RECOGNITION ARE ALSO HIGHER WHEN THE PROJECT IS IN DETAILED AND PRODUCTION ENGINEERING PHASE AND THUS THE PROFIT MARGIN REALIZED BY THE ASSESSEE IS DIRECTLY PROPORTIONAL TO THE MAN - HOURS BILLED TO THE AES. THE LEARNED COUNSEL REFERRED TO A SUMMARY OF FINANCING PERFORMANCE OF THE ASSESSEE ALONG WITH A NUMBER OF HOURS BILLED AVAILABLE IN THE SYNOPSIS SUBMITTED IN THE COURSE OF HEARING, WHICH IS REPRODUCED AS UNDER: FINANCIAL YEAR OPER ATING INCOME OPERATING EXPENSES OPERATING PROFIT OPERATING PROFIT/OPERATING NUMBER OF HOURS SPENT 2005 - 06 63.92 56.17 7.75 11.49% 6,15,914 2004 - 05 82.47 49.03 33.44 52.91% 8,66,070 2003 - 04 27.18 35.55 - 8.37 - 19.39% 2,86,348 2002 - 03 74.87 47.04 27.83 59.19% 5,99,643 4.1 THE LEARNED COUNSEL FURTHER REFERRING TO R ULE 10 B(4) OF INCOME - TAX R ULES, 1962 (IN SHORT THE R ULES ) SUBMITTED THAT THE DATA RELATING TO A PERIOD MORE THAN TWO YEARS MAY BE CONSIDERED , IF SUCH DATA REVEAL FACTS WHICH WOULD HAVE INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTION BEING COMPARED. HE SUBMITTED T HAT IN THE CASE OF THE ASSESSEE, THE OPERATIONS ARE CYCLIC IN NATURE AND WARRANT THE USE OF MULTIPLE YEAR DATA FOR BENCHMARKING. 4.2 IN THIS CONNECTION, THE LEARNED COUNSEL RELIED ON THE ORDER OF THE TRIBUNAL IN THE CASE OF INNODATA ISOGEN INDIA PRIVATE L IMITED (ITA NO. 1528/DEL/2011) AND SUBMITTED THAT THE TRIBUNAL HAS U PHELD THE USE OF MULTIPLE YEAR D A TA FOR A COMPANY HAVING FLUCTUATING PROFITS AND HAVING DIFFERENT BUSINESS MODELS. THE LEARNED COUNSEL FURTHER SUBMITTED THAT IN ASSESSMENT YEAR 2004 - 05 THE COMMISSIONER OF INCOME TAX (APPEALS) HAS UPHELD THE USE OF MULTIPLE YEAR DATA, BASED ON THE SAME FAC TS. 7 ITA NO. 5493/DEL/2010 AY: 2006 - 07 4.3 IN VIEW OF THE ABOVE, THE LEARNED COUNSEL SUBMITTED THAT MULTIPLE YEAR DATA SHOULD BE USED IN THE CASE OF THE ASSESSEE FOR COMPUTING ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION. 4.3 T HE LEARNED CIT(DR), ON THE OTHER HAND, SUBMITTED THAT HOURLY RATE OF $ 20 FOR THE CURRENT YEAR, HAS NOT BEEN CHANGED FROM YEAR TO YEAR SO THERE IS NO DIFFERENCE IN THE PRICING FROM YEAR TO YEAR AND THE LEARNED COUNSEL OF THE ASSESSEE DID NOT DEMONSTRATE THAT THE PRICING POLICY OF CURRENT YEAR I S BASED ON EARLIER PRICING POLICY. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT JUST BECAUSE THERE WAS INCREAS E IN TURNOVER, IT CANNOT BE SAID THAT OPERATIONS ARE CYCLIC IN NATURE. HE FURTHER REFERR ING TO PAGE 186 OF THE ASSESSEE S PAPER BOOK , SU BMITTED THAT THAT THE ASSESSEE WAS IMPLEMENTING MANY PROJECTS SIMULTANEOUSLY, OUT OR WHICH, FEW CONTRACTS WILL BE AT THE FIRST STAGE AND OTHER CONTRACTS WILL BE AT THE SECOND STAGE AND SO IT MAY NOT POSSIBLE THAT IN ONE YEAR THE ASSESSEE WOULD BE EXECUTING ONE PHASE ONLY AND ANOTHER YEAR ANOTHER PHASE ONLY. ACCORDING TO THE LEARNED CIT ( DR ) , THE PRICING WILL NOT BE AFFECTED BY THE PHASES OF THE CONTRACT EXECUTED. HE FURTHER SUBMITTED THAT THE ARGUMENT OF THE LEARNED COUNSEL THAT THE INITIAL PHASE RESULT INTO LOW PROFIT AND LATER PHASE RESULT INTO MORE PROFIT WAS NOT SUBSTANTIATED BY ANY EVIDENCES. HE FURTHER SUBMITTED THAT THE LEARNED COUNSEL HAS NOT BROUGHT OUT ANY DOCUMENTS IN SUPPORT OF HIS CLAIM THAT THE EARLIER YEAR DATA IS HAVING INFLUENCE ON THE CURREN T YEAR DATA. 4.4 IN THE REJOINDER, THE LEARNED COUNSEL SUBMITTED THAT TNMM HAS BEEN CHOSEN AS MOST APPROPRIATE METHOD AND NOT THE CUP M ETHOD AND THEREFORE THE ARGUMENTS OF LEARNED DEPARTMENTAL REPRESENTATIVE WERE NOT RELEVANT IN TNM M METHOD. HE FURTHER SUBMITTED THAT ONLY THE RATE PER HOUR WAS FIXED, BUT NUMBER OF HOURS OF PROJECT FLUCTUATE D FROM YEAR TO YEAR WHEREAS THE COST WAS MORE OR LESS FIXED, AND THUS THE PROFIT OF THE ASSESSEE FLUCTUATE D FROM YEAR TO YEAR. 8 ITA NO. 5493/DEL/2010 AY: 2006 - 07 4.5 WE HAVE HEARD THE RIVAL SU BMISSION AND PERUSED THE RELEVANT MATERIAL ON RECORD INCLUDING THE TRANSFER PRICING STUDY OF THE ASSESSEE AND PAPERBOOK SUBMITTED BY THE ASSESSEE. THE RULE 10B(4) HAS SPECIFIED THE USE OF SINGLE YEAR AND MULTIPLE YEAR DATA AS UNDER: DETERMINATION OF ARM'S LENGTH PRICE UNDER SECTION 92C . 10B . (1) (4) THE DATA TO BE USED IN ANALYSING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION 56A [ OR A SPECIFIED DOMESTIC TRANSACTION ] SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR 56AA [ (HEREAFTER IN THIS RULE AND IN RULE 10CA REFERRED TO AS THE 'CURRENT YEAR') ] IN WHICH THE INTERNATIONAL TRANSACTION 56A [ OR THE SPECIFIED DOMESTIC TRANSACTION ] HAS BEEN ENTERED INTO : PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO 57 [ THE CURRENT YEAR ] MAY ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTIONS BEING COMPARED: 58 [PROVIDED FURTHER THAT THE FIRST PROV ISO SHALL NOT APPLY WHILE ANALYSING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION OR A SPECIFIED DOMESTIC TRANSACTION, ENTERED INTO ON OR AFTER THE 1 ST DAY OF APRIL, 2014. ] 59 [ (5) IN A CASE WHERE THE MOST APPROPRIATE METHOD FOR DETERMINATION OF THE ARM'S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION OR A SPECIFIED DOMESTIC TRANSACTION, ENTERED INTO ON OR AFTER THE 1 ST DAY OF APRIL, 2014, IS THE METHOD SPECIFIED IN CLAUSE (B ), CLAUSE (C) OR CLAUSE (E) OF SUB - SECTION (1) OF SECTION 92C, THEN, NOTWITHSTANDING ANYTHING CONTAINED IN SUB - RULE (4), THE DATA TO BE USED FOR ANALYSING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION OR A SPECIFIED DOM ESTIC TRANSACTION SHALL BE, (I) THE DATA RELATING TO THE CURRENT YEAR; OR (II) THE DATA RELATING TO THE FINANCIAL YEAR IMMEDIATELY PRECEDING THE CURRENT, IF THE DATA RELATING TO THE CURRENT YEAR IS NOT AVAILABLE AT THE TIME OF FURNISHING THE RETURN OF INCOME BY THE ASSESSEE, FOR THE ASSESSMENT YEAR RELEVANT TO THE CURRENT YEAR: PROVIDED THAT WHERE THE DATA RELATING TO THE CURRENT YEAR IS SUBSEQUENTLY AVAILABLE AT THE TIME OF DETERMINATION OF ARM'S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION OR A SP ECIFIED DOMESTIC TRANSACTION DURING THE COURSE OF ANY ASSESSMENT PROCEEDING FOR THE ASSESSMENT YEAR RELEVANT TO THE CURRENT YEAR, THEN, SUCH DATA SHALL BE USED FOR SUCH DETERMINATION IRRESPECTIVE OF THE FACT THAT THE DATA WAS NOT AVAILABLE AT THE TIME OF F URNISHING THE RETURN OF INCOME OF THE RELEVANT ASSESSMENT YEAR . ] 9 ITA NO. 5493/DEL/2010 AY: 2006 - 07 4.6 W E FIND FROM THE ABOVE THAT DURING THE RELEVANT TIME, THE RULE PERMITTED DATA FOR COMPARISON SHOULD BE OF CONTEMPORANEOUS FINANCIAL YEAR ONLY AND AS AN EXCEPTION, IF THE CONTEMPOR ANEOUS DATA HAD SOME DEFICIENCY RENDERING IT NOT READILY COMPARABLE, THEN THAT DATA OF MULTIPLE YEAR COULD BE CONSIDERED IF SUCH DATA HAVE INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES OF THE INTERNATIONAL TRANSACTIONS BEING COMPARED. 4.7 THE LEARNED COUNSEL HAS SUBMITTED THAT MAIN REASON OF THE FLUCTUATION IN THE PROFIT OF THE ASSESSEE IS THE LESS NUMBER OF MAN - HOURS IN INITIAL PHASE AS COMPARED TO LATER PHASE OF THE PROJECT. THE LEARNED COUNSEL REFERRED TO DETAILS OF HOURS SPENT DURING THE P ERIOD FROM APRIL 2004 TO MARCH 2008, AVAILABLE ON PAGE 155 - 156 OF THE PAPER BOOK . WE ARE NOT CONVINCED WITH THE ABOVE ARGUMENT OF THE LEARNED COUNSEL BECAUSE EVERY YEAR THE ASSESSEE EXECUTE MANY PROJECTS, PART OF WHICH MIGHT BE AT INITIALLY STAGE AND BALA NCE MIGHT BE AT FINAL STAGE AND THIS MIX OF INITIAL AND LATER STAGE OF PROJECTS WILL REMAIN IN ALL THE YEARS OF EXECUTION OF PROJECT BY THE ASSESSEE, EXCEPT FIRST FEW YEARS OF THE OPERATION OF THE ASSESSEE. ON PERUSAL OF THE HOURS SPENT AVAILABLE ON PAGE 1 55 TO 156 OF THE PAPER BOOK, WE FIND THAT IN A PARTICULAR YEAR THERE IS NO BIFURCAT IONS AS , HOW MANY HOURS WERE SPENT ON INITIAL PHASE OF THE PROJECT AND HOW MANY HOURS WERE SPENT ON THE LATER STAGE OF PROJECT. THUS IN ABSENCE OF ANY SUCH DETAILS, WE CANNO T HOLD THAT THE DIFFERENT PHASES OF THE PROJECTS ARE HAVING OVERALL IMPACT ON THE PROFITABILITY FROM YEAR TO YEAR. WE FIND THAT THERE IS NO CREDIBLE OR COGENT REASONING HAS BEEN BROUGHT OUT TO JUSTIFY THE USE OF MULTIPLE YEAR DATA OF PRIOR YEARS AND THE MA NNER IN WHICH IT COULD HAVE INFLUENCE THE DETERMINATION OF TRANSFER PRICING IN RELATION TO THE INTERNATIONAL TRANSACTION IN THE CASE OF THE ASSESSEE. IN THE CASE OF M/S INNODATA ISOGEN INDIA PRIVATE LIMITED 10 ITA NO. 5493/DEL/2010 AY: 2006 - 07 (SUPRA) CITED BY THE ASSESSEE, IN PRECEDING YEA RS, THE REVENUE HAD ADOPTED MULTIPLE YEAR DATA FOR DETERMINATION OF MARGINS OF THE COMPARABLES AND NO COGENT REASONS WERE GIVEN IN THE INSTANT YEAR TO DEVIATE FROM THE VIEW TAKEN IN EARLIER YEAR AND THUS THE TRIBUNAL HELD THAT NATURE AND BUSINESS MODEL OF THE ASSESSEE REMAINING THE SAME, THE USE OF CURRENT YEAR DATA IGNORING THE MULTIPLE YEAR DATA WAS ARBITRARY AND UNREASONABLE . BUT IN PRESENT CASE, IN AY 2004 - 05 , THE REVENUE CHOSEN TO USE CURRENT YEAR DATA ONLY, BUT THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) DIRECTED TO TAKE THE MULTIPLE YEAR DATA , THUS THE RATIO OF THE CITED CASE IS NOT APPLICABLE OVER THE FACTS OF THE ASSESSEE 4.8 WE FIND THAT IN THE CASE OF MAGNETI MARELLI POWERTRAIN INDIA (P.) LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX REPORTED IN ( 2014) 148 ITD 0439 (DELHI), THE TRIBUNAL HELD THAT RULE 10B (4) PROVIDES THAT THE DATA TO BE USED IN ANALYZING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YE AR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO AND PROVISO OF THIS RULE FOR USE OF MULTIPLE YEAR DATA IS ONLY AN EXCEPTION AND NOT A RULE , WHICH CAN BE INVOKED IF THE DATA FOR THE CURRENT YEAR DOES NOT RESULT INTO THE DETERMINATION OF CORR ECT PRICES. 4.9 HAVING REGARD TO THE DISCUSSION ABOVE AND FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, THE OBJECTION OF THE ASSESSEE AGAINST THE ACTION OF THE ASSESSING OFFICER IN USING CURRENT YEAR DATA CANNOT BE ACCEPTED. THE GROUND OF THE APPEAL IS AC CORDINGLY DISMISSED. 5. ADDRESSING THE GROUND NO. 5(II), THE LEARNED COUNSEL SUBMITTED THAT COMPARABLE ALPHAGEO (INDIA) LIMITED SHOULD BE REJECTED. THE LEARNED COUNSEL SUBMITTED THAT THE STANDARDS OF CO MPARABILITY PROVIDED IN RULE 10 B OF THE R ULES MANDATE THAT WHILE COMPARING A TESTED PARTY WITH AN UNCONTROLLED PARTY, FUNCTIONS PERFORMED (TAKING INTO ACCOUNT ASSETS 11 ITA NO. 5493/DEL/2010 AY: 2006 - 07 EMPLOYED AND RISK UNDERTAKEN) SHOULD BE EXAMINED AND ANY COMPARABLE HAVING MATERIAL DIFFERENCE IN THIS RESPECT, WHICH CANNOT BE ADJUSTE D WITH REASONABLE ACCURACY HAS TO BE EXCLUDED. 5.1 THE LEARNED COUNSEL REFERRED TO ANNUAL REPORT OF M/S . ALPHAGEO (INDIA) LTD . AVAILABLE ON PAGE 324 TO 400 THE ASSESSEE S PAPER BOOK AND SUBMITTED THAT SAID COMPANY IS NOT FUNCTIONALLY COMPARABLE WITH ASSES SEE BECAUSE SAID COMPARABLE WAS ENGAGED IN SEISMIC SURVEY AND SEISMIC DATA ACQUISITION ACTIVITIES, WHICH ARE NOT COMPARABLE TO THE ENGINEERING DESIGN SERVICE PROVIDED WITH ASSESSEE. REFERRING TO PAGE 326 OF THE PAPER BOOK , IT WAS SUBMITTED THAT ALPHAGEO W AS ENGAGED IN FOLLOWING SERVICES: DESIGN AND PREPLANNING OF 2D AND 3D SURVEYS; SEISMIC DATA ACQUISITION IN 2D AND 3D; SEISMIC DATA PROC ESSING / REPROCESSING /SPECIAL PROCESSING; SEISMIC DATA PRESENTATION; GENERATION, EVALUATION AND RANKING OF PRO SPECTS; RESERVOIR DATA ACQUISITION; RESERVOIR A NALYSIS; TOPOGRAPHIC SURVEYS; TAPE TRANSCRIPTION; AND THIRD PARTY QUALITY CONTROL FOR ACQUISITION AND PROCESSING. 5.2 F URTHER , REFERRING TO THE WEBSITE OF THE COMPARABLE COMPANY, THE LEARNED COUNSEL SUBMITTED THAT THE COMPARABLE COMPANY WAS ENGAGED IN TOPOGRAPHICAL SURVEYS, DRILLING AND LAYING CABLES, DATA ACQUISITION AND INTERPRETATION, WHICH ARE MORE AKIN TO RESEARCH SERVICES RELATED TO OIL EXPLORATION. THE LEARNED COUNSEL FURTHER REFERRING TO THE WEBSITE OF M/S ALPHAGEO SUBMITTED THAT IT WAS ENGAGED IN PROVISION OF 2 - D AND 3 - D SEISMIC SERVICES, WHICH ARE USED BY OIL EXPLORATION COMPANIES TO UNDERSTAND THE DENSITY AND VELOCITY CHANGES BETWEEN ROCK AND SOIL LAYERS BEFORE DRILLING AND THOSE SERVICES ARE MORE AKIN TO RESEARCH ACTIVITIES. IN THIS CONNECTION, THE LEARNED COUNSEL FURTHER REFERRED TO THE 12 ITA NO. 5493/DEL/2010 AY: 2006 - 07 FOLLOWING RULING OF THE TRIBUNAL S WHERE THE TRIBUNAL APPROVED SELECTION OF M/S ALPHAGEO AS A COMPARABLE TO COMPANIES ENGAGED IN PROVISION OF R ESEARCH AND DEVELOPMENT SERVICES # PARTICULARS ITA NO. 1. BOSCH LTD. IT(TP)A NO. 670/BANG/2011 2. GE INDIA TECHNOLOGY CENTRE PVT. LTD ITA NO.789/BANG/2010 & ITA NOS.487 & 925/BANG/2011 3 APOTEX RESEARCH PRIVATE LTD. ITA NO.918/BANG/2011 4 TEVAPHARM PRIVATE LIMITED ITA NO.6623/MUM/2011 5 MONSANTO HOLDINGS PVT. LTD. ITA NO. 6558/M UM/2008 5.3 THE LEARNED CO UNSEL FURTHER REFERRING TO THE ANNUAL R EPORT OF ALPHAGEO, SUBMITTED THAT COMPANY HAD MADE HUGE INVESTMENT IN FIXED ASSETS AS COMPARED TO THE ASSESSEE. THE LEARNED COUNSEL DRAWN OUR ATTENTION TO THE NET FIX ED ASSETS TO SALES RATIO (NFA/SALES) AS ON 31/03/2006, MENTIONED IN THE SYNOPSIS, WHICH IS REPRODUCED AS UND ER: PARTICULARS ALPHAGEO THE APPELLANT NET FIXED ASSETS AS ON MARCH 31, 2006 (IN INR) 53,11,48,259 3,10,91,698 NET SALES (IN INR) 23,86,65,270 63,92,06,650 AVERAGE NFA / SALES RATIO 222.55% 4.86% 5.4 I N VIEW OF THE ABOVE TABLE, IT WAS SUBMITTED THAT THERE WERE HUGE DIFFERENCE IN THE ASSETS DEPLOYED BY THE COMPARABLE M/S ALPHAGEO AS COMPARED TO THE ASSESSEE COMPANY. 5.5 THE LEARNED COUNSEL FURTHER SUBMITTED THAT TH E PREREQUISITE FOR ARRIVING AT A LP IS THAT THE TRANSACTION OF THE TESTED PARTY SHOULD BE BENCHMARKED WITH UNCONTROLLED TRANSACTION AND PRESENCE OF RELATED PARTY TRANSACTIONS DILUTES THE RELIABILITY OF THE DATA, THEREFORE IT IS DESIRABLE THAT 13 ITA NO. 5493/DEL/2010 AY: 2006 - 07 RELATED PARTY TRANSACTIONS SHOULD NOT BE THE RE AT AL L OR ONLY TO A MINIMAL POSSIBLE EXTENT. THE LEARNED COUNSEL SUBMITTED THAT THE A LPHAGEO HAD RELATED PARTY TRANSACTIONS AMOUNTING TO 16.88% OF THE SALES. IN THIS CONNECTION, THE LEARNED COUNSEL RELIED ON THE FOLLOWING RULINGS, WHEREIN THE TRIBUNAL/ HON BLE HIGH COURT HELD THAT THE COMPANIES HAVING RELATED PARTY TRANSACTION MORE THAN 15% OF ITS SALES SHOULD BE REJECTED: I. HON'BLE DELHI ITAT IN AVAYA INDIA PVT. LTD. (ITA NO. 5528/DEL/2011) II. HON'BLE HC IN M/S.DE SHAW INDIA SOFTWARE PVT. LTD (I.T.T.A. NO.433 OF 2014/HC/2014) III. HON'BLE HYDERABAD ITAT IN INTOTO SOFTWARE INDIA PRIVATE LTD. (ITA.NO.1196/HYD/2010) IV. HON'BLE BANGALORE ITAT IN NTT DATA FA INSURANCE SYSTEMS (INDIA) PRIVATE LIMITED (I.T(TP).A NO. 131L/BANG/2010) V. HON'BLE BANGALORE ITAT IN M/S. CYPRESS SEMICONDUCTOR TECHNOLOGY INDIA PRIVATE LIMITED, (IT(TP)A NO.LL67/BANG/2010) VI. HON'BLE BANGALORE ITAT IN M/S. SYMBOL TECHNOLOGIES INDIA PVT. LTD., (IT(TP)A NO.391/BANG/2012) VII. HON'BLE DELHI ITAT IN SONY IND IA (P.) LTD. V. DY. CIT [2008] 114 ITD 448 (DELHI) VIII. HON'BLE BANGALORE ITAT IN M/S. 24/7 CUSTOMER .COM PVT. LTD (TS - 708 - ITAT - 2012(BANG) - TP) IX. HON'BLE BANGALORE ITAT IN M/S. 3DPLM SOFTWARE SOLUTIONS LTD. (TS - 359 - ITAT - 2013(BANG) - TP) 5.6 IN V IEW OF ABOVE SUBMISSIONS, THE LEARNED COUNSEL PRAYED THAT ALPHAGEO HAVING RELATED PARTY TRANSACTIONS AS 16.80% OF IT SALES, IT SHOULD BE REJECTED AS A COMPARABLE ENTITY. 5.7 LEARNED CIT ( DR ), ON THE OTHER HAND , SUBMITTED THAT T RANSACTION NET MARGIN METHOD (TNM M) HAS BEEN CHOSEN IN THE CASE OF THE ASSESSEE AS MOST APPROPRIATE METHOD FOR COMPUTING ARM S LENGTH PRICE WHERE THERE SHOULD BE BROAD SIMILARITY OF FUNCTIONS. HE SUBMITTED THAT M/S ALPHAGEO WAS ENGAGED IN SEISMIC STUDY DURING THE YEAR UNDER CONSIDERATION WHICH A LSO INVOLVED IN PREPARING OF DRAWINGS AND DESIGNS. HE FURTHER SUBMITTED THAT THE HIGHER ASSET BASE OF M/S ALPHAGEO WAS NOT HAVING ANY IMPACT ON THE PROFITABILITY OF THE COMPANY AS IT GET COMPENSATED BY WAY OF HIRE DEPRECIATION ON THE ASSETS. HE FURTHER 14 ITA NO. 5493/DEL/2010 AY: 2006 - 07 SUB MITTED THAT THE COMPARABLE M /S ALPHAGEO WAS SELECTED BY THE ASSESSEE HIMSELF IN ITS TRANSFER PRICING STUDY AND THUS SHOULD NOT BE ALLOWED TO REJECT THE SAME. 5.8 IN THE REJOINDER, THE LEARNED COUNSEL SUBMITTED THAT SELECTION OF M/S ALPHAGEO IN ITS TRANSF ER PRICING DOCUMENTATION IS ONE OF THE COMPARABLE, DID NOT PRECLUDE THE ASSESSEE FROM POINTING OUT ERRORS AT A LATER STAGE. IN THIS CONNECTION THE LEARNED COUNSEL RELIED ON THE DECISION OF THE TRIBUNAL IN THE CASE OF QUARK SYSTEM PRIVATE LIMITED IN ITA NO. 100/CHD/2009. THE LEARNED COUNSEL REITERATED THAT IN VIEW OF DIFFERENCE IN ASSET INTENSITY AND FUNCTIONAL PROFILE, THE SAID COMPARABLE SHOULD BE EXCLUDED FROM THE SET OF COMPARABLES. 5.9 WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE RELEVANT MATERIAL ON RECORD INCLUDING THE PAPER BOOK OF THE ASSESSEE. ON PERUSAL OF THE ANNUAL REPORT OF M/S ALPHAGEO , WE FIND THAT DURING THE YEAR UNDER CONSIDERATION THE COMPARABLE COMPANY HAS SHOWN INCO ME FROM SEISMIC SURVEY AND OTHER RELATED SERVICES. ON PERUSAL OF PAGE 326 OF THE PAPER BOOK, WHICH IS PART OF THE ANNUAL REPORT OF M/S ALPHAGEO , WE FIND THAT THE COMPANY WAS ENGAGED IN PROVIDING SERVICES OF DESIGN AND PREPLANNING OF 2 - D AND 3 - D SURVEYS, SEISMIC DATA ACQUISITION, SEISMIC DATA INTERPRETATION , TOPOGRAPHIC SURVEYS ETC. AS COMPARED TO THE SERVICES OF ENGINEERING DESIGN BY THE ASSESSEE. THUS , IN OUR OPINION , THE COMPARABLE COMPANY WAS ENGAGED IN PROVIDING DESIGNS FOR SURVEY AS WELL AS IN CONDU CTING THE SURVEYS AND DATA ACQUISITION ETC. THUS , WE FIND THAT THE ASSESSEE IS ENGAGED IN PROVIDING ONLY ENGINEERING DESIGN SERVICES WHEREAS M/S ALPHAGEO HAS PROVIDED MANY OTHE R ENGINEERING SERVICES. FURTHER, THE ASSET EMPLOYED BY M/S ALPHAGEO IS HIGHER IN TERMS OF NET FIX ED ASSETS/SALES RATIO. IN THE CASE OF THE ASSESSEE , NET FIX ED ASSE T/SALES RATIO IS 4.86% , WHEREAS THE SAME RATIO IN THE CASE OF M/S ALPHAGEO IS 220.55%. THUS , THERE IS A VERY LARGE DIFFERENCE IN THE ASSET 15 ITA NO. 5493/DEL/2010 AY: 2006 - 07 INTENSITY BETWEEN THE ASSESSEE AND THE COMPARABLE. FURTHER , WE ALSO FIND THAT IN VIEW OF THE DECISION OF THE TRIBUNAL IN THE CASE OF Q UARK SYSTEM PRIVATE L IMITED (SUPRA), THE ASSESSEE CANNOT BE STOPPED FROM POINTING OUT THAT M/S ALPHAGEO HAD WRONGLY BEEN TAKEN AS COMPARABLE. IN VIEW OF ABO VE FACTS AND CIRCUMSTANCES, WE AR E OF THE OPINION THAT M/S ALPHAG EO NEED TO BE EXCLUDED FROM THE SET OF COMPARABLES BEING FUNCTIONALLY DIS SIMILAR AND DIFFERENCE IN INTENSITY OF ASSET EMPLOYED. ACCORDINGLY , WE DIRECT THE ASSESSING OFFICER TO EXCLUDE M/S ALP HA GE O FROM THE SET OF COMPARABLES CHOSEN FOR COMPUTING ARM S LENGTH OF THE INTERNATIONAL TRANSACTION AND COMPUTE THE TRANSFER PRICING ADJUSTMENT ACCORDINGLY. 6. IN GROUND NO. 7 THE ASSESSEE HAS SOUGHT FOR ALLOWING WORKING CAPITAL ADJUSTMENT UNDER RULE 10 B(3)(II) OF THE INCOME TAX R ULES. 6.1 BEFORE US, THE LEARNED COUNSEL SUBMITTED THAT BY ALLOWING CUSTOMERS/CREDITORS TO DEFER PAYMENT FOR A CERTAIN PERIOD, ANY COMPANY FOREGOES THE RIGHT TO RECEIVE ITS REVENUE IMMEDIATELY AND ARE NO ADDITIONAL INCOME BY REINVESTING THE REVENUE OVER THE DEFERRAL PERIOD. HE FURTHER SUBMITTED THAT ALL COMPANIES HAVE THEIR OWN LIMITS FOR DEFERRING SUCH PAYMENTS AND THE LIMITS DETERMINE THE WORKING CAPITAL CYCLES AND ACCORDINGLY FOR DUE ECONOMIC ANALYSIS, IT BECOMES IMPORTANT TO MAKE AN ADJUSTMENT FOR DIFFERENT WORKING CAPITAL POSITION SO AS TO E LIMINATE THE IMPACT OF SUCH FACTORS FROM AN ARM S LENGTH COMPARISON. IN THIS CONNECTION HE RELIED ON THE DECISION OF THE TRIBUNAL DELHI BENCH IN THE CASE OF M/S MENTOR GRAPHICS (NOIDA) PRIVATE L IMITED IN ITA NO. 1969/DEL/2006 WHEREIN IT IS HELD THAT IN FIN AL SET OF COMPARABLES, TO ELIMINATE THE DIFFERENCES ADJUSTMENT FOR WORKING CAPITAL AND RISK AND GROWTH MAY BE MADE. THE LEARNED COUNSEL ACCORDINGLY PRAYED THAT THE LEARNED AO/ LEARNED TPO SHOULD BE DIRECTED TO GRANT AN APPROPRIATE ADJUSTMENT TO THE ASSESSE E ON ACCOUNT OF DIFFERENTIAL WORKING CAPITAL. 16 ITA NO. 5493/DEL/2010 AY: 2006 - 07 6.2 ON THE OTHER HAND , LEARNED CIT ( DR ) SUBMITTED THAT THE ASSESSEE HAS TO MAKE A PR I MA - FACIE CASE FOR WORKING CAPITAL ADJUSTMENT AND DEMONSTRATE THAT PRICING WAS EFFECTED DUE TO THE RECEIVABLES IN THE CASE OF THE ASSESSEE AS WELL AS IN THE CASE OF COMPARABLES. HE FURTHER SUBMITTED THAT NO SUCH WORKING WAS SUBMITTED BEFORE THE TRANSFER PRICING OFFICER (TPO). 6.3 IN REJOINDER, THE LEARNED COUNSEL SUBMITTED THAT DETAILED WORKING CAPITAL ADJUSTMENT WAS SUBMITTED BEFORE THE DISPUTE RESOLUTION PANEL (DRP), A COPY OF WHICH IS AVAILABLE ON PAGE 282 OF THE PAPER BOOK. 6.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD ON THE ISSUE IN DISPUTE. IN THE ENTIRE EXERCISE OF TRANSFER PRICING , THE OBJECTIVE IS TO HAVE BETTER COMPARABILITY AND THE PURPOSE OF WORKING CAPITAL ADJUSTMENT IS TO INCREASE THE COMPARABILITY OF TESTED PARTY AND ITS COMPARABLES. WORKING CAPITAL ADJUSTMENT IRONS OUT THE DIFFERENCES BETWEEN ASSESSEE AND COMPARABLES. 6.4 IN VARIOUS DECISIONS INCLUDING THE DECISION CITED BY THE ASSESSEE, IT IS HELD THAT IF THERE ARE DIFFERENCES WITH COMPARABLES WHICH CAN BE ADJUSTED, THEN ADJUSTMENT ARE REQUIRED TO MADE INCLUDING THE WORKING CAPITAL ADJUSTMENT. ACCORDINGLY , WE DIRECT THE AS SESSING OFFICER/TPO TO GRANT AN APPROPRIATE WORKING CAPITAL ADJUSTMENT TO THE ASSESSEE. 7. IN GROUND NO. 9 THE ASSESSEE HAS CHALLENGED THE FINDING OF THE AO/DRP IN HOL DING THAT THE AMOUNT OF RS.3,69,91, 451/ - PAID BY THE ASSESSEE FOR USE OF SUBLICENSE SOFTW ARE PACKAGE WAS A CAPITAL EXPENDITURE. 7.1 THE FACTS IN BRIEF IN RESPECT OF ISSUE IN DISPUTE ARE THAT THE ASSESSEE CLAIMED SOFTWARE EXPENSES OF RS. 3,81,23, 366/ - WHICH INCLUDED A SUM OF RS.3,69, 91,451/ - ON ACCOUNT OF ROYALTY PAYMENT FOR PLANT DESIGN SOFTW ARE. THE ASSESSEE EXPLAINED THAT SAID EXPENSES WERE TOWARDS ROYALTY PAYMENT ON ACCOUNT OF USAGE OF SUBLICENSE SOFTWARE PACKAGE 17 ITA NO. 5493/DEL/2010 AY: 2006 - 07 E.G. PLANT DESIGN SOFTWARE (PDS) PAID TO FLUOR INTERCONTINENTAL INC., USA, COMPUTED ON THE BASIS OF NUMBER OF HOURS OF USAGE OF THE SOFTWARE. THE ASSESSEE FURTHER SUBMITTED THAT TAX WAS WITHHELD AT THE RATE OF 15% ON SUCH ROYALTY PAYMENTS IN ACCORDANCE WITH THE PROVISIONS OF ARTICLE 12 OF THE TREATY BETWEEN INDIA AND USA. HOWEVER , THE ASSESSING OFFICER FOLLOWING THE ORDER FOR ASSES SMENT YEAR 2003 - 04 AND MADE THE ADDITION. THE ASSESSING OFFICER ALSO NOTED THAT THE ASSESSEE GOT RELIEF FROM THE TRIBUNAL IN ASSESSMENT YEAR 2003 - 04 AND THE DEPARTMENT PREFERRED APPEAL BEFORE THE HON BLE HIGH COURT. 7.2 BEFORE US, THE LEARNED COUNSEL OF T HE ASSESSEE SUBMITTED THAT HON BLE HIGH COURT HAS ALREADY DECIDED THE ISSUE IN DISPUTE IN FAVOUR OF THE ASS ESSEE AND THE SLP FILED BY THE R EVENUE BEFORE THE HON BLE SUPREME COURT HAS BEEN DISMISSED. HE REFERRED TO THE COPY OF ORDER OF THE HON BLE HIGH COUR T DISMISSING DEPARTMENT S APPEAL FOR ASSESSMENT YEAR 2003 - 04 AVAILABLE ON PAGE 587 TO 600 AND THE COPY OF ORDER OF THE HON BLE SUPREME COURT DISMISSING THE DEPARTMENT S SPECIAL LEAVE PETION , AVAILABLE ON PAGE 585 TO 586 OF THE PAPER BOOK. 7.3 ON THE OTHER HAND , LEARNED CIT ( DR ) RELIED ON THE ORDER OF THE LOWER AUTHORITIES. 7.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD INCLUDING THE JUDGMENT OF THE HON BLE HIGH COURT AND SUPREME COURT ON THE ISSUE IN DISPUTE. THE HON BLE HIGH COURT AFTER CONSIDERING THE PRINCIPLES LAID DOWN IN THE CASE OF COMMIS SIONER OF INCOME TAX VS. JK S YNTHETICS LTD., 309 ITR 371 AND OTHER DECISIONS UPHELD THE FINDING OF THE TRIBUNAL THAT THE EXPENDITURE IN QUESTION WAS REVENUE IN NATURE. WE ALSO FIND THAT SPECIAL LEAVE PETITION FILED BY THE DEPARTMENT AGAINST THE SAID DECISION OF THE HON BLE JURISDICTIONAL HIGH COURT HAS ALSO BEEN DISMISSED BY THE HON BLE SUPREME COURT. THUS RESPECTFULLY FOLLOWING THE DECISION OF THE HON BLE JURISDICTIONAL HIGH CO URT, 18 ITA NO. 5493/DEL/2010 AY: 2006 - 07 WE HOLD THAT AMOUNT OF RS.3,69,91, 451/ - FOR USE OF SUBLICENSE SOFTWARE PACKAGE WAS REVENUE EXPENDITURE. THE GROUND NO. 9 OF THE APPEAL IS ACCORDINGLY ALLOWED. 7.5 IN GROUND NO. 10 , THE ASSESSEE HAS SOUGHT FOR ALTERNATIVE REMEDY FOR GRANTING DEPRECIATION ON THE ROYALTY UNDER SECTION 32 OF THE ACT. SINCE THE EXPENDITURE IN QUESTION TOWARDS ROYALTY FOR USE OF SUBLICENSE SOFTWARE PACKAGE HAS ALREADY BEEN ALLOWED AS REVENUE EXPENDITURE, THE QUESTION OF ALLOWING DEPRECIATION DOES NOT ARISE. ACCORDINGLY , THIS AL TERNATIVE GROUND OF APPEAL IS DISMISSED AS INFRUCTUOUS. 8. IN THE RESULT, THE APPEAL IS ALLOWED PARTLY. THE DECISION IS PRONOUN CED IN THE OPEN COURT ON 6 T H JANUARY , 201 7 . S D / - S D / - ( I.C. SUDHIR ) ( O.P. KANT ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 6 T H JANUARY , 201 7 . LAPTOP / - COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI