ITO 8(1)(3), MUMBAI V. DG2L TECHNOLOGIES P. LTD, MUMBAI

ITA 5768/MUM/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49272 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 29-03-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 29-10-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MALTI SHRIDHARAN
• Assessee Lawyers: K SHIVARAM
• Keywords: Depreciation; Transfer pricing
• Section: 143(3); 92E; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L, MUMBAI BEFORE SHRI P.M.JAGTAP, ACCOUNTANT MEMBER & SHRI V.DURGA RAO, JUDICIAL MEMBER. I.T.A. NO. 5768/MUM/2009. ASSESS MENT YEARS : 2006-07. THE INCOME-TAX OFFICER, DG2L TECHNOLOGIES P. LTD. 8(1)(3), MUMBAI. VS. C/O V.C. SHAH & CO., CAS, 3 RD FLOOR, RAJGIR CHAMBERS, 12-14, SHAHID BHAGAT SINGH R OAD, MUMBAI 400 001. PAN AABCD8057C. APPELLANT. RESPONDENT. APPELLANT BY : SMT. MALTI SHRIDHARAN. RESPO NDENT BY : SHRI K. SHIVARAM. O R D E R. PER P.M. JAGTAP, A.M. : THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST TH E ORDER OF LEARNED CIT(APPEALS)-VIII, MUMBAI DATED 17-08-2009 AND IN A SOLITARY GROUND RAISED THEREIN, THE REVENUE HAS CHALLENGED THE ACTION OF T HE LEARNED CIT(APPEALS) IN DETERMINING SALE PRICE OF EXPORT SALE MADE BY THE A SSESSEE AT RS.5 CRORES AS AGAINST RS.9.56 CRORES DETERMINED BY THE AO AS ARMS LENGTH PRICE. 2. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY W HICH IS ENGAGED IN THE BUSINESS OF DESIGNING, DEVELOPING AND DEALING IN AL L KINDS OF SOFTWARE AND HARDWARE PRODUCTS AS WELL AS RENDERING MAINTENANCE SERVICES RELATING THERETO. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION W AS FILED BY THE ASSESSEE ON 24- 11-2006 DECLARING TOTAL INCOME AT NIL AFTER CLAIMIN G SET OFF OF BROUGHT FORWARD 2 ITA NO.5768/MUM/2009 ITO VS. DG2L TECHNOLOGIES P.LTD . BUSINESS LOSS AND DEPRECIATION. IN THE YEAR UNDER C ONSIDERATION, THE ASSESSEE COMPANY HAD SOLD A DIGITAL CINEMA DEVELOPMENT MODUL E TO ITS SINGAPORE BASED HOLDING COMPANY VIZ. DG2L PTE LTD. FOR A SUM OF RS. 5 CRORES. FROM THE AUDIT REPORT FILED BY THE ASSESSEE IN FORM NO. 3CEB AS RE QUIRED BY SECTION 92E OF THE I.T. ACT, THE AO NOTED THE FOLLOWING ASPECTS: A. DEVELOPMENT AND DESIGNING OF HARDWARE AND SOFTWA RE CONSTITUTE THE MAIN AND PRIMARY ACTIVITY OF THE ASSESSEE, FOR WHIC H IT HAS EMPLOYED A NUMBER OF WELL EXPERIENCED AND QUALIFIED STAFF. B. THE ASSESSEE HAS DEVELOPED DIGITAL CINEMA MODULE S, WHEREIN ITS SINGAPORE PARENT IS A WORLD LEADER. C. THE MODULE DEVELOPED IS A NICHE AND SPECIALIZED PRODUCT AND APPARENTLY OF GOOD VALUE TO DG2L. D. THE ASSESSEE HAS PROVIDED AND SOLD DIGITAL CINEM A TECHNOLOGY SOFTWARE MODULES TO ITS PARENT COMPANY AT SINGAPORE , DURING THE YEAR ENDED 31.03.2006, VIDE INVOICE DATED 28.03.2006. E. IT HAS ADOPTED THE CPM METHOD, SINCE THE COST OF DEVELOPMENT OF THE MODULES IS AVAILABLE, AND SO ARE THE INDUSTRY MARGI NS. 3. KEEPING IN VIEW THE ABOVE ASPECTS NOTED BY HIM F ROM THE AUDIT REPORT SUBMITTED BY THE ASSESSEE, THE AO REQUIRED THE ASSE SSEE TO OFFER ITS EXPLANATION/CLARIFICATION AS UNDER : KINDLY REFER TO YOUR REPORT U/S. 92E FOR THE DEFI NITION OF ARMS LENGTH PRICE. AS PER RULE 10B OF IT RULES THE VALUATION OF ARMS LENGTH PRICE IN RELATION TO INCOME TAX SHALL BE DETERMINED BY AN OF THE FOLLOWING METHODS : 1. COMPARABLE UNCONTROLLED PRICE METHOD. 2. RESALE PRICE METHOD. 3. COST PLUS METHOD. 4. PROFIT SPLIT METHOD. 5. TRANSACTIONAL NET MARGIN METHOD. 3 ITA NO.5768/MUM/2009 ITO VS. DG2L TECHNOLOGIES P.LTD . YOUR AUDIT REPORT DOES NOT JUSTIFY THE PERCENTAGE O F MARGIN & COST ADJUSTED BY YOU. THE MAN POWER COST TAKEN BY YOU I WITHOUT ANY JUSTIFICATION DUE TO THE FOLLOWING REASONS : (A) YOU HAVE ENTERED INTO TRADING ACTIVITY DURING T HE YEAR WHICH HAS RESULTED IN G.P. OF 47.67%. IT IS ALSO TO BE MENTIO NED THE GOODS PURCHASED BY YOU FOR TRADING ACTIVITY HAS BEEN DIRECTLY SENT TO CONSIGNEES VALUABLE MEDIA PVT. LTD. SO THERE IS NOT MUCH REQUIREMENT OF MANPOWER FOR THIS KIND OF ACTIVITY. YOU HAVE RECEIVED AN AMOUNT OF RS.37,3 4,494/- AS MAINTENANCE, SALES WHICH HAS GONE INTO THE COST OF MAN POWER FOR THE AFTER SALES SERVICE. THERE IS NO JUSTIFICATION FOR THE SALARY & WAGES T O THE EXTENT OF RS.1,80,10,179/- AND SURPRISINGLY IN THE AUDIT REPO RT U/S 92E YOU HAVE ALLOCATED ONLY RS.24,60,780/- TOWARDS MANPOWER COST AND RS.24,45,022/- TOWARDS ADMINISTRATION AND DEVELOPMENT COST. THE BA SIS OF THIS COST IS ALLOCATION HAS NOT BEEN FURNISHED BY THE AUDITORS. IT IS TO BE MENTIONED HERE THAT YOUR G.P. RATIO IN RESPECT OF TRADING ACTIVITY IS 47.67%. EVEN IN CASE OF SOFTWARE EXPORT S THE NORMAL PROFIT RATIO IS IN THE RANGE OF 45 TO 60%. YOU ARE REQUESTED TO SHOW CAUSE WHY THE ENTIRE COS T OF MANPOWER AND ADMINISTRATION AND DEVELOPMENT EXPENSES SHOULD NOT BE TAKEN AS YOUR COST OF DEVELOPMENT OF THE SOFTWARE AND AFTER REWORKING THE COST WHY THE PROFIT MARGIN OF 50% SHOULD NOT BE TAKEN FOR THE COMPUTATI ON OF ARMS LENGTH PRICE. YOUR REPLY SHOULD REACH THE UNDERSIGNED ON OR BEFOR E 26 TH DECEMBER, 2008. 4. IN REPLY, THE FOLLOWING EXPLANATION/CLARIFICATIO N WAS OFFERED BY THE ASSESSEE VIDE ITS LETTER DATED 26-12-2008 : WE HAVE TAKEN THEREIN THE RELEVANT COSTS OF SOFTWA RE FOR DIGITAL CINEMA MODULE. THIS MODULE WAS READY BY MAY END. HENCE, WE HAVE CONSIDERED THE SALARIES AND WAGES UPTO MAY, 2005. THEREAFTER O UR PEOPLE WERE NOT REQUIRED TO WORK ON THIS MODULE SINCE IT WAS READY . WE WERE SEARCHING AND TRYING TO SELL IT LOCALLY OR ABROAD. WE FOUND THE BUYER ABROAD AND WE HAVE SOLD THE SAME. WE ARE NOT MERE TRADERS IN CINEBLASTERS AND OTHER ITEMS. WE HAVE MAINTENANCE A ND TECHNICAL SALES ALSO. OUR SOFTWARE ENGINEERS HAVE TO DESIGN AND DEVELOP T HE CONFIGURATION AS PER THE REQUIREMENTS OF THE BUYER. EVEN IN RESPECT OF P RODUCTS PURCHASED AND SOLD OUR SOFTWARE ENGINEERS HAVE TO GO AND INSTALL SOFTWARE. THE HARDWARES 4 ITA NO.5768/MUM/2009 ITO VS. DG2L TECHNOLOGIES P.LTD . ARE TO BE ADJUSTED BY SOFTWARE ENGINEERS AND MAKE T HEM USABLE. HENCE SOFTWARE ENGINEERS UNDERTAKE THE JOB OF MAKING CINE BLASTERS USABLE. FOR EXAMPLE NO ONE CAN OPERATE COMPUTER WITHOUT SOFTWAR E. EVERY COMPUTER SYSTEM NEEDS SOFTWARE. SOFTWARE STANDARD CAN BE USE D OR IT MAY HAVE TO BE ADJUSTED TO USE AS PER THE REQUIREMENT OF BUSINESS. 5. THE ABOVE EXPLANATION/CLARIFICATION OFFERED BY T HE ASSESSEE WAS NOT FOUND ACCEPTABLE BY THE AO FOR THE FOLLOWING REASONS GIVE N IN PARAGRAPH 10.1 AND 10.2 OF THE ASSESSMENT ORDER : 10.1 FROM THE DATA PROVIDED BY THE ASSESSEE ABOUT THE SOFTWARE IT CAN BE INFERRED THAT THE SOFTWARE PRODUCED BY THE ASSESSEE IS A UNIQUE SOFTWARE WHICH REQUIRES EFFORT BY LARGE WORK FORCE OF TECHNI CAL AND SOFTWARE EXPERTS. THIS KIND OF SOFTWARE IS SNOT AVAILABLE ACROSS THE SHELF BUT PRODUCED ONLY AS PER THE REQUIREMENTS OF THE CUSTOMERS/CLIENTS. THE ASSESSEE WAS PRODUCING THIS SOFTWARE WITH THE HELP OF SUCH A LARGE WORK FO RCE FOR MERELY TWO YEARS. IT DOES NOT MAKE BUSINESS SENSE THAT ANY ONE WILL P UT IN SUCH EFFORTS WITH FINANCIAL COST WITHOUT HAVING ANY CUSTOMER TO BUY T HE SAME. THE CONTENTION OF THE ASSESSEE THAT THE SOFTWARE WAS READY BY THE MONTH OF MAY 2005 IS NOTHING ELSE BUT AN EYEWASH. IF THE SOFTWARE WAS RE ADY BY MAY 2005 THEN THERE WAS NO NEED FOR THE ASSESSEE TO EMPLOY THE SA ME WORK FORCE FOR THE ENTIRE YEAR WITHOUT ANY WORK ALLOCATION TO THEM. AS ALREADY STATED IN EARLIER PARAS, THE ASSESSEE DIDNT REQUIRE MUCH WORK FORCE FOR THE TRADING ACTIVITY. IT IS THEREFORE PROVED BEYOND DOUBT THAT THE SOFTWARE WAS UNDER PRODUCTION TILL MARCH 2006. AS SOON AS IT WAD READY IT AS SOLD TO T HE CUSTOMER. 10.2 AS REGARDS THE TRADING ITEMS THE ASSESSEE HAS STATED THEY REQUIRE MANPOWER FOR THE MAINTENANCE AND TECHNICAL SALES. I T IS TO BE MENTIONED HERE THAT THE ASSESSEE DOESNT REQUIRE LARGE NUMBER OF S TAFF FOR THE INSTALLATION AND AFTER SALES MAINTENANCE. THERE ARE NOT MORE THAN TE N ENGINEERS EMPLOYED BY THE ASSESSEE FOR THIS WORK WHICH IS EVIDENT FROM TH E VOUCHERS/BILLS PRODUCED BY THE ASSESSEE. THE ASSESSEE IS ALSO COLLECTING MA INTENANCE CHARGES FROM THE CUSTOMERS AGAINST WHICH THE ASSESSEE HAS DEBITE D THE MANPOWER COST. SO THE CLAIM OF THE ASSESSEE THAT SUCH A LARGE MANPOWE R UTILIZED FOR THE TRADING ACTIVITY IS JUST AN AFTER THOUGHT. BY SUCH EXPLANAT IONS THE ASSESSEE WANTS THE TAX AUTHORITIES TO BELIEVE THE UNBELIEVABLE. EVERY EXPLANATION GIVEN BY THE ASSESSEE HAS TO BE SUPPORTED BY FACTS AND FIGURES. AND ANY EXPLANATION WITHOUT SUPPORTED BY FACTS AND FIGURES IS JUST A ST ORY WHICH HAS NO 5 ITA NO.5768/MUM/2009 ITO VS. DG2L TECHNOLOGIES P.LTD . EVIDENTIARY VALUE. HENCE THE EXPLANATION GIVEN BY T HE ASSESSEE IS HEREBY REJECTED. 6. THE ARMS LENGTH PRICE WORKING PREPARED AND FURNI SHED BY THE ASSESSEE WAS ALSO EXAMINED BY THE AO AND ON SUCH EXAMINATION, HE FOUND THAT THE SAME WAS SUFFERING FROM THE FOLLOWING INFIRMITIES : A. THE ASSESSEE HAS BEEN UNABLE TO PROVIDE SUITABL E EVIDENCE TO PROVE THAT AFTER MAY 2006, NO COST WAS INCURRED BY IT TOW ARDS THE SOFTWARE MODULE DEVELOPED AND SOLD BY IT, PARTICULARLY WHEN IT WAS SOLD ONLY ON 28.03.2006. THERE IS NO EVIDENCE TO ESTABLISH TH AT THE STAFF RELATED TO THE PROJECT WAS TERMINATED OR THAT NO FURTHER TE CHNICAL SUPPORT RELATED TO THE MODULE WAS GIVEN TO THE PARENT COMPA NY. B. EVEN THOUGH ITS MAIN NATURE OF BUSINESS IS THE D ESIGN/DEVELOPMENT OF SOFTWARE HARDWARE, FOR WHICH IT HAS EMPLOYED NUMERO US HIGHLY QUALIFIED AND EXPERIENCED STAFF, IT HAS ALLOCATED A SMALL FRACTION OF SUCH MANPOWER COSTS, TO THE COST RELATED TO THE SOF TWARE DEVELOPED FOR ITS PARENT COMPANY. C. THE DEPRECIATION ALLOCATED TO SUCH ACTIVITY, IS FAR LESS, EVEN THOUGH MOST OF THE ASSETS, PARTICULARLY THE COMPUTERS, WER E USED FOR THE PURPOSE OF SUCH DEVELOPMENT. D. THE RENT ALLOCATED TOO IS INCORRECT FOR REASONS STATED IN POINTS (A)(B) ABOVE, SINCE SOFTWARE DEVELOPMENT APPARENTLY REQUIR ED A MAJOR PORTION OF THE RENTED PREMISES. E. SINCE ITS TRADING ACTIVITY INVOLVED NO VALUE ADD AT ITS END, SALES HAVING BEING MADE DIRECTLY BY ITS SUPPLIERS TO ITS CUSTOME RS, THE TRADE RELATED COSTS ARE BOUND TO BE A MINISCULE, SINCE ALL COST A ND EFFORTS WERE FOCUSED TOWARDS THE SOFTWARE DEVELOPMENT, ADMITTED BY THE ASSESSEE TO BE ITS MAIN ACTIVITY. F. INDUSTRY MARGINS RELIED UPON BY THE ASSESSEE ARE UNPROVEN AND THUS NOT RELIABLE. 7. KEEPING IN VIEW THE INFIRMITIES NOTICED BY HIM I N THE ARMS LENGTH PRICE CALCULATION MADE BY THE ASSESSEE AS WELL AS IN THE EXPLANATION/CLARIFICATION OFFERED 6 ITA NO.5768/MUM/2009 ITO VS. DG2L TECHNOLOGIES P.LTD . BY IT IN SUPPORT AND RELYING ON THE PROVISIONS OF S ECTION 91(1) AND 92C, THE AO PROCEEDED TO RECOMPUTE THE ARMS LENGTH PRICE OF THE TRANSACTION OF SALE OF SOFTWARE I.E. DIGITAL CINEMA MODULE MADE BY THE ASSESSEE CO MPANY TO ITS SINGAPORE BASED HOLDING COMPANY AND ARRIVED AT SUCH PRICE AT RS.9,5 6,38,310/- AS PER THE FOLLOWING WORKING GIVEN IN THE ASSESSMENT ORDER : PARTICULARS MANPOWER COST A) SOFTWARE IN PROCESS B/F. B) SALARY, BONUS AND OTHER BENEFITS C) CONTRIBUTION TO PF AND OTHER FUNDS D) WELFARE EXPENSES E) FIELD MAINTENANCE COST - }90% OF COSTS ALLOCATED SINCE }SOFTWARE DEVELOPMENT IS THE }MAIN ACTIVITY AND TRADING }INVOLVED NO VALUE ADDITION SUB TOTAL RS. 37205646 16209161 334052 1491445 3085588 58325892 DEPRECIATION }90% OF COST ALLOCATED SINCE }SOFTWARE DEVELOPMENT IS }THE MAIN ACTIVITY AND }TRADING INVOLVED NO VALUE }ADDITION. SUB TOTAL 2765690 _____________ 2765690 ADMINISTRATIVE & DEVELOPMENT COST A) STORES & SPARES B) ELECTRICITY CHARGES C) REPAIRS TO FURNITURE D) OTHER REPAIRS E) RENT F) INSURANCE CHARGES G) TRAVELLING & 284754 799530 9738 118769 3569625 68493 5468827 7 ITA NO.5768/MUM/2009 ITO VS. DG2L TECHNOLOGIES P.LTD . CONVEYANCE. H) BANK & FINANCE CHARGES I) OTHER EXPENSES. SUB TOTAL 30798 5526476 15877010 TOTAL COST OF SOFTWARE FOR DIGITAL CINEMA MODULES ADD: MARGIN ON COST AT 20%, SINCE NO AUTHENTIC INDU STRY MARGIN IS FURNISHED AND INDUSTRY MARGIN ST ATISTICS IN 2006 WERE MUCH HIGHER. VALUE AT ARMS LENGTH PRICE LESS : SALE PRICE ADOPTED BY THE ASSESSEE. DIFFERENCE BETWEEN ALP AND SALES PRICE 79698592 15939718 45638310 50000000 45638310 ACCORDINGLY ARMS LENGTH PRICE OF THE EXPORT SALES M ADE BY THE ASSESSEE TO ITS HOLDING COMPANY AT SINGAPORE WAS COMPUTED BY THE AO AT RS.9,56,38,310/- AS AGAINST THE SALE PRICE OF RS.5 CRORES DECLARED BY T HE ASSESSEE AND DIFFERENCE OF RS.4,56,38,310/- WAS ADDED BY HIM TO THE TOTAL INCO ME OF THE ASSESSEE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN THE ASSESSMENT CO MPLETED U/S 143(3) BY AN ORDER DATED 30-12-2008. 8. AGAINST THE ORDER PASSED BY THE AO U/S 143(3), A N APPEAL WAS PREFERRED BY THE ASSESSEE BEFORE THE LEARNED CIT(APPEALS) CHALLE NGING THEREIN THE ADDITION OF RS. 4,56,38,310/- MADE BY THE AO ON ACCOUNT OF TRAN SFER PRICING ADJUSTMENT. DURING THE COURSE OF APPELLATE PROCEEDINGS BEFORE T HE LEARNED CIT(APPEALS), THE FOLLOWING SUBMISSIONS WERE MADE ON BEHALF OF THE AS SESSEE IN SUPPORT OF ITS CLAIM THAT THE PRICE OF RS.5 LAKHS CHARGED TO SINGAPAORE BASED HOLDING COMPANY FOR THE SALE OF MODULE WAS AT ARMS LENGTH : YOUR APPELLANT HAD COMMENCED DEVELOPMENT OF DIGITA L CINEMA MODULE IN JUNE, 2003. DURING THE FIRST ACCOUNTING YEAR ENDED 31 ST MARCH, 2004 THE 8 ITA NO.5768/MUM/2009 ITO VS. DG2L TECHNOLOGIES P.LTD . SOFTWARE WAS UNDER DEVELOPMENT AND IT WAS CLASSIFIE D ACCORDINGLY IN BALANCE SHEET. IN A.Y. 2005-06 ALSO IT CONTINUED DE VELOPMENT AND IT CLASSIFIED AT THE YEAR END ON 31 ST MARCH, 2005 THAT THE SAID SOFTWARE WAS UNDER DEVELOPMENT. ON OR ABOUT DECEMBER, 2004 THE COMPANY COULD REASON ABLY PREDICT THAT BY END OF MAY, 2005 IT WOULD BE READY WITH THE RELEVAN T MODULE AND IT THEREFORE ENTERED INTO THE AGREEMENT ON 28 TH JANUARY, 2005 WITH M/S VALUABLE MEDIA PVT. LTD. OF WHICH THE COPY IS ATTAC HED (PAGE 1 TO 26) HEREWITH. AS APPEARING ON PAGE 3 OF THE SAID AGREEM ENTS THE PROJECTED SALES WERE EXPECTED TO BE RS.18,33,70,000/- FOR SUPPLY OF 2000 CINEBLASTERS AND OTHER EQUIPMENTS AND THE COMPANY WAS EXPECTED TO GE T ROYALTY AS PER CLAUSE 11 APPEARING ON PAGE 7 OF THE SAID AGREEMENT. THE C OMPANY ESTIMATED ON 31 ST MARCH, 2005 THAT IT WAS IN A POSITION TO SUPPLY 15 0 CINEBLASTER AND THEREFORE IT RAISED A PROFORMA INVOICE (38 AND 39). THIS WAS WITH A VIEW TO INDICATE A PURCHASER THAT THE COMPANY WAS FULLY REA DY TO IMPLEMENT ITS DIGITAL CINEMA MODULE. THE COMPANY ALSO PHYSICALLY SUPPLY 50 CINEMA CINEBLASTERS PER INVOICE DATED 13 TH JUNE, 2005. IT HAS GRADUALLY SUPPLIED CINEBLASTER TO THE PURCHASER WHO HAVE GRADUALLY IN STALL CINEBLASTERS. WE MAY DRAW YOUR ATTENTION TO ITEM NO. 5 ON PAGE 3 OF THE AGREEMENT WITH M/S VALUABLE MEDIA PVT. LTD. WHEREIN IT IS EVIDENT THAT THE PURCHASER HAS TO INSTALL DIGITAL CINEMA HEADEND ONE UNIT PLUS IT HAS TO INSTALL VARIOUS SOFTWARES MODULES WHICH WERE SUPPLIED BY US ON WHICH ROYALTY WAS PAYABLE PLUS THE WORK WAS TO BE DONE OF INSTALLATION, INTEGRATION, T ESTING, COMMISSIONING, CUSTOMIZATION AND PROVIDING TRAINING TO OPERATORS. IN EACH THEATRE ONE CINEBLASTER AS TO BE INSTALLED AND INTEGRATION IS T O BE DONE ITH DIGITAL CINEMA HEADEND AND THE THEATRE WAS IN A POSITION TO RELEAS E THE CINEMA TO THE VIEWERS. TO SUMMARIZE THE POSITION WAS AS FOLLOWS : A) DIGITAL CINEMA HEADEND WAS TO BE INSTALLED AT ONE P LACE. B) THERE WAS A SUPPORT TO BE GIVEN BY VARIOUS SOFTWARE MODULES BEING CINE CODERS, CINE PROCESSOR, CINE MANAGER, CINE CASTER ( 2 NOS.) AND IN EACH CINEMA HOUSE ONE CINEBLASTER HAD TO BE INSTALLED. C) SOFTWARE SUPPORT SERVICES WERE TO BE GIVEN FOR THE ABOVE SYSTEM TO BE INTEGRATED AND COMMENCE THE SHOW. MOREOVER ONLINE S OFTWARE SUPPORT WAS ALSO TO BE GIVEN. YOU WILL ACCORDINGLY NOTICE THAT WE HAD COMPLETED T HE DEVELOPMENT OF DIGITAL CINEMA MODULE BY 31 ST MAY, 2005 AND TRIED TO IMPLEMENT THE SAME THROUGH M/S VALUABLE MEDIA PVT. LTD. DURING THE FUL L YEAR ENDED 31 ST 9 ITA NO.5768/MUM/2009 ITO VS. DG2L TECHNOLOGIES P.LTD . MARCH, 2006 WE SUPPLIED THE 492 CINEBLASTERS. HOWEV ER, THE INSTALLATION PROCESS WAS VERY SLOW AND BY DECEMBER, 2005 THERE W AS INSTALLATION COMPLETED OF ONLY 198 CINEBLASTES AS PER THE CALCUL ATION ON ROYALTY. WE THEREFORE LOST HOPE OF EARNING SUBSTANTIAL AMOUN T BY WAY OF ROYALTY AND ABOUT THE SUCCESS OF FULL PROJECT. WE HAD OFFER ED SINGAPORE PARTY TO SELL THE PROJECT IN JUNE, 2005 ITSELF FOR A SUM OF RS.5,00,00,000/- WHICH WAS ASCERTAINED ON THE BASIS OF COST SHEET WORKED O UT ON THE BASIS OF ARMS LENGTH PRICE. 9. IN THE WRITTEN SUBMISSIONS FILED BEFORE THE LEAR NED CIT(APPEALS), THE ARMS LENGTH PRICE DETERMINED BY THE AO AT RS.9,23,62,310 /- WAS CHALLENGED BY THE ASSESSEE BY MAKING THE FOLLOWING SUBMISSIONS : 1) THE MODULE WAS READY BY MAY, 2005 AND COST INCU RRED WERE AS PER THE STATEMENT. THE OFFER MADE TO THE FOREIGN COMPAN Y FOR SUPPLYING AT RS.5,00,00,000/- WORKED OUT ON THE BASIS OF ARM LEN GTH PRICE. WE RESTRAINED FROM DOING THE SAME IN ANTICIPATION OF HIGHER REVEN UE ON TRANSACTION WITH M/S VALUABLE MEDIA PVT. LTD. WHEN WE REALIZE IN DEC EMBER, 2005 THAT THE PROJECT IN INDIA WAS NOT GETTING ALL WELL REVENUE W E OFFERED SINGAPORE PARENT TO PURCHASE THE SAME TO WHICH THEY AGREED AND AS PE R AGREEMENT DATED 28 TH MARCH, 2006 WE SUPPLIED THEM THE TECHNOLOGY AND REC EIVED THE PAYMENT. ACCORDINGLY THE COST OF THE SUPPLIES WAS AS PER THE STATEMENT FILED ALONG WITH THE AUDITORS REPORT. MOREOVER WE HAVE GIVEN THEM THE RIGHT ON SOFTWARE O NLY AND WE RETAINED THE RIGHT TO SUPPLY HARDWARE AND ALSO OBTAINED RIGHT OF SERVICING, INSTALLATION, ETC. 2) THE SOFTWARE ENGINEERS WERE CONTINUED TO BE EMPL OYED EVEN AFTER DEVELOPMENT OF DIGITAL CINEMA MODULE AND THEY WERE BEING USED FOR VARIOUS SERVICES TO BE RENDERED TO M/S VALUABLE MED IA PVT.LTD. WHICH INCLUDED INTEGRATION OF VARIOUS CINEBLASTERS INSTAL LED IN CINEMA THEATRES WITH HEADEND. THE DEPRECIATION ALLOCATED TO THE ACTIVITY WAS ONLY IN RESPECT OF USER UP TO 31 ST MAY, 2005 AS DEVELOPMENT WAS STOPPED ON THAT DAY. THERE IS A MISUNDERSTANDING ON THE PART OF THE ASSESSING OFFIC ER AND HE HAS WRONGLY 10 ITA NO.5768/MUM/2009 ITO VS. DG2L TECHNOLOGIES P.LTD . COME TO THE CONCLUSION THAT IN RESPECT OF TRADING A CTIVITY THE SOFTWARE ENGINEERS HAD NOT TO DO ANYTHING. IT IS A FACT THAT THE CINEBLASTERS WERE PURCHASED AND SUPPLIED AND OTHER ITEMS WERE ALSO PU RCHASED AND SUPPLIED BUT THERE WAS LOT OF WORK WHICH OUR ENGINEERS HAD O DO FOR INTEGRATING THE SYSTEM WITH THE HEAD END TO BE LINKED WITH EACH CIN EBLASTER IN VARIOUS THEATRES ALL OVER INDIA. WE ALSO FIND THAT THE LEAR NED A.O. HAS MISCALCULATED THE COST CALCULATION GIVEN IN THE ASSESSMENT ORDER WHICH BASED ON HER UNDERSTANDING IS ALSO AS FOLLOWS: TOTAL COST 7,69,68,592 ADD: MARGIN 20% 1,53,93,718 _____________ 9,23,62,310 LESS: SALE PRICE 5,00,00, 000 ______________ 4,23,62,310 ______________ IT MAY ALSO BE NOTED THAT THE FIELD MAINTENANCE COS T TO RS.30,85,588 IS WRONGLY ADDED IN ARRIVING AT THE COST OF PRODUCTION AS THIS COST WAS PURELY IN RESPECT OF SUB CONTRACT GIVEN OF FIELD MAINTENANCE IN RESPECT OF OPERATING CINEBLASTERS IN THEATRES. THE LEARNED A.O. HAS IGNORED THE FACT THAT WE HAVE RETAINED THE RIGHT IN RESPECT OF ROYALTY FOR EACH CINEBLASTER WHICH WERE WORKING FOR A PERIOD OF 3 YEARS FROM THE DATE OF COMMENCEMENT OF USER. THIS R EVENUE IS ALSO GENERATED FROM THE SOFTWARE WHICH RIGHT WAS RETAINE D AND NOT GIVEN TO THE SINGAPORE COMPANY. HENCE WHAT WAS GIVEN TO SINGAPOR E COMPANY WAS ONLY A SOFTWARE RIGHT WITHOUT ROYALTY. 10. THE LEARNED CIT(APPEALS) FOUND MERIT IN THE SUB MISSIONS MADE ON BEHALF OF THE ASSESSEE ON THIS ISSUE AND ACCEPTING THE PRICE OF 5 CRORES CHARGED BY THE ASSESSEE TO ITS SINGAPORE BASED HOLDING COMPANY FOR SUPPLY OF DIGITAL CINEMA MODULE AS ARMS LENGTH PRICE, HE DELETED THE ADDITIO N OF RS.4,56,38,310/- MADE BY 11 ITA NO.5768/MUM/2009 ITO VS. DG2L TECHNOLOGIES P.LTD . THE AO BY WAY OF TRANSFER PRICING ADJUSTMENT FOR TH E FOLLOWING REASONS GIVEN IN HIS IMPUGNED ORDER : I HAVE CONSIDERED THE SUBMISSIONS OF THE ASSESSEE AND ORDER OF THE A.O. AS PER THE FACTS OF THE CASE, IT IS NOTICED TH AT THE APPELLANT COMPANY HAD COMMENCED DEVELOPMENT OF DIGITAL CINEMA MODULE IN JUNE, 2003. THE APPELLANT COMPANY HAS PREDICTED THAT BY THE END OF MAY, 2005, IT WOULD BE READY WITH THE DIGITAL CINEMA MODULE AND THEREFORE, ENTERED INTO AN AGREEMENT ON 28/01/2005 WITH M/S VALUABLE MEDIA PVT . LTD. AS PER THE CLAUSE OF THIS AGREEMENT, THE PROJECTED SALES WERE EXPECTED TO BE OF RS.18,33,70,000/- FOR SUPPLY OF 2000 CINEBLASTERS A ND OTHER EQUIPMENTS AND THE COMPANY WAS EXPECTED TO GET ROYALTY AS PER CLAU SE 11 ON PAGE 7 OF THE AGREEMENT. THE COMPANY HAS SUPPLIED 50 CINEBLASTERS AS PER INVOICES DATED 13/06/2005. IT WAS ALSO MENTIONED IN THIS AGREEMENT THAT THE COMPANY WILL DO THE WORK OF INSTALLATION, INTEGRATION, COMMISSIO NING, CUSTOMIZATION AND PROVIDING TRAINING TO OPERATORS. IN VIEW OF WHICH T HE COMPANY WILL RECEIVE ROYALTY IN EACH ONE CINEBLASTER AS TO BE INSTALLED AND INTEGRATION IS TO BE DONE WITH DIGITAL CINEMA HEADEND AND THE THEATER WAS IN A POSITION TO RELEASE THE CINEMA. THESE FACTS INDICATE THAT THE COMPANY IS EN GAGED IN MANUFACTURING THE SOFTWARE AND TRADING OF HARDWARE. THE COMPANY H AS ALSO UNDERTAKEN THE WORK OF INSTALLATION, INTEGRATION, TESTING COMMISSI ON OF DIGITAL CINEMA MODULE IN EACH THEATER. THESE FACTS ESTABLISH THAT THE COMPANY HAS BEEN MANUFACTURING SOFTWARE AND THE ENGINEERS OF THE COM PANY HAVE TO PUT THESE SOFTWARE TO THE HARDWARE FOR DIGITAL CINEMA TO BE I NSTALLED AT EACH THEATER. THEREFORE, THE CONCLUSION OF THE AO THAT IF THE SOF TWARE WAS READY BY MAY, 2005, THEN THERE WAS NO NEED FOR THE ASSESSEE TO EM PLOY THE SAME WORK FORCE FOR THE YEAR IS WITHOUT ANY BASIS. IN OTHER WORDS, IT CAN BE SAID THAT SOFTWARE WITHOUT HARDWARE CANNOT WORK AND VIS-A-VERSA. FROM THE FACTS OF THE CASE, IT IS OBSERVED THAT THE A.O. HAS MISUNDERSTOOD THE WHO LE FACTS OF THE CASE. SHE HAS CONCLUDED THAT THE APPELLANT COMPANY IS MANUFAC TURING SOFTWARE AND TRADING HARDWARE WHICH HAD NO RELATION WITH EACH OT HER AND THE COST OF MANUFACTURING WHICH INCLUDES THE SALARY GIVEN TO TH E ENGINEERS AND ADMINISTRATIVE AND DEVELOPMENT COST IS NOT REQUIRED , HENCE, DISALLOWED THE SAME AND ESTIMATED THE PROFIT @50% AGAINST 47.67% S HOWN BY THE APPELLANT COMPANY. HER CONCLUSION IS BASED ON ASSUMPTIONS AND PRESUMPTIONS ONLY, SECONDLY, THE A.O. HAS NOT TAKEN ANY COMPARABLE CAS E TO ADOPT THE GROSS PROFIT RATE AT 50%. THE A.O. HAS ALSO ERRED IN DISA LLOWING THE MANUFACTURING COST BY HOLDING THAT THE APPELLANT COMPANY IS ENGAG ED IN TRADING OF HARDWARE AND MANUFACTURING COST IS SNOT REQUIRED FO R TRADING OF HARDWARE 12 ITA NO.5768/MUM/2009 ITO VS. DG2L TECHNOLOGIES P.LTD . AND MANUFACTURING COST IS NOT REQUIRED FOR TRADING ACTIVITY. FROM THESE FACTS, IT IS NOTICED THAT THE A.O. HAS NOT UNDERSTOOD FACT S OF THIS CASE AND ONLY ESTIMATED THE PROFIT AND DISALLOWED THE MANUFACTURI NG COST BASED ON ASSUMPTIONS AND PRESUMPTIONS WITHOUT ANY CONCRETE M ATERIAL IN HER HAND. AS PER THE FACTS OF THE CASE, THE COMPANY IS ENGAGED I N THE MANUFACTURING OF SOFTWARE AND TRADING OF HARDWARE. SOFTWARE AND HARD WARE ARE INTEGRAL PART OF EACH OTHER AND IT CANNOT BE SEPARATED BY HOLDING TH AT SOFTWARE IS A MANUFACTURING ACTIVITY AND HARDWARE IS A TRADING AC TIVITY. MOREOVER, AS PER THE AGREEMENT, THE INSTALLATION, INTEGRATION, TESTI NG, COMMISSIONING, CUSTOMIZATION AND PROVIDING TRAINING TO OPERATORS W AS THE MAIN BUSINESS ACTIVITY OF THE APPELLANT COMPANY. THE CONCLUSION D RAWN BY THE A.O. THAT THE SERVICES OF THE ENGINEERS NOT REQUIRED IS BASEL ESS AND WITHOUT ANY MATERIAL. THEREFORE, IT IS HELD THAT THE A.O. HAS E RRED IN DISALLOWING THE COST OF MANUFACTURING OF DIGITAL CINEMA MODULE BY TREATI NG IT TRADING ACTIVITY ONLY. SECONDLY, THE A.O. HAS ERRED IN ESTIMATING THE GRO SS PROFIT @50% AGAINST 47.67% SHOWN BY THE APPELLANT JUST ON ESTIM ATE BASIS. THERE IS NO MATERIAL IN THE HANDS OF THE A.O. TO ESTIMATE THE G .P. RATE AT THE HIGHER RATE. THERE IS NO PROVISIONS OF THE I.T. ACT TO EMPOWER T HE AO TO ESTIMATE THE GROSS PROFIT BASED ON PRESUMPTIONS AND ASSUMPTIONS WITHOUT ANY REASON. IN TOTALITY OF THE FACTS AND CIRCUMSTANCES, IT IS HELD THAT THE A.O. HAS MISUNDERSTOOD THE FACTS OF THE CASE BY DISALLOWING MANUFACTURING COST AND ESTIMATING THE G.P. RATE WITHOUT ANY EVIDENCE OR MA TERIAL IN HER HAND. THE FACTS OF THE CASE ARE CLEAR THAT ASSESSEE IS ENGAGE D IN MANUFACTURING OF SOFTWARE AND TRADING OF HARDWARE FOR PRODUCING THE DIGITAL CINEMA MODULE. AS PER THE AGREEMENT, IT WAS THE DUTY OF THE APPELL ANT COMPANY FOR INSTALLATION, INTEGRATION, TESTING, COMMISSIONING, CUSTOMIZATION AND PROVIDING TRAINING TO OPERATORS AT EACH CINEMA HALL . THESE FACTS PROVE THAT THE APPELLANT COMPANY NOT ONLY BASED ON MANUFACTUR ING OF SOFTWARE BUT ALSO IT WAS FOREMOST DUTY OF THE COMPANY TO COMPLET E THE INSTALLATION AND COMMISSIONING WORK OF DIGITAL CINEMA MODULE AT EACH CINEMA HALL. MOREOVER, THE HYPOTHETICAL VIEW OF THE A.O., THAT W HEN THE SOFTWARE WAS READY IN THE MONTH OF MAY, THEN FOR BALANCE PERIOD OF THE YEAR, THE SALARY PAID TO THE ENGINEERS AND OTHER ADMINISTRATION AND MANPOWER EXPENSES ARE NOT INCURRED FOR THE BUSINESS PURPOSE. HOWEVER, IT IS MENTIONED HERE THAT THE A.O. HAS MISCONCEIVED THE FACTS OF THE CASE, BECAUS E THE APPELLANT COMPANY IS NOT ONLY MANUFACTURING THE SOFTWARE, BUT ALSO TO FIT IT IN THE HARDWARE AND TO INSTALL DIGITAL CINEMA MODULE AT EACH CINEMA HAL L. THEREFORE, IT CANNOT BE 13 ITA NO.5768/MUM/2009 ITO VS. DG2L TECHNOLOGIES P.LTD . PRESUMED THAT AFTER THE MANUFACTURE OF SOFTWARE, TH ERE WAS NO WORK FOR THE ENGINEERS AD OTHER STAFF. THUS IT IS HELD THAT THE A.O. HAS MISUNDERSTOOD THE FACTS OF THE CASE AND ADDITION HAS BEEN MADE ON THE BASIS OF PRESUMPTIONS AND ASSUMPTIONS ONLY. FURTHER, IF THE A.O. IS NOT A GREEABLE TO THE PROFIT SHOWN BY THE APPELLANT, THEN ONUS LIES ON THE A.O. TO CONFRONT THE ASSESSEE A COMPARABLE CASE WHERE PROFIT MARGIN IS HIGHER ONLY THEN A REASONABLE ESTIMATE CAN BE MADE. BUT IN THIS CASE, THE A.O. HA S BUILT CASTLES IN THE AIR AND RECOMPUTED THE PROFIT ONLY BASED ON PRESUMPTION S. THEREFORE, RECOMPUTATION ACCOUNT OF THE MANPOWER AND ADMINISTR ATIVE COST DONE BY THE A.O. IS NOT JUSTIFIED AND HENCE NOT SUSTAINABLE. SECONDLY, THE DIGITAL CINEMA MODULE SOLD BY THE AP PELLANT COMPANY TO M/S DG2L PTE. LTD., SINGAPORE BY CONSIDERATION O F RS.5 CRORES. THE A.O. HAS NOT POINTED OUT ANY MISTAKE IN THIS TRANSACTION . SHE HAS ONLY ESTIMATED THE GROSS PROFIT AT 50% IN PLACE OF 47.67% SHOWN BY THE APPELLANT BY PRESUMING THAT THE G.P. RATE IN EXPORT OF SOFTWARE VARIES FROM 45 TO 60%. THE ADOPTION OF G.P. RATE AT 50% IS WITHOUT ANY BAS IS AND PURELY BASED ON IMAGINATION AND PRESUMPTION WHICH IS NOT SUSTAINABL E IN THE EYES OF LAW. TO SUM UP, IT IS HELD THAT THE A.O. HAS ERRED IN RECOM PUTING THE MANPOWER AND ADMINISTRATIVE COST AND ESTIMATING THE G.P. RATE BY ADDING THE MARGIN ON COST AT 20% IS WITHOUT ANY BASIS. THUS, THE ADDITION MAD E BY THE A.O. OF RS.4,56,38,310/- IS SNOT SUSTAINABLE, HENCE DELETED . AGGRIEVED BY THE ORDER OF THE LEARNED CIT(APPEALS) GIVING RELIEF TO THE ASSESSEE AS ABOVE, THE REVENUE HAS PREFERRED THIS APPEAL BEFORE THE TRIBUNAL. 11. THE LEARNED DR AT THE OUTSET INVITED OUR ATTENT ION TO THE WORKING OF ARMS LENGTH PRICE CALCULATION GIVEN BY THE ASSESSEE AT P AGE NO. 85 OF THE PAPER BOOK. SHE SUBMITTED THAT THERE ARE TWO DISPUTES WHICH WER E RAISED BY THE AO IN RELATION TO THE SAID WORKING I.E. THE ALLOCATION OF OVERHEAD S AND THE MARGIN OF PROFIT ADOPTED. SHE SUBMITTED THAT THE ALLOCATION OF OVERH EADS WAS MADE BY THE ASSESSEE BY CLAIMING THAT THE SOFTWARE WAS FULLY DEVELOPED I N THE MONTH OF MAY, 2005 ITSELF AND ACCORDINGLY EXPENSES INCURRED UPTO 31 ST MAY, 2005 WERE ALLOCATED BY THE ASSESSEE FOR COMPUTING THE ARMS LENGTH PRICE OF THE SOFTWARE BY ADOPTING COST PLUS 14 ITA NO.5768/MUM/2009 ITO VS. DG2L TECHNOLOGIES P.LTD . METHOD. SHE SUBMITTED THAT THE SALE OF THE SAID SOF TWARE, HOWEVER, WAS MADE BY THE ASSESSEE TO ITS HOLDING COMPANY ONLY IN THE MON TH OF MARCH, 2006 AS POINTED OUT BY THE AO AT PAGE 3 OF THE ASSESSMENT ORDER. SH E SUBMITTED THAT EVEN THE FACT THAT THE TECHNICAL STAFF WAS CONTINUED TO BE EMPLOY ED WITH THE ASSESSEE COMPANY THROUGHOUT THE YEAR UNDER CONSIDERATION IN SPITE OF THERE BEING NO OTHER SOFTWARE BEING DEVELOPED FURTHER SUPPORTS THE CASE OF THE RE VENUE THAT THE SOFTWARE EXPORTED BY THE ASSESSEE COMPANY TO ITS SINGAPORE B ASED HOLDING COMPANY WAS UNDER DEVELOPMENT AND THE SAME WAS EXPORTED ONLY AF TER IT WAS FULLY DEVELOPED IN THE MONTH OF MARCH, 2006, SHE CONTENDED THAT THE AO , THEREFORE, RIGHTLY ALLOCATED 90% OF THE TOTAL EXPENSES INCURRED BY THE ASSESSEE IN THE YEAR UNDER CONSIDERATION TO WORK OUT THE ARMS LENGTH PRICE OF THE SOFTWARE S UPPLIED BY THE ASSESSEE COMPANY TO ITS SINGAPORE BASED HOLDING COMPANY. SHE CONTEND ED THAT EVEN THE RATE OF PROFIT MARGIN ADOPTED BY THE ASSESSEE AT 15% WAS NOT SUPPO RTED AND SUBSTANTIATED BY THE ASSESSEE BY POINTING OUT ANY COMPARABLE CASE. SHE C ONTENDED THAT THE AO, THEREFORE, WAS RIGHT IN TAKING THE RATE OF PROFIT M ARGIN AT 20% TO COMPUTE THE ARMS LENGTH PRICE WHICH WAS PREVALENT IN THE I.T. INDUST RY. SHE CONTENDED THAT THE BASIS ADOPTED BY THE AO TO COMPUTE THE ARMS LENGTH PRICE, HOWEVER, WAS NOT PROPERLY APPRECIATED BY THE LEARNED CIT(APPEALS) AND HE ACCE PTED THE WORKING OF ARMS LENGTH PRICE GIVEN BY THE ASSESSEE IGNORING THE DEF ECTS AND INFIRMITIES SPECIFICALLY POINTED OUT BY THE AO THEREIN. SHE CONTENDED THAT T HE IMPUGNED ORDER OF THE LEARNED CIT(APPEALS) ON THIS ISSUE, THEREFORE, IS L IABLE TO BE SET ASIDE AND THAT OF THE AO DESERVES TO BE RESTORED. 12. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OT HER HAND, SUBMITTED THAT THE SOFTWARE FOR DIGITAL CINEMA MODULE WAS FULLY DEVELO PED IN THE MONTH OF MAY, 2005 ITSELF AND THE AO WAS NOT JUSTIFIED IN PRESUMI NG THAT THE SAME WAS UNDER DEVELOPMENT THROUGHOUT THE YEAR. HE SUBMITTED THAT THIS PRESUMPTION OF THE AO 15 ITA NO.5768/MUM/2009 ITO VS. DG2L TECHNOLOGIES P.LTD . WAS BASED ON THE FACT THAT THE TECHNICAL STAFF CONT INUED TO REMAIN IN EMPLOYMENT WITH THE ASSESSEE COMPANY THROUGHOUT THE YEAR UNDER CONSIDERATION AND THE SOFTWARE WAS FINALLY EXPORTED BY THE ASSESSEE COMPA NY TO ITS HOLDING COMPANY IN THE MONTH OF MARCH, 2006. IN THIS REGARD, HE INVITE D OUR ATTENTION TO THE COPY OF LETTER SUBMITTED TO THE AO ON 26-12-2008 PLACED AT PAGE NO. 96 OF HIS PAPER BOOK AND POINTED OUT THAT THE EMPLOYMENT OF TECHNICAL ST AFF BEYOND THE MONTH OF MAY, 2005 WAS FULLY JUSTIFIED BY THE ASSESSEE BY POINTIN G OUT ITS REQUIREMENT IN RELATION TO THE AFTER SALES SERVICES. HE SUBMITTED THAT THE SOFTWARE DEVELOPED BY THE ASSESSEE COMPANY IS USED IN CINEBLASTER AND THE ASS ESSEE COMPANY WAS NOT MERELY TRADING IN CINEBLASTER BUT WAS ALSO PROVIDING TECHN ICAL MAINTENANCE SUPPORT TO THE USERS OF CINEBLASTERS. HE SUBMITTED THAT IN CASE OF SALE OF EACH CINEBLASTER, THE TECHNICAL STAFF WAS REQUIRED TO DESIGN AND DEVELOP THE CONFIGURATION AS PER REQUIREMENTS OF THE BUYERS INCLUDING THE PROBLEMS F ACED BY THEM IN INSTALLATION THEREOF. HE CONTENDED THAT FOR THIS SPECIFIC PURPOS E, THE TECHNICAL STAFF CONTINUED TO REMAIN IN EMPLOYMENT WITH THE ASSESSEE COMPANY AND THIS PURPOSE WAS RIGHTLY APPRECIATED BY THE LEARNED CIT(APPEALS) WHILE ACCEP TING THE ALLOCATION OF OVERHEADS MADE BY THE ASSESSEE IN COMPUTING THE ARM S LENGTH PRICE. 13. THE LEARNED COUNSEL FOR THE ASSESSEE INVITED OU R ATTENTION TO PAGE NO.4 OF THE IMPUGNED ORDER OF THE LEARNED CIT(APPEALS) AND ALSO INVITED OUR ATTENTION TO THE EXPLANATION OFFERED BY THE ASSESSEE WHILE EXPLAININ G ITS BUSINESS MODULE. HE SUBMITTED THAT THE MODULE DEVELOPED BY THE ASSESSEE COMPANY WAS MEANT TO BE USED IN CINEBLASTERS AND THE FACT THAT 50 CINEBLAST ERS WERE SUPPLIED BY THE ASSESSEE COMPANY ON 13-6-2005 WAS SUFFICIENT TO SHOW THAT TH E SOFTWARE WAS READY BEFORE THAT DATE. HE SUBMITTED THAT THE ASSESSEE COMPANY W AS EXPECTED TO SALE AND INSTALL A LARGE QUANTITY OF CINEBLASTES AND TO RECOVER SUBS TANTIAL AMOUNT BY WAY OF ROYALTY. HE SUBMITTED THAT THE INSTALLATION PROCESS, HOWEVER , WAS VERY SLOW WHICH LEFT NO 16 ITA NO.5768/MUM/2009 ITO VS. DG2L TECHNOLOGIES P.LTD . OPTION FOR THE ASSESSEE BUT TO SELL THE SOFTWARE TO ITS SINGAPORE BASED HOLDING COMPANY FOR A SUM OF RS.5 CRORES WHICH WAS ASCERTAI NED BY USING A COST PLUS METHOD. HE CONTENDED THAT THIS WAS THE REASON WHY T HE ASSESSEE SOLD THE SOFTWARE IN THE MONTH OF MARCH, 2006 AND THE AO WAS NOT JUST IFIED IN DRAWING THE INFERENCE ON THE BASIS OF THE SAME THAT THE SOFTWARE WAS NOT READY IN THE MONTH OF MAY, 2005 AND THAT THE SAME BECAME READY ONLY IN THE MONTH OF MARCH, 2006. HE CONTENDED THAT THE LEARNED CIT(APPEALS), ON THE OTHER HAND, A PPRECIATED THIS POSITION IN THE PROPER PERSPECTIVE WHILE ACCEPTING THE CLAIM OF THE ASSESSEE THAT SOFTWARE WAS FULLY DEVELOPED IN THE MONTH OF MAY, 2005 ITSELF. H E CONTENDED THAT SIMILARLY THERE WAS NO REASON FOR THE AO TO REJECT THE PROFIT MARGI N OF 15% TAKEN BY THE ASSESSEE IN COMPUTING THE ARMS LENGTH PRICE BY ADOPTING COST PLUS METHOD AND SUBSTITUTING THE SAME WITH THE PROFIT MARGIN RATE OF 20% WITHOUT THERE BEING ANY COMPARABLE CASE CITED BY HIM IN SUPPORT. 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND AL SO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE DIGITAL CINEMA SOFTWARE DEVELOPED BY THE ASSESSEE COMPANY WAS EXPORTED TO ITS HOLDING COMPAN Y IN SINGAPORE DURING THE YEAR UNDER CONSIDERATION AT A PRICE OF RS.5 CRORES AND THE SAME WAS CLAIMED BY THE ASSESSEE COMPANY TO BE AN ARMS LENGTH PRICE. WHILE WORKING OUT THE SAID PRICE BY ADOPTING COST PLUS METHOD, THE ASSESSEE COMPANY HAD TAKEN INTO CONSIDERATION ALL THE RELEVANT OVERHEADS INCURRED UP TO 31 ST MAY, 2005 AND PROFIT MARGIN OF 15% WAS ADDED THEREIN. THE AO DISPUTED THE PROFIT MARGIN RA TE OF 15% ADOPTED BY THE ASSESSEE COMPANY AS THE SAME, ACCORDING TO HIM, WAS ON THE LOWER SIDE. HE, THEREFORE, ADOPTED THE PROFIT MARGIN OF 20%. AS REG ARDS THE ALLOCATION OF OVERHEADS INCURRED ONLY UPTO 31 ST MAY, 2005 AS DONE BY THE ASSESSEE, THE AO HELD THA T THE SOFTWARE WAS NOT FULLY DEVELOPED UP TO 31 ST MAY, 2005 AND THE SAME WAS DONE ONLY AT THE FAG END OF THE YEAR UNDER CONSIDERATION. FOR THIS CONCLUSION, HE MAINLY RELIED 17 ITA NO.5768/MUM/2009 ITO VS. DG2L TECHNOLOGIES P.LTD . ON THE FACT THAT THE TECHNICAL STAFF WHO WAS INVOLV ED IN DEVELOPMENT OF SOFTWARE CONTINUED TO REMAIN IN EMPLOYMENT WITH THE ASSESSEE COMPANY THROUGHOUT THE YEAR AND THAT THE SOFTWARE WAS FINALLY EXPORTED BY THE A SSESSEE COMPANY TO ITS HOLDING COMPANY IN SINGAPORE ON 28 TH MARCH, 2006. IN THIS REGARD, IT IS OBSERVED THAT T HE DIGITAL CINEMA MODULE SOFTWARE, WHICH WAS MEANT TO BE USED IN CINEBLASTER, WAS BEING DEVELOPED BY THE ASSESSEE RIGHT FROM JUNE, 20 03 WHEN IT COMMENCED THE DEVELOPMENT OF THE SAID SOFTWARE. DURING THE YEARS ENDED ON 31 ST MARCH, 2004 AND 31 ST MARCH, 2005, THE SAID SOFTWARE WAS UNDER DEVELOPME NT AS CLEARLY REFLECTED IN THE BALANCE SHEETS OF THE ASSESSEE FILED ALONG WITH THE RETURNS OF INCOME FOR ASSESSMENT YEARS 2004-05 AND 2005-06. ON 28 TH JANUARY, 2005, THE ASSESSEE COMPANY ENTERED INTO AN AGREEMENT WITH M/S VALUABLE MEDIA PVT. LTD. FOR SUPPLY OF CINEBLASTERS AND OTHER EQUIPMENTS WITH THE HOPES THAT THE SOFTWARE WOULD BE READY BY 31 ST MAY, 2005. AS A MATTER OF FACT, THE ASSESSEE COMPA NY INDEED PHYSICALLY SUPPLIED 50 CINEBLASTERS ON 13 TH JUNE, 2005 WHICH IS SUFFICIENT TO ESTABLISH THAT THE DIGITAL CINE MODULE SOFTWARE REQ UIRED FOR CINEBLASTERS WAS CERTAINLY READY ON 13 TH JUNE, 2005. 14. DUE TO SLOW PROCESS OF INSTALLATION OF CINEBLAS TERS, THE ASSESSEE COMPANY, HOWEVER, COULD NOT RECOVER THE SOFTWARE DEVELOPMENT COST AS EXPECTED AND FINALLY OFFERED ITS PARENT COMPANY IN SINGAPORE TO PURCHASE THE SOFTWARE WHICH THE LATTER AGREED AND THE SOFTWARE WAS SUPPLIED AS PER THE AGR EEMENT DATED 28 TH MARCH, 2006. THERE WAS THUS ENOUGH EVIDENCE BROUGHT ON RECORD BY THE ASSESSEE COMPANY TO SHOW THAT THE SOFTWARE WAS FULLY DEVELOPED IN THE M ONTH OF MAY, 2005 ITSELF AS CLAIMED AND THE REASONS TO FINALLY SUPPLY THE SAID SOFTWARE TO ITS PARENT COMPANY IN THE MONTH OF MARCH, 2006 WERE ALSO SATISFACTORILY E XPLAINED BY THE ASSESSEE COMPANY. EVEN THE REQUIREMENT OF TECHNICAL STAFF BE YOND THE PERIOD OF MAY, 2005 AND THE SERVICES RENDERED BY THEM FOR THE PURPOSES OF ITS BUSINESS WERE DULY 18 ITA NO.5768/MUM/2009 ITO VS. DG2L TECHNOLOGIES P.LTD . EXPLAINED BY THE ASSESSEE BY POINTING OUT THAT THE SCOPE OF SUPPLY OF CINEBLASTER INCLUDED INSTALLATION AND INTEGRATION OF VARIOUS SO FTWARE INCLUDING THE ONE DEVELOPED BY THE ASSESSEE AND THAT WAS REQUIRED TO BE DONE BY THE ASSESSEE COMPANY IN EACH THEATRE TO WHICH CINEBLASTER WAS SU PPLIED BY IT. THIS ENTIRE PROCESS AS EXPLAINED BY THE ASSESSEE BEFORE THE AUT HORITIES BELOW AS WELL AS BEFORE US INVOLVED THE FOLLOWING ACTIVITIES : A) DIGITAL CINEMA HEADEND TO BE INSTALLED AT ONE P LACE, B) SUPPORT TO BE GIVEN BY VARIOUS SOFTWARE MODULES BEING CINE CODERS, CINE PROCESSOR, CINE MANAGER, CINE CASTER AND CINEB LASTER, C) INSTALLATION OF CINEBLASTER AND INTEGRATION THER EOF WITH THE OTHER MODULES IN ORDER TO SUCCESSFULLY COMMENCE THE SHOW, D) ONLINE SOFTWAFE SUPPORT TO BE GIVEN EVEN AFTER S UCCESSFUL IMPLEMENTATION AND INSTALLATION OF CINEBLASTER AT E ACH THEATRE. 15. THE WORK WHICH WAS REQUIRED TO BE DONE BY THE A SSESSEE COMPANY IN RELATION TO SUPPLY OF CINEBLASTERS CLEARLY SHOWS TH AT IT REQUIRED INVOLVEMENT OF TECHNICAL PERSONS WHO HAD DEVELOPED THE MODULE OF T HE ASSESSEE COMPANY AND THE FACT THAT 492 CINEBLASTERS WERE SUPPLIED BY THE ASS ESSEE COMPANY IN THE YEAR UNDER CONSIDERATION OUT OF WHICH 198 CINEBLASTERS WERE SU CCESSFULLY INSTALLED FURTHER SHOWS THAT THE TECHNICAL STAFF WAS REQUIRED BY THE ASSESSEE COMPANY EVEN AFTER THE DEVELOPMENT OF SOFTWARE IN THE MONTH OF MAY, 2005 A ND SERVICES WERE RENDERED BY THE SAID STAFF FOR THE PURPOSE OF BUSINESS OF THE A SSESSEE COMPANY FROM JUNE, 2005 TO MARCH, 2006. THE INFERENCE DRAWN BY THE AO ON TH E BASIS OF THEIR CONTINUED EMPLOYMENT WITH THE ASSESSEE COMPANY COUPLED WITH T HE FACT THAT SOFTWARE WAS SUPPLIED BY THE ASSESSEE COMPANY IN THE MONTH OF MA RCH, 2006 THAT THE SOFTWARE WAS NOT FULLY DEVELOPED IN THE MONTH OF MAY, 2005 B UT THE SAME WAS DEVELOPED ONLY AT THE FAG END OF THE YEAR WHEN THE ASSESSEE C OMPANY SUPPLIED IT TO ITS PARENT COMPANY IN SINGAPORE, THUS WAS NOT WELL FOUNDED. A S A MATTER OF FACT, THE REASONS 19 ITA NO.5768/MUM/2009 ITO VS. DG2L TECHNOLOGIES P.LTD . FOR FINALLY SUPPLYING THE SAID SOFTWARE TO ITS PARE NT COMPANY IN SINGAPORE IN THE MONTH OF MARCH, 2006 WERE DULY EXPLAINED BY THE ASS ESSEE COMPANY AND THE FACT THAT AT LEAST 50 CINEBLASTERS WERE SUPPLIED BY THE ASSESSEE COMPANY ON 13 TH JUNE, 2005 CONCLUSIVELY ESTABLISH THAT THE SOFTWARE WAS R EADY IN THE MONTH OF MAY, 2005 ITSELF AS CLAIMED BY THE ASSESSEE COMPANY. THE ALLO CATION OF EXPENSES MADE BY THE ASSESSEE COMPANY AS INCURRED UPTO 31 ST MAY, 2005 TO WORK OUT THE COST OF THE SAID SOFTWARE THUS WAS PROPER AND THE PRICE WORKED OUT B Y IT AT RS. 5 CRORES BY APPLYING A PROFIT MARGIN RATE OF 15% TO THE SAID COST, IN OU R OPINION, WAS AN ARMS LENGTH PRICE SINCE THE PROFIT MARGIN OF 15% ADOPTED BY THE ASSESSEE COMPANY WAS FAIR AND REASONABLE IN THE FACTS AND CIRCUMSTANCES OF THE CA SE AND THERE WAS NOTHING BROUGHT ON RECORD BY THE AO TO JUSTIFY THE HIGHER PROFIT MARGIN RATE OF 20% ADOPTED BY HIM. AS SUCH, CONSIDERING ALL THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND NO INFIRMITY IN THE IMPUGNED ORDER OF THE L EARNED CIT(APPEALS) ACCEPTING THE SALE PRICE OF RS.5 CRORES CHARGED BY THE ASSESS EE TO ITS PARENT COMPANY IN SINGAPORE FOR SUPPLY OF DIGITAL CINEMA MODULE SOFT WARE AS ARMS LENGTH PRICE AND UPHOLDING THE SAME ON THIS ISSUE, WE DISMISS THIS A PPEAL FILED BY THE REVENUE. 16. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. . ORDER PRONOUNCED ON THIS 30 TH DAY OF JUNE, 2011. SD/- SD/- (V. DURGA RAO) (P.M. JAGTAP) JUDICIAL MEMBER ACCO UNTANT MEMBER MUMBAI, DATED: 30 TH JUNE, 2011. WAKODE 20 ITA NO.5768/MUM/2009 ITO VS. DG2L TECHNOLOGIES P.LTD . COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, L-BENCH. (TRUE COPY ) BY ORDE R ASSTT. R EGISTRAR, ITAT, MUMBAI BEN CHES, MUMBA I.