UTStarcom Inc. (India Branch), Gurgaon V. DDIT, New Delhi

ITA 5848/DEL/2011

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6507 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 11 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-12-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 07-12-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 29-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: T M SHIVAKUMAR
• Assessee Lawyers: RAJAN SACHDEV
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Rule of consistency; Deemed export; Tax effect
• Section: 143(3); 92D; 80HHC; 234B; 133(6); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.5848/DEL./2011 (ASSESSMENT YEAR : 2007-08) UT STARCOM INC. (INDIA BRANCH), VS. DDIT, CIRCLE 2 (2), 805, SIGNATURE TOWERS II, NEW DELHI. SOUTH CITY I, GURGAON (HARYANA). (PAN : AAACU5017A) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RAJAN SACHDEV, CA REVENUE BY : SHRI T.M. SHIVA KUMAR, CIT DR DATE OF HEARING : 07.12.2016 DATE OF ORDER : 23.12.2016 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, UT STARCOM INC. (INDIA BRANCH) (HER EINAFTER REFERRED TO AS THE ASSESSEE COMPANY) BY FILING TH E PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 29.09. 2011, PASSED BY THE AO UNDER SECTION 144C (1) READ WITH SECTION 143 (3) OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2007-08 IN CONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP/TPO ON THE CONCISE GROUNDS INTER ALIA THAT :- ITA NOS.5848/DEL./2011 2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED ADDITIONAL DIRECTOR OF INCOME TAX, TRANSFER PRICING OFFICER - 11(4), NEW DELHI ('LD. TPO') AND THE LEAR NED DEPUTY DIRECTOR OF INCOME-TAX, CIRCLE 2(2), INTERNATIONAL TAX, NEW DELHI ('LD. AO') UNDER DIRECTIONS ISSUED BY THE HON'BLE D ISPUTE RESOLUTION PANEL - II, NEW DELHI ('DRP'), ERRED IN MAKING AN ADDITION TO THE APPELLANT'S TOTAL INCOME OF INR 5,4 5,17,350 (I.E. INR 2,07,82,181 BASED ON THE PROVISIONS OF CHAPTER X OF THE INCOME-TAX ACT, 1961 ('THE ACT') AND INR 3,37,35,16 9 BASED ON THE OTHER PROVISIONS OF THE ACT.) 1. TRANSFER PRICING ADJUSTMENT 1.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE LD. TPO/ AO HAS ERRED IN MISCONSTRUING THE DIRECTIONS O F HON'BLE DRP ISSUED UNDER SECTION 144C( 5) OF THE AC T WHILE ISSUING FINAL ASSESSMENT ORDER UNDER SECTION 143(3) READ WITH SECTION 144C(13) OF THE ACT RESULTING IN INCORRECT TRANSFER PRICING ADJUSTMENT OF INR 2,07,82,181 INST EAD OF INR 23,98,098. 1.2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. TPO HAS ERRED AND THE HON'BLE DRP HAS FURTHER ERRED IN UPHOLDING / CONFIRMING THE ACTION OF THE LD. TPO OF DISREGARDING, WITHOUT MATERIAL DEFECTS, THE BENCHMARKING ANALYSIS AND COMPARABLE COMPANIES SELE CTED BY THE APPELLANT BASED ON THE CONTEMPORANEOUS DATA IN THE TRANSFER PRICING STUDY REPORT MAINTAINED AS PER SEC TION 92D OF THE ACT READ WITH RULE 10D OF THE INCOME-TAX RUL ES, 1962 ('THE RULES') AND THE VARIOUS SUBMISSIONS MADE BY THE APPELLANT. 1.3 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. TPO AND HON'BLE DRP HAS ERRED, IN ADOP TING AN ARBITRARY SEARCH STRATEGY FOR SELECTION OF ALLEG ED COMPARABLE COMPANIES. SPECIFICALLY, THE LD. TPO AND HON'BLE DRP HAS GROSSLY ERRED - 1.3.1 BY ADOPTING A FLAWED PROCESS OF USING NOTICES UNDER SECTION (6) OF THE ACT AND RELYING ON THE SAME WITHOUT PROV IDING COMPLETE INFORMATION TO THE APPELLANT OR AN OPPORTU NITY TO CROSS EXAMINE THE PARTIES. 1.3.2 BY DISREGARDING THE MULTIPLE YEAR DATA APPROA CH AND CONSIDERING THE DATA WHICH WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF COMPLYING WITH THE TRANSFE R PRICING DOCUMENTATION REQUIREMENTS. 1.3.3 BY ADOPTING INAPPROPRIATE FILTERS IN THE PROC ESS OF SELECTING COMPARABLE COMPANIES; ITA NOS.5848/DEL./2011 3 1.3.4 BY ADOPTING COMPANIES AS COMPARABLES HAVING C OMPLETE DISREGARD TO THEIR FUNCTIONAL COMPARABILITY; 1.3.5 BY INAPPROPRIATELY COMPUTING THE OPERATING MA RGINS OF THE ALLEGED COMPARABLE COMPANIES. 1.4 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. TPO HAS ERRED AND THE HON'BLE DRP HAS FURTHER ERRED IN UPHOLDING / CONFIRMING THE ACTION OF THE LD. TPO IN NOT ALLOWING APPROPRIATE ADJUSTMENT(S) IN ACCORDANCE WITH THE PROVISIONS OF RULE 1 OB OF THE RULES. 1.5 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. TPO HAS ERRED AND THE HON'BLE DRP HAS FURTHER ERRED IN UPHOLDING / CONFIRMING THE ACTION OF THE LD. TPO IN MAKING IN ADJUSTMENT TO THE ARM'S LENGTH PRI CE OF INTERNATIONAL TRANSACTIONS WITHOUT GIVING BENEFIT O F THE PROVISO TO SECTION 92C(2) OF THE ACT. 1.6 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. TPO HAS ERRED AND THE HON'BLE DRP HAS FURTHER ERRED IN UPHOLDING / CONFIRMING THE ACTION OF THE LD. TPO IN NOT FOLLOWING PRINCIPLE OF CONSISTENCY 1.7 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. TPO HAS ERRED AND THE HON'BLE DRP HAS FURTHER ERRED IN UPHOLDING / CONFIRMING THE ACTION OF THE LD. TPO IN MAKING THE ADJUSTMENT WITHOUT DEMONSTRATING THAT THE APPELLANT HAD ANY MOTIVE TO SHIFT PROFITS OUTSI DE OF INDIA. 1.8 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. TPO FOLLOWED AN UNJUSTIFIED APPROACH B Y ISSUING TWO SHOW-CAUSE NOTICES WITHOUT PROVIDING APPROPRIATE RESPONSES AGAINST THE REPLIES FILED BY THE APPELLANT IN RESPONSE TO THE FIRST SHOW-CAUSE NOTIC E. ACCORDINGLY, THE CHANGE IN THE APPROACH FOLLOWED BY THE LD. TPO CLEARLY DEMONSTRATES A BIASED STATE OF MIND AND IS AGAINST THE PRINCIPLE OF NATURAL JUSTICE. 1.9 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE HON'BLE DRP AND THE LD. AO/ TPO HAS ERRED NOT GRANTING REASONABLE AND ADEQUATE OPPORTUNITY TO THE APPELLANT. 2. DENIAL OF CLAIM UNDER SECTION 10A OF THE ACT 2.1 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN DENYING AND THE HON 'BLE ITA NOS.5848/DEL./2011 4 DRP HAS FURTHER ERRED IN CONFIRMING THE DISALLOWANC E OF APPELLANT'S CLAIM OF DEDUCTION UNDER SECTION 1 OA O F THE ACT AMOUNTING TO RS. 3,37,35,169/-. 2.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO HAS ERRED IN HOLDING AND THE HON'BLE DRP HAS FURTHER ERRED IN CONFIRMING THE ACTION OF LD. AO, T HAT THERE IS NO EXPORT OF SOFTWARE BY THE BRANCH IN INDIA TO THE HEAD OFFICE. 2.3 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO HAS ERRED IN HOLDING AND THE HON'BLE DRP HAS FURTHER ERRED IN CONFIRMING THE ACTION OF LD. AO, T HAT THE APPELLANT IS NOT A SEPARATE TAXABLE ENTITY AND AS A CONSEQUENCE A PERSON CANNOT EARN PROFIT FROM ITSELF . 2.4 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO IS NOT APPRECIATING AND THE HON'BLE DRP HAS FURTHER FAILED TO APPRECIATE THAT IF THE APPROACH A DOPTED BY THEM IS CONSIDERED TO BE IN ACCORDANCE WITH LAW, NO INCOME COULD BE SAID TO RESULT IN THE HANDS OF THE APPELLA NT. 2.5 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO AND THE HON'BLE DRP HAVE REACHED TO ERRO NEOUS CONCLUSION OF DISALLOWING THE DEDUCTION U/S 10A OF THE ACT BY PLACING THEIR RELIANCE ON CERTAIN JUDICIAL PRECE DENTS WHICH ARE NOT APPLICABLE TO THE APPELLANT'S CASE. 2.6 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO HAS ERRED IN AND THE HON'BLE DRP HAS FUR THER ERRED IN NOT FOLLOWING PRINCIPLE OF CONSISTENCY. 3. INTEREST UNDER SECTION 234B OF THE ACT THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN LEVYING INTEREST UNDER SECT ION 234B OF THE ACT CONSEQUENT TO THE ABOVE DISALLOWANCES. 4. PENALTY PROCEEDINGS U/S 271 (1)(C ) OF THE ACT THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN INITIATING PENALTY PROCEEDI NGS U/S 271 (1 )(C) OF THE ACT AS PER THE IMPUGNED ORDER CONSEQUENTIAL TO THE ABOVE DISALLOWANCES. THE ABOVE GROUNDS ARE NOTWITHSTANDING AND WITHOUT PREJUDICE TO EACH OTHER. THE OBJECTIONS EMBODIED IN THE ABOVE GROUNDS ARE MUTUALLY EXCLUSIVE. ITA NOS.5848/DEL./2011 5 2. ASSESSEE COMPANY, M/S. UT STARCOM INC. (INDIA BR ANCH), USA (UTS US), BEING GLOBAL LEADER IN MANUFACTURE, I NTEGRATION AND SUPPORT OF IP BASED, END-TO-END NETWORKING AND TELECOMMUNICATION SOLUTIONS, SET UP ITS BRANCH OFFI CE IN INDIA IN DECEMBER 2001, TO ENABLE UTS US TO OFFER ITS PRODUC TS AND SERVICES IN THE INDIAN MARKET. THE ASSESSEE PROVID ES SOFTWARE DEVELOPMENT SERVICES AND MARKETING SUPPORT AND IT E NABLES CUSTOMER SUPPORT SERVICES TO UTS US CUSTOMERS IN AS IA-PACIFIC REGION. 3. ASSESSEE COMPANY ENTERED INTO INTERNATIONAL TRAN SACTIONS, HEREINAFTER MENTIONED, AND CONSEQUENTLY THE MATTER WAS REFERRED TO THE TPO UNDER SECTION 92CA (1) OF THE ACT FOR DETER MINATION OF THE ARMS LENGTH PRICE (ALP) :- S.NO. DESCRIPTION OF TRANSACTION METHOD VALUE (IN RS.) 1. SOFTWARE DEVELOPMENT SERVICES TNMM 10,69,48,787 2. IT ENABLED SERVICES TNMM 4,43,50,895 3. SALES AND MARKETING SUPPORT SERVICES TNMM 6,60,7 9,561 4. COST RECHARGES PAID TNMM 70,02,078 5. PURCHASE OF FIXED ASSETS TNMM 1,34,73,082 6. PURCHASE OF FINISHED GOODS TNMM 169,44,92,221 7. SALE OF FIXED ASSETS CUP 2,53,66,396 8. REIMBURSEMENT OF EXPENSES (RECEIVED) CUP 40,90,599 TOTAL 196,18,03,618 4. ASSESSEE COMPANYS INTERNATIONAL TRANSACTIONS RE LATING TO SOFTWARE DEVELOPMENT SERVICES (SDS) AND IT ENABLED CUSTOMER SUPPORT SERVICES (ITES) SEGMENTS HAVE BEEN DISPUTED BY THE LD. TRANSFER PRICING OFFICER (TPO). ASSESSEE COMPANY, IN ORDER TO ITA NOS.5848/DEL./2011 6 BENCHMARK ITS INTERNATIONAL TRANSACTIONS RELATING T O SDS SEGMENT ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS T HE MOST APPROPRIATE METHOD WITH OPERATING PROFIT / TOTAL CO ST (OP/TC) AS PROFIT LEVEL INDICATOR (PLI) AND BY UTILIZING MULTI -YEAR DATA CHOSEN 18 COMPARABLES HAVING AVERAGE MARGIN OF 13% AS AGAI NST ASSESSEE COMPANYS MARGIN OF 12% AND CLAIMED ITS INTERNATION AL TRANSACTIONS AT ALP. HOWEVER, TPO WHILE USING CURR ENT YEARS DATA BY APPLYING FILTERS OF WAGES TO COST, PERSISTE NT LOSSES, RELATED PARTY TRANSACTIONS (RPT) OF MORE THAN 25% IN TURNOV ER CHOSEN 11 COMPARABLES HAVING MARGIN OF 21.64% AND COMPUTED TH E DIFFERENCE IN ALP AT RS.87,71,509/-. 5. IN CASE OF ITES SEGMENT, TAXPAYER ALSO ADOPTED T NMM AS THE MOST APPROPRIATE METHOD AND OP/OC AS PLI, CHOSE N 16 COMPARABLES HAVING AVERAGE MARGIN OF 11% AND AFTER USING MULTIPLE YEAR DATA AS AGAINST 14% SHOWN BY THE ASSE SSEE. AGAIN TPO BY USING CURRENT YEARS DATA CHOSEN 9 COMPARABL ES HAVING AVERAGE MARGIN OF 26.24% AND ARRIVED AT THE DIFFERE NCE IN ALP AT RS.47,47,215/-. TPO HAS ALSO NOT ALLOWED ADJUSTMEN T ON ACCOUNT OF WORKING CAPITAL AND RISK. 6. ASSESSEE COMPANY HAS CLAIMED WORKING CAPITAL ADJ USTMENT ON THE GROUND THAT DUE TO DIFFERENCE IN LEVEL OF WO RKING CAPITAL EMPLOYED BY THE ASSESSEE VIS--VIS COMPARABLE COMPA NIES WORKING ITA NOS.5848/DEL./2011 7 CAPITAL ADJUSTMENT IS REQUIRED IN THIS CASE. TPO I N ORDER TO DETERMINE THE LIABILITY OF WORKING CAPITAL ADJUSTME NT (WCA) EXAMINED MAJOR COMPARABLES OF THE ASSESSEE AND CAME TO THE CONCLUSION THAT THE COMPANIES ARE EFFICIENT PROFIT MAXIMIZER BUT POOR MANAGEMENT MAY BE THE REASON AND AS SUCH, DISA LLOWED THE WORKING CAPITAL ADJUSTMENT. SIMILARLY, ASSESSEE AL SO CLAIMED RISK ADJUSTMENT WHILE COMPUTING THE MARGIN ON THE GROUND THAT ASSESSEE IS A RISK FREE ENTITY AND OPERATES IN A CONTROLLED BUSINESS ATMOSPHERE AND CONSEQUENTLY CLAIMED THE RISK ADJUST MENT BORNE BY COMPARABLES VIS--VIS ASSESSEE. SO, THE TPO COMPUT ED THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS QUA SOFT WARE DEVELOPMENT SERVICES SEGMENT AT RS.87,71,509/- AND IT ENABLED C USTOMER SUPPORT SERVICES (ITES) SEGMENT AT RS.47,47,215/- A ND DIRECTED THE AO TO ENHANCE THE INCOME OF THE ASSESSEE BY RS. 1,35,18,724/- 7. ASSESSEE CARRIED THE MATTER BY RAISING THE OBJEC TIONS BEFORE THE LD. DRP BY WAY OF FILING THE APPEALS WHO HAS AF FIRMED THE ORDER PASSED BY AO/TPO. FEELING AGGRIEVED WITH THE ORDER PASSED BY TPO/DRP/AO, ASSESSEE COMPANY HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEALS. 8. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ITA NOS.5848/DEL./2011 8 ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. TRANSFER PRICING GROUNDS GROUND NO.1.1 9. ASSESSEE RAISED THIS GROUND THAT TPO/AO HAS MADE INCORRECT TRANSFER PRICING ADJUSTMENT OF RS.2,07,82,181/- INS TEAD OF RS.23,98,098/- BY MISCONSTRUING THE DIRECTIONS OF L D. DRP ISSUED U/S 144C (5) OF THE ACT. TO PROCEED FURTHER DIRECT IONS ISSUED BY LD. DRP QUA THIS GROUND ARE REPRODUCED AS UNDER FOR REA DY PERUSAL :- 74. WORKING CAPITAL ADJUSTMENT: THE TAXPAYER HAS O BJECTED TO THE TPO'S ACTION IN NOT ALLOWING ADJUSTMENT ON ACCOUNT WORKING CAPITAL. ACCORDING TO THE TAXPAYER THE TPO WAS NOT JUSTIFIED IN DENYING THE CLAIM ON THE GROUND OF NON AVAILABILITY OF DATA ABOUT PAYABLES AND RECEIVABLES. IT WAS SUBMITTED THAT SUC H DATA IS AVAILABLE AND WORKING CAPITAL ADJUSTMENT CAN BE COM PUTED. 75. WE FIND MERIT IN THE TAXPAYER'S ABOVE CONTENTIO N. FOR THE PURPOSES OF PROPER COMPARABILITY DIFFERENCES IN THE PRICES CHARGED BY THE ASSESSEE AND THE COMPARABLES ARISING ON ACCO UNT OF DIFFERENT LEVELS OF WORKING CAPITAL ARE REQUIRED TO BE ELIMIN ATED. THE OECD GUIDELINES ALSO SUPPORT THIS VIEW. THE GUIDELINES S AY THAT IN A COMPETITIVE ENVIRONMENT, MONEY HAS A TIME VALUE. IN A COMPETITIVE ENVIRONMENT THE PRICE SHOULD INCLUDE AN ELEMENT TO REFLECT THE DIFFERENT PAYMENT AND RECEIPT TERM AND COMPENSATE F OR THE TIMING EFFECT. GUIDELINES FURTHER SAY THAT MAKING A WORKIN G CAPITAL ADJUSTMENT IS AN ATTEMPT TO ADJUST FOR THE DIFFEREN CES IN TIME VALUE OF MONEY BETWEEN THE TESTED PARTY AND POTENTIAL COM PARABLES WITH AN ASSUMPTION THAT THE DIFFERENCE SHOULD BE REFLECT ED IN PROFITS. THOUGH GUIDELINES SAY THAT AS A MATTER OF ROUTINE S UCH ADJUSTMENT SHOULD NOT BE MADE BUT ALSO STATE THAT THE SAME SHO ULD BE GIVEN IF IT IMPROVES THE COMPARABILITY. THE PROVISIONS CONTA INED IN RULE 10B (3) ALSO MANDATE ADJUSTMENTS WHEREVER THERE ARE MATERIAL DIFFERENCES IN THE SITUATIONS OF COMPARABLES AND TH E TAXPAYER. THE DIFFERENT BENCHES OF THE ITATS HAVE UPHELD SUCH ADJ USTMENT [VEDARIS TECHNOLOGY ITAT (DEL); SONY INDIA [114 ITD 448(DEL), MENTOR GRAPHICS, E GAIN COMMUNICATION 2008-TIOL-282 -ITAT- PUNE, GLOBAL VANTEDGE 2010-TI01-24-ITAT-DEL, TNT IN DIA P ITA NOS.5848/DEL./2011 9 LTD 2011-TII-39-ITAT BANG-TP/ETCL. THE AO/TPO IS, T HEREFORE, DIRECTED TO GRANT WORKING CAPITAL ADJUSTMENT BASED ON THE OECD FORMULA BY TAKING 10.25% AS PLR AS THIS IS THE RATE CHARGED BY THE STATE BANK OF INDIA WHICH IS THE LEADING BANK IN IN DIA ON WORKING CAPITAL LOANS. THE AFORESAID RATES SHOULD, THEREFO RE, BE ADOPTED. HOWEVER, FOR THIS PURPOSE, THE ASSESSEE SHALL HAVE TO PROVIDE REASONABLY ACCURATE INFORMATION ABOUT PAYABLES AND RECEIVABLES IN BOTH THE SEGMENTS I.E. SWD AND ITES. 10. BARE PERUSAL OF THE FINDINGS RETURNED BY LD. DR P ON THIS GROUND GOES TO PROVE THAT THE LD. DRP HAS CONCEDED THE CONTENTIONS RAISED BY THE ASSESSEE BUT WITH A RIDER THAT FOR THIS PURPOSE, THE ASSESSEE SHALL HAVE TO PROVIDE REASONA BLY ACCURATE INFORMATION ABOUT PAYABLES AND RECEIVABLES IN BOTH THE SEGMENTS I.E. SOFTWARE DEVELOPMENT SERVICES (SDS) AND ITES. 11. LD. AR FOR THE ASSESSEE CONTENDED THAT TPO HAS ERRED IN COMPUTING WORKING CAPITAL ADJUSTMENT MARGIN OF COMP ARABLE COMPANIES FOR SOFTWARE DEVELOPMENT SERVICES AND ITE S SEGMENTS OF THE ASSESSEE BY CONSIDERING BALANCES OF SUNDRY D EBTORS, CREDITORS AND INVENTORY AT CONSOLIDATED ENTITY LEVEL I.E. ASS ESSEES INDIA BRANCH TOGETHER WITH FOUR PROJECT OFFICES WHEREAS R ELEVANT STANDALONE BALANCES OF ASSESSEE COMPANIES INDIA BRA NCH WERE TO BE CONSIDERED. ASSESSEE COMPANY BROUGHT ON RECORD AUD ITED FINANCIAL STATEMENT OF BRANCH OFFICE ON STANDALONE BASIS AND CORRECT RELEVANT BALANCES HAVE ALSO BEEN MADE AVAILABLE AT PAGES 817 & 818 OF THE PAPER BOOK VOL.2 AND PAGES 1130 & 1138 OF PAPER BOO K VOLUME 3. SO, WHEN WE EXAMINE THE CONTENTIONS RAISED BY THE L D. AR FOR THE ITA NOS.5848/DEL./2011 10 ASSESSEE IN THE LIGHT OF THE DIRECTIONS ISSUED BY D RP REPRODUCED IN THE PRECEDING PARAS, THE ONLY CONCLUSION CAN BE DRA WN IS THAT THE TPO WHILE COMPUTING THE WORKING CAPITAL ADJUSTMENT MARGIN OF COMPARABLE COMPANIES FOR SOFTWARE DEVELOPMENT AND I TES, HE HAS TO TAKE IT ON RELEVANT STANDALONE BALANCES OF ASSES SEE COMPANY ONLY. SO, IN THE GIVEN CIRCUMSTANCES, WE RESTORE T HE MATTER TO THE TPO TO COMPUTE WORKING CAPITAL ADJUSTMENT MARGIN OF COMPARABLE COMPANIES FOR SOFTWARE DEVELOPMENT AND ITES SEGMENT OF THE ASSESSEE BY TAKING INTO CONSIDERATION THE SEGMENTAL POSITION IN RESPECT OF CONSOLIDATED ENTITY LEVEL POSITION AFRES H BY PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. SO, GR OUNDS NO.1.1 IS DETERMINED IN FAVOUR OF THE ASSESSEE. GROUNDS NO.1.2 TO 1.9 12. FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS QUA SOFTWARE DEVELOPMENT SEGMENT (SDS), THE ASSESSEE CH ALLENGED THE SELECTION OF THREE COMPARABLES, NAMELY, INFOSYS TECHNOLOGIES LIMITED, KALS INFORMATION SYSTEM LIMITED AND TATA E LXSI LIMITED BY THE TPO BENCHMARKING THE INTERNATIONAL T RANSACTION QUA SOFTWARE DEVELOPMENT SEGMENT AND SOUGHT EXCLUSI ON OF THREE COMPANIES, NAMELY, VISHAL INFORMATION TECHNOLOGIES LIMITED (NOW KNOWN AS CORAL HUB LIMITED), TRITON CORPORATIO N LIMITED AND MAPLE ESOLUTIONS LIMITED IN ITES SEGMENT ON ACC OUNT OF ITA NOS.5848/DEL./2011 11 FUNCTIONAL DIS-SIMILARITY. WE WOULD TAKE AFORESAID COMPARABLES SELECTED BY THE TPO FOR BENCHMARKING SDS SEGMENT TR ANSACTIONS ONE BY ONE. SOFTWARE DEVELOPMENT SEGMENT INFOSYS TECHNOLOGIES LIMITED 13. THE ASSESSEE CHALLENGED THIS COMPARABLE ON THRE E GROUNDS, VIZ., (I) IT OPERATES AS A FULL-FLEDGED ENTERPRISE; (II) IT HAS SIGNIFICANT INTANGIBLES; AND (III) THIS COMPARABLE IS HAVING 12 31 TIMES THE TURNOVER OF THE ASSESSEE AND IT IS A GIANT IN SOFTW ARE DEVELOPMENT. HOWEVER, LD. DR CONTENDED THAT HUGE DIFFERENCE IN T URNOVER IS NOT A GROUND FOR EXCLUSION OF ANY COMPARABLE AS THE PRO FITABILITY ELEMENT IS A DETERMINING FACTOR FOR INCLUSION OR EX CLUSION OF ANY COMPARABLE COMPANY. 14. HOWEVER, THE ISSUE AS TO THE COMPARABILITY OF I NFOSYS TECHNOLOGIES LIMITED AS CHOSEN BY THE TPO FOR BENCH MARKING THE INTERNATIONAL TRANSACTIONS OF SDS SEGMENT OF THE AS SESSEE WITH A SIMILARLY PLACED COMPANY HAS BEEN DETERMINED BY HON BLE DELHI HIGH COURT IN CASE CITED AS CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. (ITA 1204/2011 DATED JULY 10, 2013) (ORDER AVAILABLE AT PAGE PAGES 223 TO 228 OF THE COMPENDIUM OF CASE LAW S). FOR READY PERUSAL, OPERATIVE PART OF THE AFORESAID JUDGMENT I S REPRODUCED AS UNDER:- ITA NOS.5848/DEL./2011 12 5. THE TRIBUNAL HAS OBSERVED THAT THE ASSESSEE WAS NOT COMPARABLE WITH INFOSYS TECHNOLOGIES LTD., AS INFOS YS TECHNOLOGIES LTD. WAS A LARGE AND BIGGER COMPANY IN THE AREA OF DEVELOPMENT OF SOFTWARE AND, THEREFORE, THE PROFITS EARNED CANNOT BE A BENCH MARKED OR EQUATED WITH THE RESPONDENT, T O DETERMINE THE RESULTS DECLARED BY THE RESPONDENT-ASSESSEE. IN PARAGRAPH 3.3 THE TRIBUNAL HAS REFERRED TO THE DIFFERENCE BETWEEN THE RESPONDENT- ASSESSEE AND INFOSYS TECHNOLOGIES LTD. FOR THE SAKE OF CONVENIENCE, WE ARE REPRODUCING THE SAME: BASIC PARTICULAR INFOSYS TECHNOLOGIES LTD. AGNITY IN DIA RISK PROFILE OPERATE AS FULL - FLEDGED RISK TAKING ENTREPRENEURS OPERATE AT MINIMAL RISKS AS THE 100% SERVICES ARE PROVIDED TO AES NATURE OF SERVICES DIVERSIFIED- CONSULTING, APPLICATION DESIGN, DEVELOPMENT, RE- ENGINEERING AND MAINTENANCE SYSTEM INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION AND BUSINESS PROCESS MANAGEMENT, ETC. (REFER PAGE 117 OF THE PAPER BOOK) CONTRACT SOFTWARE DEVELOPMENT SERVICES. REVENUE RS.9, 028 CRORE RS.16.09 CRORES OWNERSHIP OF BRANDED/PROPRIETARY PRODUCTS DEVELOP S/OWNS PROPRIETARY PRODUCTS LIKE FINACLE, INFOSYS ACTICE DESK, INFOSYS IPROWE, INFOSYS MCONNECT, ALSO, THE COMPANY DERIVES SUBSTANTIAL PORTION OF ITS PROPRIETARY PRODUCTS (INCLUDING ITS FLAGSHIP BANKING PRODUCT SUITE FINACLE) ONSITE VS. OFFSHORE -AS MUCH AS HALF OF THE SOFTWARE THE APPELLANT PROVIDES ONLY ITA NOS.5848/DEL./2011 13 DEVELOPMENT SERVICES RENDERED BY INFOSYS ARE ONSITE (I.E., SERVICES PERFORMED AT THE CUSTOMERS LOCATION OVERSEAS). AND OFFSHORE (50.20%) (REFER PAGE 117 OF THE PAPER BOOK) THAN HALF OF ITS SERVICE, INCOME FROM ONSITE SERVICES. OFFSHORE SERVICES (I.E., REMOTELY FROM INDIA) EXPENDITURE ON ADVERTISING/SALES PROMOTION AND BRAND BUILDING RS.61 CRORES RS. NIL (AS THE 100% SERVICES ARE PROVIDE TO AES) EXPENDITURE ON RESEARCH & DEVELOPMENT RS. 102 CRORES RS. NIL OTHER 100% OFFSHORE (FROM INDIA) 6. LEARNED COUNSEL FOR THE REVENUE HAS SUBMITTED TH AT THE TRIBUNAL AFTER RECORDING THE AFORESAID TABLE HAS NO T AFFIRMED OR GIVEN ANY FINDING ON THE DIFFERENCES. THIS IS PARTL Y CORRECT AS THE TRIBUNAL HAS STATED THAT INFOSYS TECHNOLOGIES LTD. SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES FOR THE REASO N LATTER WAS A GIANT COMPANY IN THE AREA OF DEVELOPMENT OF SOFTWAR E AND IT ASSUMED ALL RISKS LEADING TO HIGHER PROFITS, WHEREA S THE RESPONDENT- ASSESSEE WAS A CAPTIVE UNIT OF THE PARENT COMPANY A ND ASSUMED ONLY A LIMITED RISK. IT HAS ALSO STATED THAT INFOS YS TECHNOLOGIES LTD. CANNOT BE COMPARED WITH THE RESPONDENT-ASSESSE E AS SEEN FROM THE FINANCIAL DATA ETC. TO THE TWO COMPANIES M ENTIONED EARLIER IN THE ORDER I.E. THE CHART. IN THE GROUNDS OF APPE AL THE REVENUE HAS NOT BEEN ABLE TO CONTROVERT OR DENY THE DATA AND DI FFERENCES MENTIONED IN THE TABULATED FORM. THE CHART HAS NOT BEEN CONTROVERTED. 7. LEARNED COUNSEL FOR THE APPELLANT REVENUE DURING THE COURSE OF HEARING, DREW OUR ATTENTION TO THE ORDER PASSED BY THE TPO AND IT IS POINTED OUT THAT BASED UPON THE FIGUR ES AND DATA MADE AVAILABLE, THE TPO HAD TREATED A THIRD COMPANY AS COMPARABLE WHEN THE WAGE AND SALE RATIO WAS BETWEEN 30% TO 60%. BY APPLYING THIS FILTER, SEVERAL COMPANIES WER E EXCLUDED. THIS IS CORRECT AS IT IS RECORDED IN PARA 3.1.2 OF THE ORDER PASSED BY THE TPO. TPO, AS NOTED ABOVE, HOWEVER HAD TAKEN TH REE ITA NOS.5848/DEL./2011 14 COMPANIES, NAMELY, SATYAM COMPUTER SERVICE LTD., L& T INFOTECH LTD. AND INFOSYS TECHNOLOGIES AS COMPARABLE TO WORK OUT THE MEAN. 8. IT IS A COMMON CASE THAT SATYAM COMPUTER SERVICE S LTD. SHOULD NOT BE TAKEN INTO CONSIDERATION. THE TRIBUNA L FOR VALID AND GOOD REASONS HAS POINTED OUT THAT INFOSYS TECHNOLOG IES LTD. CANNOT BE TAKEN AS A COMPARABLE IN THE PRESENT CASE. THIS LEAVES L&T INFOTECH LTD. WHICH GIVES US THE FIGURE OF 11.11 %, WHICH IS LESS THAN THE FIGURE OF 17% MARGIN AS DECLARED BY THE R ESPONDENT- ASSESSEE. THIS IS THE FINDING RECORDED BY THE TRIB UNAL. THE TRIBUNAL IN THE IMPUGNED ORDER HAS ALSO OBSERVED THAT THE AS SESSEE HAD FURNISHED DETAILS OF WORKABLES IN RESPECT OF 23 COM PANIES AND THE MEAN OF THE COMPARABLES WORKED OUT TO 10%, AS AGAIN ST THE MARGIN OF 17% SHOWN BY THE ASSESSEE. DETAILS OF THESE COMP ANIES ARE MENTIONED IN PARA 5 OF THE IMPUGNED ORDER. 15. WHEN WE EXAMINE THE PROFILE OF THE ASSESSEE COM PANY VIS-- VIS INFOSYS TECHNOLOGIES LIMITED IN THE LIGHT OF TH E JUDGMENT IN CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. (SUPRA), THERE IS NO COMPARABILITY FOR BENCHMARKING THE INTERNATIONAL TR ANSACTIONS FOR THE REASONS INTER ALIA THAT INFOSYS TECHNOLOGIES LI MITED IS A GIANT RISK TAKING COMPANY WHEREAS, ON THE OTHER HAND, THE ASSESSEE IS A CAPTIVE UNIT OF ITS PARENT COMPANY AND PRONE TO MIN IMUM/ LIMITED RISK; THAT THE INFOSYS TECHNOLOGIES LIMITED IS HAVI NG HUGE SIGNIFICANT INTANGIBLES AND HAVING HUGE ASSETS LEAD ING TO THE EXORBITANT TURNOVER; THAT IT IS NOT IN DISPUTE THAT FUNCTIONAL PROFILE OF ASSESSEE COMPANY AND CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. IS SIMILAR; THAT MOREOVER, IN THE SDS SEGMENT, NUME ROUS COMPANIES ARE AVAILABLE FOR COMPARABILITY. SO, IN THE GIVEN CIRCUMSTANCES, WE ARE OF THE CONSIDERED VIEW THAT I NFOSYS ITA NOS.5848/DEL./2011 15 TECHNOLOGIES LIMITED IS NOT A VALID COMPARABLE IN T HIS CASE, HENCE ORDERED TO BE EXCLUDED. KALS INFORMATION SYSTEMS LIMITED (KALS) 16. ASSESSEE SOUGHT EXCLUSION OF KALS ON GROUND OF FUNCTIONAL DIS-SIMILARITY AS IT IS ENGAGED IN EXECUTING END TO END PROJECT THROUGH THE ENTIRE VALUE CHAIN OF SOFTWARE DEVELOPM ENT LIFE CYCLE (SDLC) RIGHT FROM DESIGN TO DELIVERY, TESTING AND T RAINING AS HAS BEEN INCORPORATED BY LD. DRP AT PAGE 9 OF ITS ORDER . THE LD. AR FOR THE ASSESSEE CONTENDED THAT SO FAR AS FUNCTIONS PER FORMED BY THE ASSESSEE COMPANY ARE CONCERNED IT ONLY CONFINES TO CUTTING AND TESTING IN INDIA WHEREAS INTANGIBLES ARE CREATED IN THE US AND RELIED UPON GLOBAL LOGIC INDIA LIMITED VS. DCIT (ORDER DATED JU NE 6, 2015) (ORDER AVAILABLE AT PAGE PAGES 313 TO 321 OF THE CO MPENDIUM OF CASE LAWS) , NETHAWK NETWORKS INDIA PVT. LTD. (ORDER DATED NOVEMBER 6, 2013) (ORDER AVAILABLE AT PAGE PAGES 322 TO 328 OF THE COMPENDIUM OF CASE LAWS) AND LG SOFT INDIA PRIVATE LIMITED (ORDER DATED MARCH 22, 2013) (ORDER AVAILABLE AT PAGE PAGES 369 TO 375 OF THE COMPENDIUM OF CASE LAWS). 17. COMPARABILITY OF KALS WITH GLOBAL LOGIC INDIA P VT. LIMITED HAS BEEN EXAMINED BY THE COORDINATE BENCH, A SIMILARLY PLACED COMPANY WHICH IS ALSO INTO THE SOFTWARE DEVE LOPMENT AS IN ITA NOS.5848/DEL./2011 16 THE CASE OF ASSESSEE COMPANY, AND HELD TO BE NOT A COMPARABLE COMPANY. WHEN WE PERUSE TP STUDY AVAILABLE AT PAGE 47 OF THE PAPER BOOK-1, IT IS NOT IN DISPUTE THAT THE ASSESSE E COMPANY IS ONLY INTO CUTTING AND TESTING OF SOFTWARE DEVELOPMENT IN INDIA WHEREAS THE CORE DESIGN IS MADE IN US AND INTANGIBLES ARE C REATED IN US. WHEREAS, ON THE OTHER HAND, KALS HAS UNDISPUTEDLY D RAWN ITS INCOME FROM SOFTWARE PRODUCT AND IS ENGAGED IN EXEC UTING END TO END PROJECT THROUGH THE ENTIRE VALUE CHAIN OF SOFTW ARE DEVELOPMENT LIFE CYCLE AND THIS ISSUE HAS BEEN DETERMINED BY TH E COORDINATE BENCH IN THE ORDER (SUPRA). 18. MOREOVER, WHEN KALS HAS NOT PREPARED SEGMENT-WI SE DATA TO PROVE ITS CUSTOMIZED SOFTWARE DEVELOPMENT SERVIC ES AND SALE OF PROPRIETARY PRODUCTS, IT IS DIFFICULT TO FATHOM AS TO WHAT EXTENT THE OVERALL PROFIT OF THIS COMPANY HAVE BEEN IMPACTED B Y THE REVENUE FROM SOFTWARE PRODUCTS. SO, WE ARE OF THE CONSIDER ED VIEW THAT KALS IS ALSO NOT A VALID COMPARABLE, HENCE ORDERED TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES. TATA ELEXI LIMITED (TEL) 19. ASSESSEE CHALLENGED THIS COMPARABLE AND SOUGHT ITS EXCLUSION ON THE GROUND THAT TEL SOFTWARE DEVELOPME NT SEGMENT IS INTO EMBEDDED PRODUCT DESIGN SERVICES (DESIGN & DEV ELOPMENT ITA NOS.5848/DEL./2011 17 OF HARDWARE AND SOFTWARE), INDUSTRIAL DESIGN AND EN GINEERING (MECHANICAL DESIGN WITH A FOCUS ON INDUSTRIAL DESIG N) AND THAT ITS FOCUS IS ON INDUSTRIAL DESIGN AND AMALGAMATION AND VISUAL EFFECT (ANIMATION AND SPECIAL EFFECTS) AND THAT SERVICES A RE HIGHLY SPECIALIZED AND COMPLEX. ASSESSEE RELIED UPON THE ORDER PASSED BY ITAT IN CASE CITED AS VIRTUSA (INDIA) PVT. LTD. VS. DCIT (ITA NO.1962/HYD./2011 DATED AUGUST 30, 2013) (ORDER AVAILABLE AT PAGE PAGES 286 TO 293 OF THE COMPENDIUM OF CASE LAW S) AND GLOBAL LOGIC INDIA PVT. LTD. VS. DCIT (ITA NO.122/D EL/2013 DATED JUNE 4, 2015) (ORDER AVAILABLE AT PAGE PAGES 313 TO 321 OF THE COMPENDIUM OF CASE LAWS). 20. COORDINATE BENCH IN VIRTUSA (INDIA) PVT. LTD. VS. DCIT (SUPRA) EXAMINED THE COMPARABILITY OF TEL WITH VIRT USA (INDIA) PVT. LTD. WHICH IS ALSO INTO SOFTWARE DEVELOPMENT S ERVICES TO ITS GROUP COMPANY AND ORDERED ITS EXCLUSION ON THE GROU ND THAT IN RESPONSE TO THE NOTICE U/S 133(6) OF THE ACT, THE T EL HAS STATED THAT IT CANNOT BE CONSIDERED AS COMPARABLE TO ANY OTHER SOFTWARE COMPANY DUE TO ITS COMPLEX NATURE OF BUSINESS. THE HYDERABAD BENCH OF ITAT BY FOLLOWING THE DECISION OF ITAT, MU MBAI BENCH HELD THAT DUE TO COMPLEX NATURE OF BUSINESS AS ADMI TTED BY TEL ITSELF, IT CANNOT BE TREATED AS A VALID COMPARABLE. MOREOVER, WHEN NUMEROUS SOFTWARE DEVELOPMENT COMPANIES ARE AVAILAB LE FOR ITA NOS.5848/DEL./2011 18 COMPARABILITY TO BENCHMARKING INTERNATIONAL TRANSAC TION, THE TEL HAVING COMPLEX BUSINESS MODEL CANNOT BE A VALID COM PARABLE IN ASSESSEES CASE. 21. COORDINATE BENCH IN GLOBAL LOGIC INDIA PVT. LTD. (SUPRA) ALSO EXAMINED THE ISSUE OF COMPARABILITY OF TEL ALS O WITH GLOBAL LOGIC INDIA PVT. LTD. WHICH IS ALSO A SOFTWARE DEVE LOPMENT COMPANY THOUGH THE TPO IN TEL OBSERVED THAT IT HAS TWO SEGMENTS, NAMELY, SOFTWARE DEVELOPMENT SERVICE SEGM ENT AND SYSTEM INTEGRATION OF SUPPORTS SEGMENT BUT ASSESSEE S OBJECTION THAT IT IS FUNCTIONALLY DIFFERENT HAS BEEN SET ASID E. 22. COORDINATE BENCH THRASHED THE ISSUE THREADBARE AND CAME TO THE CONCLUSION THAT SINE TEL OFFERS INTEGRATED HARD WARE AND PACKAGE SOFTWARE SOLUTION, THE SAME CANNOT BE CONSI DERED AS COMPARABLE WITH THE ASSESSEE COMPANY WHICH IS SIMPL Y PROVIDING SOFTWARE RELATED SERVICES. SO, BY FOLLOWING THE OR DER PASSED BY THE COORDINATE BENCH, WE ARE OF THE CONSIDERED VIEW THA T SINCE THE TEL SOFTWARE DEVELOPMENT AND SERVICES SEGMENT CONSI ST OF THREE SUB-SEGMENTS, NAMELY, EMBEDDED PRODUCT DESIGN SERVI CES (DESIGN AND DEVELOPMENT OF HARDWARE AND SOFTWARE), INDUSTRIAL DESIGN AND ENGINEERING (MECHANICAL DESIGN WITH A FO CUS ON INDUSTRIAL DESIGN) AND ANIMATION AND VISUAL EFFECTS (ANIMATION AND SPECIAL EFFECTS), THE SAME CANNOT BE COMPARED W ITH ASSESSEE ITA NOS.5848/DEL./2011 19 COMPANY WHICH IS SIMPLY PROVIDING SOFTWARE DEVELOPM ENT SERVICES WITHOUT CREATING ANY INTANGIBLE. SO, WE ORDER TO E XCLUDE THIS SEGMENT FROM THE LIST OF COMPARABLES. ITES SEGMENT VISHAL INFORMATION TECHNOLOGIES LIMITED (NOW KNOWN AS CORAL HUB LIMITED) (VITL) 23. ASSESSEE SOUGHT EXCLUSION OF THIS COMPARABLE ON THE GROUNDS INTER ALIA THAT THIS COMPARABLE COMPANY IS OUTSOURC ED SUBSTANTIAL PART OF ITS BUSINESS TO THE OTHER PARTIES WHEREAS T HE ASSESSEE COMPANY HAS USED ITS OWN SOURCES, INFRASTRUCTURE AN D MANPOWER AND RELIED UPON THE JUDGMENT CITED AS RAMPGREEN SOLUTIONS PVT. LTD. VS. CIT (ITA 102/2015 DATED AUGUST 10, 2015) (ORDER AVAILABLE AT PAGE PAGES 1 TO 42 OF THE COMPENDIUM O F CASE LAWS). ON THE OTHER HAND, LD. DR OPPOSED THE EXCLUSION OF THIS COMPANY BY RELYING UPON PARA 35 OF THE LD. DRP ORDER AT PAG E 30 WHEREIN VIDE LETTER DATED 05.02.2010 ASSESSEE RELIED UPON D ATA FOR THE FY 2007-08 AND NOT FOR FY 2006-07 REQUIRED FOR THE COM PARABILITY OF THIS COMPANY. 24. COMPARABILITY OF VITL WITH RAMPGREEN SOLUTIONS PVT. LTD., UNDISPUTEDLY ENGAGED IN ITES SERVICES, HAS BEEN EXA MINED BY THE HONBLE DELHI HIGH COURT IN JUDGMENT CITED AS RAMPGREEN SOLUTIONS PVT. LTD. AND RETURNED THE FOLLOWING FINDINGS :- ITA NOS.5848/DEL./2011 20 38. IN OUR VIEW, EVEN VISHAL COULD NOT BE CONSIDER ED AS A COMPARABLE, AS ADMITTEDLY, ITS BUSINESS MODEL WAS C OMPLETELY DIFFERENT. ADMITTEDLY, VISHALS EXPENDITURE ON EMPL OYMENT COST DURING THE RELEVANT PERIOD WAS A SMALL FRACTION OF THE PROPORTIONATE COST INCURRED BY THE ASSESSEE, APPARENTLY, FOR THE REASON THAT MOST OF ITS WORK WAS OUTSOURCED TO OTHER VENDORS/SERVICE PROVIDERS. THE DRP AND THE TRIBUNAL ERRED IN BRUSHING ASIDE THIS V ITAL DIFFERENCE BY OBSERVING THAT OUTSOURCING WAS COMMON IN ITES IN DUSTRY AND THE SAME WOULD NOT HAVE A BEARING ON PROFITABILITY. PLAINLY, A BUSINESS MODEL WHERE SERVICES ARE RENDERED BY EMPLO YING OWN EMPLOYEES AND USING ONES OWN INFRASTRUCTURE WOULD HAVE A DIFFERENT COST STRUCTURE AS COMPARED TO A BUSINESS MODEL WHERE SERVICES ARE OUTSOURCED. THERE WAS NO MATERIAL FOR THE TRIBUNAL TO CONCLUDE THAT THE OUTSOURCING OF SERVICES BY VISHAL WOULD HAVE NO BEARING ON THE PROFITABILITY OF THE SAID ENTITY. 25. ASSESSEES CASE IS COVERED BY RAMPGREEN SOLUTIONS PVT. LTD. (SUPRA) BECAUSE VITLS EXPENDITURE ON EMPLOYMENT C OST WAS VERY SMALL AS AGAINST THE PROPORTIONATE COST OF THE ASSESSEE COMPANY WHICH USES ITS OWN INFRASTRUCTURE AND HAVIN G PERMANENT WORK FORCE OF ITS EMPLOYEES. MOREOVER, VITL OUTSOU RCED MOST OF ITS WORK TO THE OTHER VENDORS/SERVICE PROVIDERS AS AGAINST THE ASSESSEE COMPANY WHEREIN SERVICES ARE RENDERED BY E MPLOYING OWN WORK FORCE AND BY USING ITS OWN INFRASTRUCTURE. SO, ON THE BASIS OF DIFFERENT COST STRUCTURE, VITL IS NOT A VA LID COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS QUA ITE S SEGMENT . TRITON CORPORATION LIMITED AND MAPLE ESOLUTIONS LIMITED 26. ASSESSEE SOUGHT EXCLUSION OF BOTH THESE COMPANI ES ON THE GROUNDS INTER ALIA THAT TRITON CORPORATION LIMITED ACQUIRED 100% STOCK IN MAPLE ESOLUTIONS LIMITED DURING THE ASSESS MENT YEAR ITA NOS.5848/DEL./2011 21 UNDER CONSIDERATION; THAT DIRECTORS/MANAGEMENT OF T HE COMPANY WERE INVOLVED IN FRAUD DUE TO SERIOUS ALLEGATIONS O F FINANCIAL IRREGULARITIES AND RELIED UPON THE ORDERS CITED AS ITO VS. CRM SERVICES INDIA (P) LTD. (ITA NO.4068/DEL/2009 & 476 9/DEL/2010 DATED JUNE306, 2011) (ORDER AVAILABLE AT PAGE PAGES 158 TO 169 OF THE COMPENDIUM OF CASE LAWS) , CALIBRATED HEALTHCARE SYSTEMS INDIA PVT. LIMITED VS. ACIT (ITA NO.5271/DEL/2012 D ATED DECEMBER 4, 2014) (ORDER AVAILABLE AT PAGE PAGES 191 TO 200 OF THE COMPENDIUM OF CASE LAWS) AND AVAYA INDIA (P) LTD. VS. ADDL.CIT (ITA NO.5528/DEL/2011 DATED SEPTEMBER 18, 2015) (ORDER AVAILABLE AT PAGE PAGES 201 TO 208 OF THE COMPENDIU M OF CASE LAWS) . 27. ON THE OTHER HAND, LD. DR OPPOSED THE EXCLUSION ON THE GROUND THAT THE ALLEGATIONS OF FRAUD AGAINST BOTH T HESE COMPANIES WERE LEVELED WAY BACK IN 1980 AND MID-1990 AND ACQU ISITION OF MAPLE ESOLUTIONS LTD. BY TRITON CORPORATION LIMITED HAS NO EFFECT ON THE PROFITABILITY. 28. HOWEVER, WE ARE OF THE CONSIDERED VIEW THAT BOT H THE AFORESAID COMPANIES HAVE ALREADY BEEN EXAMINED FOR COMPARABILITY BY THE TRIBUNAL IN AFORESAID JUDGMENTS. ITAT, DELHI BENCH B, DELHI IN CRM SERVICES INDIA (P) LTD. (SUPRA) (ORDER AVAILABLE AT PAGE PAGES 158 TO 169 OF THE COMPENDIUM OF CASE LAW S) ITA NOS.5848/DEL./2011 22 CATEGORICALLY HELD THAT THE BUSINESS REPUTATION OF RASTOGI GROUP OWNING MAPLE ESOLUTIONS LIMITED AND TRITON CORPORAT ION LIMITED UNDER SERIOUS INDICTMENT AND THIS FACT HAS NOT BEEN CONTROVERTED BY THE REVENUE AND AS SUCH, IT IS NOT SAFE TO TAKE THE SE COMPANIES AS VALID COMPARABLES. 29. SIMILARLY, COORDINATE DELHI BENCH OF ITAT IN CALIBRATED HEALTHCARE SYSTEMS INDIA PVT. LTD. VS. ACIT (SUPRA) (ORDER AVAILABLE AT PAGE PAGES 191 TO 200 OF THE COMPENDIU M OF CASE LAWS) HAS ALSO EXCLUDED THIS COMPANY DUE TO FINANCIAL IRR EGULARITIES COMMITTED BY THEIR DIRECTORS AND NO CONTRARY ORDER HAS BEEN BROUGHT ON RECORD BY THE REVENUE FOR INCLUSION OF T HIS COMPANY IN THE LIST OF COMPARABLES AND FOLLOWED THE ORDER PASS ED BY THE COORDINATE BENCH IN CRM SERVICES INDIA (P) LTD. (SUPRA). 30. FURTHERMORE, THE TRIBUNAL IN AVAYA INDIA (P) LTD. (SUPRA) (ORDER AVAILABLE AT PAGE PAGES 201 TO 208 OF THE CO MPENDIUM OF CASE LAWS) ALSO ORDERED TO EXCLUDE BOTH THESE COMPA RABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS ON GROU ND OF FINANCIAL IRREGULARITIES AND CRIMINAL PROCEEDINGS INITIATED A GAINST THE DIRECTOR OF THE COMPANY. 31. NOT ONLY THIS, THE LD. AR BROUGHT ON RECORD DIR ECTORS REPORT DATED MARCH 31, 2010 QUA TRITON CORPORATION LIMITED WHEREIN THERE IS A STEEP DOWNFALL IN THE INCOME (SALES AND OTHER INCOME) FOR ITA NOS.5848/DEL./2011 23 THE YEAR ENDING 31.03.2010 WHICH IS RS.7.59 LAKHS A S AGAINST RS.4099.43 LAKHS IN THE PREVIOUS YEAR ENDING 31.03. 2009. FURTHERMORE, IT IS CATEGORICALLY MENTIONED IN DIREC TORS REPORT THAT FOR MOST OF THE YEAR, IT AND ITES OPERATIONS OF THE COMPANY CONTINUED TO BE SUSPENDED DUE TO ONGOING GLOBAL CRI SIS AND UNFAVOURABLE MARKET CONDITIONS. IN THESE CIRCUMSTA NCES, WE ORDER TO EXCLUDE TRITON CORPORATION LIMITED AND MAPLE ESO LUTIONS LIMITED FROM THE LIST OF COMPARABLES FOR BENCHMARKI NG INTERNATIONAL TRANSACTIONS. CORPORATE GROUNDS GROUNDS NO.2.1, 2.2, 2.3, 2.4, 2.5, & 2.6 32. LD. AR FOR THE ASSESSEE CONTENDED THAT THE BENE FIT OF SECTION 10A WAS GRANTED TO THE ASSESSEE COMPANY IN ASSESSME NT YEAR 2003-04 AND CONTINUED UPTO AY 2006-07 AND FURTHER R ELIED UPON THE JUDGMENT PASSED BY HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF DDIT VS. VIRAGE LOGIC INTERNATIONAL (ITA NO.1108/20 07 ORDER DATED 09.11.2016) & ORS. HOWEVER, ON THE OTHER HAND, LD. DR RELIED UPON THE ORDER PASSED BY LD. DRP/AO. 33. UNDISPUTEDLY, THE REVENUE HAS BEEN EXTENDING TH E BENEFIT OF SECTION 10A TO THE ASSESSEE COMPANY SINCE AY 2003-0 4 UPTO AY 2006-07 AND BUSINESS MODEL OF THE ASSESSEE COMPANY HAS NOT BEEN CHANGED QUA AYS 2007-08 AND 2008-09. ITA NOS.5848/DEL./2011 24 34. MORE SO, THE ISSUE IN CONTROVERSY HAS BEEN ANSW ERED IN FAVOUR OF THE ASSESSEE BY THE HONBLE JURISDICTIONA L HIGH COURT IN DDIT VS. VIRAGE LOGIC INTERNATIONAL (SUPRA) IN THE SIMILAR SET OF FACTS AND CIRCUMSTANCES, WHEREIN FOLLOWING QUESTION S OF LAW WERE FRAMED : (I) WHETHER THE TRANSFER OF COMPUTER SOFTWARE BY T HE INDIAN BRANCH TO THE HEAD OFFICE CAN BE SAID TO BE SALE TO THE HEAD OFFICE OUT OF INDIA? (II) WHETHER THE ASSESSEE IS ENTITLED TO CLAIM BENE FIT OF SECTION 10A OF THE INCOME TAX ACT, 1961, AS THE SOFTWARE IS DEVELOPED BY THE BRANCH AS PER THE REQUIREMENT OF HEAD OFFICE AND NOT SOLD TO ANY THIR D PARTY? 35. OPERATIVE PART OF THE JUDGMENT IN DDIT VS. VIRAGE LOGIC INTERNATIONAL (SUPRA) IS REPRODUCED FOR READY PERUSAL AS UNDER : - 11. THE DECISION IN MOSER BAER (SUPRA) SPECIFICALL Y DEALT WITH THE ITATS LOGIC AND REASONING IN THE PRESENT CASE. THERE THE DIVISION BENCH OF THIS COURT NOTED THAT TRANSMISSIO N OF COMPUTER SOFTWARE FROM AN INDIAN ENTITY TO ITS HEAD OFFICE O N THE BASIS OF AN ARMS LENGTH PRICE DETERMINED FOR EXPORT ENTITLED T HE ASSESSEE TO EXEMPTION UNDER SECTION 10A. THE COURT IS IN AGREE MENT WITH THE ASSESSEES CONTENTION THAT MERE OMISSION OF A PROVI SION KIN TO SECTION 80HHC EXPLANATION (2) OR THE OMISSION TO MA KE A PROVISION OF A SIMILAR KIND OF THAT ENCOMPASSES EXP LANATION 2(IV) TO SECTION 10A BY ITSELF DOES NOT RULE OUT THE POSS IBILITY OF TREATMENT OF TRANSFER/ TRANSMISSION OF SOFTWARE FRO M THE BRANCH OFFICE TO THE HEAD OFFICE AS AN EXPORT. A PLAIN REA DING OF SECTION 80-IA(8) SHOWS THAT TRANSFER OF ANY GOODS OR SERVIC E FOR THE PURPOSE OF THE ELIGIBLE BUSINESS TO ANY OTHER BUS INESS CARRIED ON BY THE ASSESSEE, ARE COVERED. THE ONLY CONDITION I NSISTED UPON BY THE PARLIAMENT WAS THAT THE FACE VALUE OF SUCH TRAN SACTIONS WAS INCONCLUSIVE AND THAT THE AO COULD DETERMINE THE MA RKET VALUE: FOR SUCH TRANSACTIONS OR SALES. THE INCORPORATION IN IT S ENTIRETY WITHOUT ANY CHANGE IN THIS PROVISION [SECTION 80-IA(8)] TO SECTION 10A THROUGH SUB-SECTION (7) IS FOR THE PURPOSE OF ENSUR ING THAT INTER- BRANCH TRANSFERS INVOLVING EXPORTS ARE TREATED AS S UCH AS LONG AS THE OTHER INGREDIENTS FOR A SALE ARE SATISFIED. ITA NOS.5848/DEL./2011 25 12. IN THIS CASE THE AO CARRIED OUT THE EXERCISE MA NDATED BY SECTION 10A(7) READ WITH SECTION 80-IA(8). CONSEQUE NTLY THE PARTICULARS OF THE PRICE OR COST REPORTED BY THE AS SESSEE WERE NOT BINDING OR CONCLUSIVE BUT RATHER THEY ATTAINED FINA LITY IN THE ASSESSMENT PROCEEDINGS, AFTER DUE ADDITION. IT UND ERWENT FURTHER INQUIRY/ SCRUTINY UNDER CHAPTER X OF THE ACT. 13. IT IS UNDOUBTEDLY APHORISM THAT A LEGAL FICTION OUGHT TO BE TAKEN TO ITS LOGICAL CONCLUSION AND THE MIND SHOULD NOT BE ALLOWED TO BOGGLE. THIS MERELY IMPLIES THAT A FICTION SHOUL D LOGICALLY TAKE A DIRECTION; THE TRAIN OF THOUGHT HOWEVER CANNOT DIVE RT ELSEWHERE. THE ABSENCE OF A DEEMED EXPORT PROVISION IN SECTI ON 10A SIMILAR TO THE ONE IN SECTION 80HHC DOES NOT LOGICA LLY UNDERCUT THE AMPLITUDE OF THE EXPRESSION TRANSFER OF GOODS UNDER SECTION 80-IA(8) WHICH IS OF NOW PART OF SECTION 10A. SUC H AN INTERPRETATION WOULD DEFEAT SECTION 10A(7) ENTIRELY . 14. FOR THE ABOVE REASONS, THE COURT IS OF THE OPIN ION THAT SUBSTANTIAL QUESTIONS OF LAW FRAMED ARE TO BE ANSWE RED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. THE ITA NO S. 1108/2007, 1249/2009 AND 173/2016 ARE, ACCORDINGLY, DISMISSED. IT IS CLARIFIED, HOWEVER, THAT THE AO IS AT LIBERTY TO GI VE TAX EFFECT AS A CONSEQUENCE OF THE INTERPRETATION ADOPTED BY THIS C OURT. THE RATIO OF THE JUDGMENT IN VIRAGE LOGIC INTERNATI ONAL (SUPRA) IS THAT THE TRANSFER OF COMPUTER SOFTWARE, BY THE INDI AN BRANCH TO THE HEAD OFFICE IS NOT SALE, HAVING BEEN DEVELOPED AS P ER REQUIREMENT OF HEAD OFFICE, AND NOT BEING SOLD TO THIRD PARTY A ND AS SUCH ENTITLED FOR THE BENEFIT OF SECTION 10A OF THE ACT. 36. SO FOLLOWING THE LAW LAID DOWN BY HONBLE HIGH COURT IN DDIT VS. VIRAGE LOGIC INTERNATIONAL (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT SINCE ASSESSEE COMPANY HAS EXP ORTED COMPUTER SOFTWARE FROM INDIA TO ITS HEAD OFFICE IN US AS PER ITS REQUIREMENT AND NOT SOLD TO ANY THIRD PARTY, IT IS ENTITLED TO EXEMPTION U/S 10A, SO AO / DRP HAVE ERRED IN DENYING THE B ENEFIT OF ITA NOS.5848/DEL./2011 26 SECTION 10A TO THE ASSESSEE. SO, THE MATTER IS RES TORED TO THE AO TO DECIDE AFRESH IN ACCORDANCE WITH THE LAW LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT AND THE DIRECTIONS ISSUED HEREIN BEFORE. SO, GROUNDS NO.2.1, 2.2, 2.3, 2.4, 2.5, & 2.6 ARE D ETERMINED IN FAVOUR OF THE ASSESSEE. 37. GROUND NO.3 NEEDS NO ADJUDICATION AS THE SAME I S CONSEQUENTIAL IN NATURE. 38. GROUND NO.4 IS PREMATURE, HENCE NEEDS NO ADJUDI CATION. 39. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, ORDE R PASSED BY TPO/AO/DRP QUA TRANSFER PRICING ADJUSTMENT GROUNDS AS WELL AS CORPORATE GROUNDS ARE HEREBY SET ASIDE AND MATTER I S RESTORED TO THE TPO/AO TO DECIDE AFRESH IN THE LIGHT OF THE DIRECTI ONS ISSUED HEREIN BEFORE. RESULTANTLY, THE APPEAL IS ALLOWED FOR STA TISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 23 RD DAY OF DECEMBER, 2016. SD/- SD/- (S.V. MEHROTRA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 23 RD DAY OF DECEMBER, 2016 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT ITA NOS.5848/DEL./2011 27 NEW DELHI.