Starent Networks (India) Private Limited, Pune V. Joint Commissioner of Income-tax,

ITA 585/PUN/2014

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 9906 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 6 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 09-04-2018
• Assessment Year: 2009-2010
• Appeal Filed On: 26-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S B PRASAD; NIRUPAMA KOTRU
• Keywords: Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NO. 585 /P U N/201 4 / ASSESSMENT YEAR : 2009 - 10 STARENT NETWORKS (INDIA) PRIVATE LIMITED, PLOT NO. P - 17, RAJIV GANDHI INFOTECH PARK, PHASE I, HINJEWADI, PUNE 411057 PAN : AAACN5937G . / APPELLANT VS. THE JOINT COMMISSIONER OF INCOME TAX, RANGE 6, PUNE . / RESPONDENT / APPELLANT BY : SHRI RAJENDRA AGIWAL / RESPONDENT BY : SMT. NIRUPAMA KOTRU AND SHRI S.B. PRASAD / DATE OF HEARING : 17.09. 201 8 / DATE OF PRONOUNCEMENT: 26 . 0 9 .201 8 / ORDER PER SUSHMA CHOWLA, J M : TH E APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORDER OF JOINT COMMISSIONER OF INCOME TAX , RANGE - 6, PUNE, DATED 08.01. 2014 RELATING TO ASSESSMENT YEAR 2009 - 10 PASSED UNDER SECTION 143(3) R.W.S. 144C OF THE INCOME - TAX ACT , 1961 (IN SHORT THE ACT) . 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - ITA NO. 585/PUN/2014 2 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, STARENT NETWO RKS (INDIA) PRIVATE LIMITED (HEREINAFTER REFERRED TO AS 'THE APPELLANT') RESPECTFULLY CRAVES LEAVE TO PREFER AN APPEAL UNDER SECTION 253(1)( D) OF THE INCOME - TAX ACT, 1961 (HEREINAFTER REFERRED TO AS 'ACT'), AGAINST THE ORDER DATED 8 JANUARY 2014 (RECEIVED BY THE APPELLANT ON 27 JANUARY 2014) BY THE JOINT COMMISSIONER OF INCOME TAX, RANGE 6 (HEREINAFTER REFERRED TO AS 'THE LEARNED AO') UNDER SECTION 143(3) OF THE ACT IN PURSUANCE OF THE DIRECTIONS DATED 23 DECEMBER 2013 ISSUED BY THE HON'BLE DISPUTE RESOLUT ION PANEL (HEREINAFTER REFERRED TO AS 'DRP'), ON THE FOLLOWING GROUNDS: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO BASED ON DIRECTIONS OF HON'BLE DRP HAS: A. GROUNDS OF APPEAL IN RESPECT OF TRANSFER PRICING ADJUSTMENT GR OUND NO.1 - GENERAL GROUND RELATED TO TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.9,06,92,350 ERRED IN MAKING TRANSFER PRICING ADJUSTMENT BY REJECTING THE ANALYSIS UNDERTAKEN BY THE APPELLANT TO DETERMINE ARM'S LENGTH PRICE FOR ITS INTERNATIONAL TRANSACTIO NS PERTAINING TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO THE AE AND NOT CONSIDERING ALL THE DOCUMENTATIONS MAINTAINED AND FILED; GROUND NO.2 - USE OF SINGLE YEAR DATA ERRED IN NOT CONSIDERING MULTIPLE YEAR DATA FOR DETERMINING THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTION PERTAINING TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES; GROUND NO.3 - USE OF ADDITIONAL FILTERS/ MODIFICATION OF FILTERS ERRED IN INAPPROPRIATELY INTRODUCING ADDITIONAL FILTERS (SELECTION CRITERIAS) AND MODIFYING THE FILTERS ADOPTED BY THE APPELLANT AND THEREFORE, INAPPROPRIATELY REJECTING CERTAIN COMPARABLE COMPANIES AND DETERMINING INAPPROPRIATE COMPANIES AS COMPARABLES TO THE APPELLANT; GROUND NO.4 - REJECTION OF CERTAIN COMPARABLE COMPANIES IDENTIFIED BY THE APPELLANT AS C OMPARABLE COMPANIES ERRED IN REJECTING COMPARABLE COMPANIES FROM THE SET OF COMPARABLE COMPANIES IDENTIFIED BY THE APPELLANT IN TRANSFER PRICING STUDY IN RESPECT OF INTERNATIONAL TRANSACTION PERTAINING TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES; GROUND NO.5 - INAPPROPRIATELY ACCEPTING COMPANIES NOT COMPARABLE TO THE APPELLANT AS COMPARABLE AND REJECTING CERTAIN OTHER COMPANIES WHICH CAN BE CONSIDERED AS COMPARABLE ERRED IN SELECTING CERTAIN INAPPROPRIATE COMPANIES AS COMPARABLE COMPANIES AND REJECTING CO MPANIES WHICH COULD ALSO BE CONSIDERED AS COMPARABLE TO THE APPELLANT; GROUND NO.6 - CONSIDERATION OF INAPPROPRIATE OPERATING MARGIN OF THE APPELLANT AND CERTAIN COMPARABLE COMPANIES ERRED IN CONSIDERING THE INAPPROPRIATE OPERATING MARGIN OF THE APPELLANT AND CERTAIN COMPARABLE COMPANIES AND NOT CONSIDERING THE WORKING SUBMITTED BY THE APPELLANT; ITA NO. 585/PUN/2014 3 GROUND NO.7 - INCORRECT COMPUTATION OF WORKING CAPITAL ADJUSTED MARGINS OF COMPARABLE COMPANIES ERRED IN NOT CONSIDERING THE CORRECT WORKING CAPITAL ADJUSTED MA RGINS OF COMPARABLE COMPANIES; GROUND NO.8 - ADJUSTMENT FOR RISK DIFFERENCES ERRED IN COMPARING FULL - FLEDGED RISK BEARING ENTITIES WITH THE APPELLANT'S CAPTIVE OPERATIONS WITHOUT MAKING ANY RISK ADJUSTMENT FOR DIFFERENCES BETWEEN THE FUNCTIONAL AND RISK PR OFILE OF COMPARABLE COMPANIES CONSIDERED AS COMPARABLE VIS - A - VIS THE RISK PROFILE OF THE APPELLANT; GROUND NO.9 - NON APPLICABILITY OF TRANSFER PRICING PROVISIONS TO APPELLANT ENJOYING TAX HOLIDAY REGIME UNDER SECTION 10A OF THE ACT ERRED IN CONCLUDING THAT TRANSFER PRICING PROVISIONS ARE APPLICABLE TO THE APPELLANT IN - SPITE OF THE FACT THAT THE APPELLANT IS ENJOYING THE TAX HOLIDAY REGIME UNDER SECTION 10A OF THE ACT; GROUND NO.10 - TRANSFER PRICING ADJUSTMENT WITHOUT GIVING BENEFIT OF +/ - 5 PER CENT A S AVAILABLE UNDER PROVISO TO SECTION 92C(2) OF THE ACT ERRED IN COMPUTING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS, WITHOUT TAKING INTO ACCOUNT THE BENEFIT OF +/ - 5 PER CENT VARIATION FROM THE MEAN, WHICH IS PERMITTED AND OPTED FOR BY THE A PPELLANT UNDER THE PROVISIONS OF SECTION 92C(2) OF THE ACT; B. GROUNDS OF APPEAL IN RESPECT OF CORPORATE TAX ADJUSTMENT GROUND NO.11 - DISALLOWANCE OF PERSONNEL EXPENSES AMOUNTING TO RS.1,14,09,276 ERRED IN LAW AND IN FACTS, IN DISALLOWING THE PERSONNEL EXPENSES IN RESPECT OF UNIT I (TAXABLE UNIT) FROM THE TOTAL INCOME OF THE APPELLANT; C. OTHER GROUNDS GROUND NO.12 - PENALTY PROCEEDINGS ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO BASED ON THE DIRECTIONS OF THE HON'BLE DRP HAS ERRED IN INITIATING PENALTY PROCEEDINGS; GROUND NO.13 - LEVY OF INTEREST ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO BASED ON THE DIRECTIONS OF THE HON'BLE DRP HAS ERRED IN LEVYING INTEREST UNDER SECTION 234A, 234 B , 234C AND 234 D OF THE ACT, AS APPLICABLE, ON ACCOUNT OF UNANTICIPATED TRANSFER PRICING ADJUSTMENTS MADE TO THE TOTAL INCOME OF THE APPELLANT. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMIT, SUBSTITUTE OR AMEND THE ABOVE GROUNDS OF APPEAL, AT ANY TIM E BEFORE OR AT, THE TIME OF HEARING OF THE APPEAL, SO AS TO ENABLE THE HONBLE INCOME TAX APPELLATE TRIBUNAL TO DECIDE THIS APPEAL ACCORDING TO LAW. ITA NO. 585/PUN/2014 4 3. THE GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE IS GENERAL IN NATURE AND THE SAME IS DISMISSED. 4. THE GROUNDS OF APPEAL NO.2, 3, 6, 7 AND 9 ARE NOT PRESSED AND HENCE, THE SAME ARE DISMISSED AS NOT PRESSED. THE GROUND OF APPEAL NO.12 IS PREMATURE AND HENCE THE SAME IS ALSO DISMISSED. THE ISSUE IN GROUND OF APPEAL NO.13 AGAINST LEVY OF INTEREST UNDER S ECTION 234A, 234B, 234C AND 234D IS CONSEQUENTIAL AND HENCE, THE SAME IS ALSO DISMISSED. 5 . THE REMAINING GROUNDS OF APPEAL NO.4 AND 5 ARE AGAINST TRANSFER PRICING ADJUSTMENT MADE IN THE HANDS OF ASSESSEE ON ACCOUNT OF INTERNATIONAL TRANSACTIONS UNDERTAKE N BY THE ASSESSEE. THE ISSUE IN GROUND OF APPEAL NO.8 IS IN RESPECT OF RISK ADJUSTMENT TO BE ALLOWED, WHICH AS PER THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IS COVERED IN FAVOUR OF ASSESSEE. THE ISSUE IN GROUND OF APPEAL NO.10 IS TO GIVE THE BENEFIT OF +/ - 5% RANGE OF VARIATION IN RESPECT OF ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS WHEN COMPARED WITH MEAN MARGINS OF COMPARABLES. 6 . THE ISSUE IN GROUND OF APPEAL NO.11 IS CORPORATE ISSUE OF DISALLOWANCE OF PERSONNEL EXPENSES OF 1,14, 09,276/ - . 7 . BRIEFLY IN THE FACTS OF THE CASE, THE ASSESSEE HAD FURNISHED RETURN OF INCOME DECLARING TOTAL INCOME OF 1,26,38,809/ - . THE CASE OF ASSESSEE WAS PICKED UP FOR SCRUTINY . S INCE THE ASSESSEE HAD UNDERTAKEN INTERNATIONAL TRANSACTIONS OF EXPORT OF SOFTWARE DEVELOPMENT TO THE TUNE OF 81,51,27,231/ - , T HE ASSESSING OFFICER MADE REFERENCE UNDER SECTION 92CA(1) OF THE ACT TO THE ITA NO. 585/PUN/2014 5 TRANSFER PRICING OFFICER (TPO). THE ASSESSEE HAD APPLIED TNMM METHOD TO BENCHMARK ITS I NTERNATIONAL TRANSACTIONS WITH IT S ASSOCIATED ENTERPRISES BY SELECTING COMPARABLES AND HAD OBSERVED THAT THE SAID INTERNATIONAL TRANSACTIONS WERE AT ARM'S LENGTH PRICE. THE TPO NOTED THAT THE ASSESSEE WAS REMUNERATED AT COST PLUS MARGINS AT 18% AND THE PLI OF ASSESSEE WORKED OUT TO 15.61 %. THE ASSESSEE HAD ADOPTED WEIGHTED AVERAGE MARGINS OF COMPARABLES AND PLI OF COMPARABLES WORKED OUT TO 15.92%. THE TPO FURTHER NOTE D THAT THE ASSESSEE HAS SELECTED CPM METHOD AS MOST APPROPRIATE METHOD. IN THE NEXT PARA, HE NOTES THAT THE ASSESSEE HAD ADOPTED WEIGHTED AVERAGE MARGINS OF COMPARABLE COMPANIES FOR THREE YEARS. HOWEVER, HE OBSERVED THAT THE DATA FOR CONTEMPORANEOUS PERIOD I..E. YEAR ENDING 31.03.2009 SHOULD BE CONSIDERED IN THE TP ANALYSIS. THE ASSESSEE THUS, WAS ASKED TO FURNISH UPDATED MARGINS OF SELECTED COMPARABLE COMPANIES AND THE ASSESSEE FURNISHED DATA OF 29 COMPARABLE COMPANIES WHOSE AVERAGE MEAN WORKED OUT TO 14.24%. THE TPO HOWEVER, NOTED CERTAIN DEFECTS IN SELECTION APPROACH FOLLOWED BY THE ASSESSEE AND WORKED OUT THE FINAL SE T OF COMPARABLES OF SIX CONCERNS AND THE WORKING CAPITAL ADJUSTED MARGINS WORKED OUT TO 27.22%. THE TPO THUS, HELD THE MARGINS OF ASSESSEE NOT TO BE AT ARM'S LENGTH PRICE AND WORKED OUT ADJUSTMENT AT 9,06,92,350/ - . THE TPO ALSO REJECTED ASSESSEES CLA IM FOR RISK ADJUSTMENT. IN VIEW THEREOF, HE PROPOSED ADJUSTMENT OF 9.06 CRORES. THE ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP) , WHICH CONFIRMED THE UPWARD ADJUSTMENT OF 9.06 CRORES. THE ASSESSING OFFICER ALSO PROPOSED DISALL OWANCE OF PERSONNEL EXPENSES OF 1,14,09,276/ - I.E. WHERE THE ASSESSEE HAD BOOKED EXPENDITURE UNDER THE HEAD PERFORMANCE LINKED INCENTIVE OF 2.35 CRORES. THE ASSESSEE WAS SHOW CAUSED IN THIS REGARD BUT THE ASSESSING OFFICER WAS NOT SATISFIED WITH TH E DETAILS ITA NO. 585/PUN/2014 6 SUBMITTED BY THE ASSESSEE AND HE RESTRICTED THE PERSONNEL EXPENSES OF UNIT - I TO 59% OF ITS SALES I.E. 5.03 CRORES AND BALANCE OF 1,14,09,276/ - WAS DISALLOWED. THE DRP CONFIRMED THE SAID DISALLOWANCE ALSO. THE ASSESSING OFFICER THEREAFTER, P ASSED ASSESSMENT ORDER UNDER SECTION 143(3) R.W.S. 144C(13) OF THE ACT, AGAINST WHICH THE ASSESSEE IS IN APPEAL. 8 . THE FIRST ISSUE WHICH IS TO BE ADDRESSED BY WAY OF GROUNDS OF APPEAL NO.4 AND 5 IS AGAINST TRANSFER PRICING ADJUSTMENT MADE IN THE HANDS O F ASSESSEE. 9 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THOUGH THE TPO MENTIONS THAT THE ASSESSEE HAD ADOPTED CPM METHOD BUT THERE IS NO DISPUTE THAT THE METHOD WHICH HAS BEEN ADOPTED BY BOTH THE ASSESSEE AND TPO I.E. TNMM M ETHOD. HE THEN, REFERRED TO THE ORDER OF TRIBUNAL IN ASSESSEES OWN CASE RELATING TO ASSESSMENT YEAR 2006 - 07, ORDER DATED 03.10.2011 AND POINTED OUT THAT TNMM METHOD WAS ALSO APPLIED IN THE PRECEDING YEAR TO BENCHMARK INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT FIRST DISPUTE WAS WITH REGARD TO INCLUSION / EXCLUSION OF CERTAIN CONCERNS. HE REFERRED TO THE LIST OF COMPARABLES FINALLY SELECTED BY THE TPO AND POINTED OUT THAT THE CONCERN ICRA TECHNO ANALYTICS LTD. IS TO BE INCLUDED, WHICH WAS REJECTED BY THE TPO ON THE GROUND THAT IT DOES NOT SATISFY RPT FILTER. OUR ATTENTION WAS DRAWN TO THE TABULATED CHART IN THIS REGARD AND POINTED OUT THAT DIFFERENCE WAS ON ACCOUNT OF REIM BURSEMENT OF EXPENSES WHICH HAS NO BEARING ON MARGINS, SO THE SAME HAD TO BE EXCLUDED WHILE CALCULATING RPT PERCENTAGE. HE PLACED RELIANCE ON THE ORDER OF MUMBAI BENCH OF TRIBUNAL IN ITA NO. 585/PUN/2014 7 THE CASE OF M/S. JACOBS ENGINEERING INDIA PVT. LTD. VS. DCIT IN ITA NO.7 194/MUM/2012, RELATING TO ASSESSMENT YEAR 2008 - 09, ORDER DATED 17.05.2017 AT PAGE 15 AND POINTED OUT THAT IN PRECEDING YEAR ALSO THE TRIBUNAL HAD DIRECTED INCLUSION OF ICRA TECHNO ANALYTICS LTD. 1 0 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE OTHER HAND, REFERRED TO OBSERVATIONS OF TPO AT PAGE 22 OF ITS ORDER WITH REGARD TO EXCLUSION OF ICRA TECHNO ANALYTICS LTD. 1 1 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTIONS OF EXPORT OF SOFTWARE DEVELOPMENT WITH ITS ASSOCIATED ENTERPRISES TOTALING 81.51 CRORES DURING THE YEAR. THE ASSESSEE HAD BENCHMARKED INTERNATIONAL TRANSACTIONS BY APPLYING TNMM METHOD AND COMPARED ITS MARGINS WITH LIST OF COMPARABLES SELECTED BY IT. HOW EVER, SINCE THE ASSESSEE HAD TAKEN WEIGHTED AVERAGE OF THREE YEARS DATA OF SAID CONCERN S , THE TPO ASKED THE ASSESSEE TO RE - WORK MARGINS OF COMPARABLES ON THE BASIS OF DATA OF CONTEMPORANEOUS PERIOD I.E. YEAR ENDING 31.03.2009. THE ASSESSEE SELECTED 29 COM PANIES AS COMPARABLE AND AS AGAINST ITS PLI OF 15.61%, THE MEAN MARGINS OF COMPARABLES WAS COMPUTED AT 14.24%. HOWEVER, THE TPO FINALLY SELECTED SIX COMPANIES AS COMPARABLES, WHICH READ AS UNDER: - SR. NO. NAME OF THE COMPARABLE OP/OC (%) WORKING CAPITAL A DJUSTED MARGIN (%) 1 BODHTREE CONSULTING LTD. 62.29 60.12 2 GOLDSTONE TECHNOLOGIES LTD. 4.15 3.91 3 KALS INFORMATION SYSTEMS LTD. (APPLICATION SOFTWARE SEG) 41.91 40.04 4 L G S GLOBAL LTD. 20.50 14.34 5 R S SOFTWARE 9.88 9.28 6 COMPUCOM SOFTWARE 41.9 8 39.58 27.88 ITA NO. 585/PUN/2014 8 1 2 . THE ASSESSEE IN THE FIRST INSTANCE IS AGGRIEVED BY EXCLUSION OF CONCERN ICRA TECHNO ANALYTICS LTD. ON THE GROUND THAT THE SAID CONCERN FAILS RPT FILTER. THE ASSESSEE HAS EXPLAINED THAT RPT OF SAID CONCERN WAS NOT MORE THAN 25% AND ICRA TECHNO ANALYTICS LTD. SHOULD BE CONSIDERED AS COMPARABLE . IN THIS REGARD, IT HAS FILED DETAILS AND POINTED OUT THAT REIMBURSEMENT OF EXPENSES SHOULD NOT BE INCLUDED WHILE CALCULATING RPT PERCENTAGE AS IT HAS NO BEARING ON THE PROFITS OF SAID CONCERN. WE FIND MERIT IN THE PLEA OF ASSESSEE WITH REGARD TO REIMBURSEMENT OF EXPENSES, WHERE IT IS ON COST TO COST BASIS, THEN THE COST INCURRED ON BEHALF OF RELATED PARTIES IS RECOVERED FROM RELATED PARTY AND HENCE, THE NET EFFECT TO PROFIT AND LOSS ACCOUNT IS NIL. ACCORDINGLY, WE HOLD THAT REIMBURSEMENT OF EXPENSES SHOULD NOT BE INCLUDED WHILE CALCULATING RPT PERCENTAGE. THE SAID CONCERN IS FUNCTIONALLY COMPARABLE TO THE ASSESSEE AND THE SAME IS NOT DISPUTED. THE ONLY ISSUE IS THE CALCULATION OF PERCENTAGE OF RPT. 1 3 . THE MUMBAI BENCH OF TRIBUNAL IN M/S. JACOBS ENGINEERING INDIA PVT. LTD. VS. DCIT (SUPRA) HAS HELD THAT RECOVERY OF OVERHEAD CHARGES BEING REIMBURSEMENT OF EXPENSES IS TO BE EXCLUDED BEING NOT COMMERCIAL TRANSACTION INVOLVING PROFIT ELEMENT. W E FIND MERIT IN THE PLEA OF ASSESSEE AND ACCORDINGLY, DIRECT THE INCLUSION OF ICRA TECHNO ANALYTICS LTD. IN FINAL SET OF COMPARABLES. 1 4 . THE SECOND ASPECT OF TRANSFER PRICING PROVISIONS IS IN RESPECT OF EXCLUSION OF CONCERN BODHTREE CONSULTING LTD. BEING FUNCTIONALLY NOT COMPARABLE. IN THIS REGARD, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE REFERRED TO THE ORDER OF TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.164/PUN/2013, ORDER DATED 09.02.2018 , WHEREIN IN ASSESSMENT YEAR 2008 - ITA NO. 585/PUN/2014 9 09, THE SAID CONC ERN WAS EXCLUDED BEING NOT FUNCTIONALLY COMPARABLE. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND EXPORTS. HOWEVER, THE CONCERN BODHTREE CONSULTING LTD. WHICH WAS PICKED UP BY THE TPO WAS A PRODUCT COMPANY AND WAS ALSO ENGAGED IN I TES SEGMENT. SUCH WAS THE FINDING OF TRIBUNAL IN ASSESSMENT YEAR 2008 - 09 IN ASSESSEES OWN CASE AS OBSERVED IN PARAS 11 AND 12, WHICH ARE BEING REFERRED TO BUT NOT BEING REPRODUCED FOR THE SAKE OF BREVITY. IT IS NOT CASE OF REVENUE THAT FUNCTIONALITY OF SAID CONCERN BODHTREE CONSULTING LTD. HAS CHANGED DURING THE YEAR. SO, WHERE THE ASSESSEE WAS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATED ENTERPRISES AND WHERE BODHTREE CONSULTING LTD. WAS ENGAGED IN SOFTWARE DEVELOPMENT AND PRODU CT AS WELL AS ITES SERVICES AND IN THE ABSENCE OF ANY SEGMENTAL DETAILS BEING AVAILABLE, SUCH A CONCERN COULD NOT BE TREATED AS COMPARABLE. ACCORDINGLY, WE HOLD THAT BODHTREE CONSULTING LTD. IS TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. 1 5 . THE NEXT CONCERN WHICH THE ASSESSEE IS AGGRIEVED FROM INCLUSION OF CONCERN I.E. KALS INFORMATION SYSTEMS LTD. ON THE GROUND THAT IT IS A PRODUCT COMPANY. 16 . THE TRIBUNAL IN ASSESSEES OWN CASE IN EARLIER YEAR HAS ALSO CONSIDERED EXCLUSION OF KALS INFORMATI ON SYSTEMS LTD. BEING PRODUCT COMPANY AND HAD APPLIED THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN CIT VS. PTC SOFTWARE (I) PVT. LTD. IN INCOME TAX APPEAL NO.732 OF 2014, JUDGMENT DATED 26.09.2016 . THE RELEVANT FINDINGS OF TRIBUNAL ARE IN PARAS 23 AND 24 OF THE ORDER OF TRIBUNAL, WHICH ARE BEING REFERRED TO BUT ARE NOT BEING REPRODUCED FOR ITA NO. 585/PUN/2014 10 THE SAKE OF BREVITY. FOLLOWING THE SAME PARITY OF REASONING, WE HOLD THAT KALS INFORMATION SYSTEMS LTD. IS TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. 17 . THE NEXT CONCERN WHICH THE ASSESSEE WANTS TO EXCLUDE FROM THE FINAL SET OF COMPARABLES IS COMPUCOM SOFTWARE LTD. 18 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE TPO NOTES THAT ASSESSEE HAD INCLUDED THE SAID CONCERN IN ITS TP STUDY REPORT. HOWEVER, WHEN DATA OF THE SAID CONCERN WAS SEEN, THEN IT WAS FOUND IT WAS ENGAGED IN ITES SERVICES AND PROVIDING SOFTWARE SERVICES BUT THE SAME COULD NOT BE INCLUDED WHILE BENCHMARKING ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE. IN THIS REGARD, HE FU RTHER POINTED OUT THAT TPO DID NOT DISPUTE THE FUNCTIONAL DIFFERENCES BUT HA D INCLUDED THE SAID CONCERN IN THE FINAL LIST OF COMPARABLES ON THE GROUND THAT THE ASSESSEE HA D INCLUDED THE SAME IN ITS TP STUDY REPORT. HE THEN, PLACED RELIANCE ON THE RATIO LAID DOWN BY CHANDIGARH SPECIAL BENCH OF TRIBUNAL IN THE CASE OF QUARK SYSTEMS PVT. LTD. IN ITA NOS.100 & 115/CHD/2009, RELATING TO ASSESSMENT YEAR 2004 - 05, ORDER DATED 22.10.2009 AND DCIT VS. BARCLAYS TECHNO LOGY CENTRE INDIA PVT. LTD. IN ITA NO.1855/PN/2014, RELATING TO ASSESSMENT YEAR 2009 - 10, ORDER DATED 22.07.2016, WHEREIN THE TRIBUNAL HAD HELD THAT THE ASSESSEE WAS AT LIBERTY TO EXCLUDE CONCERN/S WHICH WAS NOT FUNCTIONALLY COMPARABLE WHEN IT RECEIVES CONT EMPORANEOUS DATA, THOUGH INITIALLY IT HAD SELECTED THE SAME CONCERN IN ITS TP STUDY REPORT. 19 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLACED RELIANCE ON THE ORDERS OF AUTHORITIES BELOW. ITA NO. 585/PUN/2014 11 2 0 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE RECORD. WHILE BENCHMARKING INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE, ENDEAVOUR SHOULD BE MADE TO COMPARE THE MARGINS SHOWN BY THE ASSESSEE WITH MARGINS OF CONCERN WHICH ARE FUNCTIONALLY COMPARABLE. MERELY BECAUSE ONE CONCERN WAS PICKED UP BY THE ASSESSEE IN ITS TP STUDY REPORT, WHICH ADMITTEDLY, WA S NOT FUNCTIONALLY COMPARABLE, THEN THE SAME CANNOT BE CONTINUED TO BE PART OF FINAL LIST OF COMPARABLES SELECTED FOR BENCHMARKING INTERNATIONAL TRANSACTIONS. ACCORDINGLY, WE FIND NO MERIT IN THE APPROACH ADOPTED BY THE TPO IN THIS REGARD. 2 1 . NOW, COMING TO THE FUNCTIONALITY OF SAID CONCERN COMPUCOM SOFTWARE LTD., WHEREIN IT IS NOT DISPUTED THAT THE SAID CONCERN WA S ENGAGED IN ITES SECTOR AND ALSO SOFTWARE DEVELOPMENT SERVICES. HOWEVER, IN THE ABSENCE OF SEGMENTAL DETAILS, THE MARGINS SHOWN BY THE SAID COMPANY CANNOT BE APPLIED TO BENCHMARK THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE. IN THIS REGARD, WE FIND SUPPORT FROM THE DECISION OF CHANDIGARH SPECIAL BENCH OF TRIBUNAL IN THE CASE OF QUARK SYSTEMS PVT. LTD. (2010) TIOL - 31 - ITAT - CHD - SB, WHEREIN IT WAS HELD THAT IF S O ME INCONSISTENCY IN COMPARABLE COMPANIES , THEN IT SHOULD BE REMOVED FROM THE FINAL LIST OF COMPARABLES, NOTWITHSTANDING THE FACT THAT THE ASSESSEE HAD EARLIER CON SIDERED IT AS COMPARABLE CONCERN. APPLYING THE SAID RATIO TO THE FACTS OF THE PRESENT CASE AND SINCE THE TPO HAD ACCEPTED FUNCTIONAL DIFFERENCE OF THE CONCERN COMPUCOM SOFTWARE LTD., WE HOLD THAT IT IS TO BE EXCLUDED FROM FINAL SET OF COMPARABLES. ITA NO. 585/PUN/2014 12 2 2 . TH E ASSESSEE HAS FURTHER RAISED GROUND OF APPEAL NO.5, WHEREIN IT WANTS INCLUSION OF TWO CONCERNS TVS INFOTECH LTD. AND QUINTEGRA SOLUTIONS LTD. , WHICH WERE IDENTIFIED BY THE ASSESSEE DURING THE COURSE OF TP PROCEEDINGS. THE SAID TWO CONCERNS WERE EXCLUDED AS THEY HAD SHOWN NEGATIVE ADJUSTED MARGINS FOR THE YEAR UNDER CONSIDERATION ; TVS INFOTECH LTD. HAD SHOWN MARGINS OF ( - ) 12.94% AND QUINTEGRA SOLUTIONS LTD. AT ( - ) 4.22%. 2 3 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE CONC ERN TVS INFOTECH LTD. SHOULD NOT BE EXCLUDED FROM FINAL SET OF COMPARABLES AS IT WAS NOT PERSISTENT LOSS MAKING CONCERN. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE DURING THE COURSE OF HEARING WAS ASKED TO FURNISH THE DETAILS OF MARGINS SHOWN BY THE SAID CONCERN IN EARLIER YEARS AND LATER YEARS. HOWEVER, HE POINTED OUT THAT THE DETAILS WERE NOT AVAILABLE. IN THE ABSENCE OF DETAILS BEING NOT AVAILABLE, WE FIND NO MERIT IN THE PLEA OF ASSESSEE AND WE HOLD THAT TVS INFOTECH LTD. IS TO BE EXCLUDE D. 2 4 . NOW, COMING TO THE NEXT CONCERN I.E. QUINTEGRA SOLUTIONS LTD. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE TRIBUNAL IN ASSESSMENT YEAR 2007 - 08 HAD REMITTED THE MATTER BACK TO THE FILE OF ASSESSING OFFICER/TPO FOR VER IFICATION VIS - - VIS INCLUSION OF QUINTEGRA SOLUTIONS LTD. 2 5 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT THE TPO HAD EXCLUDED THE SAID CONCERN AS BEING NOT COMPARABLE BECAUSE OF FINDINGS IN PRECEDING YEAR. ITA NO. 585/PUN/2014 13 26 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. WITH REGARD TO INCLUSION OF QUINTEGRA SOLUTIONS LTD., WE FIND THAT THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2007 - 08 HAD REMITTED THE ISSUE TO THE FILE OF TPO , WHEREIN AS PER THE ASSESSEE, THE TP O HAD ACCEPTED THE ASSESSEES CONTENTION THAT THE SAID CONCERN WAS FUNCTIONALLY COMPARABLE TO THE ASSESSEE. HE HAS REFERRED TO THE FINAL ORDER PASSED FOR ASSESSMENT YEAR 2007 - 08 AT PAGES 674 TO 680 OF PAPER BOOK. FOLLOWING THE FINDINGS OF TPO IN PRECEDIN G YEAR IN THE CASE OF ASSESSEE ITSELF IN ASSESSMENT YEAR 2007 - 08, WHEREIN QUINTEGRA SOLUTIONS LTD. WAS HELD TO BE FUNCTIONALLY COMPARABLE TO THE ASSESSEE AND THE MARGINS WERE INCLUDED IN THE FINAL LIST OF COMPARABLES , WE HOLD THAT THE SAID CONCERN IS TO BE INCLUDED IN THE FINAL LIST OF COMPARABLES AND ACCORDINGLY, THE MEAN MARGINS OF COMPARABLES ARE TO BE RE - WORKED . I N CASE THE PLI SHOWN BY THE ASSESSEE IS WITHIN +/ - 5% RANGE OF MEAN MARGINS OF COMPARABLES, THEN NO ADJUSTMENT IS TO BE MADE IN THE HANDS OF ASSESSEE , OTHERWISE TPO SHALL WORKOUT THE ADDITION ON ACCOUNT OF ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS . CONSEQUENTLY, GROUNDS OF APPEAL NO.4, 5 AND 10 ARE PARTLY ALLOWED. 27 . NOW, COMING TO RISK ADJUSTMENT ASKED FOR BY THE ASSESSEE FOR APPLYIN G TRANSFER PRICING PROVISIONS. 28 . THE TRIBUNAL IN ASSESSEES OWN CASE RELATING TO ASSESSMENT YEAR 09.02.2018 IN PARAS 34 TO 36 ALLOWED THE ISSUE IN RESPECT OF ECONOMIC ADJUSTMENT IN THE HANDS OF ASSESSEE , F OLLOWING THE RATIO LAID DOWN BY THE DELHI BENC H OF TRIBUNAL IN THE CASE OF SONY INDIA PVT. LTD. REPORTED IN 114 ITD 448 . THE RELEVANT FINDINGS ARE IN PARAS 34 TO 36 OF THE ORDER OF TRIBUNAL, DATED ITA NO. 585/PUN/2014 14 09.02.2018 WHICH ARE BEING REFERRED TO BUT ARE NOT BEING RE PRODUCED FOR THE SAKE OF BREVITY. FOLLOWING THE SAME PARITY OF REASONING, WE DIRECT THE ASSESSING OFFICER TO ALLOW ADJUSTMENT ON ACCOUNT OF RISK DIFFERENCE IN THE HANDS OF ASSESSEE AND THE COMPARABLES FINALLY SELECTED. THE GROUNDS OF APPEAL NO.4 AND 5 ARE PARTLY ALLOWED. 29 . THE CORPORATE ISSUE BY WAY OF GROUND OF APPEAL NO.11 IS AGAINST THE DISALLOWANCE OF PERSONNEL EXPENSES. 3 0 . THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAD DEBITED AN AMOUNT OF 2.35 CRORES UNDER THE HEAD PERFORMANCE LINKED INCENTIVES , WHICH WAS SUB - HEAD OF PERSONNEL EXPENSES. THE ASSESSEE WAS ASKED TO SUBMIT THE PARAMETERS ADOPTED FOR MEASURING THE PERFORMANCE OF ITS EMPLOYEES. THE ASSESSEE WAS ALSO A SKED TO SUBSTANTIATE ITS CLAIM OF EXPENDITURE BY PRODUCING DOCUMENTARY EVIDENCE TO SUPPORT THE INCENTIVES GIVEN TO THE EMPLOYEES. THE ASSESSEE EXPLAINED THAT IT WAS PAYING PERFORMANCE BONUS TO ITS EMPLOYEES BASED ON THEIR INDIVIDUAL PERFORMANCE RATING. T HE ASSESSEE ON THE BASIS OF PERFORMANCE OF ITS EMPLOYEES HAD CATEGORIZED THEM INTO FIVE BUCKETS I.E. A, B, C, D AND E AND PERCENTAGE OF BONUS WAS COMPUTED ON THE BASIC SALARY OF EMPLOYEES AS PER PERCENTAGE DECIDED BY THE ASSESSEE COMPANY. THE ANNUAL PAY C YCLE FOR THE PERFORMANCE BONUS WAS JANUARY TO JUNE AND JULY TO DECEMBER. THE ASSESSING OFFICER WAS OF THE VIEW THAT DETAILS SUBMITTED BY THE ASSESSEE WERE TOO GENERIC IN NATURE AND DO NOT SUBSTANTIATE THE CLAIM OF ASSESSEE. THE ASSESSING OFFICER COMPARED UNIT - WISE SEGMENTAL PROFIT AND LOSS STATEMENT, WHEREIN UNIT - I HAD TAXABLE INCOME AND WHEREAS INCOME OF UNIT - II AND BANGALORE UNIT WAS EXEMPT UNDER SECTION 10A OF THE ACT. THE ASSESSING ITA NO. 585/PUN/2014 15 OFFICER NOTED THAT RATIO OF PERCENTAGE EXPENSES / SALES FOR UNIT - I WH ICH WAS TAXABLE UNIT WAS 72.48%. HOWEVER, FOR UNIT - II, IT WAS 57.50% AND FOR BANGALORE UNIT, IT WAS 60.17%. THE ASSESSING OFFICER WORKED OUT THE AVERAGE AT 59%. THE ASSESSING OFFICER ALSO NOTED THAT WHERE THE ASSESSEE WAS PROVIDING ITS SERVICES EXCLUSIV ELY TO ITS PARENT COMPANY I.E. STARENT NETWORKS CORPORATION AND THE NATURE OF BUSINESS ACTIVITY CARRIED ON IN ALL THE THREE UNITS WAS SAME AND EVEN THE TERMS AND CONDITIONS PERTAINING TO SERVICES PROVIDED BY THE ASSESSEE TO ITS PARENT COMPANY WERE VERBATIM SIMILAR AND THE COMPENSATION RECEIVED BY THE ASSESSEE FROM PARENT COMPANY WAS SAME I.E. COST PLUS 18% MARK - UP, THEN IT WAS UNLIKELY FOR THE PERSONNEL EXPENSES TO THE SALES RATIO TO SHOW VARIANCE FROM ONE UNIT TO ANOTHER. REJECTING THE PLEA OF ASSESSEE, T HE ASSESSING OFFICER RESTRICTED PERSONNEL EXPENSES OF UNIT - I TO 59% OF ITS SALES AND BALANCE OF 1.14 CRORES WAS DISALLOWED IN THE HANDS OF ASSESSEE. OBJECTIONS RAISED BY ASSESSEE BEFORE THE DRP WERE DISMISSED AND THE ASSESSING OFFICER MADE ADDITION IN THIS REGARD. 3 1 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT ACTIV ITIES OF EACH OF THE UNITS MAY BE SAME BUT HEAD COUNT, QUALIFICATIONS AND ACTIVITIES PERFORMANCE WERE NOT CONSIDERED. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE STRESSED THAT THE ACCOUNTS OF ASSESSEE COMPANY WERE AUDITED UNDER THE COMPANIES AC T AND ALSO UNDER THE INCOME - TAX ACT AND ACTUAL SALARY EXPENDITURE WAS DEBITED. WHERE THE ASSESSING OFFICER HAD FAILED TO POINT OUT ANY DISCREPANCY, THEN THERE WAS NO POINT IN WORKING OUT THE AFORESAID DISALLOWANCE. OUR ATTENTION WAS DRAWN TO PAGE 22 OF P APER BOOK - I IN PARA (E), WHEREIN THREE UNITS WERE FUNCTIONING IN DIFFERENT FIELDS AND THE ASSESSEE HAVING BOOKED THE ACTUAL EXPENSES WAS FOUND , THEN THE ITA NO. 585/PUN/2014 16 SAME COULD NOT BE CURTAILED. HE FURTHER STRESSED THAT ASSESSING OFFICER HAD NO BASIS FOR FIXING 59% AS ALLOWABLE EXPENDITURE WHERE NO DISCREPANCY IN THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER REFERRED TO UNIT - WISE PROFITABILITY PLACED AT PAGE 217 OF PAPER BOOK - I, WHEREIN OVERALL ADMINIST RATIVE EXPENSES WERE SAME AND THERE WAS NO ABNORMAL VARIATION IN TOTAL EXPENSES / SALES RATIO. 3 2 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE STRESSED THAT THE ISSUE MAY BE SENT BACK TO THE FILE OF ASSESSING OFFICER FOR NECESSARY VERIFICATI ON IN THIS REGARD. 3 3 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE WAS RUNNING THREE UNITS DURING THE YEAR UNDER CONSIDERATION, OUT OF WHICH ONE UNIT I.E. UNIT NO.I WAS SHOWING TAXABLE PROFITS. THE OTHER TWO UNITS I.E. UNIT NO.II AND BANGALORE UNITS WERE 10A UNITS AND THE PROFITS OF SAID UNITS WERE NOT TAXABLE IN THE HANDS OF ASSESSEE. THE ASSESSING OFFICER NOTED THE PERSONNEL EXPENSES DEBITED BY THE ASSESSEE COMPANY AND WAS OF THE VIEW THAT EXPENSES DEBITED TO TAXABLE UNIT WERE ON THE HIGHER SIDE AS AGAINST EXPENSES DEBITED TO UNITS WHICH WE RE ENJOYING TAX - FREE BENEFITS. HE WAS OF THE VIEW THAT WHERE ALL THE UNITS WERE PROVIDING SAME FACILITIES TO ITS PARENT COMPANY I.E. STARENT NETWORKS CORPORATION, THEN THERE WAS NO MERIT IN HAVING HIGHER PERSONNEL COST IN THE TAXABLE UNIT. THE ASSESSEE ON THE OTHER HAND, HAS STRONGLY OBJECTED TO THE WORKING ADOPTED BY THE ASSESSING OFFICER, WHICH IS WITHOUT ANY BASIS AS AGAINST ENTRIES MADE IN THE BOOKS OF ACCOUNT OF ASSESSEE, WHICH ARE BACKED BY AUDITED ACCOUNTS BOTH UNDER THE COMPANIES ACT AND INCOME - TAX ACT. THE MAIN PLEA RAISED BY THE ASSESSEE IS THAT OBSERVATION OF ITA NO. 585/PUN/2014 17 ASSESSING OFFICER THAT THREE UNITS WERE FUNCTIONALLY SIMILAR IS MISLEADING. OUR ATTENTION WAS DRAWN TO PAGE 22 OF PAPER BOOK - I WITH SPECIAL REFERENCE TO PARA (E), WHEREIN IT WAS REPORTED AS UNDER : - E) THE SNIPL OWNS THREE SEPARATE UNDERTAKINGS ENGAGED INTO RESEARCH & DEVELOPMENT RELATING TO SOFTWARE SOLUTIONS AND EXPORT ACTIVITY. ALL THESE UNITS ARE ESTABLISHED AS 100% EXPORT ORIENTED UNITS WITH SEPARATE REGISTRATIONS WITH THE STPI, THE CONTROLL ING AUTHORITY FOR THE SAID PURPOSE. THE FUNCTIONS TO BE PERFORMED IN ALL THE UNDERTAKINGS ARE DIFFERENT AND THERE EXIST SEPARATE CONTRACTS WITH THE SNC TO WHOM THE SOFTWARE SERVICES ARE EXPORTED WITH RESPECT TO BOTH THE UNDERTAKINGS SEPARATELY. THE FIRST UNIT (UNDERTAKING) IS ENGAGED INTO SOFTWARE DEVELOPMENT FOR ELEMENT / NETWORK MANAGEMENT SYSTEMS, THE SECOND UNIT/UNDERTAKING IS ENGAGED INTO INTELLIGENT MOBILE GATEWAY TO PROVIDE SUPPORT SERVICES & THE THIRD UNIT/UNDERTAKING IS ENGAGED INTO DEVELOPING VO ICE APPLICATIONS LIKE VOICE INSTANT MESSAGING, PUSH TO TALK, VOICE OVER IP ETC. REGULAR INVOICES ARE RAISED FROM ALL THESE UNDERTAKINGS AND THE SAME ARE FILED WITH THE STPI VIDE SOFTEX FORMS SPECIFICALLY STIPULATED FOR THE SAID PURPOSE. ON THE BASIS OF T HESE CONTRACTUAL UNDERTAKINGS AND IN LIGHT OF THE FACTUAL MATRIX, THE PRESENT EXERCISE IS CARRIED OUT. 3 4 . THE PERUSAL OF ABOVE SAID EXPLANATION REFLECTS THAT THE ASSESSEE WAS PERFORMING DIFFERENT FUNCTIONS THOUGH ALL THE FUNCTIONS WERE UNDER THE UMBRELL A OF PROVISION OF SOFTWARE TO ITS PRINCIPAL I.E. STARENT NETWORKS CORPORATION. IN VIEW THEREOF, OBSERVATIONS OF ASSESSING OFFICER THAT THREE UNITS ARE PERFORMING SAME FUNCTIONS CANNOT BE ACCEPTED. THE ASSESSEE HAD ADOPTED FORMULA TO BENCHMARK THE PERFORM ANCE OF EMPLOYEES UNDER ITS EMPLOYMENT FOR WORKING OUT ELIGIBLE BONUS DUE TO THEM. IN VIEW OF METHODOLOGY ADOPTED BY THE ASSESSEE ON THE BASIS OF PERFORMANCE RATINGS OF EMPLOYEES, BONUS WAS CALCULATED FOR THE STIPULATED PERIOD AND WAS PASSED ON TO THE EMP LOYEES, THEN MERELY BECAUSE EXPENDITURE IN TAXABLE UNIT - I BEING PERCENTAGE ON PERSONNEL EXPENSES/SALES RATIO BEING HIGHER OF TAXABLE UNIT - I CANNOT BE THE BASIS FOR DISALLOWING PART OF EXPENDITURE OUT OF TOTAL CLAIM MADE IN UNIT - I. ADMITTEDLY, UNIT - II AND BANGALORE UNIT HAD LOWER PERSONNEL EXPENSES/SALES RATIO AND THE PROFITS OF SAID UNITS WERE NOT TAXABLE IN THE HANDS OF ASSESSEE BEING 10A UNITS BUT THAT DIFFERENCES COULD NOT BE THE BASIS FOR COMPUTING DISALLOWANCE IN THE ITA NO. 585/PUN/2014 18 HANDS OF ASSESSEE. WE FIND NO MER IT IN THE APPROACH ADOPTED BY ASSESSING OFFICER IN THIS REGARD. ACCORDINGLY, WE REVERSE THE SAME AND DIRECT THE ASSESSING OFFICER TO ALLOW EXPENDITURE OF 1.14 CRORES IN THE HANDS OF ASSESSEE . 3 5 . IN THE RESULT, APPEAL OF ASSESSEE IS PARTLY ALLOWED. OR DER PRONOUNCED ON THIS 26 TH DAY OF SEPTEMBER , 201 8 . SD/ - SD/ - (ANIL CHATURVEDI ) (SUSHMA CHOWLA ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DAT ED : 26 TH SEPTEMBER , 201 8 . GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT ; 2. / THE RESPONDENT; 3. 4 THE DISPUTE RESOLUTION PANEL, PUNE ; . THE DI RECTOR OF INCOME TAX (TP /IT ), PUNE; 5 . , , / DR B , ITAT, PUNE; 6 . / GUARD FILE. / BY ORDER , // TRUE COPY // / SR. PRIVATE SECR ETARY , / ITAT, PUNE