Siemens Product Lifecycle Management Software (India) Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 5922/DEL/2012

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 4059 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 1 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-01-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 25-05-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 27-11-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Keywords: Transfer pricing; International transaction; Question of law
• Section: 92D; 244A; 234B; 10B; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI B.P. JAIN, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.5922/DEL./2012 (ASSESSMENT YEAR : 2008-09) SIEMENS PRODUCT LIFECYCLE MANAGEMENT VS. ACIT, CIRC LE 8 (1), SOFTWARE (INDIA) PVT. LTD., NEW DELHI. E 20, 1 ST & 2 ND FLOOR, HAUZ KHAS, NEW DELHI. (PAN : AABCS7638E) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RAVI SHARMA, ADVOCATE SHRI ANUBHAV RASTOGI, ADVOCATE REVENUE BY : SHRI SANJAY I. BARA, CIT DR DATE OF HEARING : 22.11.2017 DATE OF ORDER : 22.01.2018 O R D E R PER KULDIP SINGH : THE APPELLANT, M/S. SIEMENS PRODUCT LIFECYCLE MANAGEMENT SOFTWARE (INDIA) PRIVATE LIMITED (HEREIN AFTER REFERRED TO AS THE TAXPAYER) BY FILING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 28.09.2012, PASSED BY THE ASSESSING OFFICER IN CONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP/TPO UNDER SECTION 143 (3) READ WITH SECTION 144C OF THE INCOME-TAX ITA NO.5922/DEL/2012 2 ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEARS 2008-09 ON THE GROUNDS INTER ALIA THAT :- 1. ON THE FACTS AND IN LAW, THE LEARNED ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 8(1), NEW DELHI ('LD. AO') ERRED IN PASSING THE IMPUGNED ASSESSMENT ORDER DATED 28 SEPTEMBER 2012 PURSUANT TO THE DIRECTIONS OF THE HON'BLE DISPUTE RESOLUTION PANEL ('HON'BLE DRP') AND COMPUT ING THE TOTAL INCOME OF THE APPELLANT FOR ASSESSMENT YE AR (''AY') 2008-09 AT INR 27,30,95,863 AS AGAINST THE RETURNED INCOME OF INR 12,07,44,372. 2. THE LD. AO ERRED IN PROPOSING AND THE HON'BLE DR P FURTHER ERRED IN CONFIRMING THE ADDITION OF RS.15,2 3,51,491 TO THE APPELLANT'S RETURNED INCOME OF RS.12,07,44,3 72. TRANSFER PRICING ADJUSTMENT - INR 10,91,38,523 3. ON THE FACTS AND IN LAW, THE LEARNED ADDITIONAL DIRECTOR OF INCOME TAX, TRANSFER PRICING OFFICER- I I(4) (''LD. TPO') AND THE LD. AO ERRED IN PROPOSING AND THE HON'BLE DRP ERRED IN CONFIRMING THE ADDITION OF RS.10,91,38,523 IN RELATION TO THE INTERNATIONAL TR ANSACTIONS OF PROVISION OF SOFTWARE DEVELOPMENT, COMPETENCY CE NTER AND IT SUPPORT SERVICES. 4. ON THE FACTS AND IN LAW, THE LD. TPO, THE LD. AO AND THE HON'BLE DRP ERRED IN REJECTING THE TRANSFER PRI CING ('TP') DOCUMENTATION MAINTAINED BY THE APPELLANT UN DER SECTION 92D OF THE INCOME-TAX ACT, 1961 ('THE ACT') READ WITH RULE 10D OF THE INCOME-TAX RULE, 1962 ('THE RU LES') AND CALLING FOR A FRESH SEARCH, APPLYING ARBITRARY FILTERS DURING THE ASSESSMENT PROCEEDINGS, WITHOUT DISCHARG ING THE STATUTORY ONUS TO ESTABLISH THAT ANY OF THE CONDITI ONS SPECIFIED IN CLAUSE (A) TO (D) OF SECTION 92C(3) OF THE ACT HAS NOT BEEN SATISFIED. 5. ON THE FACTS AND IN LAW, THE LD. TPO, THE LD. AO AND THE HON'BLE DRP ERRED IN DISREGARDING THE USE OF CU RRENT YEAR AND PRIOR TWO YEARS' DATA BY THE APPELLANT TO BENCHMARK THE INTERNATIONAL TRANSACTIONS IN THE TP DOCUMENTATION FOR THE RELEVANT PREVIOUS YEAR IN CONTRAVENTION OF RULE 10B(4) OF THE RULES. ITA NO.5922/DEL/2012 3 6. ON THE FACTS AND IN LAW, THE LD. TPO, THE LD. AO AND THE HON'BLE DRP VIOLATED THE PROVISIONS OF RULE 10B (2) OF THE RULES BY ARBITRARILY REJECTING THE COMPANIES SE LECTED BY THE APPELLANT IN THE TP DOCUMENTATION AND THE FRESH SEARCH, WHICH ARE FUNCTIONALLY COMPARABLE TO THE AP PELLANT. 7. ON THE FACTS AND IN LAW, THE LD. TPO, THE LD. AO AND THE HON'BLE DRP VIOLATED THE PROVISIONS OF RULE 10B (2) OF THE RULES BY ARBITRARILY INTRODUCING NEW COMPANIES AS COMPARABLE TO THE APPELLANT, DISREGARDING THE DIFFE RENCES IN THE FUNCTIONAL PROFILE OF THE APPELLANT AND SUCH AD DITIONAL COMPANIES. 8. ON THE FACTS AND IN LAW, THE LD. TPO, THE LD. AO AND THE HON'BLE DRP ERRED IN DISREGARDING THE SEGMENTAT ION CARRIED OUT BY THE APPELLANT IN ITS TP DOCUMENTATIO N AND SUBSEQUENTLY, MERGING THE THREE SEGMENTS NAMELY, SO FTWARE DEVELOPMENT, COMPETENCY CENTRE AND IT SUPPORT SERVI CES WITHOUT APPRECIATING THE CARDINAL PRINCIPAL OF TRAN SFER PRICING WHICH REQUIRES THAT EACH TRANSACTION SHOULD BE BENCHMARKED SEPARATELY BASED ON THE PROVISIONS OF S ECTION 92(1) OF THE ACT. 9. ON THE FACTS AND IN LAW, THE LD. TPO AND THE LD. AO ERRED IN COMPUTING AND THE HON'BLE DRP ERRED IN DISREGARDING THE CORRECT OPERATING PROFIT MARGIN OF THE COMPANIES SELECTED BY THE LD. TPO. 10. ON THE FACTS AND IN LAW, THE LD. TPO, THE LD. A O AND THE HON'BLE DRP GROSSLY ERRED IN NOT ALLOWING APPRO PRIATE ADJUSTMENTS IN ACCORDANCE WITH THE PROVISIONS OF RU LE 10B(I)(E)(III) AND 10B(3) OF THE RULES TO ACCOUNT F OR, INTER- ALIA (A) DIFFERENCE IN WORKING CAPITAL EMPLOYED, AN D (B) DIFFERENCE IN RISK ASSUMED, BETWEEN THE APPELLANT A ND THE COMPARABLE COMPANIES SELECTED BY THE LD. TPO. ADJUSTMENT ON ACCOUNT OF ADVANCE BILLING- INR 4,32, 12,968 11. ON THE FACTS AND IN LAW, THE LD. AO ERRED IN MA KING AND THE HON'BLE DRP ERRED IN CONFIRMING AN AD-HOC ADDITION OF RS.4,32,12,968 ON ACCOUNT OF INCOME FRO M MAINTENANCE, ENHANCEMENT AND SUPPORT SERVICES (ADVA NCE BILLING / DEFERRED REVENUE) WITHOUT APPRECIATING TH AT NO INCOME HAS ACCRUED TO THE APPELLANT FOR THE YEAR UN DER CONSIDERATION AND THAT ON SIMILAR FACTS THE HON'BLE TRIBUNAL DELETED SUCH ADDITIONS IN EARLIER YEARS. ITA NO.5922/DEL/2012 4 12. WITHOUT PREJUDICE TO ABOVE AND IN ALTERNATE, LD . AO AND THE HON'BLE DRP HAS ERRED ON FACTS AND IN LAW I N DISREGARDING THE REGULAR AND THE CONSISTENT METHOD OF ACCOUNTING BEING FOLLOWED BY THE APPELLANT IN RECO GNIZING THE REVENUE FROM MAINTENANCE, ENHANCEMENT AND SUPPO RT SERVICES PROVIDED BY THE APPELLANT TO ITS CUSTOMERS . 13. ON THE FACTS AND IN LAW, THE LD. AO ERRED IN IN ITIATING PENALTY PROCEEDINGS U/S 271( 1)(C) OF THE ACT. 14. ON THE FACTS AND IN LAW, THE LD. AO HAS ERRED H OLDING THAT INTEREST UNDER SECTION 234B AND SECTION 234C B E CHARGED ON THE ASSESSED INCOME OF THE APPELLANT. 15. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE LD. AO HAS ERRED IN WITHDRAWIN G INTEREST U/S 244A OF THE ACT. 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : THE TAXPAYER IS A SUBSIDI ARY OF SIEMENS US (FORMERLY UGS CORP., USA). THE TAXPAYER IS ENGA GED IN PROVIDING PRODUCT LIFECYCLE MANAGEMENT SOFTWARE SOL UTIONS AND MAINTENANCE, ENHANCEMENT AND SUPPORT SERVICES FOR T HE SAME. THE TAXPAYER ALSO PROVIDES SOFTWARE RELATED RESEARCH AN D DEVELOPMENT SERVICES TO ITS HOLDING COMPANY THOUGH A UNIT REGIS TERED UNDER THE SOFTWARE TECHNOLOGY PARK (STP) SCHEME OF THE GOVERN MENT OF INDIA AND TECHNICAL SUPPORT TO ITS FOLLOW SUBSIDIAR Y COMPANIES. 3. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER E NTERED INTO INTERNATIONAL TRANSACTION AS UNDER :- ITA NO.5922/DEL/2012 5 NATURE OF INTERNATIONAL TRANSACTION METHOD SELECTED AMOUNT (IN INR) PAYMENT FOR PURCHASE DEPICTION AND REPLICATION OF SOFTWARE TNMM 391,913,055 PAYMENT OF LICENSE FEE FOR USE OF SOFTWARE PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO AES 963,111,115 PROVISION OF COMPETENCY CENTRE SERVICES TO AES 11,564,838 PROVISION OF IT SUPPORT SERVICES TO AES 77,430,923 COST ALLOCATION OF INFRASTRUCTURE UTILIZATION CHARGES BY AES 40,907,307 4. THE TAXPAYER IN ITS TP STUDY AVERRED THAT WITH R EGARD TO PROVISION OF SOFTWARE DEVELOPMENT, COMPETENCY CENTR E AND IT SUPPORT SERVICES (ITSS), THE TAXPAYER WORKS AS A CO NTRACT SERVICE PROVIDER FOR GROUP COMPANY. THE TAXPAYER IN ITS TP DOCUMENTATION USED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) IN ORDER TO BENCH MARK ITS INTERNATIONAL TRANSACTIONS BY TAKING MULTIPLE YEARS DATA AND CHOSEN 23 COMPARABLES FOR SOFTWARE DEVELOPMENT AND COMPETE NCY CENTRE SEGMENT AND 7 COMPARABLES FOR ITSS WITH MEAN OPERAT ING PROFIT/ TOTAL COST (OP/TC) MARGIN OF 14.84% AND 12.14% RESP ECTIVELY AS AGAINST TAXPAYERS OP/TC MARGIN FOR SOFTWARE DEVELO PMENT, COMPETENCY CENTRE AND ITSS AT 11.36%, 10.01% AND 7. 18% RESPECTIVELY. HOWEVER, ON THE BASIS OF FRESH SEARC H RESULT, AS PER QUERIES RAISED BY LD. TPO, THE TAXPAYER TAKEN 15 CO MPARABLES FOR SOFTWARE DEVELOPMENT AND COMPETENCY CENTRE SEGMENT AND 5 COMPARABLES FOR ITSS WITH MEAN OP/TC MARGIN OF 9.68 % AND ITA NO.5922/DEL/2012 6 7.68% RESPECTIVELY AS AGAINST TAXPAYERS OP/TC MARG IN OF 11.36%, 10.01% AND 7.18% OF SOFTWARE DEVELOPMENT, COMPETENC Y CENTRE AND ITSS. 5. TPO IN ITS ECONOMIC ANALYSIS REJECTED THE SEGMEN TATION CARRIED OUT BY THE TAXPAYER. TPO ALSO REJECTED THE SEGREGATION APPROACH ADOPTED BY THE TAXPAYER FOR BENCHMARKING T HE INTERNATIONAL TRANSACTION IN RESPECT OF ITS THREE S EGMENTS VIZ. OF SOFTWARE DEVELOPMENT, COMPETENCY CENTRE AND ITSS AN D HAVE CLUBBED ALL THE THREE SEGMENTS. HOWEVER, THE TAXPA YER HAS NOT CHALLENGED THE AGGREGATION. 6. THE TPO, AFTER TAKING INTO CONSIDERATION THE TP STUDY MADE BY THE TAXPAYER IN ITS ECONOMIC ANALYSIS, FINALLY S ELECTED 14 COMPARABLES HAVING AVERAGE OP/TC AT 27.43% AS AGAIN ST TAXPAYERS OP/TC MARGIN OF 10.96% AND THEREBY PROPO SED THE TP ADJUSTMENT OF RS.16,20,62,898/-. 7. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. D RP BY FILING OBJECTIONS WHO HAS PARTLY ACCEPTED THE CONTENTIONS RAISED BY THE TAXPAYER. POST DRP DIRECTIONS, MEAN OP/TC MARGIN O F COMPARABLES COME DOWN TO 19.67% (18% AFTER TREATING FOREX MEAN/LOSS AS OPERATING) AND ACCORDINGLY, AO RECOMPU TED THE ALP ADJUSTMENT AT RS.10,91,38,523/-. FEELING AGGRIEVED , THE TAXPAYER ITA NO.5922/DEL/2012 7 HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING TH E PRESENT APPEAL. 8. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. GROUNDS NO.1, 2, 3 &4 9. GROUNDS NO.1, 2, 3 & 4 NEED NO FINDINGS BEING GE NERAL IN NATURE AND HAVING BEEN COVERED BY THE SUBSEQUENT GR OUNDS. GROUNDS NO.5, 6 & 7 10. TNMM METHOD USED BY THE TAXPAYER AS THE MAM AND PROFIT LEVEL INDICATOR (PLI) HAS NOT BEEN DISPUTED BY THE TPO. HOWEVER, THE TPO REJECTED THE SEGREGATED APPROACH ADOPTED BY THE TAXPAYER RATHER CLUBBED ALL THE SEGMENTS IN QUESTION FOR BEN CHMARKING THE INTERNATIONAL TRANSACTIONS, WHICH HAS ALSO NOT BEEN CHALLENGED BY THE TAXPAYER. 11. TPO, AFTER APPLYING VARIOUS FILTERS, MAKING ANA LYSIS OF TP STUDY OF THE TAXPAYER AND ON THE BASIS OF ITS OWN E CONOMIC ANALYSIS, FINALLY SELECTED 14 COMPARABLES HAVING AV ERAGE OP/TC OF 27.43% AS AGAINST 10.01% OF THE TAXPAYER DETERMINED THE ALP OF RS.16,20,62,898/-. HOWEVER, POST DRP DIRECTIONS, 1 5 COMPARABLES ITA NO.5922/DEL/2012 8 HAVE BEEN TAKEN BY THE AO TO CALCULATE THE OPERATIN G MARGIN (OP/TC) BY TREATING THIS FOREX GAIN/LOSS AS NON OPE RATING IN NATURE WHICH ARE AS UNDER :- SL. NO. COMPANY NAME OP/TC (TREATING FOREX GAIN/LOSS AS NON OPERATING) 1 . 3 K TECHNOLOGIES LTD. 35.36% 2 . AKSHAY SOFTWARE TECHNOLOGIES LTD. 9.25% 3. BODHTREE CONSULTING LIMITED 20.86% 4. FLEXTRONICS SOFTWARE SYSTEMS LTD (ARICENT TECHNOLOGIES (HOLDING LTD.) 7.56% 5. INFOSYS TECHNOLOGIES LIMITED 40.41% 6. KALS INFORMATION SYSTEMS LID. (SEG) 30.92% 7. LARSEN & TOUBRO INFOTECH LTD. 17.74% 8 . LUCID SOFTWARE L IMITED 16.50% 9 . MINDTREE LIMITED (SEGMENTAL) 17.51% 10. PERSISTENT SYSTEMS LTD. 27.70% 11. QUINTEGRA SOLUTION LTD. 21.74% 12. RS SOFTWARE LIMITED 7.79% 13. SAGARSOFT (INDIA) LTD. 16.92% 14 . V M F SOFT TECH LTD. 4.32% 15 . ZYLOG SYSTEMS LIMITED 20.51% MEAN 19.67333333 12. ON THE BASIS OF AVERAGE OP/TC MEAN MARGIN OF TH E COMPARABLES AT 19.67% BY TREATING FOREX GAIN/LOSS A S NON OPERATING IN NATURE, THE AO CALCULATED THE ALP ADJUSTMENT AS UNDER :- PARTICULARS AMOUNT IN INR PRICE CHARGED IN INTERNATIONAL TRANSACTION (EX CLUDING VOLUNTARY ADJUSTMENT OF INR 39,796,556) 98,40,43,263 OPERATING COST OF THE TAXPAYER FOR PROVISION OF SER VICES 94,67,52,187 ADD : MARK - UP OF 19.67% 18,62,26,155 ALP FOR PROVISION OF SERVICES 1,13,29,78,342 105% OF PRICE CHARGED IN INTERNATIONAL TRANSACTION 1,03,32,45,426 DIFFERENCE BETWEEN ALP AND PRICE CHARGED IN INTERNATIONAL TRANSACTION FOR WHICH THE ADJUSTMENT IS REQUIRED TO BE MADE 14,89,35,079 ADJUSTMENT ALREADY OFFERED BY THE TAXPAYER 3,97,96, 556 ADJUSTMENT REQUIRED TO BE MADE BY THE AO 10,91,38,5 23 ITA NO.5922/DEL/2012 9 13. IN THE BACKDROP OF THE AFORESAID FACTS AND CIRC UMSTANCES OF THIS CASE, THE LD. AR TO CUT SHORT THE CONTROVERSY SOUGHT EXCLUSION OF SIX COMPARABLES VIZ. INFOSYS TECHNOLOGIES LTD., 3K TECHNOLOGIES LTD., KALS INFORMATION SYSTEMS (SEG.), PERSISTENT SYSTEMS LTD., BODHTREE CONSULTING LTD. AND ZYLOG SY STEMS LTD. . 14. BEFORE EXAMINING THE COMPARABILITY OF THE AFORE SAID COMPANIES VIS--VIS THE TAXPAYER, WE WOULD LIKE TO HAVE AN OVERVIEW OF THE NATURE OF THE WORK DONE BY THE TAXP AYER FOR ITS AE WHICH IS OTHERWISE NOT IN DISPUTE, FOR READY PERUSA L. 15. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER PROVIDED SOFTWARE DEVELOPMENT SERVICES, COMPETENCY CENTRE SE RVICES AND IT SUPPORT SERVICES TO ITS AE QUA WHICH ALP ADJUSTMENT OF RS.10,91,38,523/- HAVE BEEN MADE. 16. NOW, WE WOULD LIKE TO EXAMINE THE COMPARABILITY OF THE AFORESAID COMPANIES VIS--VIS THE TAXPAYER ONE BY O NE. INFOSYS TECHNOLOGIES LTD. (INFOSYS) 17. THE TAXPAYER SOUGHT TO EXCLUDE INFOSYS FROM THE FINAL SET OF COMPARABLES ON THE GROUNDS INTER ALIA THAT INFOSYS IS FUNCTIONALLY DIS-SIMILAR; IT HAS HUGE SALES/TURNOVER OF RS.15648 CRORES HAVING SUBSTANTIAL INTANGIBLE ASSETS INCURRING HUGE AMOUNT ON R&D FOR ITA NO.5922/DEL/2012 10 DEVELOPING NEW AREA OF FUNCTIONS; IT OWNS PRODUCTS/ LEVERAGES ON ITS PREMIUM BANKING SOLUTION FINACLE; AND RELIED UPON THE CASES OF CIT VS. M/S. AGNITY INDIA TECHNOLOGIES PRIVATE LTD. (2013) 36 TAXMANN.COM 289 (DELHI), SYSTECH INTEGRATORS INDIA (P.) LTD. VS. ITO - 44 TAXMANN.COM 324 (BANGLAORE-TRIB.), FCG SOF TWARE SERVICES (INDIA) P. LTD. VS. ITO 51 TAXMANN.COM 7 5 (BANGALORE TRIB.) AND CIT II VS. INTOTO SOFTWARE INDIA PVT. LTD. IN ITA NO.233 OF 2014 (HONBLE HIGH COURT OF ANDHRA PRADES H). 18. UNDISPUTEDLY, THE TAXPAYER IS A CAPTIVE SERVICE PROVIDER AND PROVIDING SERVICES AS DESIRED BY ITS AE. HOWEVER, ON THE OTHER HAND, PAGE 130 OF THE ANNUAL REPORT, AVAILABLE IN T HE PAPER BOOK, SHOWS THAT INFOSYS IS INTO PROVIDING DIVERSIFIED SE RVICES VIZ. PROVIDING END TO END BUSINESS SOLUTIONS THAT LEVERA GE TECHNOLOGY THEREBY ENABLING CLIENTS TO ENHANCE BUSINESS PERFOR MANCE. THE SOLUTIONS SPAN THE ENTIRE SOFTWARE LIFE CYCLE ENCOM PASSING TECHNICAL CONSULTING, DESIGN, DEVELOPMENT, REENGINE ERING, MAINTENANCE, SYSTEMS INTEGRATION, PACKAGE EVALUATIO N AND IMPLEMENTATION, AND TESTING AND INFRASTRUCTURE MANA GEMENT SERVICES. IN ADDITION, THE COMPANY OFFERS SOFTWARE PRODUCTS FOR THE BANKING INDUSTRY. 19. MOREOVER, TURNOVER OF INFOSYS IS OF RS.15648 CR ORES FOR AY 2007-08 AS AGAINST TAXPAYERS TURNOVER OF RS.109 CR ORES WHICH IS ITA NO.5922/DEL/2012 11 143 TIMES OF THE TURNOVER OF THE TAXPAYER. INFOSYS IS ALSO HAVING HUGE INTANGIBLE OF RS.130684 CRORES AS PER THE DETA ILED REPORT FILED AT PAGE 128 OF THE ANNUAL REPORT. INFOSYS IS ALSO EXPENDING HUGE AMOUNT ON R&D FOR DEVELOPING AND CREATING NEW FUNCT IONALITIES WHICH IS TO THE TUNE OF 1.3% OF THE TOTAL REVENUE. FURTHERMORE, IT IS ALSO NOT IN DISPUTE THAT INFOSYS OWNS PRODUCT FINA CLE WHICH IS A UNIVERSAL BANKING SOLUTION EMPOWERING 109 BANKS ACR OSS 60 COUNTRIES HELPING THEM SERVE OVER 20000 BRANCHES (R EFERRED AT PAGE 80 OF THE ANNUAL REPORT COMPENDIUM). PERUSAL OF TH E P&L ACCOUNT, AVAILABLE AT PAGE 124 OF THE ANNUAL REPORT ALSO SHO WS THAT INFOSYS HAS INCOME OF RS.15648 CRORES FROM SOFTWARE SERVICE S AND PRODUCT OF WHICH SEGMENTAL INFORMATION IS NOT AVAILABLE. 20. INFOSYS HAS BEEN ORDERED TO BE EXCLUDED BY THE HONBLE DELHI HIGH COURT IN CASE CITED AS CIT VS. AGNITY INDIA TECHNOLOGIES (P.) LTD. (SUPRA) WHILE EXAMINING ITS COMPARABILITY WITH AGNITY INDIA TECHNOLOGIES WHICH WAS A CAPTIVE SERVICE PROVIDER OPERATING ON MINIMAL RISK PROVIDING SOFTWA RE DEVELOPMENT SERVICES WHICH HAS AFFIRMED THE DECISIO N RENDERED BY THE COORDINATE BENCH OF THE TRIBUNAL FOR EXCLUDING INFOSYS FROM THE LIST OF COMPARABLES FOR THE REASON THAT INFOSYS IS A GIANT COMPANY IN THE AREA OF DEVELOPMENT OF SOFTWARE, ASS UMPTION OF RISK LEADING TO HIGHER PROFITS ETC. KEEPING IN VIE W THE AFORESAID ITA NO.5922/DEL/2012 12 DISCUSSION, WE ARE OF THE CONSIDERED VIEW THAT INFO SYS BEING A GIANT COMPANY OPERATING ON FULL-FLEDGED RISK LEADING TO M AXIMUM PROFIT HAVING HUGE REVENUE AND EXPENDING 1.3% OF ITS TURNO VER ON R&D HAVING HUGE INTANGIBLES IS NOT A SUITABLE COMPARABL E VIS--VIS TAXPAYER WHICH IS A CAPTIVE SERVICE PROVIDER OPERAT ING ON A MINIMUM RISK AND ONLY HAVING TURNOVER OF RS.109 CRO RES AS AGAINST TURNOVER OF INFOSYS OF RS.15648 CRORES. SO , WE ORDER TO EXCLUDE INFOSYS FROM THE FINAL SET OF COMPARABLES. 3K TECHNOLOGIES LTD. (3K) 21. THE TAXPAYER SOUGHT EXCLUSION OF 3K FOR BENCHMA RKING THE INTERNATIONAL TRANSACTIONS ON GROUNDS OF FUNCTIONAL DISSIMILARITIES, UNRELIABLE FINANCIAL INFORMATION, FAILS EMPLOYEE CO ST FILTER APPLIED BY THE TPO AND RELIED UPON THE CASE OF NESS TECHNOLOGIES INDIA PVT. LTD. VS. ACIT (2014) 52 TAXMANN.COM 406 (MUM BAI-TRIB) . 22. PARA 3.2.1 AT PAGE 14 OF THE TP ORDER APPARENTL Y SHOWS THAT THE LD. TPO HAS HIMSELF APPLIED THE EMPLOYEE COST F ILTER AT 25% OF THE TOTAL COST, HOWEVER WHEN WE EXAMINE ANNUAL REPO RT OF 3K, AVAILABLE AT PAGE 14 OF THE AR COMPENDIUM, PERSONNE L COST IS OF RS.115,63,474/- WHICH IS 3.70%. 23. WHEN WE EXAMINE THE FUNCTIONAL COMPARABILITY OF 3K VIS-- VIS THE TAXPAYER FROM PAGE 4 OF THE ANNUAL REPORT C OMPENDIUM, IT ITA NO.5922/DEL/2012 13 HAS COME ON RECORD THAT 3K IS INTO BUSINESS OF DESI GN, DEVELOP, MANUFACTURE, ASSEMBLE COMPUTERS, COMPONENTS PARTS A ND ACCESSORIES THEREOF AND ALSO OBTAIN TECHNICAL KNOW- HOW BY ENTERING INTO FOREIGN COLLABORATION FOR THE DEVELOPMENT OF C OMPUTER SYSTEMS IN INDIA AND ABROAD AND OTHER RELATED ACTIVITIES. THE PRESENT AUTHORIZED SHARE CAPITAL OF THE COMPANY IS RS.1,00, 00,000/- AND THE ISSUE SUBSCRIBED AND PAID UP SHARE CAPITAL OF THE C OMPANY STANDS AT RS.10,00,000/-. DURING THE YEAR, THE COMPANY HAS MA DE A TURNOVER OF RS.40,20,39,534/- AND EARNED A PROFIT BEFORE TAX OF RS.8,91,02,055/-. IT IS ALSO CLEAR FROM ANNUAL REP ORT OF 3K THAT ITS FOCUS AND INVESTMENT IN ITS R&D ACTIVITIES IN SOFTW ARE ENGINEERING TECHNOLOGIES AND PRODUCTS AND 3K LEVERAGES ITS EXCE LLENCE IN TECHNOLOGY FOR PRODUCING WORLD CLASS PRODUCTS AND S OLUTIONS WHEREAS THE TAXPAYER IS A CAPTIVE SOFTWARE DEVELOPM ENT PROVIDER HAVING NO R&D ACTIVITIES AND NOT BEING INTO PRODUCI NG PRODUCT AND SOLUTIONS. 24. FURTHERMORE, FINANCIAL INFORMATION AVAILABLE IN THE PUBLIC DOMAIN IS NOT RELIABLE AS IS EVIDENT FROM SCHEDULE 12 OF THE NOTES FORMING PART OF THE ACCOUNTS AVAILABLE AT PAGE 19 O F THE PAPER BOOK. 25. COMPARABILITY OF 3K HAS ALSO BEEN EXAMINED BY T HE COORDINATE BENCH OF THE TRIBUNAL IN NESS TECHNOLOGIES INDIA PVT. LTD. (SUPRA) FOR AY 2008-09 ENGAGED IN SOFTWARE DEVELOP MENT AND ITA NO.5922/DEL/2012 14 ITES AND HAS BEEN ORDERED TO BE EXCLUDED FROM THE L IST OF COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRAN SACTIONS ON GROUND OF FAILING THE EMPLOYEE COST TO SALE FILTER OF 25% APPLIED BY THE TPO AS 3K EMPLOYEE COST OF THE COMPANY WAS FOUN D TO BE 5.56% OF THE TOTAL TURNOVER ONLY. 26. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT KEEPING IN VIEW THE FUNCTIONAL DISSIMILARITY, UNRELIABLE FINANCIALS OF THE COMPANY AND FAILING EM PLOYEE COST FILTER APPLIED BY THE TPO, 3K IS NOT A SUITABLE COM PARABLE FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS, HENCE ORDERED TO BE EXCLUDED. KALS INFORMATION SYSTEMS (SEG.) (KALS) 27. THE TAXPAYER SOUGHT EXCLUSION OF KALS ON GROUND OF FUNCTIONAL DIS-SIMILARITY BEING INTO THE BUSINESS O F SOFTWARE SERVICES AND SOFTWARE PRODUCTS. UNDISPUTEDLY, THE TAXPAYER IS INTO THE BUSINESS OF SOFTWARE DEVELOPMENT SERVICES. PER USAL OF THE ANNUAL REPORT OF KALS, AVAILABLE AT PAGES 219 TO 24 2 OF THE ANNUAL REPORT COMPENDIUM, PARTICULARLY SCHEDULE 16 OF THE NOTES TO THE FINANCIAL STATEMENTS APPARENTLY PROVED THAT KALS IS ENGAGED IN DEVELOPMENT OF SOFTWARE AND SOFTWARE PRODUCTS SINCE ITS INCEPTION. THE COMPANY CONSISTING OF STPI UNIT ENGAGED IN SOFT WARE AND ITA NO.5922/DEL/2012 15 SOFTWARE PRODUCTS AND TRAINING CENTRE ENGAGED IN TR AINING OF SOFTWARE PROFESSIONALS ON ONLINE PROJECTS. REVENUE RECOGNITION OF KALS IS THAT IT DRIVES ITS REVENUES PRIMARILY FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS, HOWEVER, SEGMENTAL DATA BIFURCATING THE REVENUE FROM PRODUCT AND SOFTWARE D EVELOPMENT IS NOT AVAILABLE. IN THE GIVEN CIRCUMSTANCES, WE ARE OF THE CONSIDERED VIEW THAT KALS CANNOT BE CONSIDERED AS A SUITABLE C OMPARABLE VIS- -VIS THE TAXPAYER WHICH IS A ROUTINE SOFTWARE DEVE LOPER, HENCE ORDERED TO BE EXCLUDED. PERSISTENT SYSTEMS LTD. (PERSISTENT) 28. THE TAXPAYER SOUGHT EXCLUSION OF PERSISTENT ON GROUNDS INTER ALIA THAT IT IS FUNCTIONALLY DIFFERENT BEING A PROD UCT COMPANY; IT HAS UNDERGONE EXTRA ORDINARY EVENTS DURING THE YEAR UND ER ASSESSMENT; HAVING HIGH RESEARCH AND DEVELOPMENT EXPENSES. 29. LD. DR RELIED UPON TPO/DRP IN ORDER TO OPPOSE T HE ARGUMENTS ADDRESSED BY LD. AR. 30. PERUSAL OF THE ANNUAL REPORT OF PERSISTENT, AVA ILABLE AT PAGES 243 TO 282 OF ANNUAL REPORT COMPENDIUM, SHOWS THAT IT IS MENTIONED IN THE VISION OF THE COMPANY FROM THE CHA IRMANS DESK AS UNDER :- ITA NO.5922/DEL/2012 16 FOCUS HAS BEEN AN IMPORTANT ATTRIBUTE FOR PERSISTE NT SYSTEMS. WE STARTED IN THE EARLY 90S BY WORKING WITH PRODUC T COMPANIES WITH AN OFFSHORE CENTRIC MODEL FOCUSED ON TECHNOLOG Y EXCELLENCE. AS OUR UNIQUE DIFFERENTIATOR, WE HAVE CONTINUED TO DEVELOP AND REFINE OUR EXPERTISE IN THIS AREA AND HAVE BUILT LE ADERSHIP IN OUTSOURCED SOFTWARE PRODUCT DEVELOPMENT (OPD). 31. FURTHERMORE, IT IS MENTIONED IN ONE OF THE STRE NGTH OF PERSISTENT AT PAGE 251 OF THE ANNUAL REPORT THAT PE RSISTENT OUTSOURCED SOFTWARE PRODUCT DEVELOPMENT (OPD) SPECI ALIST WITH DEEP ROOTED PRODUCT DEVELOPMENT CULTURE. 32. LD. AR FOR THE TAXPAYER ALSO CONTENDED THAT PER SISTENT HAS UNDERGONE EXTRA ORDINARY EVENTS IN 2007-08 AS IT HA S ACQUIRED PEOPLE AND ASSETS OF MATRIMONY PVT. LTD. AND STARTS OPERATION IN HYDERABAD AND FURTHER CONTENDED THAT THE TAXPAYER H AS INCURRED 1% OF THE TOTAL TURNOVER ON THE RESEARCH AND DEVELOPME NT EXPENDITURE. HOWEVER, THE TAXPAYER HAS FAILED TO PROVE THE IMPAC T OF EXTRA ORDINARY EVENTS ON THE PROFITABILITY OF THE COMPANY . 33. KEEPING IN VIEW THE PROFILE OF PERSISTENT DISCU SSED IN PRECEDING PARAS VIS--VIS THE TAXPAYER WHICH IS A R OUTINE SOFTWARE DEVELOPER GOES TO PROVE THAT THE TAXPAYER IS FUNCTI ONALLY DIS-SIMILAR BEING ENGAGED INTO SOFTWARE PRODUCT DESIGN AND ANAL YTIC ANALYSIS OF WHICH SEGMENTAL RESULTS ARE NOT AVAILABLE. PERS ISTENT HAS BEEN ORDERED TO BE EXCLUDED BY THE COORDINATE BENCH OF T HE TRIBUNAL AS A COMPARABLE VIS--VIS SOFTWARE DEVELOPER COMPANY, NAMELY, 3DPLM SOFTWARE SOLUTIONS LTD. VS. DCIT, CIRCLE 11 ( 1), ITA NO.5922/DEL/2012 17 BANGALORE (2014) 42 TAXMANN.COM 333 (BANGLAORE TRIB.). IN VIEW OF THE MATTER, WE ARE OF THE CONSIDERED VIEW T HAT THE PERSISTENT IS NOT A SUITABLE COMPARABLE FOR BENCHMA RKING THE INTERNATIONAL TRANSACTION, HENCE ORDERED TO BE EXCL UDED. BODHTREE CONSULTING LTD. (BODHTREE) 34. THE TAXPAYER SOUGHT EXCLUSION OF BODHTREE ON GR OUNDS INTER ALIA THAT IT IS FUNCTIONALLY DIS-SIMILAR HAVING VOL ATILE MARGIN WHICH HAS BEEN ORDERED TO BE EXCLUDED BY THE COORDINATE B ENCH OF THE TRIBUNAL IN INTOTO SOFTWARE INDIA (P.) LTD. VS. ITO (2016) 65 TAXMANN.COM 119 (HYDERABAD TRIB.) FROM THE LIST OF COMPARABLES TO BENCHMARKING THE INTERNATIONAL TRANS ACTION VIS-- VIS SOFTWARE DEVELOPER. 35. LD. DR RELIED UPON TPO/DRP IN ORDER TO OPPOSE T HE ARGUMENTS ADDRESSED BY LD. AR. 36. PROFILE OF THE BODHTREE IS DESCRIBED AT PAGE 33 OF THE ANNUAL REPORT COMPENDIUM AS UNDER :- BODHTREE HAS ONLY ONE SEGMENT, NAMELY, SOFTWARE DEVELOPMENT. BEING A SOFTWARE SOLUTIONS COMPANY, I T IS ENGAGED IN PROVIDING OPEN AND END-TO-END WEB SOLUTIONS, SOFTWARE CONSULTANCY, DESIGN AND DEVELOPMENT OF SOLUTIONS USING THE LATEST TECHNOLOG IES. IT HAS A LARGE POOL OF SKILLED RESOURCES ON ADVANCE D TECHNOLOGY PLATFORM INCLUDING J2EE, MICROSOFT, NET AND LINUX PLATFORMS. BODHTREE IS ISO CERTIFIED AND HAS A PRESENCE IN USA AND SOUTH EAST ASIAN COUNTRIES. ITA NO.5922/DEL/2012 18 37. BODHTREE WAS FOUNDED AS A PRODUCT ENGINEERING C OMPANY AND CONTINUES TO DELIVER WORLD-CLASS PRODUCT ENGINE ERING SERVICES RANGING FROM APPLICATION DEVELOPMENT AND MAINTENANC E, WEB DEVELOPMENT AND OUTSOURCED PRODUCT DEVELOPMENT TO Q A AND MANAGED TESTING SERVICES. APPLYING AGILE AND SCRUM -BASED METHODOLOGIES, WE ENGAGED CUSTOMERS IN A HIGHLY INT ERACTIVE PROCESS TO DEVELOP SUPERIOR SOFTWARE PRODUCTS ON TI MELINES THAT BEAT THE COMPETITION TO MARKET AT REDUCED OPERATI ONAL COSTS AND RISK. 38. FURTHERMORE, THE TAXPAYER PROVED ON FILE HIGHLY VOLATILE MARGIN OF BODHTREE WHICH IS REPRODUCED FOR READY PE RUSAL FORM THE SYNOPSIS GIVEN BY THE TAXPAYER AS UNDER :- FINANCIAL YEAR MARGIN %AGE 2004-05 25.24% 2005-06 14.66% 2006-07 33.20% 2007-08 19.14% 2008-09 64.04% 2009-10 34.39% 2010-11 -4.10% 39. COMPARABILITY OF BODHTREE VIS--VIS SOFTWARE DE VELOPER HAS BEEN EXAMINED BY THE COORDINATE BENCH OF THE TRIBUN AL IN INTOTO SOFTWARE INDIA (P.) LTD. (SUPRA) AND HAS ORDERED TO EXCLUDE ON THE GROUND THAT THE BODHTREE IS NOT INTO SOFTWARE DEVEL OPMENT SERVICES AND ITS SEGMENTAL DATA IS NOT AVAILABLE. ITA NO.5922/DEL/2012 19 40. KEEPING IN VIEW THE FACT THAT BODHTREE IS A PRO DUCT DEVELOPER AND INTO DIVERSIFIED FUNCTION AND NO SEGM ENTAL DATA IS AVAILABLE AND ITS MARGIN IS HIGHLY VOLATILE, IT IS NOT A SUITABLE COMPARABLE VIS--VIS THE TAXPAYER WHICH IS A ROUTIN E SOFTWARE DEVELOPER. SO, IN THE GIVEN CIRCUMSTANCES, WE ORDE R TO EXCLUDE BODHTREE FROM THE FINAL SET OF COMPARABLES FOR BENC HMARKING THE INTERNATIONAL TRANSACTIONS. ZYLOG SYSTEMS LTD. (ZYLOG) 41.. THE TAXPAYER SOUGHT TO EXCLUDE ZYLOG FROM THE FINAL SET OF COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRAN SACTIONS ON THE GROUNDS INTER ALIA THAT ZYLOG IS IN THE DEVELOPMENT OF SOFTWARE PRODUCTS HAVING NO SEGMENTAL FINANCIALS; THAT ZYLOG HAS UNDERGONE EXTRA ORDINARY EVENTS DURING THE YEAR UNDER ASSESSM ENT. 42. LD. DR RELIED UPON TPO/DRP IN ORDER TO OPPOSE T HE ARGUMENTS ADDRESSED BY LD. AR. 43. PERUSAL OF THE ANNUAL REPORT OF ZYLOG, AVAILABL E AT PAGES 383 TO 434 OF THE ANNUAL REPORT COMPENDIUM, PARTICULARL Y PAGE 399, SHOWS THAT IN THE INTANGIBLE ASSETS, ZYLOG HAS SHOW N PRODUCT DEVELOPMENT COST OF RS.1787.57 LAKHS. SO, IT IS A PRODUCT COMPANY. FROM PAGE 393, IT IS ALSO PROVED THAT DUR ING THE YEAR UNDER ASSESSMENT, ZYLOG HAS ACQUIRED ANADOS SOFTWAR E LIMITED, A ITA NO.5922/DEL/2012 20 UK BASED LIFE INSURANCE PRODUCT COMPANY AND EWAK CR EATIVE COMPUSOFT LIMITED, CHEENAI BASED REPLACEMENT TECHNO LOGY SOLUTION PROVIDER. BENEFITS FROM SUCH ACQUISITIONS , AS ENVISAGED, INCLUDE ACCESS TO NEW CLIENTS, NEW GEOGRAPHICAL ARE AS AND NEW SERVICE OFFERINGS AS WELL AS AN INCREASE IN PER-CAP ITA REVENUE PRODUCTIVITY. 44. HONBLE HIGH COURT OF ANDHRA PRADESH IN CASE CI TED AS CIT VS. M/S. INTOTO SOFTWARE INDIA PVT. LTD. IN ITTA NO .233 OF 2014 DATED 27.03.2014 DECIDED THE IDENTICAL ISSUE OF DIFFERENCES BETWEEN A PRODUCT AND SOFTWARE DEVELOPMENT SERVICES PROVIDER IN ASSESSEES FAVOUR BY RETURNING THE FOLLOWING FINDIN GS :- HAVING HEARD BOTH THE PARTIES AND HAVING GONE THROUGH THE MATERIAL ON RECORD, WE FIND THAT THE TP O AT PAGE 37 OF HIS ORDER HAS BROUGHT OUT THE DIFFERENCE S BETWEEN A PRODUCT COMPANY AND A SOFTWARE DEVELOPMENT SERVICES PROVIDER. THUS, IT IS CLEAR TH AT HE IS AWARE OF THE FUNCTIONAL DISSIMILARITY BETWEEN A PRODUCT COMPANY AND A SOFTWARE DEVELOPMENT SERVICE PROVIDER. HAVING TAKEN NOTE OF THE DIFFERENCE BETWE EN THE TWO FUNCTIONS, THE ASSESSING OFFICER OUGHT NOT TO HAVE TAKEN THE COMPANIES WHICH ARE INTO BOTH THE PRODUCT DEVELOPMENT AS WELL AS SOFTWARE DEVELOPMENT SERVICE PROVIDER AS COMPARABLES UNLESS THE SEGMENTA L DETAILS ARE AVAILABLE.' 45. FURTHERMORE, PERUSAL OF THE PROFIT & LOSS ACCOU NT OF ZYLOG, AVAILABLE AT PAGE 425 OF THE ANNUAL REPORT COMPENDI UM, SHOWS THAT ITS INCOME FROM SOFTWARE DEVELOPMENT SERVICES AND P RODUCT ITA NO.5922/DEL/2012 21 OVERSEAS IS RS.4,03,43,04,874/- AS ON 31.03.2007 AN D RS.6,05,94,45,088 AS ON 31.03.2008 HAVING NO SEGMEN TAL DETAIL. SO, KEEPING IN VIEW THE FACT THAT ZYLOG IS A PRODUC T COMPANY WITH NO SEGMENTAL FINANCIALS AND HAD BEEN INTO ACQUISITI ON DURING THE YEAR UNDER ASSESSMENT, IS NOT A SUITABLE COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS, HENCE ORDER TO BE EXCLUDED. GROUND NO.8 46. GROUND NO.8 IS DISMISSED HAVING NOT BEEN PRESSE D DURING THE COURSE OF ARGUMENTS. GROUND NO.9 47. THE TAXPAYER CHALLENGED TRADING OF FOREIGN EXCH ANGE LOSS/ GAIN AS NON-OPERATING ITEM IN NATURE BY THE TPO/DRP ON THE GROUND THAT THE SAME IS REQUIRED TO BE TREATED AS A N ITEM OF OPERATING REVENUE/COST IN CASE OF THE TAXPAYER AS W ELL AS COMPARABLES AND RELIED UPON THE DECISION RENDERED B Y SPECIAL BENCH OF THE TRIBUNAL IN ACIT VS. PRAKASH I. SHAH (2008) 115 ITD 167 (MUM.)(SB) AND TECHBOOKS INTERNATIONAL (P.) LTD. VS. DCIT (2015) 63 TAXMANN.COM 114 (DELHI TRIB.) . ITA NO.5922/DEL/2012 22 48. NOW, THE QUESTION ARISES FOR DETERMINATION IN T HIS CASE IS :- AS TO WHETHER FOREIGN LOSS/GAIN IS PART OF THE OPE RATING COST/ INCOME WHILE COMPUTING THE PROFIT LEVEL INDIC ATOR FOR THE TESTED PARTY AS WELL AS COMPARABLES? 49. LD. DR RELIED UPON TPO/DRP IN ORDER TO OPPOSE T HE ARGUMENTS ADDRESSED BY LD. AR. 50. THE ISSUE HAS ALREADY BEEN SET AT REST BY THE C OORDINATE BENCH OF THE TRIBUNAL IN TECHBOOKS INTERNATIONAL (P.) LTD. (SUPRA), THE RATIO OF WHICH IS FOR DETERMINING THE ALP FOREIGN EXCHANGE LOSS / GAIN ARISING FROM THE TRANSACTION O F REVENUE NATURE ARE REQUIRED TO BE CONSIDERED AS PART OF OPERATING PROFIT/COST OF THE ASSESSEE AS WELL AS THAT OF THE COMPARABLES. THE L D.TPO WHILE COMPUTING THE OP/OC OF THE COMPARABLES TREATED THE AMOUNT OF FOREIGN EXCHANGE GAIN/LOSS AS NON-OPERATING ITEM WH EREAS IN CASE OF THE TAXPAYER FOREIGN EXCHANGE GAIN AND LOSS HAS BEEN TREATED AS OPERATING ITEM. HOWEVER, BOTH THE TAXPAYER AS WELL AS COMPARABLE COMPANIES IS REQUIRED TO BE ON THE SAME PAGE FOR TR EATING FOREIGN EXCHANGE LOSS/GAIN ARISING FROM TRANSACTIONS OF REV ENUE NATURE AS AN OPERATING ITEM. SO, THE TPO IS DIRECTED TO COMP UTE THE ALP ACCORDINGLY. SO, THIS GROUND IS ALLOWED FOR STATIS TICAL PURPOSES. ITA NO.5922/DEL/2012 23 GROUND NO.10 51. LD. TPO AS WELL AS LD. DRP HAVE DENIED THE WORK ING CAPITAL WITH ADJUSTMENT CLAIMED BY THE TAXPAYER. THE LD. A R FOR THE TAXPAYER SUBMITTED THAT HIGH LEVELS OF WORKING CAPI TAL CREATE COSTS EITHER IN THE FORM OF INCURRED INTEREST OR IN THE F ORM OF OPPORTUNITY COSTS AND AS SUCH, NO PROFIT MAXIMIZING OR ENTREPRE NEURIAL FIRM WOULD HOLD WORKING CAPITAL WITHOUT A RETURN AND REL IED UPON RULE 10B (3) OF THE INCOME-TAX RULES, 1962 WHICH ARE REP RODUCED AS UNDER :- RULE 10B 3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 52. LD. DR RELIED UPON TPO/DRP IN ORDER TO OPPOSE T HE ARGUMENTS ADDRESSED BY LD. AR. 53. IT IS A SETTLED PRINCIPLE OF LAW THAT FOR REASO NABLY ACCURATE ADJUSTMENTS TESTED PARTY AS WELL AS COMPARABLES SHO ULD BE ON THE ITA NO.5922/DEL/2012 24 SAME PAGE. HOWEVER, SO FAR AS ISSUE OF WORKING CAP ITAL ADJUSTMENT IS CONCERNED THAT THE LD. TPO DISALLOWED THE SAME F OR LACK OF SUFFICIENT DATA AS THE AUDITED ACCOUNTS OF THE TAXP AYER DO NOT SHOW THAT IT HAS RECEIVED ANY ADVANCE FROM ITS AE. SO, WE ARE OF THE CONSIDERED VIEW THAT IN THE ABSENCE OF ANY RELIABLE DATA, WORKING CAPITAL ADJUSTMENT CANNOT BE GRANTED. SO, THE ASSE SSEE IS DIRECTED TO PROVIDE COMPLETE COMPUTATION TO AVAIL OF THE FAC ILITY OF WORKING CAPITAL ADJUSTMENT AND THEREAFTER TPO IS DIRECTED T O DECIDE THIS ISSUE AFRESH. 54. SIMILARLY, SO FAR AS QUESTION OF DENIAL OF RISK ADJUSTMENT TO THE TAXPAYER BY THE LD. TPO/DRP IS CONCERNED, THE S AME HAS ALSO BEEN DENIED ON THE GROUND THAT THE TAXPAYER HAS FAI LED TO PROVIDE ANY BACK UP CALCULATION FOR CLAIM OF RISK ADJUSTMEN T. SO, IN THE GIVEN CIRCUMSTANCES, WE ARE OF THE CONSIDERED VIEW THAT LD. TPO IS TO RE-EXAMINE THE ISSUE ON PROVIDING BACK UP CALCUL ATION BY THE TAXPAYER FOR THE CLAIM OF RISK ADJUSTMENT. CONSEQU ENTLY, GROUND NO.10 IS ALLOWED FOR STATISTICAL PURPOSES. GROUNDS NO.11 & 12 55. AO MADE AD HOC ADDITION OF RS.4,32,12,968/- ON ACCOUNT OF INCOME FROM MAINTENANCE, ENHANCEMENT AND SUPPORT SE RVICES (ADVANCE BILLING / DEFERRED REVENUE) BY RELYING UPO N THE EARLIER ITA NO.5922/DEL/2012 25 PRECEDENT OF AY 2007-08 QUA WHICH APPEAL HAS ALSO B EEN ADMITTED BY THE HONBLE HIGH COURT ON QUESTION OF LAW. UNDI SPUTEDLY, THIS ISSUE HAS ALREADY BEEN COVERED IN FAVOUR OF THE TAX PAYER VIDE ORDER PASSED BY THE COORDINATE BENCH OF THE TRIBUNAL IN ITA NOS.584 & 585/DEL/2006 AND 322/DEL/2007 FOR AYS 2001-02, 2002 -03 AND 2003-04 IN M/S. UGS INDIA PRIVATE LTD. VS. ACIT , COPY OF WHICH IS AVAILABLE AT PAGES 46 TO 64 OF THE PAPER BOOK, F URTHER RELIED UPON IN ASSESSEES OWN CASE FOR AY 2007-08. 56. LD. DR RELIED UPON TPO/DRP IN ORDER TO OPPOSE T HE ARGUMENTS ADDRESSED BY LD. AR. 57. COORDINATE BENCH OF THE TRIBUNAL WHILE DECIDING THE IDENTICAL ISSUE IN ASSESSEES OWN CASE IN ITA NOS.584 & 585/DEL/2006 AND 322/DEL/2007 (SUPRA) AS GROUND NO.2 RETURNED THE FINDINGS IN FAVOUR OF THE TAXPAYER AS UNDER :- 5.1 THE APPELLANT SELLS THE SOFTWARE PRODUCTS. IN ADDITION TO THE SALE OF SOFTWARE, THE APPELLANT, AT THE OPTION OF THE CUSTOMER, ALSO PROVIDES MAINTENANCE ENHANCEMENT & SUPPORT SER VICES (ME&S SERVICES). THE REVENUE RELATING TO THE ME&S S ERVICES ARE RECOGNIZED ON MONTHLY BASIS OVER A PERIOD WHEN THESE SERVICES ARE TO BE RENDERED. THUS, THE REVENUE FOR SERVICES WHICH ARE TO BE PROVIDED AFTER THE END OF THE YEAR IS ACC OUNTED FOR IN BOOKS IN THE SUBSEQUENT YEAR WHEN SERVICES ARE ACTU ALLY RENDERED. 5.2 THE ABOVE PROCEDURE OF ACCOUNTING IS CONSISTENT LY FOLLOWED BY THE APPELLANT AND IS ALSO SO DECLARED I N ITS ACCOUNTING POLICY NO.2 IN THE 'SIGNIFICANT ACCOUNTI NG POLICIES AND NOTES TO THE ACCOUNTS' FORMING INTEGRAL PART OF THE AUDITED BALANCE SHEET WHICH WAS ATTACHED WITH THE RETURN OF INCOME. ITA NO.5922/DEL/2012 26 5.3 THE ABOVE ACCOUNTING PROCEDURE IS STATED TO BE BASED ON ACCOUNTING STANDARD-9 'REVENUE RECOGNITION' ISSUED BY THE ICAI. THE AO HELD THAT THE ENTIRE AMOUNT RAISED IN THE BI LL IS INCOME OF THE YEAR AND TO BE TAXED ACCORDINGLY AS (I) AMOUNT NOT SEPARATELY SHOWN IN INVOICE; (II) AMOUNT IS UNCERTAIN AND CANN OT BE CALCULATED; (III) SALES-TAX RETURN SHOWS TOTAL AMOU NT AS SALE; (IV) NO TAX IS DEDUCTED BY PAYER ON SUCH SUM; AND (V) IT IS A DEVICE TO DEFER PAYMENT OF TAX. 5.4 LEARNED COUNSEL FOR ASSESSEE SUBMITTED THAT IT IS NOT CORRECT TO SAY THAT THE AMOUNT OF ME&S SERVICES IS NOT DETERMINED. WHERE ME&S IS PROVIDED ALONGWITH THE SA LE OF SOFTWARE, THE INVOICE CONTAINS ONE CONSOLIDATED FIG URE BUT THE DETAILS OF ME&S ARE INVARIABLY AVAILABLE IN THE DET AILS ATTACHED WITH THE INVOICE. IN ANY CASE, THE PERIOD OF ME&S I S INVARIABLY MENTIONED ON THE FACE OF THE INVOICE. WHERE THE ME& S IS PROVIDED INDEPENDENTLY OF SALE OF SOFTWARE, A SEPAR ATE INVOICE OF ME&S IS RAISED. THIS POSITION WAS EXPLAINED TO THE AO AND CIT(A) PARTICULARLY FOR ASSESSMENT YEAR 2003-04. SI NCE THE AO DID NOT SPECIFICALLY ASKED FOR ANY CLARIFICATION IN THE MATTER, THERE WAS NO OCCASION TO FURTHER EXPLAIN THE FACTUAL POSI TION DURING PROCEEDINGS FOR ASSTT. YEAR 2001-02. SINCE CONSOLID ATED INVOICE IS RAISED, ENTIRE AMOUNT IS BEING SHOWN AS LIABLE TO S ALES-TAX. FOR THE SAME REASON, THERE IS NO TDS. BUT AFTER SERVICE -TAX HAS BEEN LEVIED ON ME&S, SERVICE TAX IS BEING DULY CHARGED. RELIANCE WAS PLACED ON THE DECISION OF TREASURE ISLAND RESORTS ( P) LTD. VS. DCIT, 90 ITD 814 (HYD) WHEREIN IT WAS HELD AS UNDER : 'READING THEM ALL TOGETHER, THE PRINCIPLE IS THAT W HEN SERVICE IS PROVIDED ON A CONTINUING BASIS AND THE C OST RELATING TO THE SERVICE FALLS IN A DIFFERENT YEAR, REVENUE SHOULD BE RECOGNIZED ON A TIME BASIS. GOING BY THIS GENERAL IMPORT OF ITEM 6 IN THE APPENDIX AND THE WO RDING IN THE BODY OF THE ACCOUNTING STANDARD-9 ITSELF, IT IS CLEAR THAT THE ASSESSEE CONFORMED TO THE ACCOUNTING STAND ARD-9 AND AS SUCH, THE BOOK RESULTS DESERVE TO BE ACCEPTE D. IN THE LIGHT OF THE FOREGOING DISCUSSION, WE ARE OF THE VIEW THAT THE AO IS NOT JUSTIFIED IN BRINGING TO TAX THE ENTIRE MEMBERSHIP FEE COLLECTED TO TAX IN THE YEAR UNDER A PPEAL. WE, ACCORDINGLY, SET ASIDE THE IMPUGNED ORDERS OF T HE REVENUE AUTHORITIES ON THIS ASPECT AND DIRECT THE A O TO MODIFY THE ASSESSMENT ACCORDINGLY.' 5.5 THE LEARNED DR, ON THE OTHER HAND, RELIED UPON THE REASONING OF LEARNED CIT(A) EXTRACTED HEREINABOVE. ITA NO.5922/DEL/2012 27 6. WE HAVE CONSIDERED RIVAL SUBMISSIONS. ON THE BA SIS OF SUBMISSIONS MADE BEFORE AO AND BEFORE US, IT CAN BE HELD THAT WHERE THE ASSESSEE SELLS THE SOFTWARE/LICENSE WITH FREE WARRANTY, FULL INVOICE AMOUNT IS RECOGNIZED AS REVENUE. HOWEV ER, WHERE THE SALE OF SOFTWARE LICENSE IS WITH EXTENDED PERIO D OF WARRANTY OR WITH THE PAID MAINTENANCE ENHANCEMENT AND SUPPORT S ERVICES, EXTRA AMOUNT IS BEING CHARGED THOUGH NOT SEPARATELY MENTIONED IN THE INVOICE. HOWEVER, THE SAME CAN BE MEASURED C OMPARED TO INVOICES FOR SALE OF SAME SOFTWARE WHETHER MES SERV ICES ARE INCLUDED OR NOT. THUS, WHEN THE ASSESSEE CHARGES EX TRA SUM FOR MES SERVICES, THE REVENUE IN THIS REGARD CAN BE REC OGNIZED ONLY AFTER SUCH SERVICES ARE RENDERED OR THE PERIOD OF C ONTRACT IS OVER. HON'BLE DELHI HIGH COURT IN THE CASE OF UTTAM SINGH DUGGAL & CO. VS. CIT, 127 ITR 21 RECOGNIZED THIS PRINCIPLE O F MATCHING REVENUE WITH COST. ON GENERAL PRINCIPLE, IT WAS HEL D THAT IF NO WORK IS DONE IN THE YEAR OF RECEIPT OF SUM, IT HAS TO BE TREATED AS KIND OF ADVANCE PAYMENT AND WHEN THE WORK WAS DONE THEREAFTER AND EXPENDITURE IN THIS REGARD IS CLAIMED, INCOME T O THAT EXTENT WILL BE TAXABLE IN' THE SUBSEQUENT YEAR. EVEN IF TH E' AMOUNT IS NOT SEPARATELY SHOWN IN INVOICE THE EFFECT REMAIN THAT ADDITION SUM WAS CHARGED FOR ME&S SERVICES. THE AMOUNT IS NOT UN CERTAIN NOT TO BE CALCULATED. THE AMOUNT CAN VERY WELL BE A RRIVED AT BEST ON THE SALE PRICE OF SOFTWARE SOLD WITH OR WITHOUT ME&S SERVICES. THE SALES-TAX RETURN CANNOT BE A CRITERIA TO DETERM INE WHAT IS THE INCOME ACCRUING OR ARISING TO THE ASSESSEE. EVEN IF THE PAYER DO NOT DEDUCT TAX AT SOURCE, IT WILL NOT DETERMINE THE TAXABILITY OR OTHERWISE OF THE SUM CHARGEABLE TO TAX. THUS, THERE IS NOTHING LIKE DEVICE TO DEFER PAYMENT OF TAXES DUE BUT AS PE R THE RECOGNIZED METHOD OF ACCOUNTING OF MATCHING REVENUE WITH COST, THE INCOME ACCRUES ONLY IN THE SUBSEQUENT YEAR WHEN SUCH SERVICES ARE PROVIDED. THIS IS IN FORM OF A PROVISI ON FOR WARRANTY CLAIMS WHICH IS ALSO RECOGNIZED BY HON'BLE DELHI HI GH COURT IN THE CASE OF CIT VS. VINTEC CORPORATION P. LTD., 278 ITR 337 WHEREIN IT WAS HELD THAT PROVISION FOR WARRANTIES E MBEDDED IN THE SALE PRICE IS AN ASCERTAINED LIABILITY AND TO T HAT EXTENT, REVENUE NEED NOT BE RECOGNIZED. WE ACCORDINGLY HOLD THAT THE AMOUNT TREATED AS DEFERRED REVENUE BY THE ASSESSEE IS NOT TO BE BROUGHT TO TAX IN THE YEAR UNDER CONSIDERATION BUT TO BE TAXED IN THE YEAR WHEN SUCH SERVICES ARE RENDERED OR RECOGNI ZED AS INCOME BY THE ASSESSEE. 58. LD. DR FOR THE REVENUE HAS FAILED TO CONTROVERT THE FACT THAT THE FACTS OF THE YEAR UNDER ASSESSMENT ARE IDENTICA L TO THE EARLIER YEARS OF AYS 2001-02, 2002-03, 2003-04 AND 2007-08. SO, IN THE GIVEN CIRCUMSTANCES, BY FOLLOWING THE AFORESAID ORD ER PASSED BY ITA NO.5922/DEL/2012 28 THE COORDINATE BENCH OF THE TRIBUNAL, AMOUNT TREATE D AS DEFERRED REVENUE IS NOT BROUGHT TO BE TAXED IN THE YEAR UNDE R CONSIDERATION BUT TO BE TAXED IN THE YEAR WHEN SUCH SERVICES ARE RENDERED OR RECOGNIZED A INCOME OF THE TAXPAYER. SO, GROUNDS N O.11 & 12 ARE DETERMINED IN FAVOUR OF THE TAXPAYER. GROUND NO.13 59. GROUND NO.13 QUA LEVY OF PENALTY U/S 271(1)(C) OF THE ACT BEING PREMATURE IN NATURE NEEDS NO SPECIFIC FINDING S. GROUNDS NO.14 & 15 60. GROUNDS NO.14 & 15 QUA LEVY OF INTEREST U/S 234 B AND 244A OF THE ACT RESPECTIVELY NEED NO SPECIFIC FINDING BE ING CONSEQUENTIAL IN NATURE. 61. RESULTANTLY, THE APPEAL OF THE ASSESSEE IS ALLO WED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 22 ND DAY OF JANUARY, 2018. SD/- SD/- (B.P. JAIN) (KULDIP SING H) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 22 ND DAY OF JANUARY, 2018 TS ITA NO.5922/DEL/2012 29 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.