SAIC India Pvt. Ltd., Noida V. DCIT, New Delhi

ITA 6464/DEL/2012

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7228 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 5 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-06-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 06-06-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 28-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Related party transaction; Depreciation; Transfer pricing; Business expenditure; Double taxation relief; Opportunity of being heard; International transaction; Retrospective amendment; Working capital adjustments; Non-deduction of tax; Revenue expenditure; Capital expenditure
• Section: 10B; 37; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI KULDIP SINGH, JUDICIAL MEMBER AND SHRI N.K. SAINI, ACCOUNTANT MEMBER ITA NO.6464/DEL./2012 (ASSESSMENT YEAR : 2008-09) M/S. SAIC INDIA PRIVATE LIMITED, VS. DCIT, (FORMERLY KNOWN AS SCICOM TECHNOLOGIES CIRCLE 7 (1 ), PRIVATE LIMITED), NEW DELHI. (NOW KNOWN AS WIPRO ENERGY IT SERVICES INDIA PRIVATE LIMITED), C/O WIPRO ENERGY IT SERVICES INDIA PRIVATE LIMITED, A 67, SECTOR 57, NOIDA. (PAN : AAACI6192A) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI S.D. KAPILA, R.R. MAURYA, SANJAY KUMAR, ADVOCATES AND SHRI PANKAJ, CA REVENUE BY : SHRI PIYUSH JAIN, CIT DR DATE OF HEARING : 06.06.2016 DATE OF ORDER : 27.06.2016 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : APPELLANT, M/S. SAIC INDIA PRIVATE LIMITED (HEREINA FTER REFERRED TO AS THE ASSESSEE), BY FILING THE PRESE NT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER PASSED BY THE AO/TPO/D RP QUA THE ASSESSMENT YEAR 2008-09 ON THE GROUNDS INTER ALIA T HAT :- ITA NO.6464/DEL./2012 2 I. CORPORATE TAX GROUNDS 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD. AO ERRED IN HOLDING THAT T HE EXPENDITURE INCURRED IN RELATION TO RECRUITMENT AND TRAINING OF EMPLOYEES IS ENDURING IN NATURE AND THE REBY ALLOWING DEDUCTION OF ONLY 1/5TH OF THE TOTAL EXPEN DITURE OF RS.53,90,160 ONLY. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO ERRED IN HOLDING THAT THE QU ALITY AUDIT EXPENSE FOR CERTIFICATION IS NOT IN THE NATUR E OF REVENUE EXPENDITURE AND THEREBY DISALLOWING SUM OF RS.3,60,220. 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO ERRED IN DISALLOWING SUM OF RS.1,80,120 FOR PURCHASE OF SOFTWARE UNDER SECTION 40 (A) OF THE ACT HOLDING SUCH PAYMENT TO BE COVERED UNDER THE HEAD FEE FOR TECHNICAL SERVICES / ROYALTY AND THERE BY HOLDING THAT THE ASSESSEE WAS REQUIRED TO WITHHOLD TAXES ON SUCH PAYMENT. 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO ERRED IN TREATING THE PAYMEN T OF RS.1,68,17,587 TOWARDS RETENTION BONUS AS CAPITAL EXPENDITURE TO BE SPREAD OVER FIVE YEARS AND THEREB Y ALLOWING DEDUCTION OF RS.42,04,257, BEING ONLY 1/5T H OF THE EXPENDITURE. II. TRANSFER PRICING GROUNDS 5. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE ORDER PASSED BY THE LD. AO IS BAD IN LAW AND VOID AB-INITIO. 6. THE LD. AO/LD. TPO ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE IN DETERMINING THE ARM'S LENGTH ADJUSTMENT UNDER SECTION 92CA(3) OF THE ACT, TO THE ASSESSEE'S INTERNATIONAL TRANSACTIONS AND THEREBY M AKING AN ADDITION OF RS.83,695,508. ITA NO.6464/DEL./2012 3 7. THAT THE REFERENCE MADE BY THE LD. AO SUFFERS FROM JURISDICTIONAL ERROR AS THE LD. AO HAS NOT REC ORDED ANY REASONS IN THE ASSESSMENT ORDER BASED ON WHICH HE REACHED THE CONCLUSION THAT IT WAS 'EXPEDIENT AND NECESSARY' TO REFER THE MATTER TO THE LD. TPO FOR COMPUTATION OF THE ARM'S LENGTH PRICE, AS IS REQUIR ED UNDER SECTION 92CA(1). 8. THE LD. TPO ERRED IN LAW IN:- 8.1 COMMITTING BREACH OF PRINCIPAL OF NATURAL JUSTI CE BY CHANGING THE MARGINS OF CERTAIN COMPARABLE COMPANIES IN HIS ORDER AND THUS ADOPTING PROFIT MAR GINS DIFFERENT FROM THOSE INDICATED IN THE SHOW-CAUSE NO TICE ISSUED TO THE APPELLANT. 8.2 THAT THE LD. DRP ERRED IN NOT CONSIDERING THE ASSESSEE'S EXPLANATION IN RESPECT OF DETERMINATION OF ALP BY THE TPO. 9. THE LD. AO/LD. TPO/LD. DRP ERRED IN-REJECTING APPELLANT'S PLEA THAT KEEPING IN VIEW THE PECULIAR FACTS OF THE CASE THIS YEAR, THE PROVISO TO RULE 10B(4) OF T HE INCOME TAX RULES, 1962 . 10. THE LD. AO/LD. TPO/LD. DRP ERRED ON FACTS AND IN LAW IN DETERMINING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS:- 10.1 IN REJECTING, ARBITRARILY THE COMPARABILITY A NALYSIS CONDUCTED BY THE ASSESSEE FOR DETERMINING THE ARM'S LENGTH PRICE ON THE BASIS OF SURMISES AND PRESUMPTI ONS. 10.2 IN NOT TAKING INTO CONSIDERATION THE FACT THA T, DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE H AD UNDERGONE A CHANGE IN ITS BUSINESS STRUCTURE AND TH IS EXTRAORDINARY EVENT WAS A MATERIAL FACTOR FOR THE P URPOSE OF DETERMINING THE ARM'S LENGTH PROFIT MARGIN. IT M AY BE NOTED THAT THE ASSESSEE HAS MAINTAINED HIGH PROFITA BILITY IN ALL THE PRIOR AND PRECEDING YEARS. THUS, THE SAM E SHOULD HAVE BEEN CONSIDERED WHILE EVALUATING THE TRANSFER PRICING ANALYSIS FOR THE ASSESSEE. ITA NO.6464/DEL./2012 4 10.3 IN REJECTING THE COMPARABLE COMPANIES ADOPTED BY THE ASSESSEE ON THE BASIS OF ADDITIONAL OR MODIFIED FILTERS APPLIED BY HIM, WHICH LACKED VALID AND SUFFICIENT REASONING. 10.4 IN REJECTING THE COMPANIES WHICH ARE FUNCTIONA LLY COMPARABLE TO THE ASSESSEE. SIMILARLY, THE LD. AO/T PO ERRED BY RETAINING COMPANIES WHICH WERE NOT COMPARABLE TO THE ASSESSEE. 10.5 IN NOT PROVIDING ADJUSTMENT FOR THE DIFFERENC ES IN THE WORKING CAPITAL PROFILE OF THE ASSESSEE VIS A V IS COMPARABLES. 10.6 IN INCLUDING RETENTION BONUS AS A PART OF OPER ATING EXPENSES. 11. THE LD. AO/TPO ERRED IN FACTS AND IN LAW IN NOT PROVIDING ASSESSEE ANY OPPORTUNITY OF BEING HEARD O N SUBJECTIVE GROUNDS TAKEN BY HIM. 12. THE LD. AO/TPO ERRED IN LAW IN NOT GIVING THE F ULL EFFECT TO THE DIRECTIONS OF DRP. 13. THE LEARNED TPO AND THE LEARNED AO ERRED IN NOT ALLOWING THE BENEFIT OF RANGE OF +/- 5% AS PROVIDED IN PROVISO TO SECTION 92C(2) OF THE ACT TO THE APPELLA NT, WHILE DETERMINING THE ARM' S LENGTH PRICE. 14. THE LD. AO ERRED IN DETERMINING INTEREST U/S 23 4B AND 234C OF THE INCOME TAX ACT. 2. BRIEFLY STATED THE FACTS OF THIS CASE ARE : A RE FERENCE HAS BEEN MADE BY THE AO UNDER SECTION 92CA (3) OF THE INCOME -TAX ACT, 1961 (FOR SHORT THE ACT) TO THE TRANSFER PRICING OFFICER (TPO) TO DETERMINE THE ARMS LENGTH PRICE (ALP) IN RESPECT O F THE INTERNATIONAL TRANSACTIONS ENTERTAINED INTO BY THE ASSESSEE DURING THE FINANCIAL YEAR 2007-08. ASSESSEE COMPANY IS A PROVIDER OF ITA NO.6464/DEL./2012 5 ENGINEERING AND TECHNOLOGY APPLICATION SOLUTION AND CONCENTRATES ON USING ITS DOMAIN KNOWLEDGE TO PROVIDE SOLUTION T O WIDE RANGE OF INDUSTRIES VIZ. ENERGY, ENVIRONMENT, FINANCIAL SERV ICES, HEALTH CARE, LIFE SCIENCES, NATIONAL SECURITY, SPACE, TELECOMMUN ICATIONS, TRANSPORT, ETC. 3. ASSESSEE COMPANY ENGAGED IN THE PROFESSION OF SO FTWARE DEVELOPMENT SERVICES TO ITS GROUP COMPANY DURING TH E FINANCIAL YEAR 2007-08. THE ASSESSEE COMPANY FORMERLY KNOWN AS SCICOM TECHNOLOGIES PRIVATE LIMITED WHICH WAS ACQUIRED BY SAIC USA IN SEPTEMBER 2007 AND CONSEQUENTLY, THE BRANCH OFFI CE OF SAIC BASED IN BANGALORE WAS MERGED WITH SCICOM TECHNOLOG IES PVT. LTD. W.E.F. DECEMBER 2007. PRIOR TO THE ACQUISITIO N OF SAIC, THE COMPANY ACTED AS AN ENTREPRENEUR AND THE TRANSFER P RICING ARRANGEMENT BETWEEN THE COMPANY AND ITS MARKETING S UBSIDIARY WAS BASED ON A REVENUE SPLIT. DURING THE YEAR UNDE R ASSESSMENT, ASSESSEE COMPANY ENTERED INTO INTERNATIONAL TRANSAC TION AS UNDER:- NATURE OF TRANSACTION METHOD VALUE 1 PROVISION OF SOFTWARE DEVELOPMENT SERVICES TNMM 404,411,559 2 COST REIMBURSEMENT PAID TNMM 4,972,708 3 REIMBURSEMENT RECEIVED CUP 10,349,580 4. ASSESSEE COMPANY TO BENCHMARK ITS INTERNATIONAL TRANSACTION FOR PROVISION OF SOFTWARE DEVELOPMENT SERVICES ADOP TED TNMM AS THE MOST APPROPRIATE METHOD AND COMPUTED THE TEST P ARTY MARGIN AT ITA NO.6464/DEL./2012 6 12.08%. ASSESSEE SELECTED 25 COMPARABLES, USED THR EE YEARS DATA AND COMPUTED THEIR MEAN MARGIN AT 13.74% AND CLAIME D ITS INTERNATIONAL TRANSACTION AT ARMS LENGTH. 5. TPO, WHEN COMPARED THE TESTED PARTY MARGIN WITH PROFIT & LOSS ACCOUNT OF THE ASSESSEE, NOTICED THAT A SUM OF RS.1,70,00,000/- BEING THE RETENTION BONUS PAID TO THE EMPLOYEES HAS BEEN TREATED AS NON-OPERATING EXPENDITURE AND CONSEQUENTLY, REDUCED FROM TOTAL EXPENDITURE AND SIMILARLY ANOTHER SUM OF RS.66,84,5 51/- BEING THE FOREIGN EXCHANGE FLUCTUATION HAS BEEN TREATED AS NO N-OPERATING WHEREAS BOTH THESE ITEMS ARE IN THE NATURE OF OPERA TING EXPENSES. ACCORDINGLY, ASSESSEE WAS CALLED UPON TO TREAT RETE NTION BONUS OF RS.1,70,00,000/- AND FOREIGN EXCHANGE FLUCTUATION O F RS.66,84,551/- AS OPERATING EXPENSES COMPUTED AS UN DER :- OPERATING REVENUE RS.46,16,24,534/- OPERATING COST (REVISED) RS.43,55,59,139/- OPERATING PROFIT RS. 2,60,65,395/- OP / OC 5.98% 6. LD. TPO, AFTER CONSIDERING THE CONTENTIONS MADE BY THE ASSESSEE, CAME TO THE CONCLUSION THAT RETENTION BON US PAID BY THE ASSESSEE COMPANY IS TO PROTECT ITS REVENUE AND IS P AID TO EARN OPERATIONAL INCOME AND THUS TO BE TREATED AS OPERAT ING EXPENDITURE AND RECOMPUTED THE TESTED PARTY MARGIN OF OP/OC AT 5.98%. ITA NO.6464/DEL./2012 7 7. LD. TPO APPLIED THE FILTERS VIZ. FUNCTIONAL PROF ILE, COMPANIES HAVING EXPORT SALES OF MORE THAN 25% OF THE TOTAL I NCOME, COMPANIES HAVING EMPLOYEE COST TO TOTAL COST OF 25% ; RELATED PARTY TRANSACTION IS CONSIDERED AT 25% AND USED THE DATA FOR FINANCIAL YEAR 2007-08 FOR BENCHMARKING THE INTERNATIONAL TRA NSACTION. 8. BY APPLYING THE AFORESAID FILTERS, THE LD. TPO, OUT OF 25 COMPARABLES CHOSEN BY THE ASSESSEE FOR BENCHMARKING ITS INTERNATIONAL TRANSACTION, ACCEPTED 5 COMPARABLES O NLY AND PROPOSED TO SELECT 10 COMPARABLES HAVING ARITHMETIC MEAN AT 27.02%. AFTER CONSIDERING THE OBJECTIONS RAISED BY THE ASSESSEE, TPO HAS CHOSEN 10 FINAL COMPARABLE COMPANIES HAVING MEAN MARGIN OF 26.79%. THE LD. TPO ALSO CONSIDERED THE SEGMENTAL RESULT OF KALS INFORMATION SYSTEM LTD., R SYSTEM IN TERNATIONAL AND SASKEN COMMUNICATION TECHNOLOGIES LTD. AND CONSEQUE NTLY MADE AN ADJUSTMENT OF RS.9,06,20,898/- BETWEEN THE DIFFE RENCE IN ALP AND THE PRICE CHARGED BY THE ASSESSEE FROM ITS ASSO CIATED ENTERPRISES (AES) FOR EXPORT SERVICES. 9. ASSESSEE CARRIED THE MATTER BEFORE THE DRP BY RA ISING OBJECTION TO CERTAIN COMPARABLES SELECTED BY LD. TP O VIZ. : I. AARMAN SOFTWARE PRIVATE LIMITED II. ACE SOFTWARE III. BELLS SOFTECH LIMITED IV. CG-VAK SOFTWARE & EXPORTS LIMITED V. HYPERSOFT TECHNOLOGIES LIMITED ITA NO.6464/DEL./2012 8 VI. ICSA INDIA LIMITED VII. IKF TECHNOLOGIES VIII. MELSTAR INFORMATION TECHNOLOGIES LIMITED IX. PRITHVI INFORMATION SOLUTIONS LIMITED X. SYNETAIROS TECHNOLOGIES LIMITED XI. VISHESH INFOTECNICS XII. MAARS SOFTWARE INTERNATIONAL LIMITED AGREEING WITH THE CONTENTIONS RAISED BY THE ASSESSE E COMPANY, ALL THE AFORESAID 12 COMPARABLES HAVE BEEN ORDERED TO B E REJECTED BY THE LD. DRP. HOWEVER, DRP DESPITE RAISING SPECIFIC OBJECTION AS TO FUNCTIONAL DIS-SIMILARITY FOUND FCC SOFTWARE SOLUTI ONS LIMITED AS A CORRECT COMPARABLE AND ALSO ALLOWED THE CONTENTIO N OF THE ASSESSEE COMPANY AS TO KALS INFORMATION SYSTEM LIMI TED. 10. LD. DRP ALSO DIRECTED THE TPO TO EXCLUDE FOREIG N EXCHANGE FLUCTUATION FROM OPERATING INCOME/LOSS OF THE ASSES SEE/COMPARABLES BY ACCEPTING THE CONTENTIONS RAISED BY THE ASSESSEE . HOWEVER, LD. DRP RATIFIED THE OBSERVATION MADE BY AO AS TO DISAL LOWING A SUM OF RS.43,12,128/- OUT OF STAFF RECRUITMENT EXPENSES OF RS.53,90,160/- AND TRAINING EXPENSES OF RS.16,01,15 3/- AFTER ALLOWING 1/5 TH OF THESE EXPENSES AND RETENTION BONUS EXPENSES. FEELING AGGRIEVED, THE ASSESSEE COMPANY HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 11. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVE S OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ITA NO.6464/DEL./2012 9 ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 12. AT THE VERY OUTSET, LD. AR FOR THE ASSESSEE BY MOVING AN APPLICATION UNDER RULE 11 OF THE INCOME TAX APPELLA TE TRIBUNAL RULES SOUGHT TO RAISE THE ADDITIONAL GROUND AS UNDE R :- THAT ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE THE AUTHORITIES BELOW SHOULD HAVE EXCLUDED FOLLOWING COMPARABLES:- 1. BODHTREE CONSULTING LTD. 2. ZYLONG SYSTEMS LTD. 3. LANCO GLOBAL SYSTEMS LTD. 4. GOLDSTONE TECHNOLOGIES LTD. 5. FCS SOFTWARE SOLUTIONS LTD. 6. KALS INFORMATION SYSTEM LTD. ON THE GROUNDS INTER ALIA THAT THE ASSESSEE HAS SOU GHT TO EXCLUDE FCC SOFTWARE AND KALS INFORMATION BEFORE THE LOWER REVENUE AUTHORITIES BUT REJECTED THE PLEA RAISED BY THE ASS ESSEE; THAT THE PLEA RAISED BY THE ASSESSEE FOR EXCLUSION OF THE COMPANI ES REFERRED IN THE ADDITIONAL GROUND IS BASED UPON THE FINDINGS AN D RULINGS OF THE TRIBUNAL WHICH WERE NOT AVAILABLE IN THE PUBLIC DOM AIN AT THAT TIME; THAT THE ASSESSEE CANNOT BE ESTOPPED TO SEEK EXCLUSION OF THE COMPARABLES FROM THE FINAL LIST OF COMPARABLES AND RELIED UPON THE JUDGMENT CITED AS (I) KEDARNATH JUTE MFG. CO. LTD. VS. CIT 82 ITR 363; (II) CWT VS. MEATTLES (P_ LTD. 156 ITR 5 69; (III) CIT VS. MRS. V. CHANDRA 245 ITR 610; (IV) DIRECTO R OF ITA NO.6464/DEL./2012 10 INSPECTION OF INCOME-TAX (INV.) VS. POORAN MALL & S ONS 96 ITR 390; (V) PV DOSHI VS. CIT 113 ITR 22 (GUJ.). 13. HOWEVER, ON THE OTHER HAND, LD. DR OPPOSED THE APPLICATION ON THE GROUNDS INTER ALIA THAT THE ASSESSEE CANNOT BE ALLOWED TO PARA-DROP FAVOURABLE COMPARABLES AND EXCLUDE UNFAVO URABLE ONES AT THIS STAGE AS IT HAS BEEN GRANTED FULL OPPORTUNI TY TO CHOOSE THE CORRECT COMPARABLES BEFORE TPO; THAT EXCEPT BOTHTRE E CONSULTING LIMITED, NONE OF THE COMPARABLES NOW SOUGHT TO BE I NTRODUCED BY THE ASSESSEE HAS BEEN TAKEN BEFORE THE TPO; THAT TA KING NEW COMPARABLES AT THIS STAGE WOULD CAUSE PREJUDICE TO THE REVENUE AS COMPLETE SEARCH OF THE NEW COMPARABLES IS NOT POSSI BLE AT THIS STAGE. 14. KEEPING IN VIEW THE RATIO OF THE JUDGMENTS (SUP RA) REFERRED TO IN THE PRECEDING PARAS RELIED UPON BY THE ASSESS EE THAT EVEN IF A PARTICULAR PLEA FACTUAL OR LEGAL NOT TAKEN BY THE A SSESSEE BEFORE THE LOWER AUTHORITIES OUT OF IGNORANCE OR NEGLIGENCE, T HEY CANNOT BE ESTOPPED FROM TAKING A CORRECT VIEW LATER ON BEFORE THE APPELLATE AUTHORITY; THAT THOUGH ADMISSION IS AN ADMISSIBLE P IECE OF EVIDENCE BUT IT CANNOT BE SAID TO BE CONCLUSIVE AS IT IS OPE N TO THE PERSON WHO MADE THE ADMISSION TO SHOW THAT IT IS INCORRECT ; THAT THE ASSESSEE IS ENTITLED TO ARGUE BEFORE THE APPELLATE AUTHORITIES THAT A WRONG STAND TAKEN AT THE TIME OF FILING OF RETURN O F INCOME SHOULD ITA NO.6464/DEL./2012 11 BE ALLOWED TO BE MODIFIED; THAT IN CASE, THE ASSESS EE HAS NOT INCLUDED CORRECT COMPARABLE IN ITS TP STUDY NOR SOU GHT TO EXCLUDE THE COMPARABLES CHOSEN BY THE TPO, THE ASSESSEE CAN NOT BE ESTOPPED FROM FURNISHING THE CORRECT POSITION REGAR DING COMPARABLES AT ANY STAGE OF THE PROCEEDINGS, WE ARE OF THE CONSIDERED VIEW THAT TO ARRIVE AT THE LOGICAL CONCL USION AS TO BENCHMARKING THE INTERNATIONAL TRANSACTION UNDERTAK EN BY THE ASSESSEE DURING THE YEAR UNDER ASSESSMENT, NEW SET OF COMPARABLES NOW SOUGHT TO BE EXCLUDED BY WAY OF ADDITIONAL EVID ENCE IS NECESSARY FOR COMPLETE ADJUDICATION OF THE CONTROVE RSY AT HAND. SO FAR AS QUESTION OF CAUSING PREJUDICE TO THE REVENUE AT THIS STAGE IS CONCERNED, IT WOULD AMOUNT TO PREJUDGING THE ISSUE SOUGHT TO BE RAISED BY THE ASSESSEE BY WAY OF ADDITIONAL GROUND, BECAUSE QUESTION OF COMPARABILITY, IF ANY, IS ULTIMATELY TO BE DETERMINED BY THE TPO BY PROVIDING AN OPPORTUNITY TO BE HEARD TO THE PARTIES. SO, WE HEREBY ALLOW THE APPLICATION UNDER CONSIDERATION WITHOUT PREJUDICE TO THE MERITS OF THE CASE. 15. THOUGH CORPORATE TAX GROUNDS AS WELL AS TRANSFE R PRICING GROUNDS ARE INTER-LINKED BUT, FOR THE SAKE OF BREVI TY, ALL THE GROUNDS UNDER BOTH THE HEADS ARE BEING DISCUSSED SEPARATELY . ITA NO.6464/DEL./2012 12 CORPORATE TAX GROUNDS GROUND NO.1 16. AO/DRP DISALLOWED A SUM OF RS.43,12,128/- OUT O F RECRUITMENT EXPENSES OF RS.37,89,007/- AND TRAINING EXPENSES OF RS.5,39,01,601/- BY ALLOWING 1/5 TH OF THESE EXPENSES BY TREATING THE SAME AS ENDURING BENEFIT TO THE ASSESSEE COMPANY AS ITS BENEFIT DO NOT RESTRICT ONE YEAR ONLY AND REMAINING TO BE APPO RTIONED IN THE NEXT FIVE YEARS. DRP ALSO AGREED WITH THE AO AND O BSERVED THAT RECRUITMENT AND TRAINING EXPENSES GAVE LONG TERM BE NEFIT TO THE COMPANY BECAUSE THE RECRUITED AND TRAINED EMPLOYEES ARE GENERALLY WORKING NOT FOR THE YEAR IN WHICH THEY ARE RECRUITE D BUT THEY CONTRIBUTE TO THE PROFIT OF THE COMPANY FOR A LONG PERIOD. 17. LD. AR FOR THE ASSESSEE CONTENDED THAT RECRUITM ENT AND TRAINING EXPENSES INCURRED BY THE ASSESSEE ARE REVE NUE EXPENDITURE, HENCE ALLOWABLE AND RELIED UPON JUDGMENT CITED AS HINDUSTAN ALUMINIUM CORPORATION LTD. VS. CIT - (1986) 159 ITR 673 AND CIT VS. MUNJAL SHOWA LTD. - (2010) 329 ITR 449. 18. HONBLE SUPREME COURT IN JUDGMENT CITED AS HINDUSTAN ALUMINIUM CORPORATION LTD. (SUPRA) WHILE DECIDING THE IDENTICAL ISSUED HELD AS UNDER :- CAPITAL OR REVENUE EXPENDITURE ASSESSEE ESTABLISHING FACTOYR FOR MANUFACTURE OF ALUMINIUM EXPENDITURE INCURRED IN ITA NO.6464/DEL./2012 13 SENDING SOME EMPLOYEES TO U.S.A. FOR PRACTICAL TRAINING AND EXPERIENCE IN RUNNING FACTORY TRAINING GIVEN TO ACHIEVE EFFICIENT RUNNING OF FACTORY FOR GAINING OPTIMUM PRODUCTION DIRECTLY LINKED TO PROFIT EARNING PROCESS IS REVENUE EXPENDITURE EXPENDITURE INCURRED FOR PRSPECTIVE AND SEARCHING BAUXITE MINES BAUXITE RAW MATERIAL FOR PRODUCTION OF ALUMINIUM EXPENDITURE WAS FOR EARNING PROFITS IS REVENUE EXPENDITURE AND AN ALLOWABLE DEDUCTION INCOME TAX ACT, 1961, S. 37. 19. SIMILARLY, HONBLE JURISDICTIONAL HIGH COURT IN JUDGMENT CITED AS CIT VS. MUNJAL SHOWA LTD. (SUPRA) WHILE DECIDING THE IDENTICAL ISSUE HELD AS UNDER :- CAPITAL OR REVENUE EXPENDITURE FEES PAID TO FOREIGN COMPANY FOR DESIGNS AND DRAWINGS AND EXPENSES ON FOREIGN TECHNICIANS FOR TRAINING ASSESSEES PERSONNEL EXPENDITURE FOR FACILITATING PROCESS OF MANUFACTURE EXPENSES INCURRED ARE REVENUE EXPENDITURE INCOME TAX ACT, 1961. 20. NOW, ADVERTING TO THE CASE AT HAND, WHEN THE AS SESSEE HAS COME UP WITH SPECIFIC PLEAS THAT HE HAS MADE PAYMEN T OF RS.37,89.007/- TO THE THIRD PARTY RECRUITMENT AGENC Y, ACCESS FEE TO VARIOUS JOB SITES LIKE NAUKARI.COM ETC. AND RS.16, 01,153/- FOR IMPARTING TRAINING TO THE NEW EMPLOYEES WHO HAVE RE CENTLY JOINED AND ON JOB TRAINING TO EXISTING EMPLOYEES, WHICH HA VE OTHERWISE ITA NO.6464/DEL./2012 14 BEEN NOT DISPUTED BY THE AO/DRP, RECRUITMENT OF EMP LOYEES FOR EFFICIENT PROFIT EARNING THROUGH A RECRUITMENT AGEN CY IS RECURRING PROCESS AND SUCH EXPENDITURE CANNOT BE AVOIDED / DE FERRED. AT THE SAME TIME, IN THE GLOBALISED SET UP, SUDDEN UPGRADA TION OF KNOWLEDGE AND SKILL OF THE IT ENGINEERS / TECHNICIA NS FOR PROVIDING IT SOFTWARE DEVELOPMENT SERVICES PARTICULARLY TO FO REIGN AE IS ALSO NECESSARY FOR EARNING PROFIT BY A COMPANY. MO REOVER, WHEN UNDISPUTEDLY THERE IS NO MEMORANDUM OF UNDERSTANDIN G BETWEEN THE ASSESSEE COMPANY AND ITS EMPLOYEES THAT THE EMP LOYEE WILL WORK FOR SPECIFIC PERIOD, AS THE ATTRITION RATE IN SOFTWARE INDUSTRY IS HIGHEST, RECRUITMENT OF EMPLOYEES AND IMPARTING OF TRAINING TO THEM CANNOT BE CONSIDERED AS OF ENDURING BENEFIT. SO, BY FOLLOWING THE LAW LAID DOWN BY THE HONBLE CALCUTTA HIGH COURT HINDUSTAN ALUMINIUM CORPORATION LTD. VS. CIT (SUPRA) AND HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. MUNJAL SHOWA LTD. , WE HEREBY DECIDE GROUND NO.1 IN FAVOUR OF THE ASSES SEE. GROUND NO.2 21. AO, IN COMPLIANCE TO THE DIRECTIONS ISSUED BY T HE LD. DRP, MADE ADDITION OF RS.3,60,220/- DEBITED BY THE ASSES SEE TO THE PROFIT AND LOSS ACCOUNT DURING THE YEAR UNDER ASSESSMENT B EING EXPENDITURE ON QUALITY AUDIT BY TREATING THE SAME A S CAPITAL ITA NO.6464/DEL./2012 15 EXPENDITURE BEING IN THE NATURE OF ENDURING BENEFIT TO THE COMPANY. LD. AR FOR THE ASSESSEE CONTENDED THAT QUALITY DATA EXPENSES ARE IN THE NATURE OF REVENUE EXPENDITURE NECESSARY FOR SMO OTH CONDUCT OF BUSINESS AND ALSO IS THE REQUIREMENT OF MANY CLIENT S WITH SUCH CERTIFICATE BE OBTAINED BEFORE AWARDING THE CONTRAC T. THE LD. AR FOR THE ASSESSEE FURTHER CONTENDED THAT QUALITY DAT A IS JUST TO FACILITATE THE ASSESSEES TRADING OPERATIONS AND CO NDUCT OF BUSINESS IN A MORE PROFITABLE MANNER; THAT THE EXPENDITURE W OULD BE OF REVENUE NATURE EVEN THOUGH THE ADVANTAGE MAY ENDURE FOR AN INDEFINITE FUTURE AND RELIED UPON THE JUDGMENT OF T HE HONBLE SUPREME COURT CITED AS EMPIRE JUTE CO. LTD. VS. CIT 124 ITR 1 (SC). HONBLE APEX COURT WHILE EXAMINING THE NATURE OF REVENUE EXPENDITURE HELD AS UNDER :- (II) THERE MAY BE CASES WHERE EXPENDITURE, EVEN IF INCURRED FOR OBTAINING AN ADVANTAGE OF ENDURING BEN EFIT, MAY, NONE THE LESS, BE ON REVENUE ACCOUNT AND THE T EST OF ENDURING BENEFIT MAY BREAK DOWN. IT IS NOT EVERY ADVANTAGE OF ENDURING NATURE ACQUIRED BY AN ASSESSE E THAT BRINGS THE CASE WITHIN THE PRINCIPLE LAID DOWN IN THIS TEST. WHAT IS MATERIAL TO CONSIDER IS THE NATURE OF THE ADVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHER E THE ADVANTAGE IS IN THE CAPITAL FIELD THAT THE EXPENDIT URE WOULD BE DISALLOWABLE ON AN APPLICATION OF THIS TES T. IF THE ADVANTAGE CONSISTS MERELY IN FACILITATING THE ASSESSEE'S TRADING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEE'S BUSINESS T O BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY WHIL E LEAVING THE FIXED CAPITAL UNTOUCHED, THE EXPENDITUR E WOULD BE ON REVENUE ACCOUNT, EVEN THOUGH THE ADVANT AGE ITA NO.6464/DEL./2012 16 MAY ENDURE FOR AN INDEFINITE FUTURE. THE TEST OF EN DURING BENEFIT IS, THEREFORE, NOT A CERTAIN OR CONCLUSIVE TEST AND IT CANNOT BE APPLIED BLINDLY AND MECHANICALLY WITHO UT REGARD TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF A GIVEN CASE. (III) WHAT IS AN OUTGOING OF CAPITAL AND WHAT IS AN OUTGOING ON ACCOUNT OF REVENUE DEPENDS ON WHAT THE EXPENDITURE IS CALCULATED TO EFFECT FROM A PRACTICA L AND BUSINESS POINT OF VIEW RATHER THAN UPON THE JURISTI C CLASSIFICATION OF THE LEGAL RIGHTS, IF ANY, SECURED , EMPLOYED OR EXHAUSTED IN THE PROCESS. THE QUESTION MUST BE VIEWED IN THE LARGER CONTEXT OF BUSINESS NECESSI TY OR EXPEDIENCY. 22. KEEPING IN VIEW THE FACT THAT THE EXPENDITURE O N ACCOUNT OF QUALITY AUDIT INCURRED BY THE ASSESSEE EVEN IF TREA TED TO BE OF ENDURING NATURE, IT IS TO BE TREATED AS EXPENDITURE IN THE NATURE OF REVENUE FIELD AS THE TEST OF BENEFIT OF ENDURING NA TURE BREAKS DOWN IN THIS CASE. BECAUSE QUALITY AUDIT CREATES POSITI VE IMAGE OF THE PRODUCT OF THE ASSESSEE; IT FULFILLS THE REQUIREMEN T OF CERTAIN CLIENTS WHICH CONTRACTS WITH THE ASSESSEE COMPANY ONLY WITH SUCH CERTIFICATION; THAT BY MAKING SUCH EXPENDITURE, ASS ETS OF THE ASSESSEE COMPANY HAS NOT BEEN ENHANCED IN ANY MANNE R. SO, WE ARE OF THE OPINION THAT DRP HAS ERRED IN DECIDING THIS ISSUE AGAINST ASSESSEE. CONSEQUENTLY, GROUND NO.2 IS DETERMINED IN FAVOUR OF THE ASSESSEE. ITA NO.6464/DEL./2012 17 GROUND NO.3 23. ASSESSEE CLAIMED TO HAVE INCURRED EXPENSES OF R S.3,00,200/- FOR PURCHASE OF PTC SOFTWARE. AO, IN COMPLIANCE TO THE DIRECTIONS PASSED BY THE LD. DRP, MADE ADDITION OF RS.1,80,120 /- ON THE GROUND THAT THE ASSESSEE HAS FAILED TO COMPLY WITH THE PROVISIONS OF SECTION 195 OF THE ACT AND DISALLOWED THE AMOUNT OF DEPRECIATION AMOUNTING TO RS.1,80,120/-. 24. LD. AR CHALLENGING THE IMPUGNED ORDER CONTENDED INTER ALIA THAT PROVISIONS CONTAINED U/S 40(A)(I) ARE NOT APPL ICABLE TO DEPRECIATION; THAT DEPRECIATION IS A STATUTORY DEDU CTION AND IT IS OBLIGATORY FOR THE AO TO ALLOW THE DEDUCTION OF DEP RECATION IRRESPECTIVE OF THE CLAIM OF THE ASSESSEE. 25. NOW THE QUESTION ARISES FOR DETERMINATION IS AS TO WHETHER THE AO/DRP HAVE ERRED IN TREATING THE PAYMENT FOR A CQUISITION OF SOFTWARE AS FEE FOR TECHNICAL SERVICES / ROYALTY. 26. LD. DRP, WHILE RELYING UPON THE DECISION RENDER ED BY ITAT, DELHI IN THE CASE OF GRARCEMAC CORP. VS. ADIT (ITA NO.1331 1336 OF 2008) HELD THAT THE CONSIDERATION FOR ACQUIRING SUCH SOFTWARE WAS ROYALTY WHICH WAS TAXABLE IN INDIA U/S 9(1)(VI) AND ARTICLE 12 OF DTAA, AMENDED BY FINANCE ACT, 2012 WI TH RETROSPECTIVE EFFECT AND IT IS PROVIDED THEREIN THA T ROYALTY INCLUDES PAYMENT FOR TRANSFER OF ANY RIGHT TO USE COMPUTER S OFTWARE AND TAX ITA NO.6464/DEL./2012 18 WAS REQUIRED TO BE DEDUCTED AT SOURCE AND RATIFIED THE ORDER PASSED BY THE AO IN DISALLOWING THE DEDUCTION FOR SUCH PAY MENT U/S 40(1)(I) ON GROUND OF THE NON-DEDUCTION OF TAX AT S OURCE. 27. HOWEVER, HONBLE JURISDICTIONAL HIGH COURT IN J UDGMENT CITED AS DIRECTOR OF INCOME TAX VS. INFRASOFT LTD. - (2013) 39 TAXMAN.COM 88 MADE A DISTINCTION BETWEEN ROYALTY PAID AND CONSIDERATION FOR TRANSFER OF COPYRIGHTED ARTICLES TO DECIDE THE ISSUE IF ROYALTY IS TO BE PAID IN CASE OF PURCHASE OF COM PUTER SOFTWARE BY MAKING FOLLOWING OBSERVATIONS :- 89. THERE IS A CLEAR DISTINCTION BETWEEN ROYALTY P AID ON TRANSFER OF COPYRIGHT RIGHTS AND CONSIDERATION F OR TRANSFER OF COPYRIGHTED ARTICLES. RIGHT TO USE A COPYRIGHTED ARTICLE OR PRODUCT WITH THE OWNER RETAI NING HIS COPYRIGHT, IS NOT THE SAME THING AS TRANSFERRIN G OR ASSIGNING RIGHTS IN RELATION TO THE COPYRIGHT. THE ENJOYMENT OF SOME OR ALL THE RIGHTS WHICH THE COPYR IGHT OWNER HAS, IS NECESSARY TO INVOKE THE ROYALTY DEFIN ITION. VIEWED FROM THIS ANGLE, A NON-EXCLUSIVE AND NON- TRANSFERABLE LICENCE ENABLING THE USE OF A COPYRIGH TED PRODUCT CANNOT BE CONSTRUED AS AN AUTHORITY TO ENJO Y ANY OR ALL OF THE ENUMERATED RIGHTS INGRAINED IN ARTICL E 12 OF DTAA. WHERE THE PURPOSE OF THE LICENCE OR THE TRANSACTION IS ONLY TO RESTRICT USE OF THE COPYRIGH TED PRODUCT FOR INTERNAL BUSINESS PURPOSE, IT WOULD NOT BE LEGALLY CORRECT TO STATE THAT THE COPYRIGHT ITSELF OR RIGHT TO USE COPYRIGHT HAS BEEN TRANSFERRED TO ANY EXTENT. T HE PARTING OF INTELLECTUAL PROPERTY RIGHTS INHERENT IN AND ATTACHED TO THE SOFTWARE PRODUCT IN FAVOUR OF THE LICENSEE/CUSTOMER IS WHAT IS CONTEMPLATED BY THE TR EATY. MERELY AUTHORIZING OR ENABLING A CUSTOMER TO HAVE T HE BENEFIT OF DATA OR INSTRUCTIONS CONTAINED THEREIN W ITHOUT ANY FURTHER RIGHT TO DEAL WITH THEM INDEPENDENTLY D OES NOT, AMOUNT TO TRANSFER OF RIGHTS IN RELATION TO CO PYRIGHT OR CONFERMENT OF THE RIGHT OF USING COPYRIGHT. THE ITA NO.6464/DEL./2012 19 TRANSFER OF RIGHTS IN OR OVER COPYRIGHT OR THE CONF ERMENT OF THE RIGHT OF USE OF COPYRIGHT IMPLIES THAT THE TRANSFEREE/LICENSEE SHOULD ACQUIRE RIGHTS EITHER IN ENTIRETY OR PARTIALLY CO-EXTENSIVE WITH THE OWNER/ TRANSFEROR WHO DIVESTS HIMSELF OF THE RIGHTS HE POS SESSES PRO TANTO. 90. THE LICENSE GRANTED TO THE LICENSEE PERMITTING HIM TO DOWNLOAD THE COMPUTER PROGRAMME AND STORING IT I N THE COMPUTER FOR HIS OWN USE IS ONLY INCIDENTAL TO THE FACILITY EXTENDED TO THE LICENSEE TO MAKE USE OF TH E COPYRIGHTED PRODUCT FOR HIS INTERNAL BUSINESS PURPO SE. THE SAID PROCESS IS NECESSARY TO MAKE THE PROGRAMME FUNCTIONAL AND TO HAVE ACCESS TO IT AND IS QUALITAT IVELY DIFFERENT FROM THE RIGHT CONTEMPLATED BY THE SAID PARAGRAPH BECAUSE IT IS ONLY INTEGRAL TO THE USE OF COPYRIGHTED PRODUCT. APART FROM SUCH INCIDENTAL FAC ILITY, THE LICENSEE HAS NO RIGHT TO DEAL WITH THE PRODUCT JUST AS THE OWNER WOULD BE IN A POSITION TO DO 91. THERE IS NO TRANSFER OF ANY RIGHT IN RESPECT OF COPYRIGHT BY THE ASSESSEE AND IT IS A CASE OF MERE TRANSFER OF A COPYRIGHTED ARTICLE. THE PAYMENT IS F OR A COPYRIGHTED ARTICLE AND REPRESENTS THE PURCHASE PRI CE OF AN ARTICLE AND CANNOT BE CONSIDERED AS ROYALTY EITH ER UNDER THE INCOME TAX ACT OR UNDER THE DTAA. 28. JUDGMENT CITED AS DIT VS. INFRASOFT LTD. (SUPRA) IS APPLICABLE TO THE FACTS AND CIRCUMSTANCES OF THE CA SE IN WHICH UNDISPUTEDLY NO LICENCE HAS BEEN ISSUED BY THE AES IN FAVOUR OF THE ASSESSEE FOR TRANSFER OF COPYRIGHTS BUT ASSESSE E HAS MERELY PAID THE CONSIDERATION FOR TRANSFER OF COPYRIGHTED ARTIC LE IN THE FORM OF PTC SOFTWARE AND AS SUCH, EXCLUSIVE RIGHT HAS NOT B EEN TRANSFERRED IN FAVOUR OF THE ASSESSEE QUA THE SOFTWARE PURCHASE D BY IT RATHER ITA NO.6464/DEL./2012 20 ASSESSEES RIGHT WAS RESTRICTED TO USE THE COPYRIGH TED PRODUCT FOR INTERNAL BUSINESS PURPOSE. 29. IDENTICAL ISSUE HAS BEEN DEALT WITH BY THE TRIB UNAL IN CASE CITED AS SMS DEMAG (P.) LTD. VS. DCIT, 9 (1), NEW DELHI (2010) 38 SOT 496 (DELHI), THE OPERATIVE PART OF THE FINDINGS ARE AS UNDER:- 'SECTION 40(A)(I) OF THE INCOME-TAX ACT, 1961, READ WITH ARTICLE 24 OF THE DTAA BETWEEN INDIA AND GERMANY - BUSINESS DISALLOWANCE - INTEREST, ETC., PAYABLE OUT SIDE INDIA - ASSESSMENT YEAR 2000-01 - ASSESSEE PAID CER TAIN AMOUNT TO 'AG', ITS PARENT COMPANY IN GERMANY FOR PURCHASE OF SOFTWARE 'SAP' - IT CLAIMED DEDUCTION O N SAID PAYMENT - ASSESSING OFFICER DISALLOWED ASSESSEE'S C LAIM ON GROUND THAT SAID AMOUNT PAID BY ASSESSEE TO ITS PARENT COMPANY WAS IN NATURE OF ROYALTY/FEES FOR TECHNICAL SERVICES AND WAS CHARGEABLE TO TAX IN INDIA - WHETH ER PAYMENT MADE FOR PURCHASE OF SOFTWARE CANNOT BE TRE ATED EITHER AS ROYALTY OR FEES FOR TECHNICAL SERVICES - HELD, YES - WHETHER THEREFORE, PAYMENT FOR SAP SOFTWARE COULD NOT BE CHARGED TO TAX IN INDIA AS INTEREST OR ROYALTY O R FEE FOR TECHNICAL SERVICES - HELD, YES - WHETHER EVEN OTHER WISE BECAUSE OF NON-DISCRIMINATORY CLAUSE 24(1) OF DTAA WITH INDIA AND GERMANY, FOREIGN NATIONAL COULD NOT BE SUBJECTED TO PROVISIONS OF SECTION 40(A)(I) AND, TH EREFORE, AMOUNT PAID BY ASSESSEE FOR ACQUISITION OF COMPUTER S COULD NOT BE TAXED IN INDIA - HELD, YES 30. SO, BY FOLLOWING THE JUDGMENTS IN CASE OF DIT VS. INFRASOFT LTD. AND SMS DEMAG (P.) LTD. (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT AO/DRP HAVE ERRED IN TREATING THE ACQUISI TION OF SOFTWARE UNDER THE HEAD FEE FOR TECHNICAL SERVICES /ROYALTY REQUIRING THE ASSESSEE TO PAY THE TAX ON THE SAME. ITA NO.6464/DEL./2012 21 TRANSFER PRICING GROUNDS GROUNDS NO.4, 5, 6, 9 & 10.1 TO 10.6 31. ALL THESE GROUNDS ARE INTER-LINKED AND ARE TAKE N UP TOGETHER TO AVOID REPETITION OF DISCUSSION. FIRST OF ALL WE WOULD LIKE TO EXAMINE THE ISSUE OF ALLOWABILITY AND THE RETENTION OF BONUS CLAIMED BY THE ASSESSEE COMPANY AS IT HAS DIRECT IM PACT ON TP ADJUSTMENT. 32. ASSESSEE DEBITED AN AMOUNT OF RS.2,10,21,984/- ON ACCOUNT OF RETENTION BONUS PAID TO ITS EMPLOYEES, OUT OF WH ICH AO/DRP DISALLOWED AN AMOUNT OF RS.1,68,17,587/- BEING 4/5 TH OF THE TOTAL LIABILITY OF RS.2,10,21,984/- BY TREATING THE SAME AS CAPITAL EXPENDITURE ON THE GROUNDS THAT THE SAID EXPENDITUR E WAS INCURRED DUE TO AMALGAMATION OF BANGALORE BRANCH OF US COMPA NY BY THE ASSESSEE WHICH IS TO BE AMORTIZED OVER A PERIOD OF FIVE SUCCESSIVE YEARS IN EQUAL PROPORTION BY INVOKING THE PROVISION S OF SECTION 35DD OF THE ACT AND THAT THE RETENTION BONUS PAID T O THE EMPLOYEES ARE NOT IN THE NATURE OF NORMAL BUSINESS EXPENDITUR E BUT EXPENDITURE WHICH WOULD RESULT INTO ENDURING BENEFI T. 33. UNDISPUTEDLY, AN AMOUNT OF RS.2,10,21,984/- ON ACCOUNT OF RETENTION BONUS WAS PAID BY THE ASSESSEE COMPANY PR IOR TO FILING OF THE INCOME-TAX RETURN. ITA NO.6464/DEL./2012 22 34. LD. AR FOR THE ASSESSEE CONTENDED THAT AO/DRP H AVE ERRED IN TREATING THE RETENTION BONUS AS AMALGAMATION E XPENSES BECAUSE IT WAS NOT A CASE OF AMALGAMATION RATHER IT WAS A CASE OF SALE OF BANGALORE BRANCH OF US COMPANY BY THE ASSES SEE COMPANY. 35. IN THE BACKDROP OF THE AFORESAID FACTS AND CIRC UMSTANCES, THE FIRST QUESTION ARISES FOR DETERMINATION IN THIS CAS E IS AS TO WHETHER TRANSFER OF BUSINESS OF ONE OF THE BRANCH OF SAIC G ROUP OF USA TO THE ASSESSEE COMPANY ON NOVEMBER 30, 2007 AMOUNT S TO AMALGAMATION OR SALE OF THE BRANCH OF US BRANCH? 36. BARE PERUSAL OF THE ASSESSMENT ORDER AS WELL AS ORDER PASSED BY THE DRP AND MATERIAL BROUGHT ON RECORD BY THE PA RTIES GO TO PROVE THAT THE BUSINESS OF THE SAIC GROUP, USA BRAN CH HAS BEEN TRANSFERRED TO THE ASSESSEE AND IN CONSIDERATION TH EREOF, THE ASSESSEE ISSUED SHARES TO SAIC GROUP, USA. ASSESSE E COMPANY STATED TO HAVE PAID THE BONUS TO THE ERSTWHILE EMPL OYEES OF TRANSFERRING COMPANY TO ENSURE THE SMOOTH FUNCTIONI NG OF THE BUSINESS. SO, THERE IS NO MATERIAL ON FILE TO ARRI VE AT THE CONCLUSION THAT IT WAS A CASE OF AMALGAMATION RATHER A CASE OF SALE ON TRANSFER OF THE SHARES BY THE ASSESSEE COMPANY TO SAIC GROUP , USA. SO, THE FINDINGS OF THE AO/DRP THAT THE RETENTION BONUS EXPENDITURE ARE AMALGAMATION EXPENSES ARE BASED UPON SURMISES O NLY. ITA NO.6464/DEL./2012 23 37. DRP IN ORDER TO ASCERTAIN WHETHER THE PAYMENT O F RETENTION BONUS ACTUALLY ENTAIL ANY EXTRA EXPENDITURE BY THE ASSESSEE AS COMPARED TO THE EARLIER YEARS AND SUCCEEDING YEARS CALLED UPON THE ASSESSEE TO PROVIDE THE DETAILS OF THE EMPLOYEE COS T AND TOTAL OPENING COST FOR THE FINANCIAL YEAR 2005-06 TO FINA NCIAL YEAR 2010- 11, WHICH HAS BEEN SUPPLIED BY THE ASSESSEE COMPANY , WHICH IS REPRODUCED FOR READY REFERENCE AS UNDER :- 7.3 WE HAVE CONSIDERED THE SUBMISSIONS OF THE ASSESSEE. HIGH RATE OF ATTRITION OF EMPLOYEES IN SO FTWARE INDUSTRY IS A VERY COMMON FEATURE. AS PER THE NASSC OM REPORT AVAILABLE ON WEBSITE HTTP://WWW.DNB.CO.IN/TO NIT 08/OVERVIEW.ASP, MAJOR PLAYERS IN THE INDIAN SOFTWA RE INDUSTRY - TATA CONSULTANCY SERVICES TCS), INFOSYS TECHNOLOGIES, AND WIPRO--- ARE CURRENTLY WITNESSING HIGH ATTRITION RATES. TCS REPORTED AN ATTRITION RATE OF 11.5% - UP FROM 10.6% A YEAR AGO; THE ATTRITION RATE AT INF OSYS WAS 13.17% IN FY07 - HIGHER THAN 11.2% RECORDED IN FY06; THE RATE AT WIPRO WITNESSED A SURGE TO 17.4% AS AGAINST 14.6% DURING THE PREVIOUS FISCAL, IN ITS GL OBAL IT SERVICES AND PRODUCT BUSINESS THAT IS WHY THE PAYME NT OF VARIOUS INCENTIVES TO RETAIN THE EMPLOYEES SUCH AS EMPLOYEES STOCK OPTION (ESOP) AND PAYMENT OF RETENTION BONUS IS A VERY COMMON HR STRATEGY TO ENS URE CONTINUITY AND RETENTION OF TALENT IN THE COMPANY. BY PAYING SUCH INCENTIVES, THE COMPANY SAVES A LOT OF EXPENDITURE WHICH IT WOULD HAVE OTHERWISE REQUIRED TO SPEND ON THE TRAINING AND RECRUITMENT OF NEW EMPLOY EES. ALL SOFTWARE COMPANY HAVE TO GIVE SUCH INCENTIVES T O ITS EMPLOYEES IN ORDER TO RETAIN THEM. IN ORDER TO ASCE RTAIN THAT WHETHER THE PAYMENT OF RETENTION BONUS ACTUALL Y ENTAILED ANY EXTRA EXPENDITURE BY THE ASSESSEE AS COMPARED TO THE EARLIER YEARS AND SUBSEQUENT YEARS, THE ASSESSEE WAS REQUESTED BY THIS PANEL TO PROVIDE THE DETAILS OF THE EMPLOYEES COST AND THE TOTAL OPERATI NG COST FOR THE F.Y.2005-06 TO F.Y.2010-11. THE DETAILS FIL ED BY THE ASSESSEE VIDE LETTER DATED 23.08.2012 ARE AS FO LLOW. ITA NO.6464/DEL./2012 24 TREND OF EMPLOYEE COST TO TOTAL OPERATIN G COST FINANCIAL YEAR EMPLOYEE COST TOTAL OPERATING COST EMPLOYEE COST AS A PERCENTAGE TO TOTAL OPERATING COST 2006 - 07 149,200,190 222,227,392 67.14% 2007 - 08 280,561,911 411,874,588 68.12% 2008 - 09 557,348,550 774,705,588 71.94% 2009 - 10 562,674,852 787 ,496,860 71.45% 2010 - 11 476,350,112 714,427,011 66.68% 38. ON THE BASIS OF MATERIAL AVAILABLE ON RECORD, L D. DRP CAME TO THE CONCLUSION THAT THERE IS NO SUBSTANTIAL INCR EASE IN THE EMPLOYEE COST AS A PROPORTION OF TOTAL OPERATING CO ST AS COMPARED TO THE EARLIER YEARS I.E. IT HAS INCREASED FROM 67. 14% IN THE PREVIOUS FINANCIAL YEAR TO 68.12% IN THE FINANCIAL YEAR UNDE R ASSESSMENT WHICH IS INSIGNIFICANT AMOUNT TO HAVE ANY SUBSTANTI AL EFFECT ON THE PROFIT MARGIN OF THE COMPANY. 39. LD. DRP ALSO NOTICED THAT RETENTION BONUS WAS P AYABLE OVER NEXT THREE YEARS AND NOW IN THE YEAR UNDER ASSESSME NT ALONE. LD. DRP RETURNED SELF CONTRADICTORY FINDINGS THAT ON T HE ONE HAND, IT IS OBSERVED THAT THE PAYMENT OF RETENTION BONUS AND AL LOTMENT OF ESOPS IS VERY COMMON FEATURE IN SOFTWARE INDUSTRY A ND THEREFORE SUCH COST WOULD BE EMBEDDED IN THE EMPLOYEE COST OF COMPARABLE ALSO AND ON THE OTHER HAND, LD. DRP OBSERVED THAT R ETENTION BONUS ITA NO.6464/DEL./2012 25 PAID TO THE EMPLOYEE IN ORDER TO RETAIN THEM FOR FU TURE IS NOT IN THE NATURE OF NORMAL BUSINESS EXPENDITURE BUT AN EXPEND ITURE RESULTING INTO ENDURING BENEFIT TO THE COMPANY. 40. LD. AR FOR THE ASSESSEE ALSO CONTENDED THAT THE RETENTION BONUS PAID TO THE EMPLOYEES OF THE ERSTWHILE COMPAN Y FALLS UNDER THE DEFINITION OF SALARIES U/S 15 OF THE ACT. 41. FOR FACILITY OF REFERENCE, SECTION 15 OF THE AC T IS REPRODUCED AS UNDER :- 15. THE FOLLOWING INCOME SHALL BE CHARGEABLE TO INCOME-TAX UNDER THE HEAD 'SALARIES' (A) ANY SALARY DUE FROM AN EMPLOYER OR A FORMER EMPLOYER TO AN ASSESSEE IN THE PREVIOUS YEAR, WHETH ER PAID OR NOT; (B) ANY SALARY PAID OR ALLOWED TO HIM IN THE PREVIO US YEAR BY OR ON BEHALF OF AN EMPLOYER OR A FORMER EMPLOYER THOUGH NOT DUE OR BEFORE IT BECAME DUE TO HIM; (C) ANY ARREARS OF SALARY PAID OR ALLOWED TO HIM I N THE PREVIOUS YEAR BY OR ON BEHALF OF AN EMPLOYER OR A F ORMER EMPLOYER, IF NOT CHARGED TO INCOME-TAX FOR ANY EARL IER PREVIOUS YEAR. EXPLANATION 1.FOR THE REMOVAL OF DOUBTS, IT IS HER EBY DECLARED THAT WHERE ANY SALARY PAID IN ADVANCE IS INCLUDED IN THE TOTAL INCOME OF ANY PERSON FOR ANY PREVIOUS YEAR IT SHALL NOT BE INCLUDED AGAIN IN THE TOTAL INCOME OF THE PERSON WHEN THE SALARY BECOMES DUE. EXPLANATION 2.ANY SALARY, BONUS, COMMISSION OR REMUNERATION, BY WHATEVER NAME CALLED, DUE TO, OR RECEIVED BY, A PARTNER OF A FIRM FROM THE FIRM SHAL L NOT BE REGARDED AS 'SALARY' FOR THE PURPOSES OF THIS SECTI ON. ITA NO.6464/DEL./2012 26 42. SO, WHEN THE RETENTION BONUS HAS BEEN PAID BY T HE ASSESSEE COMPANY TO THE ERSTWHILE EMPLOYEES OF SCICOM IN ORD ER TO ENSURE THE SMOOTH FUNCTIONING OF THE BUSINESS TO ARREST TH E ATTRITION RATE PREVALENT IN THE SOFTWARE INDUSTRY, IT WOULD CERTAI NLY ENHANCE THE PROFITABILITY OF THE ASSESSEE COMPANY. SO, WE ARE OF THE CONSIDERED VIEW THAT PAYMENT OF RETENTION BONUS MADE BY THE AS SESSEE COMPANY PARTAKES CHARACTER OF SALARY PAYABLE TO ITS EMPLOYEE FOR THE BUSINESS PURPOSES AND HAS TO BE TREATED AS REVE NUE EXPENDITURE. HAD THE EMPLOYEES OF ERSTWHILE COMPANY NOT BEEN RET AINED BY THE ASSESSEE COMPANY ITS BUSINESS WOULD HAVE ADVERSELY AFFECTED AND THIS FACT GOES TO PROVE THAT THE RETENTION BONUS WA S PAID AS AN INCENTIVE TO THE EMPLOYEE, WHICH IS SALARY AS PER E XPLANATION 2 TO SECTION 15 OF THE ACT, AND IS A BUSINESS EXPENDITUR E NOT CREATING ANY ENDURING BENEFIT. SINCE ASSESSEE COMPANY HAD U NDISPUTEDLY PAID THE RETENTION BONUS BEFORE FILING THE RETURN O F INCOME OF THE RELEVANT ASSESSMENT YEAR THESE EXPENDITURE ARE ENTI TLED TO BE ALLOWED U/S 37 OF THE ACT. SO, WE HEREBY DETERMINE GROUND NO.4 IN FAVOUR OF THE ASSESSEE COMPANY. 43. NOW, COMING TO TP GROUNDS SPECIFICALLY RAISED B Y THE ASSESSEE COMPANY, DURING THE YEAR UNDER ASSESSMENT, ASSESSEE COMPANY WAS ENGAGED IN THE PROFESSION OF SOFTWARE D EVELOPMENT ITA NO.6464/DEL./2012 27 SERVICES TO ITS GROUP COMPANY AND HAS ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS AE TO THE FOLLOWING EFFECT :- NO. NATURE OF TRANSACTIONS METHOD VALUE OF TRANSACTION 1. PROVISION OF SOFTWARE DEVELOPMENT SERVICES TNMM 404,411,559 2. COST REIMBURSEMENT PAID TNMM 4,972,708 3. REIMBURSEMENT RECEIVED CUP 10,349,580 44. ASSESSEE COMPANY BY APPLYING TRANSACTIONAL NET MARGIN METHOD (TNMM) IN ORDER TO BENCHMARKING ITS INTERNAT IONAL TRANSACTION COMPUTED ITS MARGIN AT 12.08% AS AGAINS T MEAN OPERATING MARGIN OF THE COMPARABLE SELECTED BY IT A T 13.74%. 45. HOWEVER, TPO BY MAKING FRESH SEARCH ON THE BASI S OF CURRENT YEAR DATA ONLY I.E. FINANCIAL YEAR 2007-08 AND BY APPLYING DIFFERENT SETS OF FILTERS CHOSEN 10 COMPARABLES ARR IVED AT ARITHMETIC MEAN OP/OC MARGIN OF COMPARABLES AT 26.79% AND COMP UTED ALP OF SOFTWARE DEVELOPMENT SERVICES PROVIDED BY TH E ASSESSEE COMPANY TO ITS AE AS UNDER :- 1. OPERATING COST 435,559,139/- 2. ARMS LENGTH MARGIN 26.79% OF THE OC 3. ARMS LENGTH PRICE (ALP) 552,245,432/ - 4. PRICE RECEIVED BY THE ASSESSEE 461,624,534 5. ADJUSTMENT PROPOSED BY TPO {(3) (4)} 90,620898 46. UNDISPUTEDLY, TNMM IS THE MOST APPROPRIATE METH OD APPLIED BY BOTH THE ASSESSEE COMPANY AS WELL AS TPO IN THIS CASE FOR BENCHMARKING THE INTERNATIONAL TRANSACTION. ITA NO.6464/DEL./2012 28 47. LD. AR FOR THE ASSESSEE TO CUT SHORT THE CONTRO VERSY AS TO THE BENCHMARKING THE INTERNATIONAL TRANSACTION UNDERTAK EN BY THE ASSESSEE RESTRICTED ITS ARGUMENT FOR INCLUSION OF T WO COMPARABLES, NAMELY, M/S. AARMAN SOFTWARE PRIVATE LIMITED AND CG -VAK SOFTWARE & EXPORTS LIMITED OTHERWISE REJECTED BY TH E TPO AS WELL AS LD. DRP AND FOR EXCLUSION OF KALS INFORMATION SY STEM LTD. OTHERWISE ACCEPTED BY THE TPO/DRP, WHICH ARE DISCUS SED AS UNDER:- AARMAN SOFTWARE PRIVATE LIMITED 48. TPO AS WELL AS DRP HAVE REJECTED THIS COMPANY A S COMPARABLE ON THE SOLE GROUND THAT ITS ANNUAL REPOR T FOR THE YEAR ENDING MARCH 2008 IS NOT AVAILABLE IN THE PUBLIC DO MAIN. HOWEVER, LD. AR BROUGHT ON RECORD THE ANNUAL REPORT OF THIS COMPARABLE COMPANY LYING AT PAGE 799 TO 812 OF VOLU ME IV OF THE PAPER BOOK, WHICH FACT HAS NOT BEEN CONTROVERTED BY THE LD. DR. SO, WE ARE OF THE CONSIDERED VIEW THAT WHEN FUNCTIO NAL DIS- SIMILARITY BETWEEN THE ASSESSEE COMPANY VIS--VIS C OMPARABLE COMPANY IS NOT IN DISPUTE, THE TPO IS REQUIRED TO R ECONSIDER THIS COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANS ACTION. SO, THE MATTER IS ORDERED TO BE RESTORED TO THE TPO TO DECI DE AFRESH AFTER PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE ASSE SSEE COMPANY. ITA NO.6464/DEL./2012 29 CG-VAK SOFTWARE & EXPORTS LIMITED 49. LD. TPO REJECTED THIS COMPANY AS A COMPARABLE O N THE GROUND THAT IT FAILS EMPLOYEE COST FILTER; THAT EMP LOYEES COST SHOULD BE MORE THAT 25% OF THE TOTAL COST WHEREAS ASSESSEE FOR BENCHMARKING INTERNATIONAL TRANSACTION APPLIED THE FILTER OF EMPLOYEES COST MORE THAN 25% OF THE TOTAL SALES. H OWEVER, ASSESSEE COMPANY PROVED ON RECORD THAT EMPLOYEES CO ST (COST OF SERVICE) AS PERCENTAGE OF THE TOTAL REVENUE OF THE COMPANY IS 75.55%. DURING THE COURSE OF ARGUMENT, LD. AR FOR THE ASSESSEE HAS FAIRLY CONCEDED THAT FILTER OF EMPLOYEES COST M ORE THAN 25% OF TOTAL COST IS TO BE APPLIED IN THIS CASE. 50. ASSESSEE BROUGHT ON RECORD PROFIT AND LOSS ACCO UNT FOR THE YEAR ENDING 31.03.2008 LYING AT PAGES 771 TO 775 WH EREIN IN COLUMN NO.15 COST OF SERVICES HAS BEEN DULY DESCRIB ED. WHEN THE FILTER OF EMPLOYEES COST MORE THAN 25% OF TOTAL COS T IS TO BE APPLIED OF COST OF SERVICES DESCRIBED IN COLUMN NO.15 AT PA GE 774 OF VOLUME IV OF PAPER BOOK, ALL THE COST OF SERVICES A RE TO BE TREATED AS SALARY AND THIS COMPARABLE COMPANY QUALIFIES FOR INCLUSION IN THE FINAL LIST OF COMPARABLES. SO, WE ARE OF THE C ONSIDERED VIEW THAT THIS ISSUE IS AGAIN REQUIRED TO BE RECONSIDERE D BY THE TPO BY TAKING INTO ACCOUNT THE COST OF SERVICES WHILE APPL YING THE FILTER OF ITA NO.6464/DEL./2012 30 EMPLOYEES COST OF MORE THAN 25% OF TOTAL COST. SO, WE HEREBY RESTORE THE ISSUE TO THE TPO TO DECIDE AFRESH BY PR OVIDING OPPORTUNITY OF BEING HEARD IN THE LIGHT OF THE OBSE RVATION MADE HEREIN BEFORE. KALS INFORMATION SYSTEM LTD. 51. THIS COMPANY HAS BEEN ACCEPTED AS A COMPARABLE BY THE TPO BUT THE ASSESSEE HAS OPPOSED ITS INCLUSION ON T HE GROUND THAT ITS SEGMENTAL MARGIN HAVING INCONSISTENCY IN SEGMEN TAL INFORMATION AND P&L ACCOUNT FOR FINANCIAL YEAR 2007 -08 HAS BEEN USED WITHOUT PROVIDING AN OPPORTUNITY OF BEING HEAR D TO THE ASSESSEE. LD. DRP BY ACCEPTING THE CONTENTION OF T HE ASSESSEE RECOMPUTED THE MARGIN OF THIS COMPANY AT 13.92% AFT ER ALLOCATING IN ALLOCATED OPERATIONAL EXPENSES IN PROPORTION OF REVENUES. BUT, UNDISPUTEDLY, THE DIRECTIONS ISSUED BY THE DRP HAVE NOT BEEN COMPLIED WITH. SO, THE MATER IS REQUIRED TO BE DET ERMINED AFRESH BY THE TPO IN THE LIGHT OF THE UNCHALLENGED OBSERVA TIONS MADE BY THE DRP BY PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE COMPANY. WORKING CAPITAL ADJUSTMENT 52. THE LD. AR FOR THE ASSESSEE WHILE RELYING UPON THE PROVISIONS OF RULE 10B(1)(E) READ WITH RULE 10B (3) CONTENDED ITA NO.6464/DEL./2012 31 THAT WORKING CAPITAL ADJUSTMENT SHOULD BE MADE ON R EASONABLY ACCURATE BASIS. DRP DISALLOWED THE WORKING CAPITAL ADJUSTMENT BY MAKING FOLLOWING OBSERVATIONS :- 10. THE ASSESSEE HAS CONTENDED THAT IT SHOULD HAVE BEEN ALLOWED WORKING CAPITAL ADJUSTMENT TO ACCOUNT FOR THE DIFFERENCES BETWEEN THE WORKING CAPITAL DEPLOYE D BY THE ASSESSEE AND THAT OF COMPARABLES. AT THE OUTSET , IT IS MADE CLEAR THAT FOR ALLOWING ANY ADJUSTMENT FOR DIFFERENCES IN RESPECT OF FUNCTIONS, ASSETS AND RIS KS ETC., AS A GENERAL RULE, THE MARGINS OF COMPARABLES ARE ADJUSTED TO ELIMINATE THE INFLUENCE OF SUCH DIFFERE NCES ON THE MARGINS OF EACH COMPARABLE RATHER THAN ADJUSTIN G THE MARGINS OF TESTED PARTY, I.E., THE ASSESSEE IN THIS CASE. THE REASON IS OBVIOUS THAT MARGIN OF TESTED PARTY C ANNOT BE ADJUSTED TO BRING IT AT PAR WITH EACH OF THE COM PARABLE BECAUSE DEGREE OF DIFFERENCE IN FUNCTIONS, ASSETS A ND RISKS OF EACH OF COMPARABLE WITH THAT OF THE ASSESS EE DIFFERS IN CASE OF EACH COMPARABLE. TO CARRY OUT TH E ADJUSTMENT, THE AVAILABILITY OF RELEVANT INFORMATIO N TO ACCURATELY IDENTIFY THE DIFFERENCE AND THEN QUANTIF Y IMPACT OF SUCH DIFFERENCE IS A PRE-REQUISITE. IN TH IS CASE, WE ONLY KNOW THE AMOUNT OF WORKING CAPITAL DEPLOYED BY THE COMPARABLES ON THE FIRST AND LAST DAY OF THE ACCOUNTING PERIOD. WE HAVE NO MEANS TO ASCERTAIN TH E WORKING CAPITAL DEPLOYED BY THE COMPARABLES THROUGH THE YEAR. IN FACT, THE WORKING CAPITAL ADJUSTMENT SHOUL D BE COMPUTED ON THE BASIS DAILY AVERAGE OF WORKING CAPI TAL DEPLOYED BY THE TESTED PARTY AND EACH OF COMPARABLE , RESPECTIVELY. THE ASSESSEE HAS TAKEN THE AVERAGE OF THE AMOUNT OF WORKING CAPITAL DEPLOYED BY THE COMPARABL ES ON THE FIRST AND LAST DAY OF THE ACCOUNTING PERIOD TO COMPUTE THE WORKING CAPITAL ADJUSTMENT. IT IS QUITE PROBABLE THAT DAILY AVERAGE IS SUBSTANTIALLY DIFFER ENT FROM THE AVERAGE OF THE AMOUNT OF WORKING CAPITAL DEPLOYED BY THE COMPARABLES ON THE FIRST AND LAST D ATE OF THE ACCOUNTING PERIOD. THE ADJUSTMENT FOR FUNCTIONA L DIFFERENCES ETC. IS TO BE ALLOWED ONLY IF IT CAN BE ASCERTAINED WITH REASONABLE ACCURACY WHICH IS IMPOSSIBLE IN THIS CASE BECAUSE OF UNAVAILABILITY O F RELEVANT DATA. THEREFORE, THIS PANEL ENDORSES THE ITA NO.6464/DEL./2012 32 PROPOSAL OF THE AO TO DISALLOW THE WORKING CAPITA] ADJUSTMENT CLAIMED BY THE ASSESSEE. 53. HOWEVER, LD. AR CONTENDED THAT IDENTICAL ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN CASE CITED AS QUALCOM INDIA PVT. LTD. VS. ACIT (ITA NO.5239/DE L/2010) . 54. COORDINATE BENCH IN THE JUDGMENT CITED AS QUALCOM INDIA PVT. LTD. (SUPRA) DETERMINED THE ISSUE OF WORKING CAPITAL ADJUSTMENT TO ACCOUNT FOR DIFFERENCE IN WORKING CAP ITAL EMPLOYED BY ASSESSEE VIS--VIS COMPARABLE COMPANIES IN FAVOU R OF THE ASSESSEE BY MAKING FOLLOWING OBSERVATIONS :- 41. CONSIDERING THE ABOVE SUBMISSIONS WE CONCUR W ITH THE SUBMISSION OF THE LD. DR THAT THE ISSUE RAISED IN GROUND NO. 6 & 7 ON ACCOUNT OF WORKING CAPITAL ADJUSTMENT AND RISK ADJUSTMENT DEPEND UPON THE FACT AND CIRCUMSTANCES OF EACH CASE. BUT AT THE SAME TIME WE ARE OF THE VIEW THAT THESE FACTORS ARE EQUALLY IMPORTAN T TO CONSIDER WHILE SELECTING COMPARABLE COMPANIES. IN T HE PRESENT CASE THE ASSESSEE IS ENGAGED IN THE BUSINES S OF SOFTWARE DEVELOPMENT AND PROVIDING MARKETING SERVIC ES, HENCE THERE IS NO DISPUTE THAT APPROPRIATE ADJUSTME NT TO ACCOUNT FOR DIFFERENCE IN WORKING CAPITAL EMPLOYED BY THE ASSESSEE VIS. A VIS. THE COMPARABLE COMPANIES F OR SOFTWARE DEVELOPMENT SERVICES IS REQUIRED TO BE CONSIDERED. SIMILARLY MAKING OF SUITABLE ADJUSTMENT S TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE ASSESSEE VIS. A VIS. THE COMPARABLE COMPANIES FOR SOFTWARE DEVELOPMENT SERVICES IS ALSO REQUIRED TO BE CONSIDE RED. OF COURSE THESE ADJUSTMENTS ON ACCOUNT OF WORKING CAPITAL AND RISK IS TO BE MADE AFTER ANALYZING THE CASE OF THE ASSESSEE SINCE IT DEPENDS UPON THE FACTS OF THE CASE OF THE ASSESSEE. THE REQUEST FOR SUCH ADJUSTMENTS CANN OT BE SUMMARILY REJECTED UNLESS SOME ANALYSIS OF THE CASE OF THE ASSESSEE IS MADE VIS-A-VIS COMPARABLES COMPANIE S. WE THUS SET ASIDE THE MATTER TO THE FILE OF THE LD. TPO/AO ITA NO.6464/DEL./2012 33 TO CONSIDER THESE ASPECT OF ADJUSTMENT WHILE DECIDI NG THE ISSUE AFRESH VIS-A-VIS THE COMPARABLE COMPANIES IN THE BUSINESS OF SOFTWARE DEVELOPMENT AS DISCUSSED HEREINABOVE IN THE PRESENT ORDER OF THE TRIBUNAL. I T IS NEEDLESS TO MENTION OVER HERE THAT WHILE CONSIDERIN G THESE ASPECTS OPPORTUNITY WOULD BE GIVEN TO THE ASS ESSEE TO PRESENT ITS CASE IN THIS REGARD. THE ASSESSEE IS REQUIRED TO COOPERATE WITH THE LD. TPO IN FURNISHING THE DET AILS, BREAK UP, DATAS, ETC. OR ANY OTHER NECESSARY INFORM ATION TO THE SATISFACTION OF THE TPO SO THAT REASONABLY A CCURATE ADJUSTMENT, IF ANY, CAN BE MADE AS PER INDIAN TRANS FER PRICING LAW (I.E. RULE 10B (3)(III)) ON ACCOUNT OF RISK AND WORKING CAPITAL. GROUND NO.6 & 7 ARE THUS ALLOW ED FOR STATISTICAL PURPOSES. 55. IDENTICAL ISSUE HAS ALSO BEEN DEALT WITH BY THE ITAT, DELHI BENCH E, NEW DELHI IN CASE CITED AS M/S. NOKIA INDIA PVT. LTD. VS. ADDL. CIT (ITA NO.551/DEL/2011) AND DETERMINED THE ISSUE IN FAVOUR OF THE ASSESSEE BY RETURNING THE FOLLOWING F INDINGS :- 5.1 THUS IT IS THE CONTENTION OF THE LD. COUNSEL O F THE ASSESSEE THAT THE TPO WHILE DETERMINING THE ARM'S L ENGTH PRICE OF THE SUBJECT INTERNATIONAL TRANSACTION DURI NG ASSESSMENT YEAR 2006-07 IGNORED THE FACT THE ASSESS EE HAS BEEN GRANTED THE BENEFIT OF THE WORKING CAPITAL ADJUSTMENT DURING A.Y. 2005-06 BY HIMSELF AND THE F ACT THE SAME HAS ALSO BEEN ALLOWED BY HIS PREDECESSORS DURING THE TRANSFER PRICING ASSESSMENT PROCEEDING F OR A.Y. 2002-03 TILL A.Y. 2004-05 DESPITE THE CONSTRAI NTS MENTIONED IN THE TRANSFER PRICING ORDER. THUS, IT I S THE CONTENTION OF THE ASSESSEE THAT THERE IS NO CHANGE IN THE BUSINESS MODEL OF THE ASSESSEE WITH RESPECT TO THE PROVISION OF CONTRACT SOFTWARE DEVELOPMENT SERVICES OF THE ASSESSEE VIS-A-VIS A.Y. 2005-06, THE BENEFIT OF WORKING CAPITAL ADJUSTMENT SHOULD BE ALLOWED TO THE ASSESSEE IN THE SUBJECT YEAR UNDER APPEAL AS WELL. 5.2 LD. COUNSEL OF THE ASSESSEE HAS FURTHER SUBMITT ED THAT RULES 10B(1)(E) OF THE RULES PRESCRIBE THAT AT THE TIME OF APPLICATION OF TRANSACTIONAL NET MARGIN MET HOD, ITA NO.6464/DEL./2012 34 THE NET PROFIT MARGIN NEEDS TO BE ADJUSTED TO ACCOU NT FOR THE DIFFERENCE IF ANY BETWEEN THE INTERNATIONAL TRANSACTION AND COMPARABLE UNCONTROLLED TRANSACTION S. THE RELEVANT TEXT OF THE PROVISIONS IS REPRODUCED B ELOW FOR REFERENCE: '10B DETERMINATION OF ARM'S LENGTH PRICE UNDER SECTION 92C-(1) FOR THE PURPOSES OF SUB-SECTION (2) OF SECTION 92C, THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY :- (A) TO (D)- (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH,- '(III) THE NET PROFIT MARGIN REFERRED TO IN SUB- CLAUSE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET;' THE LD. COUNSEL HAS FURTHER SUBMITTED THAT THE HON' BLE DELHI, ITAT HAS ALSO UPHELD THE NEED OF MAKING WORK ING CAPITAL ADJUSTMENT IN FOLLOWING JUDGMENTS. MENTOR GRAPHICS (NOIDA) (P.) LTD. V. DY. CIT[2007] 109 ITD 101/ 18 SOT 76 (DELHI) SONY INDIA (P.) LTD V. DY. CIT[2008] 114 ITD 448 (DELHI) THUS IN LIGHT OF THE PROVISIONS OF RULE 10B(1)(E) A ND THE HON'BLE ITAT JUDGMENTS, IT HAS BEEN PLEADED TO GRAN T THE APPELLANT THE BENEFIT OF WORKING CAPITAL ADJUSTMENT . ITA NO.6464/DEL./2012 35 5.3 LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND RELIED UPON THE ORDER OF THE TPO. 5.4 THE DRP IN ITS ORDER HAS NOT DEALT WITH THE ISS UE PROPERLY AND HAS HELD THAT FOR THE SAKE OF CONSISTE NCY AND TO PROTECT THE INTEREST OF THE REVENUE, THE ADJ USTMENT MADE BY THE TPO HAS TO BE UPHELD. 6. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS IN LIGHT OF THE MATERIAL PRODUCED AND PRECEDENT RELIED UPON. IT IS AN UNDISPUTED FACT THAT ON THE SAME SET OF FA CTS AND IN THE SAME BUSINESS MODEL THE ASSESSEE HAS BEEN PROVIDED THE WORKING CAPITAL ADJUSTMENTS IN THE PRECEDING ASSESSMENT YEARS. UNDER THE CIRCUMSTANCES , IN OUR CONSIDERED OPINION, IT WAS INCUMBENT UPON THE T PO TO CONSIDER THE SAME IN THE CURRENT YEAR. 56. KEEPING IN VIEW THE FACT THAT THE ISSUE IN QUES TION HAS BEEN SETTLED IN THE CASES CITED AS QUALCOM INDIA PVT. LTD. AND M/S. NOKIA INDIA PVT. LTD. (SUPRA AND THE FACT THAT ASSESSEE IN THIS CASE IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVIC ES TO ITS GROUP COMPANIES AND TO ARRIVE AT ALP OF THE INTERNATIONAL TRANSACTIONS, THE LD. TPO / DRP RESORTED TO COMPARABILITY BY SELE CTING DIFFERENT SETS OF COMPARABLE COMPANIES AND AFTER APPLYING THE VARIOUS FILTERS, THE LD. TPO SELECTED 10 COMPARABLE COMPANIES AS MEN TIONED IN PARA 8.7 OF HIS ORDER, THE APPROPRIATE TRANSFER PRI CING ADJUSTMENT CAN ONLY TO BE MADE QUA THE INTERNATIONAL TRANSACTI ON UNDERTAKEN BY THE ASSESSEE COMPANY DURING THE YEAR UNDER ASSES SMENT ON THE BASIS OF ITS COMPARABILITY VIS--VIS COMPARABLE COM PANIES, BY PROVIDING WORKING CAPITAL ADJUSTMENT TO THE ASSESSE E IN VIEW OF THE ITA NO.6464/DEL./2012 36 PROVISIONS CONTAINED UNDER RULE 10B(1)(E) ALSO. S O, WE ARE OF THE CONSIDERED VIEW THAT THE MATTER IS REQUIRED TO BE RESTORED TO THE TPO TO PROVIDE THE ASSESSEE COMPANY THE BENEFIT OF WORKING CAPITAL ADJUSTMENT FOR TRANSFER PRICING ADJUSTMENT. GROUND NO.7 & 8 57. LD. AR FOR THE ASSESSEE STATED THAT HE DOES NOT PRESS THE GROUNDS NO.7 & 8. GROUND NO.11 58. GROUND NO.11 IS GENERAL IN NATURE. HOWEVER, AO /TPO BEING QUASI-JUDICIAL AUTHORITIES ARE UNDER LEGAL OB LIGATION TO PROVIDE AN OPPORTUNITY OF BEING HEARD TO THE ASSESS EE BEFORE PASSING AFRESH ORDER. SO, THIS GROUND IS DETERMINE D IN FAVOUR OF THE ASSESSEE. GROUND NO.12 59. WHEN, UNDISPUTEDLY, THE LD. DRP HAS DIRECTED TO TREAT THE FOREX FLUCTUATION GAINS/LOSS ON SUPPORT SALE AS AN EXPORT ITEM WHILE COMPARING THE ASSESSEE COMPANY WITH COMPARABLE COMP ANIES AND NO APPEAL HAS BEEN FILED AGAINST THE SAID DIRECTION S, TPO IS UNDER LEGAL OBLIGATION U/S 144 C (10) & (13) TO IMPLEMENT THE DRPS ITA NO.6464/DEL./2012 37 DIRECTION. SO, GROUND NO.12 IS DETERMINED IN FAVOU R OF THE ASSESSEE. GROUND NO.13 & 14 60. GROUNDS NO.13 & 14 ARE CONSEQUENTIAL, HENCE NEE DS NO SEPARATE DISCUSSION. 61. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE HE REBY PARTLY ALLOW THE PRESENT APPEAL FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 27 TH DAY OF JUNE, 2016. SD/- SD/- (N.K. SAINI) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 27 TH DAY OF JUNE, 2016 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.