M/s. Stryker Global Technology Center Pvt. Ltd., Gurgaon V. DCIT, New Delhi

ITA 6866/DEL/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 4046 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 9 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-10-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2010-2011
• Appeal Filed On: 19-12-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 92D; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.6866/DEL./2014 (ASSESSMENT YEAR : 2010-11) M/S. STRYKER GLOBAL TECHNOLOGY CENTER VS. DCIT, PRIVATE LIMITED, CIRCLE 9 (1), VATIKA BUSINESS PARK, 8 TH 12 TH FLOOR, NEW DELHI. SOUTH ROAD, SECTOR 49, BLOCK B, GURGAON 122 001 (HARYANA). (PAN : AAJCS9528D) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RAVI SHARMA, ADVOCATE MS. SHRUTI KHIMTA, ADVOCATE SHRI RAVI G. GUPTA, ADVOCATE REVENUE BY : SHRI H.K. CHOUDHARY, CIT DR DATE OF HEARING : 13.09.2017 DATE OF ORDER : 13.10.2017 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, M/S. STRYKER GLOBAL TECHNOLOGY CENT ER PVT. LTD. (HEREINAFTER REFERRED TO AS THE TAXPAYER) BY FILING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 16.10.2014, PASSED BY THE AO IN CONSONANCE WITH THE DIRECTIONS ISSUED BY THE LD. DRP/TPO UNDER SECTION 143 (3) READ WITH SECTION 144C OF THE ITA NO.6866/DEL/2014 2 INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2010-11 ON THE GROUNDS INTER ALIA THAT :- 1. THE LEARNED DISPUTE RESOLUTION PANEL ('LD. DRP') AND THE LD. DEPUTY COMMISSIONER OF INCOME- TAX ('LD. AO') (FOLLOWING THE DIRECTIONS OF THE LD. DRP) HAVE ERRED ON FACTS AND IN LAW IN ENHANCING THE INCOME OF THE APPELLANT BY INR 1,00,97,208 UNDER SECTION 143(3) OF THE INCOME-TAX ACT 1961 ('ACT') AND INR 5,99,003 UNDER SECTION 115JB OF THE ACT. 2. THE LD. DRP AND LD. AO HAVE ERRED ON FACTS AND IN LAW IN ENHANCING THE INCOME OF THE APPELLANT BY INR 1,00,97,208 BY HOLDING THAT THE APPELLANT'S INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF CONTRACT SOFTWARE DEVELOPMENT SERVICES AND INFORMATION TECHNOLOGY ('IT') ENABLED BACK OFFICE SUPPORT SERVICES DOES NOT SATISFY THE ARM'S LENGTH PRINCIPLE ENVISAGED UNDER THE ACT AND IN DOING SO HAVE GROSSLY ERRED IN: 2.1 DISREGARDING THE ALP AS DETERMINED BY THE APPELLANT IN THE TRANSFER PRICING ('TP') DOCUMENTATION MAINTAINED BY IT IN TERMS OF SECTION 92D OF THE ACT READ WITH RULE 100 OF THE INCOME-TAX RULES, 1962 (RULES') AS WELL AS FRESH SEARCH; 2.2 DISREGARDING MULTIPLE YEAR AND PRIOR YEARS' DATA AS USED BY THE APPELLANT IN ITS TP DOCUMENTATION AND HOLDING THAT CURRENT YEAR (I.E. FY 2009-10) DATA FOR COMPARABLE COMPANIES SHOULD BE USED DESPITE THE FACT THAT THE SAME WAS NOT NECESSARILY AVAILABLE TO THE APPELLANT AT THE TIME OF PREPARING ITS TP DOCUMENTATION; 2.3 REJECTING THE ECONOMIC AND COMPARABILITY ANALYSIS UNDERTAKEN BY THE APPELLANT IN ITS TP DOCUMENTATION/ FRESH SEARCH ENTAILING A DETAILED AN D ROBUST SEARCH METHODOLOGY, WHILE PROCEEDING TO ITA NO.6866/DEL/2014 3 APPLY CERTAIN ERRONEOUS ADDITIONAL! MODIFIED FILTER S IN DETERMINING THE ALP SUCH AS REJECTING COMPARABLE COMPANIES BASED ON SALES LESS THAN INR 5 CRORES, WHILE DISREGARDING THE FACT THAT THE APPELLANT ITSELF HAD EARNED A REVENUE OF LESS THAN INR 5 CRORES IN THE IT ENABLED BACK OFFICE SUPPORT SERVICE SEGMENT; 2.4 ERRONEOUSLY INCLUDING CERTAIN FUNCTIONALLY DISSIMILAR COMPANIES THAT ARE FULL-FLEDGED RISK TAK ING ENTREPRENEURS AND HIGH-PROFIT MAKING COMPANIES FOR BENCHMARKING A LOW RISK CAPTIVE SERVICE PROVIDER LIKE THE APPELLANT AND EXCLUDING CERTAIN COMPARABLE COMPANIES ON ARBITRARY/ FRIVOLOUS GROUNDS; 2.5 NOT CONSIDERING THE CORRECT COMPUTATION OF OPERATING PROFIT MARGINS OF CERTAIN COMPANIES USED AS COMPARABLE IN THE IT ENABLED BACK OFFICE SUPPORT SERVICES SEGMENT OF THE APPELLANT; 2.6 DISREGARDING JUDICIAL PRONOUNCEMENTS IN INDIA IN UNDERTAKING THE TP ADJUSTMENT. 3. THE LD. DRP/ LD. AO ERRED IN IGNORING THE FACT THAT THE APPELLANT IS ENTITLED TO TAX HOLIDAY UNDER SECTION 10A OF THE ACT ON ITS PROFITS AND THEREFORE WOULD NOT HAVE ANY UNTOWARD MOTIVE OF DERIVING A TAX ADVANTAGE BY MANIPULATING TRANSFER PRICES OF ITS INTERNATIONAL TRANSACTIONS; 4. THE LD. DRP AND LD. AO HAVE ERRED ON FACTS AND IN LAW IN ADDING BACK THE AMOUNT OF RENT EQUALISATION RESERVE OF INR 5,99,003 TO THE BOOK PROFITS OF THE APPELLANT, DECLARED UNDER SECTION 115JB OF THE ACT, AND IN DOING SO HAS GROSSLY ERRED IN: 4.1 PROPOSING THAT THE AMOUNT OF RENT EQUALISATION RESERVE CHARGED TO PROFIT AND LOSS ACCOUNT IS COVER ED UNDER CLAUSE (B) OR (C) OF EXPLANATION 1 TO SECTION 115JB OF THE ACT, AND THUS NEEDED TO BE ADDED IN BOOK PROFITS. ITA NO.6866/DEL/2014 4 5. THE LD. AO ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(L)(C) OF THE ACT. 6. THE LD. AO ERRED IN CHARGING INTEREST UNDER SECTION 234D OF THE ACT. 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : STRYKER TECHNOLOGY STARTE D ITS BUSINESS FROM OCTOBER 1, 2006 AS A GLOBAL TECHNOLOGY CENTRE FOR THE STRYKER GROUP IN INDIA. THE TAXPAYER OPERATES AS A TECHNOL OGY SUPPORT CENTRE FOR THE GROUP AND PROVIDES COMPUTER AIDED DE SIGNING (CAD) / ENGINEERING, CONTRACT SOFTWARE DEVELOPMENT, AND IT ENABLED BACK OFFICE SUPPORT SERVICES TO THE STRYKER GROUP. ACCORDING TO TP REPORT, STRYKER TECHNOLOGY HAS BEEN CHARACTERIZED AS A ROUTINE CAD / ENGINEERING CONTRACT SOFTWARE DE VELOPMENT AND IT ENABLED BACK OFFICE SUPPORT SERVICES PROVIDER AN D STATED TO USE ALL THE VALUABLE INTELLECTUAL PROPERTY RIGHTS (KNOW -HOW, COPYRIGHTS ETC.) AND OTHER COMMERCIAL OR MARKETING INTANGIBLES (BRAND NAMES, TRADEMARKS ETC.) OWNED BY THE GROUP. 3. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER E NTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISES (AE) AS UNDER :- ITA NO.6866/DEL/2014 5 S.NO. TYPE OF INTERNATIONAL TRANSACTION METHOD SELECTED TOTAL VALUE OF TRANSACTION (RS.) I. PURCHASE OF FIXED ASSETS TNMM OP/OC 904,667 II. PROVISION OF CAD / ENGINEERING SERVICES TNMM OP/OC 150,956,456 III. PROVISION OF CONTRACT SOFTWARE DEVELOPMENT SERVICES TNMM OP/OC 158,083,256 IV. PROVISION OF IT ENABLED BACK OFFICE SERVICES TNMM OP/OC 38,037,799 V. COST RECHARGE FROM GROUP COMPANIES TNMM OP/OC 58,521,893 VI. COST RECHARGE TO GROUP COMPANIES CUP NA 28,298,733 4. ASSESSEE IN ITS TP STUDY HAS COMPUTED ITS MARGIN AT 17.03% AS TESTED PARTY AND AFTER SELECTING 16 COMPARABLES AND BY TAKING OP/TC COMPUTED THE MEAN MARGIN AT 13.18% AND FOUND ITS INTERNATIONAL TRANSACTIONS QUA SOFTWARE MAINTENANCE SERVICES OF RS.15,80,83,256/- AT ARMS LENGTH. 5. ASSESSEE IN ITS TP STUDY BENCHMARKED ITS INTERNA TIONAL TRANSACTIONS PERTAINING TO IT ENABLED SERVICES (ITE S) BY ADOPTING TNMM AS THE MOST APPROPRIATE METHOD WITH OP/TC AS P LI HAVING TESTED PARTY MARGIN AT 21.47% AS AGAINST AVERAGE OP /TC MARGIN OF 14.27% OF 15 COMPARABLES CHOSEN BY THE ASSESSEE. H OWEVER, ON THE BASIS OF SHOW-CAUSE NOTICE AND FILTERS PROPOSED TO BE USED BY TPO, THE TAXPAYER GIVEN FRESH SEARCH CONDUCTED DURI NG TP PROCEEDINGS AND SELECTED 11 COMPARABLES HAVING OP/T C AS PLI AT 7.69% FOR SOFTWARE DEVELOPMENT AND MAINTENANCE SERV ICES TRANSACTIONS. SIMILARLY, THE TAXPAYER HAS GIVEN FR ESH SEARCH ITA NO.6866/DEL/2014 6 CONDUCTED DURING TP PROCEEDINGS FOR ITES ON THE BAS IS OF SHOW- CAUSE NOTICE AND FILTERS ADOPTED TO BE APPLIED AND COMPUTED THE OP/TC MARGIN OF 10 COMPARABLES AT 15.83%. 6. TPO THEN CHOSEN 15 COMPARABLES HAVING OP/OC AT 2 7.64% AND WORKED CAPITAL ADJUSTMENT OF OP/OC AT 25.95% RE LATING TO SOFTWARE DEVELOPMENT SERVICES AND PROPOSED THE ADJU STMENT OF ARMS LENGTH PRICE (ALP) OF INTERNATIONAL TRANSACTIO N AT RS.1,20,55,936/-. 7. TPO FINALLY CHOSEN 9 COMPARABLES HAVING OP/OC AT 32.72% AND WORKING CAPITAL ADJUSTMENT OP/OC AT 32.72% AND WORKING CAPITAL ADJUSTMENT OP/OC AT 32.62% AND THEREBY PROP OSED AN ADJUSTMENT OF RS.34,90,402/- RELATING TO ITES. TPO ACCORDINGLY PROPOSED THE TOTAL ADJUSTMENT OF RS.1,55,46,338/- T O THE INCOME OF THE ASSESSEE. 8. AO ADDED AN AMOUNT OF RS.5,99,003/- TO THE BOOK PROFIT OF THE ASSESSEE DEBITED BY THE TAXPAYER TOWARDS RENT A CQUISITION RESERVE BY APPLYING EXPLANATION 1 TO SECTION 115JB OF THE ACT. PURSUANT TO THE DIRECTIONS ISSUED BY LD. DRP, AO PA SSED ASSESSMENT ORDER BY ASSESSING TOTAL INCOME OF THE A SSESSEE AT RS.1,00,97,208/-. 9. THE TAXPAYER CARRIED THE MATTER BY WAY OF FILING OBJECTIONS BEFORE THE LD. DRP WHO HAS DISMISSED THE SAME. FEE LING ITA NO.6866/DEL/2014 7 AGGRIEVED, THE TAXPAYER HAS COME UP BEFORE THE TRIB UNAL BY WAY OF FILING THE PRESENT APPEAL. 6. 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. GROUND NO.1 7. GROUND NO.1 IS GENERAL IN NATURE, HENCE DOES NOT REQUIRE ANY ADJUDICATION. GROUND NOS.2, 2.1, 2.2, 2.3, 2.4, 2.5 & 2.6 8. TRANSACTIONAL NET MARGIN METHOD (TNMM) USED BY T HE ASSESSEE FOR BENCHMARKING ITS INTERNATIONAL TRANSAC TION AS MOST APPROPRIATE METHOD HAS BEEN ACCEPTED BY THE TPO/DRP . TPO/ DRP HAVE ALSO PROVIDED WORKING CAPITAL ADJUSTMENT T O THE ASSESSEE FOR BENCHMARKING ITS INTERNATIONAL TRANSACTIONS. 9. TPO HAS FINALLY SELECTED 15 COMPARABLES FOR BENC HMARKING ITS INTERNATIONAL TRANSACTIONS QUA SOFTWARE DEVELOP MENT SERVICES, WHICH ARE TO THE FOLLOWING EFFECT :- ITA NO.6866/DEL/2014 8 NO. NAME OF THE COMPANY OP/OC (%) WORKING CAPITAL ADJUSTED OP/OC I. AKSHAY SOFTWARE TECH LTD. -1.04 -0.53 II. E - INFOCHIPS BANGALORE LTD. 72.69 66.03 III. EVOKE TECHNOLOGIES LTD. 19.02 19.56 IV. E - ZEST SOLUTIONS LTD. 18.66 14.71 V. INFINITE DATA SYSTEMS PVT. LTD. (MERGED) 88.25 84.63 VI. INFOSYS LTD. 45.08 46.29 VII. LARSEN & TOUBRO INFOTECH LTD. 20.48 20.87 VIII. LGS GLOBAL LTD. 12.79 8.35 IX. MINDTREE LTD. 16.62 15.39 X. PERSISTENT SYSTEMS & SOLUTIONS LTD. (MERGED) 15.38 12.74 XI. R S SOFTWARE INDIA LTD. 10.29 11.07 XII. SASKEN COMMUNICATION TECHNOLOGIES LTD. 17.54 18.75 XIII. TATA ELEXI LD. 19.82 17.93 XIV. THINKSOFT GLOBAL SERVICES LTD. 17.35 14.51 XV. THIRDWARE SOLUTIONS LTD. 41.63 38.94 AVERAGE 27.64 25.95 10. ON THE BASIS OF MEAN MARGIN OF 27.60% OF COMPAR ABLE COMPANIES AFTER GIVING WORKING CAPITAL ADJUSTMENT O F OP/OC AT 25.95%, TPO COMPUTED THE ARMS LENGTH PRICE OF INTER NATIONAL TRANSACTION RELATING TO SOFTWARE DEVELOPMENT SERVIC ES AS UNDER :- PARTICULARS AMOUNT INR OPERATING COST ( ADJUS TED AS DISCUSSED SUPRA) 135,084,710 ARMS LENGTH MARGIN (%) 25.95% ARMS LENGTH MARGIN (RS.) 35,054,482 ARMS LENGTH PRICE 170,139,192 PRICE CHARGED BY THE ASSESSEE 158,083,256 105% OF PRICE CHARGED IN INTERNATIONAL TRANSACTION 165,987,419 DIFFERENCE FOR WHICH ADJUSTMENT IS PROPOSED TO BE MADE 12,055,936 ITA NO.6866/DEL/2014 9 11. SIMILARLY, TPO HAS FINALLY SELECTED 9 COMPARABL ES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS QUA ITE S, WHICH ARE AS UNDER :- S.NO. COMPANY NAME OP/OC (%) WCA OP/OC (%) I. ACCENTIA TECHNOLOGIES LTD. 43.07 39.86 II. COSMTIC GLOBAL LTD. 18.28 19.95 III. E4E HEALTHCARE 31.03 31.21 IV. I - GATE GLOBAL LTD. 24.54 23.75 V. INFOSYS BPO LTD. 31.46 29.83 VI. JINDAL INTELLICOM LTD. 13.62 14.61 VII. OMEGA HEALTHCARE 15.31 14.40 VIII. TCS E-SERVE INTERNATIONAL LTD. 53.80 55.09 IX. TCS E - SERVE LTD. 63.38 64.93 AVERAGE 32.72 32.62 12. ON THE BASIS OF AVERAGE OP/OC OF 32.72% AND WOR KING CAPITAL ADJUSTMENT OF OP/OC AT 32.62% OF THE COMPAR ABLE COMPANIES, THE LD. TPO COMPUTED THE ARMS LENGTH PRI CE OF INTERNATIONAL TRANSACTION RELATING TO ITES AS UNDER :- PARTICULARS AMOUNT INR OPERATING COST 31313679 ARMS LENGTH MARGIN (%) 32.62% ARMS LENGTH MARGIN (RS.) 10214522 ARMS LENGTH PRICE 41528201 PRICE CHARGED BY THE ASSESSEE 38037799 105% OF PRICE CHARGED IN INTERNATIONAL TRANSACTION 39939689 DIFFERENCE BETWEEN ALP AND PRICE CHARGE BY ASSESSEE 3,490,402 % OF DIFFERENCE WITH ALP 9.18% ITA NO.6866/DEL/2014 10 13. LD. AR FOR THE ASSESSEE IN ORDER TO CUT SHORT T HE CONTROVERSY SOUGHT TO EXCLUDE TWO COMPARABLES VIZ. E-INFOCHIPS BANGALORE LTD. AND INFINITE DATA SYSTEMS PVT. LTD. (MERGED) FOR BENCHMARKING INTERNATIONAL TRANSACTIONS RELATING TO SOFTWARE DEVELOPMENT AND MAINTENANCE SERVICES AND TCS E-SERVE COMPANY FOR BENCHMARKING INTERNATIONAL TRANSACTIONS RELAT ING TO ITES. SO, WE WILL EXAMINE ALL THE THREE COMPARABLE COMPANIES FINALLY SELECTED BY TPO FOR BENCHMARKING THE INTERN ATIONAL TRANSACTIONS ONE BY ONE. COMPARABLE FOR BENCHMARKING INTERNATIONAL TRANSCTIONS QUA SOFTWARE DEVELOPMENT SERVICES E-INFOCHIPS BANGALORE LTD. (E-INFOCHIPS) 14. THE TAXPAYER SOUGHT TO EXCLUDE E-INFOCHIPS FROM THE FINAL LIST OF COMPARABLES ON THE GROUNDS INTER ALIA THAT IT IS FUNCTIONALLY DISSIMILAR; IT IS ENGAGED IN PRODUCT AND SEMICONDUC TOR ENGINEERING SERVICES HAVING 500 PRODUCTS FOR KEY VERTICALS LIKE AEROSPACE AND DEFENCE, SECURITY AND SURVEILLANCE, CONSUMER DEVISE S, MEDICAL DEVICES, RETAIL AND E-COMMERCE AND SOFTWARE TECHNOL OGY; IT IS A MEMBER OF INDIAN ELECTRONICS AND SEMICONDUCTOR ASSO CIATION (IESA). LD. TPO AS WELL AS DRP HAVE DISMISSED THE OBJECTIONS ITA NO.6866/DEL/2014 11 RAISED BY THE ASSESSEE BY RECORDING THE FINDINGS TH AT THIS COMPARABLE COMPANY IS FUNCTIONALLY COMPARABLE; ENGA GED IN MAINTENANCE AND DEVELOPMENT OF SOFTWARE AND ITS INC OME FROM SOFTWARE SERVICES IS RS.7,43,04,66,481/- AND THUS R ETAINED THIS COMPANY AS A COMPARABLE. 15. APPRAISAL OF THE ANNUAL REPORT, AVAILABLE AT PA GES 1 TO 85 OF THE PAPER BOOK AND SCHEDULE VII, AVAILABLE AT PAGES 1 TO 41 MAKE IT CLEAR THAT E-INFOCHIPS HAD INCOME FROM SOFTWARE SER VICES TO THE TUNE OF RS.37,13,88,107/-. FROM SCHEDULE XI, AVAIL ABLE AT PAGES 42 TO 46 OF THE PAPER BOOK, IT IS CLEAR FROM PARA 9 OF SCHEDULE XI THAT E-INFOCHIPS IS ENGAGED IN DEVELOPMENT AND MAI NTENANCE OF COMPUTER SOFTWARE , THE PRODUCTION AND SALES OF SOF TWARE CANNOT BE EXPRESSED IN ANY GENERIC UNIT, HENCE, IT IS NOT POS SIBLE TO GIVE QUANTITATIVE DETAILS OF SALE AND CERTAIN OTHER INFO RMATION AS REQUIRED UNDER PARAGRAPH 3, 4C AND 4D OF PART II OF SCHEDULE VI TO THE COMPANIES ACT, 1956 . 16. HOWEVER, THE LD. DR DREW OUR ATTENTION TO PARA 16 OF SCHEDULE XI OF THE ANNUAL REPORT WHEREIN IT IS MENT IONED THAT THE COMPANY IS PRIMARILY ENGAGED IN SOFTWARE DEVELOPMEN T AND ITES WHICH IS CONSIDERED THE ONLY REPORTABLE BUSINESS SE GMENT AS PER ACCOUNTING STANDARD AS 17 SEGMENT REPORTING ISS UED BY MANDATORY ACCOUNTING STANDARDS PRESCRIBED IN COMPAN IES ITA NO.6866/DEL/2014 12 (ACCOUNTING STANDARDS) RULES, 2006 AND RELEVANT PRO VISIONS OF COMPANIES ACT, 1956. 17. HOWEVER, WE ARE OF THE CONSIDERED VIEW THAT THE ENTIRE RESERVES ARE TO BE EXAMINED IN TOTALITY. MOREOVER, FROM SCHEDULE III, DEPICTING FIXED ASSETS, AVAILABLE AT PAGE 39 O F THE ANNUAL REPORT, SHOWS THAT THE COMPARABLE COMPANY HAS HUGE INTANGIB LES WHICH INCREASES THE BRAND VALUE OF THE COMPARABLE COMPANY . 18. SUITABILITY OF E-INFOCHIPS HAS BEEN EXAMINED BY COORDINATE BENCH OF THE TRIBUNAL VIS--VIS SUN LIFE INDIA SERVICE CENTRE (P.) LTD. VS. DCIT (2016) 71 TAXMANN.COM 189 (DELHI TRIB.) . E- INFOCHIPS HAS BEEN ORDERED TO BE EXCLUDED AS A COMP ARABLE WITH SUN LIFE INDIA SERVICE CENTRE (P.) LTD. WHICH IS A ROUTINE SERVICE PROVIDER LIKE THE TAXPAYER ON THE GROUNDS INTER ALI A THAT E-INFOCHIPS ENGAGED IN BOTH SOFTWARE DEVELOPMENT AS WELL AS ITE S AND ITS SEGMENTAL INFORMATION IS NOT AVAILABLE. MOREOVER, E-INFOCHIPS IS HAVING VOLATILE MARGIN TREND FOR A PERIOD OF FIVE Y EARS WHICH IS DETAILED AS UNDER :- COMPANY NAME OP/TC MAR - 07 MAR - 08 MAR - 09 MAR - 10 MAR - 11 E-INFOCHIPS 91.83% 38.48% 97.29% 72.69% 27.31% 19. MOREOVER, E-INFOCHIPS IS A PRODUCT AND SEMICOND UCTOR ENGINEERING SERVICES COMPANY AND HAS DESIGNED 500 P RODUCTS FOR ITA NO.6866/DEL/2014 13 KEY VERTICALS LIKE AEROSPACE, DEFENCE, SEMICONDUCTO R, SECURITY AND SURVEILLANCE, ETC., THUS FUNCTIONALLY INCOMPARABLE. SO, WE ARE OF THE CONSIDERED VIEW THAT E-INFOCHIPS IS NOT A SUITA BLE COMPARABLE VIS--VIS ASSESSEE COMPANY, HENCE ORDERED TO BE EXC LUDED. INFINITE DATA SYSTEMS PRIVATE LIMITED (INFINITE) 20. ASSESSEE SOUGHT TO EXCLUDE INFINITE FROM THE FI NAL LIST OF COMPARABLES FOR BENCHMARKING INTERNATIONAL TRANSACT IONS ON THE GROUNDS INTER ALIA THAT IT IS FUNCTIONALLY DISSIMIL AR; PRIMARILY IT DERIVES REVENUE FROM TECHNICAL SUPPORT AND INFRASTR UCTURE MANAGEMENT SERVICES; THAT IT IS HAVING ABNORMALLY H IGH MARGIN AND HAVING EXCEPTIONAL GROWTH IN BUSINESS OPERATION OVE R THE LAST FOUR YEARS I.E. 908% IN SALES OVER PREVIOUS YEAR. 21. HOWEVER, TPO/DRP HAVE RETAINED INFINITE AS COMP ARABLE BY HOLDING THAT THIS COMPANY PROVIDES IT SERVICES, APP LICATION SERVICES, IT INFRASTRUCTURE SERVICES, PROJECT ENGIN EERING SOLUTIONS AND MOBILITY & MESSAGING SOLUTIONS & PLATFORMS. 22. THE LD. AR FOR THE ASSESSEE IN ORDER TO POINT O UT FUNCTIONAL DISSIMILARITY OF INFINITE DREW OUR ATTENTION TO PAG ES 98 TO 102 OF ANNUAL REPORT. IN PARA 17 AT PAGE 98 OF SCHEDULES TO FINANCIAL STATEMENTS IN COMPANY OVERVIEW, IT IS CATEGORICALLY MENTIONED THAT INFINITE PROVIDES SOLUTIONS THAT ENCOMPASS TEC HNICAL ITA NO.6866/DEL/2014 14 CONSULTING, DESIGN AND DEVELOPMENT OF SOFTWARE, MAI NTENANCE, SYSTEMS INTEGRATION, IMPLEMENTATION, TESTING AND IN FRASTRUCTURE MANAGEMENT SERVICES, WHEREAS ASSESSEE COMPANY IS A ROUTINE SERVICE PROVIDER. FURTHERMORE WHEN WE EXAMINE PARA 17.1.3. AT PAGE 98 OF THE ANNUAL REPORT UNDISPUTEDLY INFINITE DERIVES ITS REVENUE PRIMARILY FROM TECHNICAL SUPPORT AND INFRAS TRUCTURE MANAGEMENT SERVICES WHICH MAKES INFINITE FUNCTIONAL LY DISSIMILAR TO THE ASSESSEE. 23. FURTHERMORE INFINITE HAS EXCEPTIONAL GROWTH IN BUSINESS OPERATION OVER THE LAST FOUR YEARS I.E. 908% GROWTH RATE IN SALES OVER PREVIOUS YEAR AS IS EVIDENT FORM AUDITING TABU LATED AS UNDER :- PARTICULARS MAR - 12 MAR - 11 MAR - 10 MAR - 09 SALES (IN INR (CRORES) 43.31 52.75 38.31 4.74 % GROWTH IN SALES 182% 23 8% 908% - OP/TC 124.40% 153.97% 88.25% 31.48% 24. THE COMPARABILITY OF INFINITE WAS ALSO EXAMINED IN SUN LIFE INDIA SERVICE CENTRE (P.) LTD. (SUPRA) WITH SUN LIFE INDIA SERVICE CENTRE (P.) LTD. WHICH IS A ROUTINE SOFTWARE DEVEL OPMENT AND SERVICE PROVIDER AND HELD TO BE NOT A SUITABLE COMP ARABLE AS IT IS A FULL-FLEDGED IT CONSULTING ORGANISATION AND PROVIDE S SERVICES IN THE NATURE OF TECHNICAL CONSULTING, DESIGN AND DEVELOPM ENT OF SOFTWARE, MAINTENANCE, SYSTEM IRRIGATION, IMPLEMENT ATION, TESTING AND INFRASTRUCTURE MANAGEMENT SERVICES. SO, IN VIE W OF THE MATTER, ITA NO.6866/DEL/2014 15 WE ARE OF THE CONSIDERED VIEW THAT INFINITE IS NOT A SUITABLE COMPARABLE VIS--VIS ASSESSEE COMPANY, HENCE ORDERE D TO BE EXCLUDED. COMPARABLE FOR BENCHMARKING INTERNATIONAL TRANSACTIONS QUA ITES SEGMENT TCS E-SERVE INTERNATIONAL LTD. (TCS E-SERVE) 25. ASSESSEE SOUGHT TO EXCLUDE TCS E-SERVE FROM THE FINAL LIST OF COMPARABLES FOR BENCHMARKING INTERNATIONAL TRANS ACTIONS QUA ITES ON THE GROUND THAT IT IS FUNCTIONALLY DISSIMIL AR BPO SERVICES ALONG WITH TECHNICAL SERVICES. HOWEVER, TPO/DRP HA VE RETAINED TCS E-SERVE AS A COMPARABLE BY MERELY RECORDING THE FINDINGS THAT THE COMPANY IS FUNCTIONALLY COMPARABLE TO THE ASSESSEE AND IT SATISFIES ALL THE FILTERS. 26. LD. AR FOR THE ASSESSEE IN ORDER TO POINT OUT F UNCTIONAL DISSIMILARITY OF TCS E-SERVE VIS--VIS ASSESSEE DRE W OUR ATTENTION TOWARDS PAGE 927 OF PAPER BOOK (ANNUAL REPORT COMPE NDIUM II) WHEREIN IT IS CATEGORICALLY MENTIONED THAT TCS E-SE RVE IS ENGAGED IN BUSINESS OF PROVIDING INFORMATION TECHNOLOGY E NABLED SERVICES (ITES) / BUSINESS PROCESSING OUTSOURCING ( BPO) SERVICES PRIMARILY TO CITI GROUP ENTITIES GLOBALLY. IT IS F URTHER MENTIONED IN THE NOTES TO ACCOUNT THAT COMPANYS OPERATIONS BROA DLY COMPRISE ITA NO.6866/DEL/2014 16 OF TRANSACTION PROCESSING AND TECHNICAL SERVICES WH ICH INCLUDES BROAD SPECTRUM OF ACTIVITIES INVOLVING THE PROCESSI NG, COLLECTIONS, CUSTOMER CARE AND PAYMENTS IN RELATION TO THE SERVI CES OFFERED BY CITI GROUP TO IS CORPORATE AND RETAIL CLIENT. TECH NICAL SERVICES INVOLVE SOFTWARE TESTING, VERIFICATION AND VALIDATI ON OF SOFTWARE AT THE TIME OF IMPLEMENTATION AND DATA CENTRE MANAGEME NT ACTIVITIES. SO, THE FUNCTIONS BEING PERFORMED BY TCS E-SERVE AR E DIAMETRICALLY DISSIMILAR TO THE ASSESSEE COMPANY. 27. FURTHERMORE SEGMENTAL INFORMATION OF TCS E-SERV E IS NOT AVAILABLE TO BIFURCATE ITES AND CSD SERVICES AS IS EVIDENT FROM PAGE 916 OF THE ANNUAL REPORT COMPENDIUM II, WHICH IS PROFIT AND LOSS ACCOUNT, BECAUSE INCOME FROM TRANSACTION PROCE SSING AND OTHER SERVICES IS JOINTLY GIVEN. FURTHERMORE BECAU SE OF ACQUISITION BY TCS E-SERVE FROM CITI GROUP EFFECTIVE FROM JANUA RY 2009, THE BRAND VALUE OF TCS E-SERVE HAS IMPACTED THE PROFITA BILITY AND REVENUE OF BUSINESS. MOREOVER, TCS E-SERVE IS HAVI NG VOLATILE PROFIT MARGIN AS IS EVIDENT FROM THE TABLE REPRODUC ED BELOW :- COMPANY NAME FY 2007-08 FY 2008-09 FY 2009-10 TCS E SERVE - 100% - 27.50% 51.51% 28. FURTHERMORE TCS E-SERVE IS HAVING SUPER-NORMAL GROWTH OF 173% IN REVENUE AND IS AN INDUSTRY GIANT AS AGAINST THE ASSESSEE ITA NO.6866/DEL/2014 17 WHICH IS A CAPTIVE SERVICE PROVIDER RENDERING BACK- END SUPPORT SERVICES TO ITS AE. 29. SO, IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, W E ARE OF THE CONSIDERED VIEW THAT TCS E-SERVE IS NOT A SUITABLE COMPARABLE VIS- -VIS ASSESSEE FOR BENCHMARKING INTERNATIONAL TRANS ACTION QUA ITES. HENCE, WE ORDERED TO EXCLUDE THE SAME. GROUND NO.3 30. GROUND NO.3 IS GENERAL IN NATURE AND DOES NOT R EQUIRE ANY ADJUDICATION. GROUND NOS.4 & 4.1 31. LD. DRP / AO BY INVOKING CLAUSE B & C OF EXPLAN ATION 1 TO SECTION 115JB OF THE ACT ADDED THE AMOUNT OF RS. 5,99,003/- ON ACCOUNT OF RENT ACQUISITION RESERVE CHARGED TO PROF IT & LOSS ACCOUNT AND ADDED THE SAME IN BOOK PROFITS. THE LD. AR FOR THE ASSESSEE FAIRLY CONCEDED THAT THIS ISSUE HAS BEEN DECIDED AG AINST THE ASSESSEE IN ITS OWN CASE FOR AY 2008-09 IN ITA NO.1 49/DEL/2013 VIDE ORDER DATED 24.01.2017 . LD. DR ALSO RELIED UPON THE AFORESAID ORDER PASSED BY THE TRIBUNAL. 32. UNDISPUTEDLY, THE ISSUE IN CONTROVERSY HAS COME UP BEFORE THE COORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2008-09 (SUPRA) BY WAY OF RAISING FOLLOWING ROUN D :- ITA NO.6866/DEL/2014 18 9. THE LD. AO HAS GROSSLY ERRED IN ADDING BACK THE AMOUNT OF RENT EQUALIZATION RESERVE OF RS.18,45,875 /- TO THE BOOK PROFITS OF THE APPELLANT, DECLARED UNDE R SECTION 115JB OF THE ACT, ERRONEOUSLY PROPOSING THA T THE AMOUNT OF RENT EQUALIZATION RESERVE CHARGED TO PROFIT AND LOSS ACCOUNT IS COVERED UNDER CLAUSE (B) OR (C) OF EXPLANATION 1 TO SECTION 115JB OF THE ACT, A ND THUS NEEDS TO BE ADDED IN BOOK PROFITS. 33. IT IS ALSO NOT IN DISPUTE THAT THE ASSESSEE HAS CLAIMED RENT ACQUISITION RESERVE OF RS.5,99,003/- IN ACCORDANCE WITH THE LEASE DEED DATED 06.09.2006 ENTERED INTO BETWEEN M/S. VAT IKA LANDBASE PVT. LTD. AND THE ASSESSEE. THE COORDINATE BENCH O F THE TRIBUNAL HAS DETERMINED THE ISSUE AGAINST THE ASSESSEE BY RE TURNING THE FOLLOWING FINDINGS :- 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND H AVE PERUSED THE RECORD OF THE CASE. THE SCOPE OF AS 19 DOES NOT EXTEND, INTER-ALIA, TO LEASE AGREEMENTS TO USE LAND S. PARA 2 OF SCOPE READS AS UNDER :- 2. THIS STANDARD APPLIES TO AGREEMENTS THAT TRANS FER THE RIGHT TO USE ASSETS EVEN THOUGH SUBSTANTIAL SER VICES BY THE LESSOR MAY BE CALLED FOR IN CONNECTION WITH THE OPERATION OR MAINTENANCE OF SUCH ASSETS. ON THE OTH ER HAND, THIS STANDARD DOES NOT APPLY TO AGREEMENTS TH AT ARE CONTRACTS FOR SERVICES THAT DO NOT TRANSFER THE RIG HT TO USE ASSETS FROM ONE CONTRACTING PARTY TO THE OTHER. 11. THE CLASSIFICATION OF LEASES FOR THE PURPOSES OF AS 19 ARE AS UNDER :- CLASSIFICATION OF LEASES 5. THE CLASSIFICATION OF LEASES ADOPTED IN THIS STANDARD IS BASED ON THE EXTENT TO WHICH RISKS AND REWARDS INCIDENT TO OWNERSHIP OF A LEASED ASSET LIE WITH THE LESSOR OR THE LESSEE. RISKS INCLUDE THE POSSIBI LITIES OF LOSSES FROM IDLE CAPACITY OR TECHNOLOGICAL OBSOLESC ENCE AND OF VARIATIONS IN RETURN DUE TO CHANGING ECONOMI C ITA NO.6866/DEL/2014 19 CONDITIONS. REWARDS MAY BE REPRESENTED BY THE EXPECTATION OF PROFITABLE OPERATION OVER THE ECONOM IC LIFE OF THE ASSET AND OF GAIN FROM APPRECIATION IN VALUE OR REALISATION OF RESIDUAL VALUE. 6. A LEASE IS CLASSIFIED AS A FINANCE LEASE IF IT TRANSFERS SUBSTANTIALLY ALL THE RISKS AND REWARDS I NCIDENT TO OWNERSHIP. TITLE MAY OR MAY NOT EVENTUALLY BE TRANSFERRED. A LEASE IS CLASSIFIED AS AN OPERATING LEASE IF IT DOES NOT TRANSFER SUBSTANTIALLY ALL THE RISKS AND R EWARDS INCIDENT TO OWNERSHIP. 7. SINCE THE TRANSACTION BETWEEN A LESSOR AND A LES SEE IS BASED ON A LEASE AGREEMENT COMMON TO BOTH PARTIE S, IT IS APPROPRIATE TO USE CONSISTENT DEFINITIONS. THE APPLICATION OF THESE DEFINITIONS TO THE DIFFERING CIRCUMSTANCES OF THE TWO PARTIES MAY SOMETIMES RESU LT IN THE SAME LEASE BEING CLASSIFIED DIFFERENTLY BY THE LESSOR AND THE LESSEE. 8. WHETHER A LEASE IS A FINANCE LEASE OR AN OPERAT ING LEASE DEPENDS ON THE SUBSTANCE OF THE TRANSACTION R ATHER THAN ITS FORM. EXAMPLES OF SITUATIONS WHICH WOULD NORMALLY LEAD TO A LEASE BEING CLASSIFIED AS A FINA NCE LEASE ARE: (A) THE LEASE TRANSFERS OWNERSHIP OF THE ASSET TO THE LESSEE BY THE END OF THE LEASE TERM; (B) THE LESSEE HAS THE OPTION TO PURCHASE THE ASSE T AT A PRICE WHICH IS EXPECTED TO BE SUFFICIENTLY LOWER TH AN THE FAIR VALUE AT THE DATE THE OPTION BECOMES EXERCISABLE SUCH THAT, AT THE INCEPTION OF THE LEAS E, IT IS REASONABLY CERTAIN THAT THE OPTION WILL BE EXERCISE D; (C) THE LEASE TERM IS FOR THE MAJOR PART OF THE EC ONOMIC LIFE OF THE ASSET EVEN IF TITLE IS NOT TRANSFERRED; (D) AT THE INCEPTION OF THE LEASE THE PRESENT VALU E OF THE MINIMUM LEASE PAYMENTS AMOUNTS TO AT LEAST SUBSTANTIALLY ALL OF THE FAIR VALUE OF THE LEASED A SSET; AND (E) THE LEASED ASSET IS OF A SPECIALISED NATURE SUC H THAT ONLY THE LESSEE CAN USE IT WITHOUT MAJOR MODIFICATI ONS BEING MADE. 9. INDICATORS OF SITUATIONS WHICH INDIVIDUALLY OR IN COMBINATION COULD ALSO LEAD TO A LEASE BEING CLASSI FIED AS A FINANCE LEASE ARE: ITA NO.6866/DEL/2014 20 (A) IF THE LESSEE CAN CANCEL THE LEASE, THE LESSOR S LOSSES ASSOCIATED WITH THE CANCELLATION ARE BORNE BY THE LESSEE; (B) GAINS OR LOSSES FROM THE FLUCTUATION IN THE FA IR VALUE OF THE RESIDUAL FALL TO THE LESSEE (FOR EXAMPLE IN THE FORM OF A RENT REBATE EQUALLING MOST OF THE SALES PROCEEDS AT THE END OF THE LEASE); AND (C) THE LESSEE CAN CONTINUE THE LEASE FOR A SECOND ARY PERIOD AT A RENT WHICH IS SUBSTANTIALLY LOWER THAN MARKET RENT. 10. LEASE CLASSIFICATION IS MADE AT THE INCEPTION OF THE LEASE. IF AT ANY TIME THE LESSEE AND THE LESSOR AGR EE TO CHANGE THE PROVISIONS OF THE LEASE, OTHER THAN BY RENEWING THE LEASE, IN A MANNER THAT WOULD HAVE RES ULTED IN A DIFFERENT CLASSIFICATION OF THE LEASE UNDER TH E CRITERIA IN PARAGRAPHS 5 TO 9 HAD THE CHANGED TERMS BEEN IN EFFECT AT THE INCEPTION OF THE LEASE, THE REVISED AGREEMEN T IS CONSIDERED AS A NEW AGREEMENT OVER ITS REVISED TERM . CHANGES IN ESTIMATES (FOR EXAMPLE, CHANGES IN ESTIM ATES OF THE ECONOMIC LIFE OR OF THE RESIDUAL VALUE OF TH E LEASED ASSET) OR CHANGES IN CIRCUMSTANCES (FOR EXAMPLE, DE FAULT BY THE LESSEE), HOWEVER, DO NOT GIVE RISE TO A NEW CLASSIFICATION OF A LEASE FOR ACCOUNTING PURPOSES. 12. NOW, IF, WE EXAMINE VARIOUS DEFINITIONS CONTAI NED IN PARAGRAPH 3, WE FIND THAT THE SAME DEALS PRIMARILY WITH DEFINING OF FINANCE LEASE, OPERATING LEASE, NON-CANCELLABLE LEASE, LEASE TERM, FAIR VALUE OF ASSET, ECONOMIC LIFE, USEFUL LI FE, RESIDUAL VALUE, GUARANTEED RESIDUAL VALUE OF LEASE ASSETS. IT CLEA RLY SHOWS THAT THE MAIN OBJECT OF THE AS 19 IS TO DEAL WITH THE LE ASES CONCERNING MOVABLE ASSETS AND IT SPECIFICALLY EXCLUDES LEASE A GREEMENTS TO USE LANDS. WE FIND CONSIDERABLE FORCE IN THE SUBMI SSIONS OF LD. CIT-DR THAT AS 19 IS NOT APPLICABLE TO LEASE OF IMM OVABLE PROPERTY. THEREFORE, THE ASSESSING OFFICER RIGHTLY ADDED BACK THE RENT EQUALIZATION RESERVE DEBITED TO PROFIT & LOSS ACCOUNT WHILE COMPUTING THE BOOK PROFIT FOR THE PURPOSES OF SECTI ON 115JB OF THE ACT. MOREOVER, THE ASSESSEE ITSELF HAS ADDED B ACK THIS RESERVE FOR THE PURPOSES OF COMPUTATION OF TOTAL INCOME UND ER THE NORMAL PROVISIONS OF THE ACT. THEREFORE, IN ANY VI EW OF THE MATTER, THE STAND OF THE ASSESSEE IS CONTRADICTORY. ACCORDINGLY, THIS GROUND IS DISMISSED. ITA NO.6866/DEL/2014 21 34. SO, IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, A O HAS RIGHTLY ADDED BACK THE RENT ACQUISITION RESERVE DEB ITED TO PROFIT & LOSS ACCOUNT WHILE COMPUTING THE BOOK PROFIT FOR TH E PURPOSE OF SECTION 115JB OF THE ACT. SO, WE HEREBY DETERMINE GROUNDS NO.4 & 4.1 AGAINST THE ASSESSEE. GROUND NO.5 35. GROUND NO.5 IS PREMATURE. GROUND NO.6 36. GROUND NO.6 IS CONSEQUENTIAL. 37. RESULTANTLY, THE APPEAL FILED BY THE ASSESSEE I S PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN OPEN COURT ON THIS 13 TH DAY OF OCTOBER, 2017. SD/- SD/- (R.K. PANDA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 13 TH DAY OF OCTOBER, 2017 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.