M/s. Sony Mobile Communications International AB (India Branch Office), New Delhi V. DDIT, New Delhi

ITA 769/DEL/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8113 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 2 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 28-04-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 10-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A M GOVIL
• Assessee Lawyers: PARTH S
• Keywords: Depreciation; Transfer pricing; Rectification of order; Opportunity of being heard; International transaction; Wholly owned subsidiary
• Section: 143(3); 10AA; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-2 : NEW DELHI BEFORE SHRI R.S. SYAL, AM & SHRI KULDIP SINGH, JM ITA NO.769/DEL/2014 ASSESSMENT YEAR : 2009-10 SONY MOBILE COMMUNICATIONS INTERNATIONAL AB (INDIA BRANCH OFFICE), (FORMERLY KNOWN AS SONY ERICSSON MOBILE COMMUNICATION INTERNATIONAL AB), A-31, MOHAN COOPERATIVE INDUSTRIAL ESTATE, NEW DELHI. PAN: AAGCS4829J VS. DDIT, CIRCLE-2(2), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI NAGESWAR RAO, SHRI SANDEEP S. KARHAIL & SHRI PARTH, ADVOCATES DEPARTMENT BY : SHRI A.M. GOVIL, CIT, DR DATE OF HEARING : 28.04.2016 DATE OF PRONOUNCEMENT : 29.04.2016 ORDER PER R.S. SYAL, AM: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE FINAL ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER (A O) U/S 143(3) READ ITA NO.6794/DEL/2015 2 WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (HERE INAFTER ALSO CALLED THE ACT) ON 30.12.2013 IN RELATION TO THE ASSESSM ENT YEAR 2009-10. 2. THE FIRST MAJOR ISSUE RAISED BY THE ASSESSEE IN THIS APPEAL IS AGAINST THE ADDITION OF RS.3,84,30,722/- MADE BY THE AO ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS AN INDIAN BRANCH OFFICE OF SONY MOBILE COMMUNICATIONS INTERNA TIONAL AB (HEREINAFTER REFERRED TO AS `SMCI) (FORMERLY CALLE D SONY ERICSSON MOBILE COMMUNICATIONS INTERNATIONAL AB), A COMPANY INCORPORATED UNDER THE LAWS OF SWEDEN. THE ASSESSEES HEAD OFFI CE IS A WHOLLY OWNED SUBSIDIARY OF SONY ERICSON MOBILE COMMUNICATI ONS AB (HEREINAFTER REFERRED TO AS `SEMC). SMCI SET UP A BRANCH OFFICE (R&D CENTRE) IN A SPECIAL ECONOMIC ZONE (SEZ) IN CHENNAI WITH THE OBJECTIVE OF ENTERING INTO RESEARCH AND DEVELOPMENT ACTIVITY IN THE INFORMATION TECHNOLOGY INDUSTRY. THE ASSESSEE FILED ITS RETURN ALONG WITH THE AUDIT REPORT IN FORM NO. 3CEB SHOWING FOUR INTERNATIONAL TRANSACTIONS. ON A REFERENCE MADE BY THE AO TO THE TRANSFER PRICING OF FICER (TPO) FOR ITA NO.6794/DEL/2015 3 DETERMINING THE ARMS LENGTH PRICE (ALP) OF THESE I NTERNATIONAL TRANSACTIONS, THE TPO TOOK UP FOR CONSIDERATION THE INTERNATIONAL TRANSACTION OF RENDERING SERVICES WITH THE TRANSA CTED VALUE OF RS.58,93,09,326/-. THE TPO NOTICED THAT THE ASSESS EE ENTERED INTO AN AGREEMENT WITH SONY ERICSON MOBILE COMMUNICATIONS ( SEMC) FOR CARRYING OUT R&D SERVICES RELATING TO CONTRACT SOFT WARE DEVELOPMENT MAINTENANCE AND UP GRADATION AND CONTRACT DESIGN, D EVELOPMENT, TESTING AND ANY SIMILAR ACTIVITIES IN RELATION TO MOBILE PH ONES, THEIR ACCESSORIES, COMMUNICATION DEVICES OR COMMUNICATION SYSTEMS. TH E NATURE OF BUSINESS CARRIED ON BY THE ASSESSEE WAS CHARACTERIZ ED BY THE TPO AS THAT OF PROVIDING SOFTWARE SERVICES TO ITS AE. THE ASSE SSEE ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH THE PROFIT LEVEL INDICATOR (PLI) OF OPE RATING PROFIT/OPERATING COST FOR DEMONSTRATING THAT THE IN TERNATIONAL TRANSACTION OF RENDERING OF SERVICES WAS AT ALP. SEVENTEEN C OMPANIES WERE SELECTED BY THE ASSESSEE AS COMPARABLE WITH THEIR A VERAGE PLI OF 13.28%. AFTER APPLYING CERTAIN FILTERS, THE UPDATE D MARGIN OF THE FINALLY SELECTED NINE COMPANIES WAS WORKED OUT AT 13.21%. THE TPO ANALYSED ITA NO.6794/DEL/2015 4 THE FUNCTIONS PERFORMED BY THE ASSESSEE AND THE OTH ER RELEVANT DETAILS FURNISHED BEFORE HIM. AFTER DOING ALL THIS, HE SHO RTLISTED 19 COMPANIES (SHOWN AS 21 IN THE TABLE WITH DUPLICATION OF TWO C OMPANIES), AS TABULATED ON PAGES 55 AND 56 OF HIS ORDER, AS COMPA RABLE WITH THEIR AVERAGE OP/TC AT 26.37%. BY APPLYING THIS PROFIT RA TE AS BENCHMARK, THE TPO PROPOSED A TRANSFER PRICING ADJUSTMENT OF R S.10,68,36,646/-. THE ASSESSEE ASSAILED THE DRAFT ORDER OF THE AO CON TAINING SUCH ADDITION BEFORE THE DISPUTE RESOLUTION PANEL (DRP). AFTER C ERTAIN RECTIFICATION ORDER PASSED BY THE TPO PURSUANT TO THE DIRECTIONS OF THE DRP, A FINAL ADDITION OF RS.3.84 CRORE WAS MADE BY THE AO, AGAIN ST WHICH THE ASSESSEE HAS COME UP IN APPEAL BEFORE US. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE ON THE DET ERMINATION OF ALP OF ANY TRANSACTION OTHER THAN THAT OF `RENDERING OF SE RVICES WITH THE DECLARED VALUE AT RS.58,93,09,326/-. FURTHER, THERE IS NO DISPUTE ON THE APPLICATION OF THE TNMM AS THE MOST APPROPRIATE MET HOD WITH PLI OF OP/TC. THE ASSESSEE IS AGGRIEVED ONLY AGAINST INCL USION OF THREE ITA NO.6794/DEL/2015 5 COMPANIES IN THE FINAL SET OF COMPARABLES, NAMELY, INFOSYS LTD., TATA CONSULTANCY SERVICES LTD. (CONSOLIDATED) AND BODHTR EE CONSULTING LTD. (STANDALONE). WE WILL TAKE UP THESE THREE COMPANIE S IN SERIATIM TO DECIDE THEIR INCLUSION IN THE FINAL LIST OF COMPARA BLES. 5. BEFORE DECIDING THE COMPARABILITY OR OTHERWI SE OF THE THREE COMPANIES UNDER CHALLENGE, IT IS OF PARAMOUNT IMPOR TANCE TO FIRST ASCERTAIN THE FUNCTIONAL PROFILE OF THE ASSESSEE. I T HAS BEEN NOTICED ABOVE THAT THE ASSESSEE IS PROVIDING RESEARCH AND DEVELOP MENT SERVICES RELATING TO CONTRACT SOFTWARE DEVELOPMENT MAINTENANCE AND UP GRADATION AND CONTRACT DESIGN, DEVELOPMENT, TESTING AND ANY SIMIL AR ACTIVITIES IN RELATION TO MOBILE PHONES, THEIR ACCESSORIES, COMMU NICATION DEVICES OR COMMUNICATION SYSTEMS. SUCH SERVICES WERE PROVIDED PURSUANT TO AN AGREEMENT ENTERED INTO BETWEEN THE ASSESSEE THROUGH ITS HEAD OFFICE, NAMELY, SMCI ON THE ONE HAND AND SEMC ON THE OTHER. A COPY OF THIS AGREEMENT DATED 19.9.2008 IS AVAILABLE ON PAGE 102 ONWARDS. THE NATURE OF SERVICES PROVIDED BY THE ASSESSEE PURSUAN T TO THIS AGREEMENT ARE CONTAINED IN ANNEXURE, WHICH ARE VERBATIM REPRODUCTION OF WHAT ITA NO.6794/DEL/2015 6 HAS BEEN MENTIONED ABOVE. THIS AGREEMENT PROVIDES THAT THE ASSESSEE WILL BE COMPENSATED BY ITS AE ON ALL COSTS INCURRED IN PROVIDING SUCH SOFTWARE SERVICES WITH A CERTAIN MARK UP. THE TER M COSTS HAS BEEN DEFINED TO MEAN ALL VARIABLE AND FIXED OPERATING EX PENSES INCLUDING NORMAL RECURRING COSTS, SUCH AS, LEASE RENT, COMMUN ICATION AND LINKAGE CHARGES, SALARIES, EMPLOYEE BENEFITS, DEPRECIATION, AMORTIZATION AND NET LOSS OF FOREIGN EXCHANGE TRANSACTIONS. IT HAS BEEN PROVIDED THAT THE TERM COSTS SHALL NOT INCLUDE INTEREST PAID, LOSS IN SA LE OF FIXED ASSETS AND ANY PRIOR PERIOD OR EXTRAORDINARY EXPENSES. AS PER THIS AGREEMENT, THE ASSESSEE, INDIAN BRANCH OF SMCI, HAS UNDERTAKEN TO PERFORM RESEARCH AND DEVELOPMENT SERVICES FOR THE BENEFIT OF SEMC. CLAUSE 6 OF THE AGREEMENT IS IMPORTANT, AS PER WHICH SEMC SHALL, A T ALL TIMES, BE THE SOLE OWNER OF ALL RIGHTS RELATING TO OR EMANATING F ROM ANY INFORMATION OR MATERIAL INCLUDING INTANGIBLES SUPPLIED BY IT TO TH E ASSESSEE. IT HAS FURTHER BEEN AGREED THAT THE ASSESSEE WILL NOT ACQU IRE ANY OWNERSHIP OR ECONOMIC INTEREST IN THE INTANGIBLES. WE HAVE GONE THROUGH CERTAIN INVOICES RAISED BY THE ASSESSEE ON SEMC, COPIES OF WHICH ARE AVAILABLE ON PAGE 118 ONWARDS OF THE PAPER BOOK. FOR EXAMPLE , INVOICE DATED ITA NO.6794/DEL/2015 7 7.1.2009 HAS BEEN RAISED ON SEMC BY GIVING TOTAL E XPENSES INCURRED DURING THE MONTH OF DECEMBER, 2008 TO WHICH A MARKU P OF 15% HAS BEEN ADDED. SIMILAR IS THE POSITION ABOUT 15% MARK UP ON THE COSTS INCURRED BY THE ASSESSEE IN PROVIDING THESE SOFTWAR E SERVICES TO ITS AE IN OTHER MONTHS. WITH THE ABOVE BACKGROUND IN MIND AB OUT THE FUNCTIONAL PROFILE OF THE ASSESSEE, WE WILL NOW TRY TO ASCERTA IN AS TO WHETHER OR NOT THE ABOVE REFERRED THREE COMPANIES ARE COMPARABLE. I) INFOSYS TECHNOLOGIES LTD. 6.1. THE TPO NOTICED THAT THIS COMPANY WAS FINDING PLACE IN THE ACCEPT/REJECT MATRIX. HE FOUND IT TO BE ENGAGED INT O SOFTWARE DEVELOPMENT SERVICES QUALIFYING ALL THE FILTERS APP LIED BY HIM. THE ASSESSEE RAISED CERTAIN OBJECTIONS BEFORE THE DRP A GAINST THE INCLUSION OF THIS COMPANY, BUT WITHOUT ANY SUCCESS. THE TPO COMPUTED OPERATING PROFIT MARGIN OF THIS COMPANY AT 40.74% AND CONSID ERED IT ACCORDINGLY. THE ASSESSEE IS AGGRIEVED AGAINST THE INCLUSION OF THIS COMPANY IN THE EVENTUAL SET OF COMPARABLES. ITA NO.6794/DEL/2015 8 6.2. WE ARE DISINCLINED TO SUSTAIN THE PRELIMINARY OBJECTION TAKEN BY THE LD. DR THAT THE ASSESSEE SHOULD BE PROHIBITED FROM ADOPTING A STAND CONTRARY TO THE ONE TAKEN AT THE STAGE OF THE TP ST UDY OR DURING THE COURSE OF PROCEEDINGS BEFORE THE TPO. IT GOES WITHO UT SAYING THAT THE OBJECT OF AN ASSESSMENT IS TO DETERMINE THE INCOME IN RESPECT OF WHICH THE ASSESSEE IS RIGHTLY CHARGEABLE TO TAX. AS THE I NCOME NOT ORIGINALLY OFFERED FOR TAXATION, IF OTHERWISE CHARGEABLE, IS R EQUIRED TO BE INCLUDED IN THE TOTAL INCOME, IN THE SAME BREATH, ANY INCOME WRONGLY INCLUDED IN THE TOTAL INCOME, WHICH IS OTHERWISE NOT CHARGEABLE , SHOULD ALSO BE EXCLUDED. THERE CAN BE NO ESTOPPEL AGAINST THE PROV ISIONS OF THE ACT. EXTENDING THIS PROPOSITION FURTHER TO THE CONTEXT O F THE TRANSFER PRICING, WE FIND THAT IF AN ASSESSEE FAILS TO REPORT AN OTHE RWISE COMPARABLE COMPANY, THEN THE TPO IS OBLIGED TO INCLUDE IT IN T HE LIST OF COMPARABLES, AND IN THE SAME MANNER, IF AN ASSESSE E WRONGLY REPORTS AN INCOMPARABLE CASE AS COMPARABLE IN ITS TP STUDY AND THEN LATER ON CLAIMS THAT IT SHOULD BE EXCLUDED, THEN, THERE SHO ULD BE NOTHING TO FORBID FROM CLAIMING SO, PROVIDED THE TPO IS SATISFIED TH AT THE COMPANY SO ORIGINALLY REPORTED AS COMPARABLE IS, IN FACT, NOT COMPARABLE. THE ITA NO.6794/DEL/2015 9 SPECIAL BENCH OF THE TRIBUNAL IN DCIT VS. QUARK SYSTEMS PVT. LTD. (2010) 132 TTJ (CHD) (SB) 1 HAS ALSO HELD THAT A COMPANY WHICH WAS INCLUDED BY THE ASSESSEE AND ALSO BY THE TPO IN THE LIST OF COMPARABLES AT THE TIME OF COMPUTING ALP, CAN BE EXCLUDED BY TH E TRIBUNAL, IF THE ASSESSEE PROVES THAT THE SAME WAS WRONGLY INCLUDED. 6.3. TURNING TO THE FUNCTIONAL COMPARABILITY, WE F IND THAT THE ASSESSEE IS SIMPLY A CAPTIVE UNIT RENDERING SERVICES TO ITS AE ALONE WITHOUT ACQUIRING ANY INTELLECTUAL PROPERTY RIGHTS IN THE W ORK DONE BY IT IN THE DEVELOPMENT OF SOFTWARE. THE HONBLE DELHI HIGH CO URT IN CIT VS. AGNITY INDIA TECHNOLOGIES (P) LTD. (2013) 219 TAXMA NN 26 (DEL) CONSIDERED THE GIANTNESS OF INFOSYS LTD., IN TERMS OF RISK PROFILE, NATURE OF SERVICES, NUMBER OF EMPLOYEES, OWNERSHIP OF BRAN DED PRODUCTS AND BRAND RELATED PROFITS, ETC. IN COMPARISON WITH THE FACTORS PREVAILING IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD., BEING, A CAPTIVE UNIT PROVIDING SOFTWARE DEVELOPMENT SERVICES WITHOUT HAV ING ANY IP RIGHTS IN THE WORK DONE BY IT. AFTER MAKING COMPARISON OF VA RIOUS FACTORS AS ENUMERATED ABOVE, THE HONBLE DELHI HIGH COURT HELD INFOSYS LTD. TO BE ITA NO.6794/DEL/2015 10 INCOMPARABLE WITH AGNITY INDIA TECHNOLOGIES PVT. LT D. THE FACTS OF THE INSTANT CASE ARE MORE OR LESS SIMILAR INASMUCH AS T HE EXTANT ASSESSEE IS ALSO A CAPTIVE SERVICE PROVIDER AND ALSO NOT OWNING ANY BRANDED PRODUCTS WITH NO EXPENDITURE OF ITS OWN ON R&D ETC. WHEN WE CONSIDER THE ABOVE FACTORS IN A HOLISTIC MANNER, THERE REMAI NS ABSOLUTELY NO DOUBT IN OUR MINDS THAT INFOSYS TECHNOLOGIES LTD. IS NON- COMPARABLE WITH THE ASSESSEE COMPANY. RESPECTFULLY FOLLOWING THE JUDGM ENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN AGNITY INDIA (SUPRA) , WE HOLD THAT INFOSYS TECHNOLOGIES LTD., CANNOT BE TREATED AS COMPARABLE WITH THE ASSESSEE COMPANY. THIS COMPANY IS, THEREFORE, DIRECTED TO B E EXCLUDED FROM THE LIST OF COMPARABLES. II) TCS LTD . 7.1. THIS COMPANY WAS CHOSEN BY THE TPO AS COMP ARABLE. THE ASSESSEES OBJECTIONS ABOUT THIS COMPANYS INCOMPAR ABILITY WERE TURNED DOWN. 7.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUAL REPORT OF THIS COMPANY THAT ITA NO.6794/DEL/2015 11 ITS TOTAL INCOME COMPRISES OF REVENUES FROM `IT AND CONSULTANCY SERVICES AT RS.21535.75 CRORE AND `SALE OF EQUIPME NT AND SOFTWARE LICENSES AT RS.868.25 CRORE. THE TPO HAS TAKEN EN TITY LEVEL FIGURES OF THIS COMPANY FOR THE PURPOSE OF MAKING COMPARISON. WHEN WE PERUSE THE SEGMENTAL REPORTING GIVEN BY THIS COMPANY, IT T URNS OUT THAT THE SAME HAS BEEN DONE ON THE BASIS OF GEOGRAPHICAL LOCATION S AND THERE ARE NO FUNCTIONAL SEGMENTS. IT IS FURTHER NOTICED ABOVE T HAT TOTAL REVENUE OF THIS COMPANY INCLUDES A LARGER CHUNK FROM THE SALE OF EQ UIPMENT AND SOFTWARE LICENSES, WHICH RENDERS IT INCOMPARABLE WI TH THE ASSESSEE, WHICH IS SOLELY ENGAGED IN RENDERING SOFTWARE SERVI CES TO ITS AE. 7.3. SIGNIFICANTLY, PAGE 23 OF THE ANNUAL REPORT OF THIS COMPANY DIVULGES THAT: DURING THE YEAR 2008-09, THE COMPAN Y HAS ACQUIRED CITIGROUP INC.S (CITI) 96.26% INTEREST IN TCS E-SE RVE LTD. (FORMERLY KNOWN AS CITIGROUP GLOBAL SERVICES LTD.), THE INDI A-BASED CAPITAL BPO, FOR A TOTAL CONSIDERATION OF USD 504.54 MILLION. T HIS INDICATES THAT THIS COMPANY MADE ACQUISITION DURING THE YEAR IN QUESTIO N WHICH IS AN EXTRAORDINARY FINANCIAL EVENT. THE MUMBAI BENCH OF THE TRIBUNAL IN ITA NO.6794/DEL/2015 12 PETRO ARALDITE (P) LTD. VS. DCIT (2013) 154 TTJ (MU M) 176, HAS HELD THAT A COMPANY CANNOT BE CONSIDERED AS COMPARABLE B ECAUSE OF EXCEPTIONAL FINANCIAL RESULTS DUE TO MERGERS/DEMERG ERS. SIMILAR VIEW HAS BEEN ADOPTED BY THE DELHI BENCH OF THE TRIBUNAL IN SEVERAL CASES INCLUDING CIENA INDIA PVT. LTD. VS. DCIT (ITA NO.3324/DEL/2013) VIDE ITS ORDER DATED 23.4.2015. THE LD. DR CONTENDED TH AT THE MERE FACT OF ACQUISITION AND MERGER SHOULD NOT BE CONSIDERED AS A DECISIVE TEST FOR EXCLUSION OF A COMPANY UNLESS IT HAS AFFECTED THE P ROFITABILITY DUE TO SUCH MERGER ETC. WE ARE NOT INCLINED TO ACCEPT THIS CONTENTION FOR THE OBVIOUS REASON THAT ONCE ACQUISITION AND MERGER ETC . HAS TAKEN PLACE, IT IS ALWAYS LIKELY TO AFFECT THE PROFITABILITY OF SUC H A COMPANY IN THE YEAR OF ACQUISITION ETC. THERE CANNOT BE ANY STANDARD YA RDSTICK TO MEASURE THE IMPACT OF SUCH A FACTOR ON THE OVERALL PROFITABILIT Y OF SUCH A COMPANY. IT IS RELEVANT TO HIGHLIGHT THAT WE ARE CONSIDERING TH E EXCLUSION OF A COMPANY ON THIS SCORE. IN OUR CONSIDERED OPINION, WHEN OTHER COMPARABLES ARE AVAILABLE, THE EXCLUSION OF A PROBA BLE COMPARABLE COMPANY CANNOT HAVE MUCH SIGNIFICANCE IN CONTRAST T O A SITUATION OF INCLUSION OF A PROBABLE INCOMPARABLE. RESPECTFULLY FOLLOWING THE ABOVE ITA NO.6794/DEL/2015 13 REFERRED DECISIONS, WE HOLD THAT TCS LTD. CANNOT BE CONSIDERED AS COMPARABLE WITH THE ASSESSEE. THE SAME IS DIRECTED TO BE EXCLUDED. (III) BODHTREE CONSULTING LTD . 8.1. THIS COMPANY WAS CHOSEN BY THE TPO AS COMPARAB LE. THE ASSESSEES OBJECTIONS TO THE FUNCTIONAL DISSIMILARI TY OF THIS COMPANY WERE JETTISONED. THAT IS HOW THE TPO FINALLY INCLU DED THIS COMPANY IN THE LIST OF COMPARABLES. THE ASSESSEE IS AGGRIEVED AGAINST THE INCLUSION OF THIS COMPANY. 8.2. THE TPO TREATED BODHTREE CONSULTING LTD. AS ON E OF THE COMPARABLES. THE ASSESSEE OBJECTED TO THE INCLUSIO N OF THIS COMPANY ON THE GROUND OF FUNCTIONAL DISSIMILARITY AND ITS FLUC TUATING PROFIT MARGINS. THE TPO REJECTED THE ASSESSEES CONTENTION ABOUT TH E SUPER NORMAL PROFITS EARNED BY THIS COMPANY DURING THE YEAR AND ALSO HELD THE SAME TO BE FUNCTIONALLY SIMILAR INASMUCH AS IT WAS HAVING O NLY ONE IDENTIFIABLE REPORTING SEGMENT, I.E., SOFTWARE DEVELOPMENT SERVI CES. THE ASSESSEE IS AGGRIEVED WITH THE INCLUSION OF THIS COMPANY IN THE FINAL LIST OF COMPARABLES. ITA NO.6794/DEL/2015 14 8.3. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PE RUSING THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUAL REPORT OF THIS COMPANY, THAT IT HAS ONLY ONE SEGMENT, NAMELY, SOFTWARE DEVELOPM ENT. IT IS ENGAGED IN PROVIDING OPEN AND END-TO-END WEB SOLUTIONS, OFF -SHORING DATA MANAGEMENT, DESIGN AND DEVELOPMENT OF SOLUTIONS. WH EN WE CONSIDER THE NATURE OF SERVICES PROVIDED BY THE ASSESSEE UND ER THIS SEGMENT, NAMELY, SOFTWARE DEVELOPMENT, THERE REMAINS NO DOUB T THAT FUNCTIONALLY BODHTREE CONSULTING LTD. IS A COMPARABLE ENTITY. 8.4. THE LD. AR SUBMITTED THAT BODHTREE CONSULTIN G LTD. CANNOT BE CONSIDERED AS COMPARABLE BECAUSE OF A DIFFERENT MOD EL OF REVENUE RECOGNITION. HE INVITED OUR ATTENTION TOWARDS THE A NNUAL REPORT OF THIS COMPANY, IN WHICH IT HAS BEEN REPORTED THAT REVENUE FROM SOFTWARE DEVELOPMENT IS RECOGNIZED BASED ON SOFTWARE DEVELOP ED AND BILLED TO CLIENTS. HE SUBMITTED THAT THE COSTS INCURRED BY T HIS COMPANY IN RESPECT OF THE PROJECTS PENDING COMPLETION AT THE END OF TH E YEAR ARE BOOKED AT THE TIME OF INCURRING, BUT, THE INCOME IS RECOGNIZE D ON THE RAISING OF BILLS ITA NO.6794/DEL/2015 15 IN SUBSEQUENT YEAR, THEREBY DISTORTING THE COMPARAB ILITY WITH THE ASSESSEE COMPANY. 8.5. WE FIND THAT THE ASSESSEE IS RAISING INVOIC ES ON MONTH TO MONTH BASIS. FROM THE DATES OF INVOICES RAISED BY THE AS SESSEE, IT IS FOUND THAT SUCH INVOICES ARE RAISED IN SUCCEEDING MONTH OF DOI NG THE WORK. FOR EXAMPLE, TOTAL EXPENSES INCURRED BY THE ASSESSEE IN RENDERING THE SERVICES IN THE MONTH OF JUNE, 2008 WILL BE BILLED IN THE MONTH OF JULY, 2008. THIS SHOWS THAT EXPENSES INCURRED IN RENDERIN G SERVICES BETWEEN APRIL 2008 TO FEBRUARY, 2009 AND DEBITED TO THE PRO FIT AND LOSS ACCOUNT MATCH WITH THE CORRESPONDING INVOICES RAISED DURING THE MONTHS OF MAY 2008 TO MARCH 2009. HOWEVER, DIFFICULTY ARISES QUA THE EXPENSES INCURRED IN RENDERING THE SERVICES DURING THE MONTH OF MARCH, 2008, FOR WHICH BILL IS RAISED IN THE MONTH OF APRIL, 2008 AN D THE EXPENSES INCURRED IN RENDERING THE SERVICES DURING THE MONTH OF MARCH, 2009, FOR WHICH THE BILL IS RAISED IN THE MONTH OF APRIL, 200 0. THE ASSESSEE FOLLOWS THE FINANCIAL YEAR CLOSING, NAMELY, MARCH ENDING EV ERY YEAR. THE REVENUE FOR THE YEAR ENDING 31.3.2009 THUS INCLUDES THE INVOICE RAISED ITA NO.6794/DEL/2015 16 DURING THE MONTH OF APRIL, 2008 FOR WHICH EXPENSES WERE INCURRED AND BOOKED IN THE PRECEDING YEAR AND ACCORDINGLY THE EX PENSES INCURRED DURING THE YEAR INCLUDE EXPENSES INCURRED AND BOOKE D DURING THE MONTH OF MARCH, 2009, FOR WHICH INCOME GOT RECOGNIZED IN SUCCEEDING YEAR. THIS DISTORTS THE MATCHING PRINCIPLE IN THE SAME WA Y AS IS BEING DONE BY BODHTREE, A POSITION CONTRARY TO WHAT HAS BEEN ARGU ED BY THE LD. AR. THE ASSESSEE RAISED INVOICE IN APRIL, 2008 FOR POUN DS 3,22,465.01 AND IN APRIL, 2009 FOR POUNDS 3,40,153.46. DIFFERENCE IN THESE TWO AMOUNTS, TRANSLATED INTO INDIAN RUPEES, AS PER THE LD. AR WOULD BE ROUGHLY TO THE TUNE OF RS. 18.00 LAC. THIS SHOWS THAT BOTH THE ASS ESSEE AND BODHTREE CONSULTING LTD. ARE NOT FOLLOWING ANY DIFFERENT PAT TERN OF INCOME RECOGNITION, NAMELY, BODHTREE CONSULTING IS RECOGNI ZING INCOME AT THE COMPLETION OF PROJECT AND THE ASSESSEE AT THE END O F MONTH. IN SUCH CIRCUMSTANCES, WE FIND IT DIFFICULT TO ORDER THE EX CLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES ON THIS SOLE GROUND, W HEN THIS COMPANY IS OTHERWISE FUNCTIONALLY SIMILAR. ITA NO.6794/DEL/2015 17 8.6. THE LD. AR RELIED ON AN ORDER PASSED BY THE DELHI TRIBUNAL IN CIENA INDIA (P.) LTD. VS. ITO (2015) 59 TAXMANN.COM 92 (DEL -TRIB), IN WHICH BODHTREE HAS BEEN HELD TO BE NOT COMPARABLE. IT WAS THEREFORE, URGED THAT THE SAME VIEW BE TAKEN HERE ALSO. WE AR E NOT INCLINED TO ACCEPT THIS PROPOSITION. IT HAS BEEN REPEATEDLY LAI D DOWN IN SEVERAL DECISIONS THAT A PARTICULAR COMPANY TREATED AS COMP ARABLE IN ONE CASE DOES NOT PER SE BECOME COMPARABLE IN ALL OTHER CASES AND VICE VERSA . WHAT IS REQUIRED TO BE SEEN IS THE BASIS/FACTOR ON WHICH SUCH COMPANY WAS HELD AS COMPARABLE OR NON-COMPARABLE IN THE FIR ST CASE. IF THE SAME BASIS/FACTOR EXISTS IN OTHER CASES AS WELL THEN, NO DIFFERENT VIEW CAN BE TAKEN. BUT IF THE RELEVANT BASIS/FACTOR FOR DECISIO N IN THE FIRST CASE DOES NOT EXIST IN THE OTHER CASES, IT IS BUT NATURAL THA T DIFFERENT VIEW WILL HAVE TO BE TAKEN. IN CIENA (SUPRA) , THE TRIBUNAL FOUND BODHTREE AS OTHERWISE FUNCTIONALLY COMPARABLE, EXCEPT CIENA ACCOUNTING FO R EXPENSES MATCHING WITH THE REVENUE AS AGAINST THE OTHERWISE POSITION IN BODHTREE, WHICH LED TO TREATING IT AS NON-COMPARABLE ON THE B ASIS OF SUCH INCOME RECOGNITION METHODOLOGY. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND SUCH DISTINGUISHING FACTOR TO BE ABSENT HERE. WE, THEREFORE, HOLD THAT ITA NO.6794/DEL/2015 18 THE AUTHORITIES BELOW WERE JUSTIFIED IN INCLUDING T HIS COMPANY IN THE FINAL LIST OF COMPARABLES. 9.1. THE NEXT ISSUE RAISED BY THE LD. AR IS ABOUT N OT GRANTING OF WORKING CAPITAL ADJUSTMENT. THE ASSESSEE REQUESTED FOR ALLOWING WORKING CAPITAL ADJUSTMENT WHICH THE TPO REFUSED TO ALLOW ON THE GROUND THAT SUCH ADJUSTMENT WOULD BE RELEVANT ONLY WHEN SOME INVENTORY REMAINS TIED UP OR RECEIVABLES ARE HELD U P WHICH CANNOT BE A CRITERIA IN A SERVICE INDUSTRY AS THE ASSESSEE IS E NGAGED IN. HE, THEREFORE, REFUSED TO ALLOW ANY WORKING CAPITAL ADJUSTMENT. 9.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE ASSESSE E LODGED A CLAIM FOR GRANT OF WORKING CAPITAL ADJUSTMENT. THE TPO REFUSE D TO ALLOW SUCH ADJUSTMENT. THE DRP STRENGTHENED THE CASE OF THE TP O BY ADDING ONE MORE REASON, BEING THE NECESSITY AND NON-AVAILABILI TY OF DAILY AVERAGE OF WORKING CAPITAL DEPLOYED AS AGAINST THE USE BY THE ASSESSEE OF THE AVERAGE OF SUCH FIGURES OF WORKING CAPITAL ON THE F IRST AND THE LAST DAYS OF THE ACCOUNTING PERIOD. ITA NO.6794/DEL/2015 19 9.3. WE ARE NOT INCLINED TO ACCEPT THE VIEW CANVASS ED BY THE AUTHORITIES THAT THE WORKING CAPITAL ADJUSTMENT CANNOT BE ALLOW ED AS THE ASSESSEE IS IN SERVICE INDUSTRY. SUCH AN ADJUSTMENT IS RESTRICT ED TO INVENTORY, TRADE RECEIVABLES AND TRADE PAYABLES. IF A COMPANY CARRI ES HIGH TRADE RECEIVABLES, IT WOULD MEAN THAT IT IS ALLOWING ITS CUSTOMERS RELATIVELY LONGER PERIOD TO PAY THEIR DUES, WHICH WILL RESULT INTO HIGHER INTEREST COST AND THE RESULTANT LOW NET PROFIT. SIMILARLY, BY CA RRYING HIGH TRADE PAYABLES, A COMPANY BENEFITS FROM A RELATIVELY LONG ER PERIOD AVAILABLE TO IT FOR PAYING BACK THE DUES TO ITS SUPPLIERS, WHIC H REDUCES THE INTEREST COST AND INCREASES PROFITS. IN ORDER TO NEUTRALIZE THE DIFFERENCES ON ACCOUNT OF CARRYING HIGH OR LOW INVENTORY, TRADE PA YABLES AND TRADE RECEIVABLES, AS THE CASE MAY BE, IT BECOMES EMINENT TO ALLOW WORKING CAPITAL ADJUSTMENT SO AS TO BRING THE CASE OF THE A SSESSEE AT PAR WITH THE OTHER FUNCTIONALLY COMPARABLE ENTITIES. WE, THEREF ORE, AGREE IN PRINCIPLE WITH THE GRANT OF WORKING CAPITAL ADJUSTMENT. 9.4. THE VIEW TAKEN BY THE DISPUTE RESOLUTION PA NEL (DRP) FOR COMPUTING SUCH ADJUSTMENT ON THE BASIS OF DAILY AVE RAGE OF WORKING ITA NO.6794/DEL/2015 20 CAPITAL DEPLOYED BY THE TESTED PARTY AND ALSO EACH OF THE COMPARABLES, IS NOT TENABLE BECAUSE OF THE ORDER PASSED BY THE DELH I BENCH OF THE TRIBUNAL IN THE CASE OF NAVISITE INDIA PVT. LTD. VS. ITO (ITA NO.5329/DEL/2012) . VIDE ITS ORDER DATED 31.5.2013, THE TRIBUNAL HAS HELD THAT THE COMPONENTS OF THE WORKING CAPITAL DEP LOYED SHOULD BE CONSIDERED ON ANNUAL BASIS WITH THE AVERAGE OF OPEN ING AND CLOSING FIGURES. WE, THEREFORE, HOLD THAT THE ENTITLEMENT O F THE ASSESSEE TO THE WORKING CAPITAL ADJUSTMENT, CANNOT BE DENIED. SINCE THE NECESSARY DETAILS QUA THE GRANT OF SUCH AN ADJUSTMENT HAVE NOT BEEN EXAMI NED BECAUSE OF REFUSAL TO GRANT SUCH ADJUSTMENT AT THE THRESHOLD, WE ARE OF THE CONSIDERED OPINION THAT IT WOULD BE FIT AND PRO PER TO SET ASIDE THE IMPUGNED ORDER ON THIS ISSUE AND SEND THE MATTER BA CK TO THE FILE OF THE AO/TPO TO COMPUTE AND ALLOW WORKING CAPITAL ADJUSTM ENT, IF ANY, AVAILABLE TO THE ASSESSEE IN THE LIGHT OF OUR ABOVE DISCUSSION. ONCE IT IS HELD THAT SUCH AN ADJUSTMENT IS ALLOWABLE, THEN IT SHOULD BE CARRIED OUT WHETHER IT FAVOURS OR DISFAVORS THE ASSESSEE. IT GO ES WITHOUT SAYING THAT THE ASSESSEE WILL BE ALLOWED AN OPPORTUNITY OF HEAR ING IN SUCH FRESH DETERMINATION OF THE WORKING CAPITAL ADJUSTMENT, IF ANY. ITA NO.6794/DEL/2015 21 10. TO SUM UP, WE SET ASIDE THE IMPUGNED ORDER ON T HE ISSUE OF ADDITION TOWARDS TRANSFER PRICING ADJUSTMENT AND RE MIT THE MATTER TO THE FILE OF AO/TPO FOR FRESH DETERMINATION OF THE ALP O F THE INTERNATIONAL TRANSACTION OF RENDERING OF SOFTWARE SERVICES IN CO NSONANCE WITH OUR ABOVE DIRECTIONS. NEEDLESS TO SAY, THE ASSESSEE WI LL BE ALLOWED A REASONABLE OPPORTUNITY OF BEING HEARD IN SUCH FRESH PROCEEDINGS. 11. THE ONLY OTHER GROUND WHICH SURVIVES FOR OUR CO NSIDERATION IS THE DISALLOWANCE OF DEDUCTION U/S 10AA OF THE ACT AMOUN TING TO RS.5,42,10,177/- 12. THE FACTS APROPOS THIS ISSUE ARE THAT THE ASSES SEE CLAIMED THIS DEDUCTION U/S 10AA. THE AO REFUSED IT GIVING THREE MAJOR REASONS AS RECORDED ON PAGES 6 AND 7 OF HIS ORDER, NAMELY, FIR ST, THAT THE SERVICES WERE RENDERED BY THE INDIAN BRANCH OFFICE TO ITS HO LDING COMPANY AT COST PLUS BASIS AND THE BRANCH OFFICE CANNOT BE TREATED AS SEPARATE TAXABLE ENTITY DIFFERENT FROM ITS HEAD OFFICE FOR DETERMINI NG THE INCOME WHICH ACCRUES IN RESPECT OF ACTIVITIES UNDERTAKEN BY IT. THE SECOND REASON GIVEN BY THE AO WAS THAT EVEN IF EXPORTS WERE MADE, BUT, SALE PROCEEDS ITA NO.6794/DEL/2015 22 IN FOREIGN CURRENCY WERE NOT RECEIVED IN OR BROUGHT INTO INDIA INASMUCH AS WHAT WAS RECEIVED IN INDIA WAS ONLY REMUNERATION DETERMINED ON COST PLUS BASIS FOR DEVELOPMENT OF COMPUTER SOFTWARE. AN D THIRD REASON WAS THAT THE ASSESSEE CANNOT CLAIM BENEFIT OF DEDUCTION U/S 10AA FROM THE TRANSFER OF SOFTWARE SERVICES TO ITS HOLDING COMPAN Y. IN VIEW OF THE ABOVE REASONS, THE TPO REFUSED TO ALLOW DEDUCTION U /S 10AA. NO RELIEF WAS ALLOWED BY THE DRP, WHICH RESULTED INTO DISALLO WANCE OF RS.5,42,10,177/- MADE BY THE AO. THE ASSESSEE IS A GGRIEVED AGAINST THE DENIAL OF BENEFIT OF DEDUCTION U/S 10AA OF THE ACT. 13. WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT THE ASSESSEE FURN ISHED COMPLETE DETAILS ABOUT THE FULFILLMENT OF ALL THE RELEVANT CONDITION S FOR THE ELIGIBILITY OF DEDUCTION U/S 10AA BEFORE THE AO AS WELL AS THE DRP . COPIES OF SUCH LETTERS ADDRESSED TO THESE AUTHORITIES ARE AVAILABL E ON PAGES 138, 166, 167, 173, 184, 193, ETC. OF THE PAPER BOOK. THE AO HAS DENIED THE DEDUCTION, INTER ALIA, BY HOLDING THAT IN THE INSTANT CASE THERE WERE NO EXPORTS INASMUCH AS CERTAIN SERVICES WERE RENDERED BY THE BRANCH OFFICE ITA NO.6794/DEL/2015 23 TO ITS HEAD OFFICE ON COST PLUS BASIS. WE DO NOT F IND THIS VIEW POINT OF THE AO AS CORRECT FOR THE OBVIOUS REASON THAT THE A SSESSEE DID NOT RENDER THESE SERVICES TO ITS HEAD OFFICE, BUT, TO SEMC, WH ICH IS THE HOLDING COMPANY OF THE ASSESSEES HEAD OFFICE. WE HAVE DIS CUSSED IN DETAIL ABOUT THE INTERNATIONAL TRANSACTION OF RENDERING OF SOFTWARE SERVICES TO ITS AE, ON WHICH TRANSFER PRICING ADJUSTMENT WAS MA DE. UNDER SUCH CIRCUMSTANCES, THE POINT OF VIEW OF THE AO THAT THE SERVICES WERE RENDERED BY THE ASSESSEE TO ITS HOLDING COMPANY, IS WHOLLY INCORRECT. AS REGARDS THE OTHER POINT CONSIDERED BY THE AO FOR DE NIAL OF DEDUCTION ABOUT THE ASSESSEE RENDERING SERVICES TO ITS HEAD O FFICE ALONE, THEREBY LEADING TO TRANSACTION WITH SELF, IN OUR CONSIDERED OPINION, IS AGAIN DEVOID OF MERITS. ONCE THE LAW REQUIRES AN INDIAN BRANCH OF A FOREIGN ENTERPRISE TO BE CONSIDERED INDEPENDENT OF ITS HEAD OFFICE FOR TAXATION PURPOSE, THE AO CANNOT MAKE OUT A CASE THAT THERE I S NO DIFFERENCE BETWEEN HEAD OFFICE AND BRANCH OFFICE IN INDIA AND, HENCE, NO DEDUCTION, WHICH IS OTHERWISE AVAILABLE, SHOULD BE GIVEN. IF THE PRINCIPLE OF MUTUALITY AS INVOKED BY THE AO FOR DENIAL OF DEDUCT ION U/S 10AA IS TAKEN TO ITS LOGICAL CONCLUSION, THEN, IT WOULD ALS O MEAN THAT THE ASSESSEE ITA NO.6794/DEL/2015 24 DID NOT EARN ANY INCOME AT ALL FROM ITS HEAD OFFICE AGAIN ON THE PRINCIPLE OF MUTUALITY. OBVIOUSLY, THIS POSITION IS NOT SUSTA INABLE. BE THAT AS IT MAY, WE ARE CONFRONTED WITH A SITUATION IN WHICH TH E ASSESSEE HAS RENDERED SOFTWARE SERVICES TO ITS AE AND NOT HEAD O FFICE. 14. THE OTHER REASON OF THE AO FOR DENIAL OF DED UCTION U/S 10AA IS THAT THE ASSESSEE DID NOT RECEIVE ANY INCOME AT ALL IN FOREIGN CURRENCY AND WHAT WAS RECEIVED WAS SIMPLY THE COST INCURRED PLUS A CERTAIN MARK UP AND THE SAME CANNOT BE CONSIDERED AS SALE PROCEE DS OF THE SOFTWARE SOLD BY THE ASSESSEE. AGAIN, WE ARE UNABLE TO COUN TENANCE THIS VIEW OF THE AO BECAUSE THE ASSESSEE BROUGHT IN INDIA SALE P ROCEEDS FROM RENDERING OF SERVICES TO ITS AE. THE REMUNERATION MODEL HAS BEEN DECIDED BY THE PARTIES INTER SE WITH A COST PLUS MARK-UP, WHICH IN THE INSTANT CASE, IS 15% OF COSTS. WHAT THE ASSESSEE H AS REALIZED IN INDIA IS NOTHING, BUT, SALE PROCEEDS OF SOFTWARE SERVICE PRO VIDED BY IT TO ITS FOREIGN AE, WHICH INCLUDE NOT ONLY THE COSTS INCURR ED BY IT IN PROVIDING SOFTWARE SERVICES BUT ALSO SUCH MARK-UP. THIS, IN O UR CONSIDERED OPINION, SATISFIES THE REQUIREMENT OF RECEIPT OF FO REIGN CURRENCY IN INDIA. ITA NO.6794/DEL/2015 25 SINCE THE ASSESSEE HAS SATISFIED ALL THE REQUISITE CONDITIONS FOR AVAILING OF THE BENEFIT OF DEDUCTION U/S 10AA, WE ARE OF THE CO NSIDERED OPINION THAT THE AUTHORITIES BELOW ERRED IN REFUSING TO GRANT SU CH DEDUCTION. WE, THEREFORE, OVERTURN THE IMPUGNED ORDER ON THIS ISSU E AND DIRECT THE GRANT OF DEDUCTION U/S 10AA OF THE ACT. 15. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 29.04.201 5. SD/- SD/- [KULDIP SINGH] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 29 TH APRIL, 2015. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.