M/s Brocade Communications Systems Private Limited , Bangalore V. Deputy Commissioner of Income Tax Circle-1(1)(1), Bangalore

ITA 79/BANG/2019

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 0473 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 5 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-06-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 15-06-2020
• Assessment Year: 2014-2015
• Appeal Filed On: 10-01-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MUZAFFAR HUSSAIN BENGALURU
• Assessee Lawyers: T SURYANARAYANA
• Keywords: Capital asset; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Services rendered outside India; Bad and doubtful debts
• Section: 143(3); 56(2); 144C; 13; 22; 92CA; 56; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B R BASKARAN , ACCOUNTANT MEMBER IT (TP) A NO. 79/BANG/2019 ASSESSMENT YEAR : 2014 - 15 BROCADE COMMUNICATIONS SYSTEMS PRIVATE LIMITED, FLOOR-3, B & C WING & FLOOR 8, D WING, S1, WIPRO ELECTRONIC CITY SPECIAL ECONOMIC ZONE, DODDATHOGUR VILLAGE, BEGUR HOBLI, ELECTRONIC CITY, BENGALURU 560 100. PAN : AACCB 4490N . VS. THE DEPUTY COMMMISSIONER OF INCOME TAX, CIRCLE 1(1)(1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI T. SURYANARAYANA, ADVOCATE RESPONDENT BY : SHRI MUZAFFAR HUSSAIN, CIT(DR)(ITAT), BENGALURU. DATE OF HEARING : 15 .0 6 .2020 DATE OF PRONOUNCEMENT : 19 .0 6 .2020 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE FI NAL ASSESSMENT ORDER DATED 30.10.2018 PASSED U/S. 143(3) R.W.S. 14 4C OF THE INCOME-TAX ACT, 1961 [THE ACT]. 2. WE SHALL FIRST TAKE UP FOR CONSIDERATION THE AD DITION ON ACCOUNT OF TRANSFER PRICING [TP] ADJUSTMENT OF RS.17,69,47,938 /- MADE BY THE TRANSFER PRICING OFFICER [TPO] TOWARDS THE INTERNAT IONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES [SWD SER VICES] TO THE IT(TP)A NO.79/BANG/2019 PAGE 2 OF 22 ASSESSEES ASSOCIATED ENTERPRISES [AE], WHICH WAS S UBSEQUENTLY REDUCED TO RS. 15,48,94,050/- ON GIVING EFFECT TO THE DIREC TIONS OF THE DISPUTE RESOLUTION PANEL [DRP]. 3. THE ASSESSEE IS A SUBSIDIARY OF BROCADE COMMUNI CATIONS SWITZERLAND SARL, SWITZERLAND WITH THE LATTER HOLDI NG 99.99% OF EQUITY SHARES OF THE ASSESSEE. THE ASSESSEE PROVIDED SOFTW ARE RESEARCH & DEVELOPMENT SERVICES AND MARKETING & TECHNICAL SUPP ORT SERVICES TO ITS AES. 4. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE, INTER ALIA, PROVIDED CONTRACT SWD SERVICES TO ITS AES FOR A CONSIDERATIO N OF RS. 161,91,46,172. IT IS NOT IN DISPUTE THAT THE TRANSACTION OF RENDER ING SWD SERVICES BY THE ASSESSEE TO ITS AE WAS AN INTERNATIONAL TRANSACTION AND THEREFORE THE PRICE RECEIVED BY THE ASSESSEE FROM ITS AE AND INCOME REC EIVED FROM SUCH TRANSACTION HAS TO PASS THE ARMS LENGTH PRICE [ALP ] TEST AS LAID DOWN IN SECTION 92 OF THE ACT. 5. THE ASSESSEE IN SUPPORT OF ITS CLAIM, THAT THE P RICE RECEIVED FROM THE AE WAS AT ARMS LENGTH, FILED A TP ANALYSIS IN WHIC H IT ADOPTED TRANSACTION NET MARGIN METHOD [TNMM] AS THE MOST APPROPRIATE ME THOD [MAM] FOR DETERMINING THE ALP. THE PROFIT LEVEL INDICATOR [P LI] CHOSEN FOR COMPARING THE ASSESSEES PROFIT MARGIN WITH THAT OF THE COMPA RABLES WAS OPERATING PROFIT TO OPERATING COST [OP/OC]. THE OP/OC OF THE ASSESSEE WAS AS FOLLOWS:- OPERATING INCOME RS. 162,92,37,531/- OPERATING COST RS.139,58,15,664/- OPERATING PROFIT (OP. INCOME OP. COST) RS.23,34,21,867/- OPERATING/NET MARK-UP (OP/TC) 16.72% 6. THE ASSESSEE CHOSE 17 COMPARABLE COMPANIES AND T HE AVERAGE ARITHMETIC MEAN PROFIT OF THOSE COMPANIES WAS 11.98 % BEFORE WORKING IT(TP)A NO.79/BANG/2019 PAGE 3 OF 22 CAPITAL ADJUSTMENT AND 6.77% AFTER WORKING CAPITAL ADJUSTMENT. SINCE ASSESSEES PROFIT MARGIN WAS MORE THAN THAT OF THE COMPARABLE COMPANIES, THE ASSESSEE CLAIMED THAT THE PRICE RECEIVED FROM A E WAS AT ARMS LENGTH. 7. OUT OF THE 17 COMPANIES SELECTED BY THE ASSESSE E, THE TPO, TO WHOM THE AO REFERRED THE QUESTION OF DETERMINATION OF ALP AS REQUIRED U/S. 92CA OF THE ACT, ACCEPTED 4 COMPANIES VIZ., LARSEN AND TOUBRO INFOTECH LTD., THIRDWARE SOLUTIONS LTD., R S SOFTWARE (INDIA ) LTD. AND CIGNITI TECHNOLOGIES LTD. AND REJECTED THE OTHER COMPANIES. THE TPO ON HIS OWN CHOSE 4 OTHER COMPARABLE COMPANIES AND DETERMINED THE ALP AND ADD ITION TO BE MADE TO TOTAL INCOME ON ACCOUNT OF SHORTFALL IN ALP AS FOLLOWS:- COMPARABLES SELECTED BY TPO AND THEIR ARITHMETIC ME AN SL. NO. NAME OF THE COMPANY OP/OC (WC UNADJ) (IN %) 1 INFOSYS LTD. 36.13 2 LARSEN & TOUBRO INFOTECH LTD. 24.61 3 MINDTREE LTD. 20.43 4 PERSISTENT SYSTEMS LTD. 35.10 5 R S SOFTWARE (INDIA) LTD. 24.25 6 CIGNITI TECHNOLOGIES LTD. 27.62 7 SQS INDIA LTD. 22.37 8 THIRDWARE SOLUTION LTD. 44.68 AVERAGE MARK-UP 29.40 COMPUTATION OF ARMS LENGTH PRICE BY THE TPO AND TH E ADJUSTMENT MADE ARMS LENGTH MEAN MARK-UP 29.40% OPERATING COST RS.1,39,58,15,664/- ARMS LENGTH PRICE @129.40% OF COST RS.1,80,61,85,4 69/- PRICE RECEIVED RS.1,62,92,37,531/- SHORTFALL BEING ADJUSTMENT U/S. 92CA RS.17,69,47,938/- 8. THE ADDITION SUGGESTED BY THE TPO WAS ADDED TO T HE TOTAL INCOME OF THE ASSESSEE BY THE AO IN THE DRAFT ORDER OF ASSESS MENT. THE ASSESSEE IT(TP)A NO.79/BANG/2019 PAGE 4 OF 22 PREFERRED OBJECTIONS TO THE SAID DRAFT ASSESSMENT O RDER BEFORE THE DISPUTE RESOLUTION PANEL U/S. 144C OF THE ACT. 9. BRIEFLY, THE DIRECTIONS ISSUED BY THE DRP ARE AS FOLLOWS: (I) FUNCTIONALITY FILTER: THE FOLLOWING COMPANIES WERE DIRECTED BY THE DRP TO BE EXCLUDED FROM THE LIST OF COMPARABLES BY ACCEPTING THE CONTENTIONS OF THE APPELLANT: (I) CIGNITI TECHNOLOGIES LTD.; AND (II) SQS INDIA LTD. THE DRP ALSO DIRECTED THE INCLUSION OF CG-VAK SOFTW ARE AND EXPORTS LTD. HOWEVER THE OTHER CONTENTIONS OF THE APPELLANT SEEK ING THE EXCLUSION OF INCOMPARABLE COMPANIES AND INCLUSION OF COMPARABLE COMPANIES CAME TO BE REJECTED. (II) WORKING CAPITAL AND RISK ADJUSTMENTS: THE DRP UPHELD THE ACTION OF THE TPO IN NOT GRANTIN G ANY ADJUSTMENT TOWARDS THE DIFFERENCES IN WORKING CAPITAL (WC ADJUSTMENT ) AND RISK OF THE APPELLANT AND THE COMPARABLE COMPANIES. 10. ON GIVING EFFECT TO THE ABOVE DIRECTIONS ISSUED BY THE DRP, THE FINAL LIST OF COMPARABLES IS AS FOLLOWS: SL. NO. NAME OF THE COMPANY 1 INFOSYS LTD. 2 LARSEN & TOUBRO INFOTECH LTD. 3 MINDTREE LTD. 4 PERSISTENT SYSTEMS LTD. 5 R S SOFTWARE (INDIA) LTD. 6 THIRDWARE SOLUTIONS LTD. 7 CG-VAK SOFTWARE AND EXPORTS LTD. 11. THE AO PASSED THE IMPUGNED FINAL ASSESSMENT OR DER IN LINE WITH THE DIRECTIONS OF THE DRP IN WHICH THE TP ADJUSTMEN T WAS REWORKED. IT(TP)A NO.79/BANG/2019 PAGE 5 OF 22 AGGRIEVED BY THE ADDITION MADE IN THE FINAL ASSESSM ENT ORDER, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 12. BRIEFLY, THE GROUNDS IN THE APPEAL WHICH ARE BE ING PRESSED ARE AS FOLLOWS:- (I) THAT THE DRP ERRED IN UPHOLDING THE INCLUSION OF IN FOSYS LTD., PERSISTENT SYSTEMS LTD., LARSEN AND TOUBRO IN FOTECH LTD. AND THIRDWARE SOLUTIONS LTD. (GROUND NO. 9). (II) THAT THE DRP ERRED IN UPHOLDING THE EXCLUSION AKSHA Y SOFTWARE TECHNOLOGIES LTD., SASKEN COMMUNICATION TECHNOLOGIES LTD., MAVERIC SYSTEMS LTD., SANKHYA INFOTECH LTD. AND 8K MILES SOFTWARE LTD. (GROUND NO S. 7 AND 8). (III) THAT THE DRP ERRED IN NOT GRANTING WC ADJUSTMENT (GROUND NO.4). (IV) THAT THE DRP ERRED IN NOT GRANTING ADJUSTMENT ON AC COUNT OF RISKS (RISK ADJUSTMENT) ASSUMED BY THE APPELLA NT AND THE COMPARABLE COMPANIES (GROUND NO. 5) (V) THAT THE DRP HAS ERRED IN UPHOLDING CERTAIN MISTAKE S AND/OR OMISSIONS IN CALCULATING THE PROFIT LEVEL IN DICATORS OF THE COMPANIES ADOPTED BY THE TPO (GROUND NO. 10) 13. AS FAR AS GROUND NO.9 RAISED BY THE ASSESSEE IS CONCERNED, THE ASSESSEE IS SEEKING THE EXCLUSION OF INFOSYS LTD., PERSISTENT SYSTEMS LTD., LARSEN AND TOUBRO INFOTECH LTD. AND THIRDWARE SOLUT IONS LTD. FROM THE LIST OF COMPARABLES. THE ASSESSEE HAD CHOSEN LARSEN AND TOUBRO INFOTECH LTD. AND THIRDWARE SOLUTIONS LTD. AS COMPARABLE COM PANIES IN ITS TP STUDY. HOWEVER, BEFORE THE DRP, THE ASSESSEE SOUGH T EXCLUSION OF THESE TWO COMPANIES FROM THE LIST OF COMPARABLES. 14. IT IS NOT IN DISPUTE THAT THESE FOUR COMPANIES WERE EXCLUDED FROM THE FINAL LIST OF COMPARABLES IN CASES OF ASSESSEES PLA CED SIMILAR TO THE ASSESSEE BY THIS TRIBUNAL FOR THE AY 2014-15 IN LG SOFT INDIA PVT. LTD. V. IT(TP)A NO.79/BANG/2019 PAGE 6 OF 22 DCIT , ORDER DATED 28.05.2019 IN IT(TP)A NO. 3122/BANG/2 018 AND EMC SOFTWARE AND SERVICES INDIA PVT. LTD. V. JCIT , ORDER DATED 18.12.2019 PASSED IN IT(TP)A NO. 3375/BANG/2018), WHEREIN THE AFORESAID 4 COMPANIES WERE DIRECTED TO BE EXCLUDED. IN VIEW OF THE ABOVE, IT IS SUBMITTED THAT THIS COMPANY OUGHT TO BE EXCLUDED FR OM THE FINAL LIST OF COMPARABLES:- (A) INFOSYS LTD. WAS DIRECTED TO BE EXCLUDED ON THE GRO UND THAT IT OWNS IPRS, BRAND VALUE, FOCUSSES ON R&D AND OPERATES IN DIVERSIFIED MARKETS, ETC. (B) LARSEN & TOUBRO WAS EXCLUDED ON THE GROUND THAT IT IS FUNCTIONALLY INCOMPARABLE TO THE ASSESSEE ON VARIOUS COUNTS. TH E COMPANY DEALS WITH SOFTWARE PRODUCTS AND RENDERS AFTERMARKE T SERVICE MANAGEMENT SERVICES, INTEGRATED IT SERVICE MANAGEME NT SAAS SOLUTION, BUSINESS PROCESS MANAGEMENT IMPLEMENTATIO N SERVICES, CLOUD COMPUTING, CONSULTING, ENTERPRISE INTEGRATION , GEOGRAPHICAL INFORMATION SYSTEM AND INFRASTRUCTURE MANAGEMENT SE RVICES. DESPITE RENDERING THESE DIVERSE SERVICES, THE SEGME NTAL DETAILS OF THE VARIOUS SERVICES AND PRODUCTS ARE NOT AVAILABLE . THE COMPANYS BUSINESS SEGMENTS ARE DIVIDED INTO SERVICE CLUSTER, INDUSTRIAL CLUSTER AND TELECOM BUSINESS. IN THE ABSENCE OF SEGMENTAL D ATA BEING MADE AVAILABLE AS REGARDS THE DIVERSE SERVICES, IT IS NOT POSSIBLE TO DETERMINE WHETHER THE COMPANY PASSES THE FILTERS AP PLIED BY THE TPO. THEREFORE, THE COMPANY OUGHT TO BE EXCLUDED. F URTHER, THE COMPANY IS A MARKET LEADER AND THUS ENJOYS SIGNIFIC ANT BENEFITS ON ACCOUNT OF OWNERSHIP OF MARKETING INTANGIBLES, INTE LLECTUAL PROPERTY RIGHTS AND BUSINESS RIGHTS. ALSO, IN ADDITION TO TH E ABOVE, THE COMPANY OWNS PROPRIETARY SOFTWARE PRODUCTS WHICH AR E DEVELOPED IN-HOUSE. ACCORDINGLY, THE APPELLANT SUBMITS THAT L &T IS A PRODUCT COMPANY HAVING SIGNIFICANT INTANGIBLES AND IS THUS NOT COMPARABLE IT(TP)A NO.79/BANG/2019 PAGE 7 OF 22 TO CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROVIDERS S UCH AS THE APPELLANT WHO DOES NOT OWN ANY SIGNIFICANT OR NON-R OUTINE INTANGIBLES. FURTHER, L&T ENJOYS SIGNIFICANT BRAND VALUE. AS A RESULT OF THIS HIGH BRAND VALUE, THE COMPANY ENJOYS A HIGH BARGAINING POWER IN THE MARKET. (C) PERSISTENT SYSTEMS LTD. (PERSISTENT) WAS EXCLUDED ON THE GROUND THAT IT IS FUNCTIONALLY DISSIMILAR AS IT IS ENGAGED IN RENDERING IT SERVICES AND IN THE DEVELOPMENT OF SOFTWARE PRODUCT S WITHOUT THERE BEING SEPARATE SEGMENTAL INFORMATION DISCLOSED IN I TS ANNUAL REPORT FOR SUCH ACTIVITIES. IN THE ABSENCE OF SEGMENTAL DA TA BEING MADE AVAILABLE AS REGARDS THE IT SERVICES AND PRODUCTS O FFERED BY IT, IT IS NOT POSSIBLE TO DETERMINE WHETHER THE COMPANY PASSE S THE FILTERS APPLIED BY THE TPO. THE OPERATIONS OF THE COMPANY P REDOMINANTLY RELATE TO PROVIDING SOFTWARE PRODUCTS, SERVICES AND TECHNOLOGY INNOVATION COVERING FULL LIFE CYCLE OF PRODUCT TO I TS CUSTOMERS, WHICH IS COMPLETELY DIFFERENT FROM THE SERVICES RENDERED BY THE APPELLANT. THE COMPANY ALSO MADE SIGNIFICANT INVESTMENT IN INT ELLECTUAL PROPERTY LED SOLUTIONS AND ALSO HAD A DEDICATED TEA M FOR RESEARCH AND IP DEVELOPMENTS. THE COMPANY ALSO OWNS SEVERAL IP SOLUTIONS, AND DURING THE YEAR UNDER CONSIDERATION IT ACQUIRED FOUR PRODUCTS. FURTHER, IT IS SUBMITTED THAT PERSISTENT UNDERTAKES SIGNIFICANT R&D ACTIVITIES AND HAS AN IN-HOUSE R&D CENTRE APPROVED BY THE DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH. T HE COMPANY ALSO MADE SIGNIFICANT INVESTMENTS TOWARDS RESEARCH AND D EVELOPMENT ACTIVITIES IN THE RELEVANT PREVIOUS YEAR. (D) THIRDWARE SOLUTIONS LTD. WAS EXCLUDED FOR THE REASO N THAT THE COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE APPEL LANT. THE COMPANY IS AN IT CONSULTING FIRM ENGAGED IN CONSULT ING, DESIGN, IMPLEMENTING AND SUPPORT OF ENTERPRISE APPLICATIONS . THE COMPANY IT(TP)A NO.79/BANG/2019 PAGE 8 OF 22 HAS SIGNIFICANT CAPABILITIES IN THE TRANSACTION, AN ALYTICS AND CLOUD LAYERS OF ENTERPRISE APPLICATION. THE COMPANY ALSO RENDERS INDUSTRY- SPECIFIC SOLUTIONS SPANNING BUSINESS APPLICATIONS C ONSULTING, DESIGN, IMPLEMENTATION AND SUPPORT. THE SAID SERVICES ARE I N THE NATURE OF KNOWLEDGE PROCESS OUTSOURCING SERVICES AND ARE ENTI RELY DIFFERENT FROM THE ROUTINE SWD SERVICES RENDERED BY THE ASSES SEE. THE COMPANY IS ALSO ENGAGED IN DEVELOPMENT OF SOFTW ARE PRODUCTS AND EARNS REVENUES FROM SALE OF USER LICENSES FOR S OFTWARE APPLICATIONS. THESE DIVERSE SERVICES ARE REPORTED U NDER ONE SEGMENT WITHOUT ANY DETAILS BEING AVAILABLE AS REGA RDS THESE SERVICES. 15. FOR THE REASONS GIVEN ABOVE AND FOLLOWING THE DECISIONS OF THE TRIBUNAL, WE DIRECT EXCLUSION OF THE 4 COMPANIES ME NTIONED IN GROUND NO.9 AND THUS GROUND NO.9 IS ACCORDINGLY ALLOWED. 16. AS FAR AS GROUND NOS. 7 & 8 ARE CONCERNED, THE ASSESSEE SEEKS INCLUSION OF AKSHAY SOFTWARE TECHNOLOGIES LTD., SAS KEN COMMUNICATION TECHNOLOGIES LTD. MAVERIC SYSTEMS LTD., SAKHYA INFOTECH LTD. AND 8K MILES SOFTWARE LTD. AKSHAY SOFTWARE TECHNOLOGIES LTD. (AKSHAY) 17. THIS COMPANY WAS SELECTED BY THE ASSESSEE IN IT S TP ANALYSIS BUT WAS REJECTED BY THE TPO FOR THE REASON THAT THE COM PANY IS ENGAGED IN PROVIDING PROFESSIONAL SERVICES, PROCUREMENT, INSTA LLATION, IMPLEMENTATION, SUPPORT AND MAINTENANCE OF ERP PRODUCTS AND SERVICE S, AND THAT THE COMPANY INCURRED EXPENDITURE TO THE TUNE OF 85% ON FOREIGN BRANCHES, WHICH SUGGESTED THAT THE BUSINESS MODEL ADOPTED BY THE COMPANY WAS DIFFERENT FROM THAT OF THE ASSESSEE. THE EXCLUSION OF THIS COMPANY CAME TO BE UPHELD BY THE DRP ON THE LATTER BASIS. IT(TP)A NO.79/BANG/2019 PAGE 9 OF 22 18. BEFORE THE TRIBUNAL, THE LD. AR SUBMITTED THAT FIRSTLY, PERUSAL OF THE FUNCTIONS OF THE COMPANY LISTED IN ITS ANNUAL REPOR T SHOWS THAT THE COMPANY IS FUNCTIONALLY SIMILAR TO THE ASSESSEE. THE WEBSIT E OF THE COMPANY STATES THAT THE COMPANY IS ENGAGED IN RENDERING IT SERVICE S, WHICH ARE IN THE NATURE OF SWD AND CATERS TO THE NEEDS OF CORPORATE BODIES, BANKS AND FINANCIAL INSTITUTIONS. FURTHER, IT WAS SUBMITTED T HAT THE INCOME FROM COMMISSION AND SALE OF SOFTWARE LICENSES CONSTITUTE S A MEAGRE 0.5% OF THE TOTAL REVENUE AND THEREFORE THE SAME WOULD NOT HAVE ANY IMPACT ON THE PROFITABILITY OF THE COMPANY. IT WAS SUBMITTED THAT THE ACTION OF THE DRP IN UPHOLDING THE EXCLUSION OF THIS COMPANY ON THE BASI S THAT IT INCURS FOREIGN BRANCH EXPENSES INDICATING THAT THE BUSINESS MODEL ADOPTED BY IT IS DIFFERENT IS ERRONEOUS AS FIRSTLY, THE TPO DID NOT APPLY THE ON-SITE DEVELOPMENT FILTER. THEREFORE THE ACTION OF THE DRP IS ARBITRARILY REJECTING AKSHAY ON THIS COUNT, WITHOUT FIRST APPLYING THE FI LTER AT A UNIFORM THRESHOLD ACROSS ALL COMPANIES IS ERRONEOUS AND UNSUSTAINABLE . IN ANY EVENT, IT IS SUBMITTED THAT FOREIGN BRANCH EXPENSES PER SE DO NO T INDICATE ONSITE DEVELOPMENT. THERE IS NO DIFFERENCE IN THE BUSINESS MODEL ADOPTED BY THE COMPANY AND THE ASSESSEE, AND WITHOUT PREJUDICE, IT IS SUBMITTED THAT THE DIFFERENCE IF ANY, WOULD NOT HAVE ANY IMPACT ON THE PROFITABILITY OF THE COMPANY. RELIANCE IN THIS REGARD IS PLACED ON THE D ECISION OF THIS TRIBUNAL IN THE CASE OF DCIT V. ABB GLOBAL INDUSTRIES & SERVICES (P.) LTD. (REPORTED IN [2018] 97 TAXMANN.COM 465 (BANGALORE - TRIB.) WHEREIN IN THE CASE OF AN ASSESSEE PLACED SIMILAR TO THAT OF THE ASSESSEE, THE INCLUSION OF THIS COMPANY WAS UPHELD. 19. RELIANCE WAS ALSO PLACED ON THE DECISION OF THI S TRIBUNAL IN THE CASE OF EMC SOFTWARE AND SERVICES INDIA PVT. LTD. V. JCIT ( ORDER DATED 18.12.2019 PASSED IN IT(TP)A NO. 3375/BANG/2018) , WHEREIN IN THE CASE OF AN ASSESSEE PLACED SIMILAR TO THE ASSESSEE, THE COM PARABILITY OF THE COMPANY WAS REMANDED TO THE TPO. IT(TP)A NO.79/BANG/2019 PAGE 10 OF 22 20. THE LD. DR RELIED ON THE ORDER OF THE DRP. 21. WE ARE OF THE VIEW THAT IN THE LIGHT OF THE SUB MISSIONS MADE AS ABOVE AND AS DIRECTED BY THE TRIBUNAL IN THE CASE O F EMC SOFTWARE AND SERVICES INDIA PVT. LTD. (SUPRA) , THE COMPARABILITY OF THE THIS COMPANY SHOULD BE CONSIDERED AFRESH BY THE TPO AFTER AFFORD ING ASSESSEE OPPORTUNITY OF BEING HEARD. WE THEREFORE ORDER ACC ORDINGLY. SASKEN COMMUNICATION TECHNOLOGIES LTD. (SASKEN) 22. THIS COMPANY WAS SELECTED BY THE ASSESSEE AND C AME TO BE REJECTED BY THE TPO FOR THE REASON THAT THE COMPANY WAS FUNCTIONALLY DISSIMILAR. THE EXCLUSION OF THE COMPANY CAME TO BE UPHELD BY THE DRP ON THE GROUNDS THAT (I) THE COMPANY FAILS EXPORT TURNO VER FILTER; (II) THE COMPANY EARNS REVENUE FROM LICENSING, SWD AND ROYALTY; AND (III) THE COMPANY OFFERS R&D CONSULTANCY, WIRELESS AND SOFTWARE PRODU CTS. 23. IN THIS REGARD, IT WAS SUBMITTED BY THE LD. AR THAT THE COMPANY IS FUNCTIONALLY SIMILAR TO THE APPELLANT AS THE SERVIC ES RENDERED BY THE COMPANY PREDOMINANTLY ARE IN THE NATURE OF SWD SERV ICES, WITH 99.12% OF ITS REVENUE FOR THE YEAR BEING GENERATED FROM RENDE RING THE SAID SERVICES. THE INCOME FROM SOFTWARE PRODUCTS CONSTITUTES A MEA GRE 0.88% OF TOTAL REVENUE, WHICH WOULD NOT HAVE ANY IMPACT ON THE PRO FITABILITY OF THE COMPANYS SWD SERVICES SEGMENT. DETAILED SUBMISSION S IN THIS REGARD ARE PLACED AT PAGES 169 AND 429 OF THE PAPERBOOK. FURTH ER, THE SERVICES RENDERED BY THE COMPANY PREDOMINANTLY FALL WITHIN T HE AMBIT OF SWD SERVICES AS PER THE SAFE HARBOUR RULES PRESCRIBED B Y THE CBDT AND THEREFORE THE COMPANY IS COMPARABLE TO THE ASSESSEE . FURTHER, IT WAS SUBMITTED THAT THE DRP ERRED IN TAKING INTO ACCOUNT ONLY THE REVENUES EARNED FROM SERVICES RENDERED TO CUSTOMERS IN NORTH AMERICA, EUROPE AND ASIA PACIFIC REGION WHILE DETERMINING WHETHER THE C OMPANY PASSES THE IT(TP)A NO.79/BANG/2019 PAGE 11 OF 22 EXPORT REVENUE FILTER APPLIED BY THE TPO. IT WAS SU BMITTED THAT IF THE ENTIRE FOREIGN EXCHANGE EARNED BY THE COMPANY DURING THE Y EAR IS TAKEN INTO CONSIDERATION, IT WOULD PASS THE EXPORT REVENUE FIL TER APPLIED BY THE TPO. THEREFORE, IT WAS SUBMITTED THAT THE COMPANY OUGHT TO BE INCLUDED IN THE FINAL LIST OF COMPARABLES. 24. IN ANY EVENT, IT WAS SUBMITTED THAT THE DRP UPH ELD THE REJECTION OF THIS COMPANY AS ITS INCOME FROM EXPORT OF SERVICES AS A PERCENTAGE OF TOTAL REVENUE WAS 74.35%, I.E. FOR THE REASON THAT IT FAI LS THE EXPORT REVENUE FILTER BY A MEAGRE .65%. IN THIS REGARD IT WAS SUBMITTED T HAT THE DRP HAS PROCEEDED ON A HYPER-TECHNICAL BASIS TO EXCLUDE THE COMPANY, WITHOUT APPRECIATING THE OBJECT BEHIND APPLICATION OF THE S AID FILTER. THE EXPORT REVENUE FILTER WAS APPLIED BY THE TPO TO EXCLUDE PR EDOMINANTLY DOMESTIC COMPANIES WHICH CANNOT BE COMPARED WITH THE ASSESSE E HAVING MAJOR EARNINGS FROM EXPORT. THEREFORE, WHILE THE OBJECTIV E STANDS COMPLIED SUBSTANTIALLY, THE COMPANY CANNOT BE EXCLUDED FOR F AILING THE THRESHOLD MARGINALLY. 25. IT WAS SUBMITTED THAT THIS COMPANY WAS SELECTED BY THE TPO AND ITS INCLUSION WAS UPHELD BY THE DRP FOR THE ASSESSMENT YEAR 2011-12 IN THE ASSESSEES OWN CASE. THEREFORE THIS COMPANY OUGHT T O BE INCLUDED IN THE FINAL LIST OF COMPARABLES. 26. RELIANCE WAS ALSO PLACED ON THE DECISION OF THI S HONBLE TRIBUNAL IN THE CASE OF EMC SOFTWARE AND SERVICES INDIA PVT. LTD. V. JCIT (SUPRA) WHEREIN IN THE CASE OF AN ASSESSEE PLACED SIMILAR T O THE ASSESSEE, THE COMPARABILITY OF THE COMPANY WAS REMANDED TO THE TP O. 27. THE LD. DR RELIED ON THE ORDER OF DRP. 28. IN THE LIGHT OF THE SUBMISSIONS MADE AS ABOVE A ND AS DIRECTED BY THE TRIBUNAL IN THE CASE OF EMC SOFTWARE AND SERVICES INDIA PVT. LTD. (SUPRA) , IT(TP)A NO.79/BANG/2019 PAGE 12 OF 22 WE ARE OF THE VIEW THAT THE COMPARABILITY OF THE TH IS COMPANY SHOULD BE CONSIDERED AFRESH BY THE TPO AFTER AFFORDING ASSESS EE OPPORTUNITY OF BEING HEARD. WE HOLD ACCORDINGLY. MAVERIC SYSTEMS LTD. (MAVERIC) 29. IT WAS SUBMITTED THAT THIS COMPANY APPEARED IN THE ACCEPT/REJECT MATRIX OF THE SEARCH CONDUCTED BY THE TPO AND WAS R EJECTED BY THE TPO ON THE BASIS THAT THE COMPANY WAS ENGAGED IN SOFTWA RE TESTING. THE COMPANYS INCLUSION WAS SOUGHT BY THE ASSESSEE. IN THE ORDER PASSED UNDER SECTION 92CA OF THE ACT, THE TPO EXCLUDED THE COMPANY ON THE GROUND THAT THE COMPANY IS ENGAGED IN SIGNIFICANT R &D ACTIVITY AND INCURRED EXPENDITURE OF 6% OF TURNOVER. THE DRP UPH ELD THE EXCLUSION OF THE COMPANY ON THE BASIS THAT GENERALLY, COMPANIES WITH R&D EXPENDITURE OF LESS THAN 3% ALONE WERE CONSIDERED. 30. IN THIS REGARD IT WAS SUBMITTED THAT THE ACTION S OF THE LOWER AUTHORITIES ARE ERRONEOUS AND WHOLLY INCONSISTENT. IT WAS SUBMITTED THAT WHILE THE TPO REJECTED THE APPLICATION OF R&D EXPEN SES > 3% OF TOTAL TURNOVER FILTER, THE DRP UPHELD THE EXCLUSION OF TH E COMPANY ON THE BASIS THAT IT INCURRED R&D EXPENSES IN EXCESS OF 3% OF RE VENUE. THIS ACTION OF THE DRP IS WHOLLY BASELESS AND ARBITRARY AND ON THA T GROUND, THE COMPANY OUGHT TO BE INCLUDED IN THE FINAL LIST OF COMPARABL ES. IT WAS SUBMITTED THAT THE COMPANY IS FUNCTIONALLY COMPARABLE AND PASSES A LL FILTERS APPLIED BY THE TPO, WHICH IS NOT DISPUTED BY THE LOWER AUTHORITIES . THEREFORE THIS COMPANY OUGHT TO BE INCLUDED IN THE FINAL LIST OF C OMPARABLES. RELEVANT SUBMISSIONS IN THIS REGARD ARE PLACED AT PAGES 171 AND 474 OF THE PAPERBOOK. 31. RELIANCE WAS PLACED ON THE DECISION OF THIS TR IBUNAL IN THE CASE OF EMC SOFTWARE AND SERVICES INDIA PVT. LTD. V. JCIT (SUPRA) WHEREIN IN THE IT(TP)A NO.79/BANG/2019 PAGE 13 OF 22 CASE OF AN ASSESSEE PLACED SIMILAR TO THE ASSESSEE, THE COMPANYS COMPARABILITY WAS REMANDED TO THE TPO. 32. THE LD. DR RELIED ON THE ORDER OF THE DRP. 33. IN THE LIGHT OF THE SUBMISSIONS MADE AS ABOVE A ND AS DIRECTED BY THE TRIBUNAL IN THE CASE OF EMC SOFTWARE AND SERVICES INDIA PVT. LTD. (SUPRA) , WE ARE OF THE VIEW THAT THE COMPARABILITY OF THIS C OMPANY SHOULD BE CONSIDERED AFRESH BY THE TPO AFTER AFFORDING ASSESS EE OPPORTUNITY OF BEING HEARD. IT IS ORDERED ACCORDINGLY. SANKHYA INFOTECH LTD. (SANKHYA) 34. THIS COMPANY WAS SELECTED BY THE ASSESSEE IN IT S TP STUDY AND CAME TO BE REJECTED BY THE TPO FOR THE REASON THAT IT FAILS THE EXPORT REVENUE FILTER. WHILE THE ASSESSEE DEMONSTRATED BEF ORE THE DRP THAT THE COMPANY PASSES THE FILTER AND EARNED REVENUE FROM E XPORT OF SERVICES COMPRISING 96.53% OF THE TOTAL REVENUE, THE DRP UPH ELD THE REJECTION OF THE COMPANY ON AN ALTOGETHER NEW BASIS THAT THE COM PANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE AND PRODUCTS, AND THAT IT H AD INCURRED SUBSTANTIAL R&D EXPENSES TO THE TUNE OF 5.9% OF TOTAL OPERATING REVENUE. 35. AT THE OUTSET IT WAS SUBMITTED THAT THE COMPANY IS FUNCTIONALLY COMPARABLE AND PASSES ALL THE FILTERS APPLIED BY TH E TPO. IT WAS SUBMITTED THAT ACTION OF THE DRP IN UPHOLDING THE EXCLUSION O F THE COMPANY ON AN ALTOGETHER NEW BASIS WITHOUT FIRST PUTTING THE ASSE SSEE ON NOTICE OF THE SAME IS WHOLLY ERRONEOUS AND UNSUSTAINABLE. 36. WE ARE OF THE VIEW THAT THE COMPARABILITY OF TH E COMPANY SHOULD BE CONSIDERED AFRESH BY THE TPO BOTH ON THE EXPORT REV ENUE FILTER AND THE FILTERS APPLIED BY THE DRP, BECAUSE ADMITTEDLY THE ASSESSEE WAS NOT IT(TP)A NO.79/BANG/2019 PAGE 14 OF 22 CONFRONTED BY THE DRP ON THE NEW FILTER IT APPLIED NOR DID IT GIVE A FINDING ONE WAY OR THE OTHER ON THE EXPORT TURNOVER FILTER. 8K MILES SOFTWARE LTD. 37. THIS COMPANY WAS SELECTED BY THE ASSESSEE IN IT S TP STUDY AND CAME TO BE REJECTED BY THE TPO FOR THE REASON THAT IT FAILS THE EXPORT REVENUE FILTER. WHILE THE ASSESSEE DEMONSTRATED BEF ORE THE DRP THAT THE COMPANY PASSES THE FILTER AND EARNED REVENUE FROM E XPORT OF SERVICES COMPRISING 95.41% OF THE TOTAL REVENUE, THE DRP UPH ELD THE REJECTION OF THE COMPANY ON AN ALTOGETHER NEW BASIS THAT THE COM PANY HAD EMPLOYED MORE ASSETS IN THE NATURE OF INTANGIBLES. 38. AT THE OUTSET, IT WAS SUBMITTED THAT THE COMPAN Y IS FUNCTIONALLY COMPARABLE AND PASSES ALL THE FILTERS APPLIED BY TH E TPO. IT IS SUBMITTED THAT ACTION OF THE DRP IN UPHOLDING THE EXCLUSION O F THE COMPANY ON AN ALTOGETHER NEW BASIS WITHOUT FIRST PUTTING THE ASSE SSEE ON NOTICE OF THE SAME IS WHOLLY ERRONEOUS AND UNSUSTAINABLE. 39. WE ARE OF THE VIEW THAT THE COMPARABILITY OF TH E COMPANY SHOULD BE CONSIDERED AFRESH BY THE TPO BOTH ON THE EXPORT REV ENUE FILTER AND THE FILTERS APPLIED BY THE DRP, BECAUSE ADMITTEDLY THE ASSESSEE WAS NOT CONFRONTED BY THE DRP ON THE NEW FILTER IT APPLIED NOR DID IT GIVE A FINDING ONE WAY OR THE OTHER ON THE EXPORT TURNOVER FILTER. 40. IN GROUND NO.4, THE ASSESSEE HAS PROJECTED ITS GRIEVANCE REGARDING NON-GRANT OF WORKING CAPITAL ADJUSTMENT (WCA) AND R ISK ADJUSTMENT. THE ASSESSEE SUBMITS THAT THAT RULE 10B(3) OF THE INCOM E-TAX RULES, 1962 (THE RULES), ITSELF CATEGORICALLY PROVIDES THAT AN ADJU STMENT OUGHT TO BE PROVIDED FOR ANY DIFFERENCES IN THE ECONOMIC FACTOR S BETWEEN THE TESTED PARTY AND THE COMPARABLES. A WORKING CAPITAL ADJUST MENT IS ONE SUCH ADJUSTMENT WHICH IS TO BE APPLIED IN ORDER TO ADJUS T FOR THE DIFFERENCES IT(TP)A NO.79/BANG/2019 PAGE 15 OF 22 BETWEEN THE WORKING CAPITAL POSITIONS OF THE TESTED PARTY AND OF THE COMPARABLE. 41. RELIANCE WAS PLACED BY THE ASSESSEE ON THE DECI SION OF THIS TRIBUNAL IN THE CASES OF BEARING POINT BUSINESS CONSULTING (P.) LTD. VS. DCIT [(2013) 33 TAXMANN.COM 92] . FURTHER IN THE ASSESSEES OWN CASE FOR THE AY 2010-11, THIS TRIBUNAL HELD THAT WORKING CAP ITAL ADJUSTMENT OUGHT TO BE GRANTED WHILE COMPUTING THE ALP. FURTHER, IN THE ASSESSEES OWN CASE FOR THE AY 2009-10, THIS TRIBUNAL UPHELD THE ACTIO N OF THE DRP IN DIRECTING ALLOWING WORKING CAPITAL ADJUSTMENT ON ACTUAL BASIS WITHOUT APPLYING ANY RESTRICTION. 42. THE LD. DR RELIED ON THE ORDER OF DRP. 43. WE ARE OF THE VIEW THAT IT IS NOW A SETTLED PRO POSITION OF LAW THAT NECESSARY ADJUSTMENTS ARE TO BE MADE TO THE MARGINS OF COMPARABLES TO GIVE EFFECT TO THE DIFFERENCES IN THE WORKING CAPIT AL POSITIONS OF THE TESTED PARTY AND OF THE COMPARABLES. THE TPO OUGHT TO HAVE GIVEN THE ASSESSEE THE BENEFIT OF THE SAME. WE HOLD AND DIRECT THE TPO TO ALLOW WORKING CAPITAL ADJUSTMENT AFTER VERIFICATION OF THE ASSESS EES COMPUTATION AND AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSE E. 44. AS REGARDS RISK ADJUSTMENT, IT WAS SUBMITTED TH AT RULE 10B(2) OF THE RULES SPECIFICALLY STATE THAT COMPARABILITY OF AN I NTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WI TH REFERENCE TO INTER ALIA THE RISKS ASSUMED BY THE PARTIES TO THE TRANSACTION . COUPLED WITH RULE 10B(3) OF THE RULES, IT BECOMES CLEAR THAT ADJUSTME NT TOWARDS DIFFERENCES IN RISK ASSUMED BY THE PARTIES IN CONTEMPLATED IN T HE STATUTE ITSELF. IN THIS REGARD IT WAS SUBMITTED THAT THE TPO AND THE DRP ER RED IN HOLDING THAT NO SUCH ADJUSTMENT WAS WARRANTED AS IT WAS NOT DEMONST RATED THAT THERE WAS A DIFFERENCE IN THE RISKS ASSUMED BY THE TESTED PAR TY AND THE COMPARABLE IT(TP)A NO.79/BANG/2019 PAGE 16 OF 22 COMPANIES. IN THIS REGARD IT WAS SUBMITTED THAT SIN CE THE APPELLANT IS A CAPTIVE SERVICE PROVIDER, THE RISKS ASSUMED BY THE APPELLANT ARE SIGNIFICANTLY LOW. THE FOLLOWING CHART SETS OUT THE LEVELS OF RISK ASSUMED BY THE ASSESSEE AND ITS AE: R ISK APPELLANT AE MARKET RISK 0 4 PROJECT LIABILITY RISK 1 3 R&D RISK 0 4 CREDIT RISK 0 4 FOREIGN EXCHANGE RISK 2 2 MANPOWER R ISK 0 4 GENERAL BUSINESS RISK 2 2 NOTE: 0 INDICATES NO RESPONSIBILITY, 1 INDICATES LOW RISK, 2 INDICATES MODERATE RISK, 3 INDICATES HIGH RISK, 4 INDICATES SIGNIFICANT RISK. DETAILED SUBMISSIONS IN THIS REGARD ARE PLACED AT P AGES 249-266 OF THE PAPERBOOK. 45. RELIANCE IN THIS REGARD WAS PLACED ON THE DECIS ION OF THE HONBLE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF HONEYWELL TURBO TECHNOLOGIES (INDIA) (P.) LTD. V. DCIT (REPORTED IN [2017] 78 TA XMANN.COM 342 (PUNE - TRIB.) , WHEREIN THE TRIBUNAL GRANTED AN ADJUSTMENT TO BE GRANTED FOR DIFFERENCES IN RISK ASSUMED BY THE TESTED PARTY AND THE COMPARABLE ENTITIES. 46. WE ARE OF THE VIEW THAT THE QUESTION OF ALLOWIN G RISK ADJUSTMENT SHOULD BE CONSIDERED BY THE TPO AFRESH IN THE LIGHT OF THE SUBMISSIONS AND AFTER EXAMINING THE COMPUTATION OF RISK ADJUSTMENT AND AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 47. IN GROUND NO. 10 THE ASSESSEE POINTED OUT TO TH E MISTAKES IN COMPUTATION OF PLI. IT WAS SUBMITTED THAT THE TPO HAS CONSIDERED IT(TP)A NO.79/BANG/2019 PAGE 17 OF 22 PROVISION FOR DOUBTFUL DEBTS AND PROVISION FOR DOUB TFUL ADVANCES ARE NON- OPERATING IN NATURE AND THE ACTION WAS UPHELD BY TH E DRP. IN THIS REGARD IT WAS SUBMITTED THAT PROVISION FOR DOUBTFUL DEBTS IS A PROVISION WHICH IS TO BE MADE AS A PART OF THE OPERATING ACTIVITIES OF BUSIN ESS GOVERNED BY THE PRINCIPLES OF PRUDENCE, AND THEREFORE IT IS NOT COR RECT TO CONTEND THAT THE SAME IS NON-OPERATING IN NATURE. RELIANCE IN THIS R EGARD IS PLACED ON THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF ROLLS- ROYCE INDIA (P.) LTD. V. DCIT (REPORTED IN [2016] 69 TAXMANN.CO M 209 (DELHI - TRIB.) . THEREFORE IT WAS SUBMITTED THAT THE AFORESAID ITEMS ARE TO BE TREATED AS BEING OPERATING IN NATURE. 48. THE LD. DR RELIED ON THE ORDER OF THE DRP. 49. WE ARE OF THE VIEW THAT IN THE LIGHT OF THE DEC ISION OF THE TRIBUNAL IN THE CASE OF ROLLS- ROYCE INDIA (P.) LTD. (SUPRA) , THE PLI SHOULD DIRECTED TO BE REWORKED BY CONSIDERING THE PROVISION FOR DOUBTF UL DEBTS AS OPERATING EXPENDITURE. WE HOLD AND DIRECT ACCORDINGLY. 50. THE OTHER GROUNDS RAISED IN THE APPEAL IN RELAT ION TO ITS INTERNATIONAL TRANSACTION OF PROVISION OF SWD SERVICES WERE NOT P RESSED AT THIS STAGE. HOWEVER, THE ASSESSEE HAS SOUGHT LIBERTY TO URGE TH E SAID GROUNDS IN ANY FUTURE PROCEEDING, APPELLATE OR OTHERWISE, AND IN T HESE PROCEEDINGS AT A FUTURE POINT IN TIME, WHICH LIBERTY IS ALLOWED. 51. THE TPO IS DIRECTED TO COMPUTE THE ALP IN ACCOR DANCE WITH THE DIRECTIONS CONTAINED IN THIS ORDER, AFTER AFFORDING ASSESSEE OPPORTUNITY OF BEING HEARD. 52. VIDE GROUND NO.11 & 13, THE ASSESSEE HAS CHALLE NGED THE ACTION OF THE AO IN BRINGING TO TAX VALUE OF CERTAIN ASSETS R ECEIVED BY IT FREE OF COST UNDER SECTION 28(IV) OF THE ACT. DURING THE YEAR UN DER CONSIDERATION, THE ASSESSEE RECEIVED CERTAIN ASSETS FREE OF COST FROM ITS AES. THE SAID ASSETS IT(TP)A NO.79/BANG/2019 PAGE 18 OF 22 WERE ACCOUNTED FOR IN THE BOOKS OF THE AES SINCE TH E OWNERSHIP OF THE ASSETS REMAINS WITH THE AES, DEPRECIATION ON THE SA ME WERE CLAIMED BY THE AES. SINCE THE ASSETS WERE RECEIVED FREE OF COS T, THE SAME WERE NOT REFLECTED IN THE BOOKS OF THE ASSESSEE. 53. THE DRP UPHELD THE ACTION OF THE AO IN BRINGING THE VALUE OF ASSETS TO TAX UNDER SECTION 28(IV) OF THE ACT INTER ALIA ON THE BASIS THAT THE ASSESSEE WAS THE BENEFICIAL OWNER OF THE ASSET. IN THIS REGARD IT WAS SUBMITTED THAT THE ACTION OF THE LOWER AUTHORITIES IS ERRONEOUS. IT WAS SUBMITTED THAT IN ORDER TO BRING A BENEFIT OR PERQU ISITE TO TAX UNDER SECTION 28(IV) OF THE ACT, THE NECESSARY PRECONDITIONS ARE THAT SUCH BENEFIT OR PERQUISITE SHOULD ARISE FROM THE BUSINESS AND THERE MUST BE A NEXUS BETWEEN THE BENEFIT/PERQUISITE AND THE BUSINESS. IT WAS SUBMITTED THAT THE ASSETS RECEIVED BY THE ASSESSEE FREE OF COST DID NO T ARISE FROM THE BUSINESS INASMUCH AS THE SAME WAS NOT AS A CONSEQUE NCE OF THE SERVICES RENDERED BY THE ASSESSEE TO THE AES/THIRD PARTIES W HO SUPPLIED THE ASSETS. THEREFORE, AT THE THRESHOLD, THIS SECTION CANNOT BE INVOKED. 54. IT WAS SUBMITTED THAT THE ASSETS RECEIVED BY TH E ASSESSEE FREE OF COST CANNOT BE BROUGHT TO TAX UNDER SECTION 28(IV) OF THE ACT. RELIANCE IN THIS REGARD IS PLACED ON THE FOLLOWING DECISIONS: I. MAHINDRA AND MAHINDRA LTD. V. CIT (REPORTED IN 26 1 ITR 501) II. LOGITRONICS PVT. LTD. V. CIT (ORDER PASSED BY THE HONBLE DELHI HIGH COURT ON ITA NO. 1623/2010) AND III. CIT V. JUBILANT SECURITIES LTD. (ORDER PASSED BY THE HONBLE DELHI HIGH COURT ON ITA NO. 503/2010) 55. FURTHER, IT WAS SUBMITTED THAT A BENEFIT/PERQUI SITE CAN BE BROUGHT TO TAX UNDER SECTION 28(IV) OF THE ACT ONLY IF THE SAM E IS IN THE NATURE OF INCOME. IN THE PRESENT CASE, THE ASSETS RECEIVED BY THE ASSESSEE CANNOT BE TREATED AS INCOME INASMUCH AS THE GOODS ARE CAP ITAL IN NATURE AND THEREFORE CANNOT BE TREATED AS A TRADING RECEIPT. IT(TP)A NO.79/BANG/2019 PAGE 19 OF 22 56. IT WAS SUBMITTED THAT OUT OF THE TOTAL AMOUNT O F RS. 15,07,90,003/- BROUGHT TO TAX UNDER SECTION 28(IV) BY THE AO, THE DRP DIRECTED THAT AN AMOUNT OF RS. 1,65,86,025/- BE BROUGHT TO TAX UNDER SECTION 69 OF THE ACT. IT WAS SUBMITTED THAT THE AO GROSSLY ERRED IN BRING THE VALUE OF CERTAIN ASSETS RECEIVED FREE OF COST BY THE ASSESSEE TO TAX UNDER SECTION 69 OF THE ACT. IT WAS SUBMITTED THAT THE SAID SECTION DOES NO T APPLY AT THE VERY THRESHOLD AS THE REQUIREMENTS FOR INVOKING THE SAID PROVISION IS NOT SATISFIED IN THE PRESENT CASE. IT WAS SUBMITTED THAT SECTION 69 OF THE ACT APPLIES ONLY IN A CASE WHERE THE ASSESSEE HAS MADE CERTAIN INVES TMENTS WHICH ARE NOT RECORDED IN THE BOOKS OF ACCOUNTS, AND THE ASSESSEE OFFERS NO EXPLANATION ABOUT THE NATURE AND SOURCE OF THE INVESTMENT. IT W AS SUBMITTED THAT THE ASSETS WERE NOT RECORDED IN THE BOOKS OF THE ASSESS EE AS THE SAME WERE RECEIVED BY IT FREE OF COST, AND RECORDING OF ASSET S RECEIVED FREE OF COST WOULD RUN COUNTER TO THE APPLICABLE ACCOUNTING STAN DARDS. THE ASSESSEE HAD DEMONSTRATED BEFORE THE LOWER AUTHORITIES THE N ATURE AND SOURCE OF THE ASSETS, WHICH THE AUTHORITIES FAILED TO APPRECIATE. FURTHER, THE DRP ERRED IN DIRECTING THE AO TO BRING THE VALUE OF THE ASSET S TO TAX AS INCOME FROM OTHER SOURCES. IT WAS SUBMITTED THAT THE ASSETS REC EIVED BY THE ASSESSEE FREE OF COST CANNOT BE TREATED AS INCOME UNDER SE CTION 2(24) OF THE ACT, WHICH IS A PREREQUISITE FOR INVOKING THE PROVISIONS OF SECTION 56 OF THE ACT. FURTHER, THE ASSETS RECEIVED BY THE ASSESSEE ARE NO T COVERED UNDER SECTION 56(2) OF THE ACT AND THEREFORE THE VALUE OF SUCH ASSETS CANNOT BE BROUGHT TO TAX AS INCOME FROM OTHER SOURCES. 57. WITHOUT PREJUDICE TO THE CONTENTIONS ON GROUND NOS. 11 & 13, IN GROUND NO. 12 , THE ASSESSEE HAS SUBMITTED THAT DUR ING THE YEAR UNDER CONSIDERATION THE ASSESSEE IS ELIGIBLE TO CLAIM DED UCTION OF ITS PROFITS AND GAINS DERIVED FROM EXPORT OF ARTICLES, UNDER SECTIO N 10A OF THE ACT. THE ADDITION MADE UNDER SECTION 28(IV) OF THE ACT WOULD GO TO ENHANCE THE PROFITS OF THE ASSESSEE AND THE ASSESSEE WOULD BE E LIGIBLE TO CLAIM IT(TP)A NO.79/BANG/2019 PAGE 20 OF 22 DEDUCTION OF THE ENHANCED PROFITS. HOWEVER, THE DRP REJECTED THE CLAIM ON THE BASIS THAT THE ISSUE HAD NOT REACHED FINALITY. IN THIS REGARD IT WAS SUBMITTED THAT THE ASSESSEE IS ENTITLED TO CLAIM DE DUCTION ON THE ENHANCED PROFITS AND RELIANCE IN THIS REGARD IS PLACED ON TH E DECISION OF THE HONBLE HIGH COURT OF KARNATAKA IN CIT V. MPACT TECHNOLOGY SERVICES PVT. LTD. (ORDER DATED 11.07.2018 PASSED IN ITA NO. 228/2013) . 58. THE LD. DR RELIED ON THE ORDER OF DRP. 59. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RI VAL SUBMISSIONS. THE FACTS AS RECORDED IN THE ORDER OF DRP SHOWS THAT TH E ASSESSEE RECEIVED CAPITAL ASSETS WORTH RS.15,07,90,003 FROM THE HOLDI NG COMPANY, BROCADE COMMUNICATION SYSTEMS LLC. OUT OF THE AFORESAID AS SETS RECEIVED BY THE ASSESSEE, THE DRP FOUND THAT THE INVOICES SUBMITTED IN RESPECT OF THE ASSETS OF THE VALUE OF RS.1,65,86,025 DID NOT SHOW THAT THE ASSETS CAME TO BE RECEIVED FREE OF COST OR LOAN BASIS BY THE ASSES SEE FROM ITS AE. IN THE ABOVE CIRCUMSTANCES, THE DRP TREATED THE ASSETS WOR TH RS.13,42,03,978 [15,07,90,003 () 1,65,86,025] AS VALUE OF BENEFIT/ PERQUISITE RECEIVED BY THE ASSESSEE IN THE COURSE OF BUSINESS AND TAXED IT U/S. 28(IV) OF THE ACT. A SUM OF RS.1,68,86,025 WAS TAXED AS INCOME FROM OTHE R SOURCES. 60. AS RIGHTLY CONTENDED BY THE ASSESSEE, THE PROVI SIONS OF SECTION 69 ARE NOT ATTRACTED BECAUSE THERE IS NOTHING BROUGHT ON RECORD TO SHOW THAT THE ASSESSEE WAS THE OWNER OF THESE ASSETS. FROM T HE FACT THAT INVOICES WERE IN THE NAME OF ASSESSEE, IT CANNOT BE SAID THA T ASSESSEE WAS THE OWNER OF THE ASSETS, ESPECIALLY IN THE LIGHT OF THE AFFIRMATION BY BROCADE COMMUNICATION LLC THAT THEY ARE GIVEN ALL THE ASSET S FREE OF COST TO THE ASSESSEE. THEREFORE, THE ADDITION OF RS.1,65,86,02 5 U/S. 69 OF THE ACT CANNOT BE SUSTAINED. 61. THE ENTIRE VALUE OF ASSETS TOTALLING RS.15,07,9 0,003 HAS TO BE REGARDED AS AN ADDITION MADE U/S. 28(1)(IV) OF THE ACT, AS WAS DONE BY THE IT(TP)A NO.79/BANG/2019 PAGE 21 OF 22 AO IN THE ORDER OF ASSESSMENT. THE ISSUE THAT ARIS ES FOR CONSIDERATION IN GROUND NOS.11 & 13 IS AS TO, WHETHER THE REVENUE AU THORITIES WERE JUSTIFIED IN TREATING THE VALUE OF ASSETS AS A BENEFIT/PERQUI SITE RECEIVED BY THE ASSESSEE AND TAXING THE SAME U/S. 28(1)(IV) OF THE ACT. WE ARE OF THE VIEW THAT THIS ISSUE NEED NOT BE ADJUDICATED IN VIEW OF GROUND NO.12 RAISED BY THE ASSESSEE BEFORE US. IN GROUND NO.12, THE ASSES SEE HAS PRAYED THAT THE ADDITION MADE WILL GO TO ENHANCE ITS PROFITS AN D THAT PROFIT IS ELIGIBLE FOR CLAIM OF DEDUCTION U/S. 10A OF THE ACT AND THEREFOR E, THE ADDITION, EVEN IF SUSTAINED, WILL NOT HAVE ANY IMPACT ON THE TAX LIAB ILITY. THE PLEA OF THE ASSESSEE IN THIS REGARD IS SUPPORTED BY THE DECISIO N OF THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF MPACT TECHNOLOGY SERVICES PVT. LTD. (SUPRA) . THE CBDT IN CIRCULAR NO.37/2016 DATED 02.11.2016 HAS ALSO TAKEN THE VIEW THAT ANY DISALLOWANCE OF EXPENSES WH ICH GO TO ENHANCE THE PROFITS OF ELIGIBLE BUSINESS, WOULD BE ELIGIBLE FOR DEDUCTION ON ENHANCED PROFITS. 62. IN VIEW OF THE ABOVE, WE DIRECT THE AO TO ALLOW DEDUCTION U/S. 10A OF THE ACT ON THE ENHANCED PROFITS. ACCORDINGLY, GROU ND NO.12 IS ALLOWED. GROUND NO.11 IS TREATED AS ACADEMIC AND LEFT OPEN W ITHOUT ANY ADJUDICATION. 63. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 19 TH DAY OF JUNE, 2020. SD/- SD/- ( B R BASKARAN ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 19 TH JUNE, 2020. / DESAI S MURTHY / IT(TP)A NO.79/BANG/2019 PAGE 22 OF 22 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.