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ITA 825/DEL/2014

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3445 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 11 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-02-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 30-05-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 13-02-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KUMAR PRANAV SENIOR
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; Principle of natural justice; International transaction; Question of law; Cost of acquisition; Deemed export; Arm length price
• Section: 92C; 143(3); 10AA; 80HHC; 80IB; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.825/DEL./2014 (ASSESSMENT YEAR : 2009-10) UNITED HEALTH GROUP INFORMATION SERVICES VS. DCIT, CIRCLE 18 (1), PRIVATE LIMITED, NEW DELHI. 14 TH FLOOR, TOWER B, UNITECH CYBER PARK, SECTOR 39, GURGAON 122 002 (HARYANA). (PAN : AADCA6769Q) ITA NO.419/DEL./2014 (ASSESSMENT YEAR : 2009-10) DCIT, CIRCLE 18 (1), VS. UNITED HEALTH GROUP INF ORMATION NEW DELHI. SERVICES PRIVATE LIMITED, 14 TH FLOOR, TOWER B, UNITECH CYBER PARK, SECTOR 39, GURGAON 122 002 (HARYANA). (PAN : AADCA6769Q) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI NAGESHWAR RAO, ADVOCATE SHRI S. CHAKRABORTY, ADVOCATE REVENUE BY : SHRI KUMAR PRANAV, SENIOR DR DATE OF HEARING : 15.01.2018 DATE OF ORDER : 09.02.2018 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 2 PRESENT CROSS APPEALS FILED BY THE ASSESSEE AS WELL AS BY THE REVENUE ARE BEING DISPOSED OF BY WAY OF CONSOLIDATE D ORDER TO AVOID REPETITION OF DISCUSSION. 2. THE APPELLANT, UNITED GROUP INFORMATION SERVICES PRIVATE LIMITED (HEREINAFTER REFERRED TO AS THE TAXPAYER) BY FILING THE PRESENT APPEAL BEING ITA NO.825/DEL/2014 SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 20.12.2013, PASSED BY THE AO I N CONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP/TPO UNDER SEC TION 143 (3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2009-10 ON THE GROUND S INTER ALIA THAT :- 1. THAT, THE IMPUGNED ORDER OF ASSESSMENT FRAMED BY THE LEARNED DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 1 8(1), NEW DELHI (HEREINAFTER REFERRED TO AS 'THE LEARNED AO') PURSUANT TO THE DIRECTIONS OF THE HON'BLE DISPUTE RESOLUTION PA NEL - II (HEREINAFTER REFERRED TO AS 'THE HON'BLE DRP') UNDE R SECTION 143(3) READ WITH SECTION 144C OF THE INCOME-TAX ACT , 1961 ('ACT'), IS A VITIATED ORDER HAVING BEEN PASSED IN VIOLATION OF PRINCIPLES OF NATURAL JUSTICE AND IS OTHERWISE ARBI TRARY AND IS THUS BAD IN LAW AND IS VOID AB-INITIO. 2. THAT, WITHOUT PREJUDICE, THE LEARNED AO HAS GROS SLY ERRED IN MAKING A TRANSFER PRICING ADDITION OF RS.277,999 ,266/- AND A CORPORATE TAX ADDITION OF RS.14,857,889 WHILE COMPU TING THE INCOME OF THE APPELLANT. THE ADDITION MADE TO THE R ETURNED INCOME IS HIGHLY UNJUSTIFIED AND ALSO SUFFERS FROM MISTAKES APPARENT FROM RECORD. 3. THAT THE HON'BLE DRP HAS COMMITTED GROSS ERRORS IN CONFIRMING THE ORDER PASSED U/S 92CA(3) OF THE ACT BY THE LEARNED TRANSFER PRICING OFFICER (THE LEARNED TPO') PROPOSING A TRANSFER PRICING ADJUSTMENT TO THE ACTUAL VALUE OF THE INTERNATIONAL TRANSACTIONS OF THE APPELLANT WITH IT S ASSOCIATED ENTERPRISES AND ONLY GRANTING A PARTIAL RELIEF THER EOF. ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 3 4. THAT ON THE FACTS AND IN LAW, THE LEARNED TPO HA S GROSSLY ERRED IN TREATING FOREIGN EXCHANGE GAIN/ LOSS AS NO N-OPERATING ITEM WHILE DETERMINING THE ARM'S LENGTH PRICE OF TH E INTERNATIONAL TRANSACTIONS OF THE APPELLANT WITHOUT CONSIDERING THE TERMS & CONDITIONS OF THE INTER-COMPANY TRANSAC TIONS OF THE APPELLANT. 5. THE LEARNED AO/TPO/DRP HAS ERRED BY NOT MAKING APPROPRIATE ADJUSTMENTS ON ACCOUNT OF WORKING CAPIT AL DIFFERENCES BETWEEN THE APPELLANT VIS-A-VIS THE COM PARABLES COMPANIES, WITHOUT APPRECIATING THE FACT THAT THE S IMILAR ADJUSTMENT HAS BEEN ALLOWED TO THE APPELLANT IN THE ASSESSMENT YEAR 2007-08 & ASSESSMENT YEAR 2010-11. THUS, IN TH E ABSENCE OF ANY SUBSTANTIAL CHANGE IN THE FUNCTIONAL PROFILE OF THE APPELLANT AND FOLLOWING THE PRINCIPLE OF RES JUDICATA, THE BE NEFIT OF WORKING CAPITAL ADJUSTMENT SHOULD BE ALLOWED FOR AY 2009-10 AS WELL. 6. THAT WITHOUT PREJUDICE, ON THE FACT AND THE CIRC UMSTANCES OF THE CASE AND IN LAW, THE LEARNED TPO / HON'BLE D RP HAS ERRED IN NOT ALLOWING A RISK ADJUSTMENT TO THE ASSESSEE O N ACCOUNT OF THE FACT THAT THE APPELLANT IS A CAPTIVE SERVICE PR OVIDER FOR ITS ASSOCIATED ENTERPRISES AND IS REMUNERATED ON A COST PLUS BASIS IRRESPECTIVE OF THE OUTCOME OF THE SERVICES PROVIDE D AND HENCE UNDERTAKES NO MARKET RISK, SERVICE LIABILITY RISK, CREDIT AND COLLECTION RISK AS AGAINST COMPARABLE COMPANIES THA T ARE THE FULL FLEDGED RISK TAKING ENTREPRENEURS. 7. THAT, IN FRAMING THE IMPUGNED ASSESSMENT, THE RE FERENCE MADE BY THE LEARNED AO U/S 92CA (1) OF THE ACT SUFF ERS FROM JURISDICTIONAL ERROR, AS THE LEARNED AO HAD NOT REC ORDED ANY REASONS NOR HE HAD ANY MATERIAL WHATSOEVER ON THE B ASIS OF WHICH HE COULD EVEN REACH A PRIMA-FACIE OPINION, TH AT IT WAS 'NECESSARY OR EXPEDIENT' TO REFER THE MATTER TO THE LEARNED TPO FOR COMPUTATION OF ALP. 8. THAT WITHOUT PREJUDICE, ON THE FACTS AND CIRCUMS TANCES OF THE CASE AND IN LAW, THE LEARNED AO / TPO / HON'BLE DRP HAS ERRED IN NOT ALLOWING THE BENEFIT OF DOWNWARD ADJUS TMENT OF 5 PERCENT, AS PROVIDED IN THE PROVISO TO SECTION 92C OF THE ACT, FROM THE ALP OF THE INTERNATIONAL TRANSACTIONS AS D ETERMINED BY THEM. 9. THAT ON THE FACT AND THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED TPO / HON'BLE DRP HAS ERRED BY NOT ACCEPTING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT I N ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE RULES, AND CONDUCTING A FRESH ECONOMIC ANALYSIS FOR THE DE TERMINATION OF THE ALP OF THE APPELLANT'S INTERNATIONAL TRANSAC TIONS AND HOLDING THAT THE INTERNATIONAL TRANSACTIONS ARE NOT AT ARM'S LENGTH. ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 4 10.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED TPO / HON'BLE DRP HAS ERRED IN REJ ECTING THE APPELLANT'S CLAIM TO USE MULTIPLE YEAR DATA FOR COM PUTING THE ARM'S LENGTH PRICE AND, INSTEAD, HAS ADHERED TO THE USE OF SINGLE YEAR UPDATED DATA TO CONCLUDE THE ALP OF THE INTERN ATIONAL TRANSACTIONS. 10.2 EVEN AS OTHERWISE, ON THE ASSUMPTION ADOPTED BY THE LEARNED TPO AND WITHOUT PREJUDICE TO GROUND 10.1 AB OVE, EVEN IF SINGLE YEAR UPDATED DATA OF THE COMPARABLES SELECTE D IN THE TRANSFER PRICING DOCUMENTATION IS CONSIDERED, THEN ALSO NO TRANSFER PRICING ADJUSTMENT COULD HAVE BEEN MADE TO THE INCOME OF THE APPELLANT. 10.3 THAT ON THE FACTS AND THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LEARNED TPO/ HON'BLE DRP HAS ERRED IN SELE CTION OF FUNCTIONAL NON COMPARABLE COMPANIES AND APPLICATION OF ARBITRARY FILTERS FOR THE PURPOSE OF DETERMINATION OF ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF IT AND IT ENABLED SERVICES BY THE APPELLANT TO ASSO CIATED ENTERPRISES. 10. THAT ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TPO / HON'BLE DRP IGNORED THE FACT THAT THE APPELLANT IS ENTITLED TO A TAX HOLIDAY UNDER SECTIO N 10A OF THE ACT ON ITS PROFITS AND THEREFORE DOES NOT HAVE AN ULTER IOR MOTIVE OF SHIFTING PROFITS OUTSIDE INDIA. 11. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO/ HON'BLE DRP HAS ERRED IN NOT A LLOWING DEDUCTION UNDER SECTION 10A OF THE ACT ON INTEREST INCOME OF RS. 12,571,932 AND MISCELLANEOUS INCOME OF RS. INR 1,54 3,188. 11.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LEARNED AO HAS ERRED IN NOT ALLOWING DEDUCTION UNDE R SECTION 10A OF THE ACT ON 'EXCESS PROVISION WRITTEN BACK', AMOUNTING TO INR 742,769, DESPITE DIRECTIONS FROM THE HON'BLE DR P TO ALLOW THE SAME. 12. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO HAS ERRED IN NOT GRANTING CREDI T FOR TAX DEDUCTED AT SOURCE ('1DS') OF INR 58,922. 13. 'THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED AO HAS ERRED IN NOT GRANTING CREDI T FOR ADVANCE TAX OF INR 27,500,000 DEPOSITED BY THE APPELLANT FO R THE SUBJECT YEAR. ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 5 14. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO HAS ERRED IN NOT GRANTING SET O FF OF MINIMUM ALTERNATE TAX ('MAT) CREDIT OF INR 21,654,9 47 BROUGHT FORWARD IN THE SUBJE~T YEAR, AS PER SECTION 115JAA OF THE ACT. 15. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO HAS ERRED IN LEVYING CONSEQUENT IAL INTEREST UNDER SECTION 2348 AND 234C OF THE ACT. 15.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED AO HAS ERRED IN LEVYING INTEREST U NDER SECTION 234C OF THE ACT ON ASSESSED INCOME SINCE INTEREST U NDER SECTION 234C OF THE ACT CAN BE LEVIED ON RETURNED INCOME ON LY. 16. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO HAS ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271 (1 )(C) OF THE ACT. 3. THE APPELLANT, DEPUTY COMMISSIONER OF INCOME-TAX , CIRCLE 18 (1), NEW DELHI (HEREINAFTER REFERRED TO AS THE REVENUE) BY FILING THE PRESENT APPEAL BEING ITA NO.419/DEL/2014 SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 20.12.2013, PASSED B Y THE AO IN CONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP/TP O UNDER SECTION 143 (3) READ WITH SECTION 144C OF THE INCOM E-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2009- 10 ON THE GROUNDS INTER ALIA THAT :- I. THAT THE LD. DRP-II ERRED IN LAW AND FACTS IN A LLOWING PART RELIEF OF RS.4,24,45,874/- TO THE ASSESSEE IN THE COMPUTATION OF ARM LENGTH PRICES OF THE INTERNATIONAL TRANSACTI ONS PERTAINING TO THE PROVISION OF ITES AND SOFTWARE DEVELOPMENT SERVICES. II. THAT THE LD. DRP-II ERRED IN LAW AND FACTS IN A CCEPTING THE CONTENTION OF THE ASSESSEE REGARDING EXCLUSION OF M/S. ARICENT TECH., M/S. BODHTREE CONSULTING AND M/S. CA T TECHNOLOGIES (PROVISION FOR SOFTWARE DEVELOPMENT SE RVICES) WITHOUT APPRECIATING THE REASONS GIVEN BY TPO AND W ITHOUT ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 6 CONSIDERING THAT THE TPO HAD SELECTED THE COMPARABL ES KEEPING IN VIEW THE BROAD COMPARABILITY UNDER TNMM. III. THAT THE LD. DRP-II ERRED IN LAW AND FACTS IN ACCEPTING THE CONTENTION OF THE ASSESSEE REGARDING EXCLUSION OF M/S CORAL HUB (PROVISION TOR ITES) WITHOUT APPRECIATING THE R EASONS GIVEN BY TPO AND WITHOUT CONSIDERING THAT THE TPO HAD SEL ECTED THE COMPARABLES KEEPING IN VIEW THE BROAD COMPARABILITY UNDER TNMM. IV. THAT THE LD. DRP-II ERRED IN LAW AND FACTS IN N OT APPRECIATING THE FACT THAT THE ASSESSEE HAD CLUBBED THE TWO INTERNATIONAL TRANSACTIONS - 'PROVISION OF CLAIM PR OCESSING SERVICES' AND 'PROVISION OF DATA ANALYTICS SERVICES ' TOGETHER, AS PROVISION FOR ITES, FOR BENCHMARKING UNDER TNMM IN THE TP STUDY REPORT WHICH WAS FOLLOWED BY THE ASSESSEE DESPITE THE FACT THAT 'PROVISION OF CLAIM PROCESSING SERVICES' COME UNDER THE CATEGORY OF BPO AND 'PROVISION OF DATA ANALYTIC S SERVICES'' COME UNDER THE CATEGORY OF KPO AND THUS THE COMPARA BLES WERE SELECTED BY THE ASSESSEE AS WELL BY THE TPO FROM TH E ENTIRE SPECTRUM (HIGH END SERVICES AS WELL AS LOW END SERV ICES) OF ITES. V. THAT THE LD. DRP-II ERRED IN LAW AND FACTS IN N OT APPRECIATING THE FACT THAT WHEN THE TWO INTERNATION AL TRANSACTIONS - 'PROVISION OF CLAIM PROCESSING SERVI CES - BPO SERVICES' AND 'PROVISION OF DATA ANALYTICS SERVICES - KPO SERVICES' ARE CLUBBED TOGETHER, AS PROVISION FOR IT ES, FOR BENCHMARKING UNDER TNMM BY THE ASSESSEE (IN TP STUD Y REPORT) AND TPO THEN ONLY THE BROAD FUNCTIONAL COMP ARABILITY BETWEEN THE COMPARABLES AND ASSESSEE CAN BE COMPARE D. VI. THAT THE ORDER OF THE DRP-II IS ERRONEOUS AND I S NOT TENABLE ON FACTS AND IN LAW. VII. THAT THE GROUNDS OF APPEAL ARE WITHOUT PREJUD ICE TO EACH OTHER. 4. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : UNITED HEALTH GROUP INSU RANCE COMPANY LIMITED (UHG INDIA) IS INTO PROVIDING IT ENABLED HE ALTH CARE (CLAIM PROCESSING, DATA ANALYTICS & CLINICAL RESEAR CH SUPPORT SERVICES) (HEREINAFTER COLLECTIVELY REFERRED TO AS IT ENABLED ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 7 SERVICES AND IT SOFTWARE DEVELOPMENT) TO UHG GRO UP COMPANIES AS A CAPTIVE SERVICE PROVIDER. DURING TH E YEAR UNDER ASSESSMENT, THE TAXPAYER ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AE) AS UNDER :- NATURE OF INTERNATIONAL TRANSACTION METHOD SELECTED AMOUNT (IN INR) PROVISION OF CLAIM PROCESSING SERVICES (ITES) TNMM 864,954,341 PROVISION OF DATA ANALYTICS SERVICES TNMM 81,347,775 PROVISION OF SOFTWARE DEVELOPMENT SERVICES (IT SERVICES) TNMM 1,279,079,702 PROVISION OF CLINICAL RESEARCH SUPPORT SERVICES TNMM 54,559,250 PURCHASE OF FIXED ASSETS (REVERSAL) - 442,915 REIMBURSEMENT OF EXPATRIATES SALARIES - 6,627,466 REIMBURSEMENT OF EXPENSES RECEIVED BY UHG INDIA - 5,636,108 ADVANCE AGAINST EXPENSES - 12,326,620 GRANT OF RSU/SAR - NIL 5. THE TAXPAYER HAS TWO SEGMENTS CONCERNING INTERNA TIONAL TRANSACTIONS VIZ. INFORMATION TECHNOLOGY ENABLED SE RVICES (ITES) AND SOFTWARE DEVELOPMENT SERVICES. THE TAXPAYER IN ITS TRANSFER PRICING STUDY USED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS MOST APPROPRIATE METHOD (MAM) FOR BOTH THE SEGMENTS AND COMPUTED ITS MARGIN AT 13.83% AND 13.23% IN ITES AN D SOFTWARE DEVELOPMENT SERVICES RESPECTIVELY. 6. LD. TRANSFER PRICING OFFICER (TPO), AFTER EXAMIN ING THE TP STUDY MADE BY THE TAXPAYER AND ON THE BASIS OF VARI OUS FILTERS, ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 8 DESCRIBED IN PARA 3.2 OF THE TP ORDER MADE ITS OWN TP ANALYSIS BY SELECTING 8 COMPARABLES FOR ITES SEGMENT AND 18 COM PARABLES IN SOFTWARE DEVELOPMENT SEGMENT AND CALCULATED THEIR M ARGIN AT 34.29% AND 28.88% RESPECTIVELY AND COMPUTED THE CUM ULATIVE ADJUSTMENT IN BOTH THE SEGMENTS TO THE TUNE OF RS.3 2,04,45,140. 7. LD. DRP WHO HAS GIVEN PART RELIEF BY EXCLUDING BODHTREE CONSULTING, CAT TECHNOLOGIES AND ARICENT TECHNOLOGI ES FROM THE FINAL SET OF COMPARABLES QUA SOFTWARE DEVELOPMENT S ERVICES AND BY EXCLUDING CORAL HUB QUA ITES SEGMENT FOR BENCHMARKI NG THE INTERNATIONAL TRANSACTION. FEELING AGGRIEVED, THE TAXPAYER HAS COME UP BEFORE THE TRIBUNAL SEEKING EXCLUSION OF 5 COMPA RABLES AND 3 COMPARABLES QUA SOFTWARE DEVELOPMENT SERVICES AND I TES SEGMENT RESPECTIVELY AND THE TAXPAYER ALSO SOUGHT INCLUSION OF 3 COMPARABLES QUA ITES SEGMENT. THE REVENUE ALSO CHA LLENGED EXCLUSION OF BODHTREE, CAT TECHNOLOGY QUA SOFTWARE DEVELOPMENT SEGMENT AND CORAL HUB IN ITES FOR BENCH MARKING THE INTERNATIONAL TRANSACTION 8. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 9 TAXPAYERS APPEAL (ITA NO.825/DEL/2014) 9 UNDISPUTEDLY, POST DRP DIRECTIONS, THE LD. TPO PA SSED ORDER DATED 29.11.2013 MAKING TOTAL ADJUSTMENT IN BOTH TH E SEGMENTS AT RS.27,79,99,260/- AS UNDER :- 2. SOFTWARE SEGMENT S.NO. COMPANY NAME OP/TC% 1. GOLDSTONE TECHNOLOGIES (SEG) 10.28 2. INFOSYS LTD 40.74 3. AKSHAY SOFTWARE TECHNOLOGIES LTD 8.24 4. LARSEN & TURBO INFOTECH 21.33 5. MINDTREE LTD 27.36 6. PERSISTENT SYSTEMS LTD 37.77 7. LGS GLOBAL 18.88 8. TATA CONSULTANCY SERVICES LTD (CONSOLIDATED) 31.44 9. TATA ELXSI LTD (SEG) 16.88 10. SASKEN 21.76 11. WIPRO LTD. (SEG.) 25.78 12. THIRDWARE 37.27 13. AZTECSOFT 27.37 14. CG-VAK SOFTWARE AND EXPORTS LTD. 2.7 15. R S SOFTWARE INDIA PVT. LTD. 10.15 AVERAGE 22.53 THE COMPUTATION OF ADJUSTMENT AMOUNT BASED ON THE A BOVE ARM'S LENGTH MARGIN IS AS FOLLOWS: TOTAL COST RS.L,12,95,89,650 ARM'S LENGTH PRICE AT A MARGIN OF 22.53% RS.L,38,4 0,86,198 PRICE RECEIVED RS.L,27,90,79,702 PROPOSED ADJUSTMENT U/S 92CA RS. 10,50,06,496 % OF DIFFERENCE WITH ALP 7.58% BASED ON THIS ANALYSIS, ADJUSTMENT AMOUNT RS.10,50, 06,496 IS PROPOSED FOR SWD SEGMENT. 3. ITES SEGMENT S.NO. COMPANY NAME OP/TC% 1. ACCENTIA TECHNOLOGIES LTD. 52.52 ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 10 2. COSMIC GLOBAL LTD. 50.70 3. CROSSDOMAIN SOLUTION PVT. LTD. 25.63 4. INFOSYS BPO 24.28 5. ECLERX SERVICES LTD. 66.01 6. ADITYA BIRLA MINAC WORLDWIDE LTD 11.95 7. FORTUNE LNFOTECH LTD. 6.27 AVERAGE 33.90 THE COMPUTATION OF ADJUSTMENT AMOUNT BASED ON THE A BOVE ARM'S LENGTH MARGIN IS AS FOLLOWS: OPERATING COST(A) 86,20,69,892 OP/TC 33.90% MARGIN (B) 29,22,41,693 ARM'S LENGTH PRICE(A+B)=C 1,15,43,11,585 PRICE CHARGED BY THE ASSESSEE(D) 98,13,18,815 DIFFERENCE (C-D) 17,29,92,770 % OF DIFFERENCE WITH ALP 14.98% ADJUSTMENT PROPOSED 17,29,92,770 BASED ON THIS ANALYSIS, ADJUSTMENT AMOUNT RS.17,29, 92,770 IS PROPOSED FOR ITES SEGMENT. TOTAL ADJUSTMENT AMOUNT : RS.27,79,99,266 TRANSFER PRICING ISSUES 10. UNDISPUTEDLY, THERE IS NO DISPUTE AS TO THE TNM M USED BY THE TAXPAYER AS MAM FOR BENCHMARKING THE INTERNATIO NAL TRANSACTIONS. IT IS ALSO NOT IN DISPUTE THAT THE T AXPAYER IS A CAPTIVE SERVICE PROVIDER TO ITS AE TO PROVIDE SOFTWARE DEVE LOPMENT SERVICES AND ITES SERVICES. THERE IS ALSO NO CHANG E IN THE BUSINESS MODEL OF THE TAXPAYER AS COMPARED TO THE PRECEDING YEARS. ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 11 11. THE LD. AR FOR THE TAXPAYER TO CUT SHORT THE CO NTROVERSY SOUGHT EXCLUSION OF 5 COMPARABLES, VIZ., INFOSYS TECHNOLOGIES LTD., PERSISTENT SYSTEMS LTD., TATA CONSULTANCY SER VICES LTD. (CONSOLIDATED), THIRDWARE SOLUTIONS LTD. & WIPRO LT D. FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS QUA SOF TWARE DEVELOPMENT AND INCLUSION OF QUINTEGRA SOLUTIONS LTD. QUA SOFTWARE DEVELOPMENT AND SOUGHT EXCLUSION OF ACCENTIA TECHNOLOGIES LTD., COSMIC GLOBAL LTD. & ECLERX SERV ICES AND SOUGHT INCLUSION OF MICROLAND LTD., R SYSTEMS & CG VAK SOFTWARE & EXPORTS LTD. FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS QUA ITES SEGMENT. 12. WE WOULD EXAMINE THE EXCLUSION / INCLUSION OF T HE AFORESAID COMPARABLES SOUGHT BY THE TAXPAYER ONE BY ONE IN TH E LIGHT OF THE ARGUMENTS ADDRESSED BY LD. AR FOR THE TAXPAYER AND LD. DR FOR THE REVENUE. SOFTWARE DEVELOPMENT SEGMENT INFOSYS TECHNOLOGIES LIMITED (INFOSYS) 13. THE TAXPAYER SOUGHT EXCLUSION OF INFOSYS ON GRO UNDS INTER ALIA THAT IT IS FUNCTIONALLY DISSIMILAR AND INCURRI NG SIGNIFICANT R&D EXPENSES HAVING SIGNIFICANT INTANGIBLES AND A GIANT COMPANY HAVING FULLY RISK BEARING PROFILE AND RELIED UPON T HE DECISION RENDERED BY THE COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 12 OWN CASE IN ITA NO.6312/DEL/2012 FOR AY 2008-09 ORD ER DATED 28.08.2014 . 14. HOWEVER, ON THE OTHER HAND, LD. DR FOR THE REVE NUE RELIED UPON THE ORDERS PASSED BY THE AO/DRP. 15. PERUSAL OF PAGE 1045 OF ANNUAL REPORTS COMPENDI UM VOL.IV GOES TO PROVE THAT INFOSYS IS PROVIDING END TO END SOLUTIONS INTER ALIA INCLUDE BUSINESS AND TECHNOLOGY CONSULTING, CU STOM APPLICATION DEVELOPMENT, INFRASTRUCTURE MAINTENANCE SERVICES, MAINTENANCE AND PRODUCTION SUPPORT, PACKAGE ENABLED CONSULTING AND IMPLEMENTATION INCLUDING ENTERPRISE SOLUTIONS, PRODUCT ENGINEERING SOLUTIONS AND PRODUCT LIFECYCLE MANAGEM ENT, SYSTEMS INTEGRATION, VALUATION SOLUTIONS AND SOFTWARE AS A SERVICE (SAAS) RELATED SOLUTIONS. INFOSYS HAS DEVELOPED FINACLE U NIVERSAL BANKING SOLUTION EMPOWERING 114 BANKS ACROSS 62 COUNTRIES H ELPING THEM SERVE 25,000 BRANCHES 244 MILLION CUSTOMERS 297 MIL LION ACCOUNTS AND 2 LAKHS MILLION USERS. FINACLE HAS ALSO EMERGE D AS ONE OF THE MOST SCALE-ABLE CORE BANKING SOLUTION IN THE WORLD BY ACHIEVING AN UNPARALLEL PERFORMANCE BENCHMARK OF 104 MILLION EFF ECTIVE TRANSACTIONS PER HOUR. 16. FURTHERMORE, INFOSYS IS INCURRING 1.3% OF THE T OTAL REVENUE ON R&D AND IS HAVING SIGNIFICANT INTANGIBLES DULY D ETAILED AT PAGE 1138 OF THE ANNUAL REPORT COMPENDIUM. PERUSAL OF T HE DIRECTORS ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 13 REPORT, AVAILABLE AT PAGE 1016 OF THE ANNUAL REPORT COMPENDIUM, ALSO SHOWS THAT INFOSYS IS A GIANT COMPANY HAVING G ROSS PROFIT OF RS.9119 CRORES. 17. ON THE OTHER HAND, THE LD. TAXPAYER IS PROVIDIN G SERVICES ON COST PLUS BASIS HAVING MINIMUM RISK AND HAVING NO I NTANGIBLES. INFOSYS HAS BEEN ORDERED TO BE EXCLUDED AS A COMPAR ABLE BY HONBLE DELHI HIGH COURT IN CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD. (2013) 219 TAXMAN 26 (DEL.) BEING A GIANT COMPANY HAVING HUGE INTANGIBLES AND INCURRING SUBSTANTIVE A MOUNT ON R&D AND IS A FULL-FLEDGED RISK TAKING COMPANY. MORE SO , INFOSYS WAS ORDERED TO BE EXCLUDED IN TAXPAYERS OWN CASE FOR A Y 2008-09 (SUPRA). IN THESE CIRCUMSTANCES, INFOSYS IS NOT A SUITABLE COMPARABLE VIS--VIS THE TAXPAYER FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS, HENCE WE ORDER TO EXCLU DE IT. PERSISTENT SYSTEMS LTD. (PERSISTENT) 18. THE TAXPAYER SOUGHT EXCLUSION OF PERSISTENT ON THE GROUNDS INTER ALIA THAT IT IS OUTSOURCING ITS SERVICES; THA T IT IS ALSO ENGAGED IN DEVELOPMENT OF PRODUCTS WITH NO SEGMENTAL DATA AVAI LABLE; AND THAT IT IS EXPENDING AROUND 1% OF ITS TOTAL INCOME OF RS .56.1 MILLION ON R&D ACTIVITIES. UNDISPUTEDLY, PERSISTENT HAS NOT B EEN CONTESTED BY THE TAXPAYER BEFORE LD. TPO AS WELL AS LD. DRP. IN THE GIVEN ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 14 CIRCUMSTANCES, WE ARE OF THE CONSIDERED VIEW THAT I F SOMETHING NEW IS TO BE EXAMINED LET IT BE EXAMINED BY THE LD. TPO FIRST AS THE TAXPAYER HAS PREFERRED NOT TO CONTEST PERSISTENT BE FORE THE LD. TPO AS WELL AS DRP. SO, THIS ISSUE IS SET ASIDE TO THE LD. TPO TO EXAMINE AFRESH AFTER PROVIDING AN OPPORTUNITY OF BE ING HEARD TO THE TAXPAYER. TATA CONSULTANCY SERVICES LTD. (TATA) 19. THE TAXPAYER SOUGHT EXCLUSION OF TATA ON GROUND OF FUNCTIONAL DIS-SIMILARITY; THAT IT IS PROVIDING IT AND CONSULTANCY SERVICES WITH NO SEGMENTAL DETAILS OF PRODUCT AND S ERVICES; THAT IT IS A LEADING GLOBAL BRAND HAVING HUGE INTANGIBLES AND SIGNIFICANT EXPENSES ON R&D AND THAT IT IS A GIANT RISK TAKING COMPANY AND HAS ALSO UNDERGONE VARIOUS ACQUISITION AND DIVESTMENT D URING THE YEAR UNDER ASSESSMENT; THAT TATA HAS BEEN ORDERED TO BE EXCLUDED AS A COMPARABLE IN AY 2007-08 AND 2008-09 IN IDENTICAL C ASES BY THE COORDINATE BENCH OF THE TRIBUNAL VIZ., SUNLIFE INDIA SERVICES CENTRE PVT. LTD. IN ITA NO.1489/DEL/2014 FOR AY 200 9-10 & ST. ERICSSON INDIA (P.) LTD. VS. ADDL. CIT IN ITA NO.16 72/DEL/2014 FOR AY 2009-10 . 20. HOWEVER, ON THE OTHER HAND, LD. DR FOR THE REVE NUE RELIED UPON THE ORDERS PASSED BY THE AO/DRP. ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 15 21. ANNUAL REPORT OF THE TATA, AVAILABLE AT PAGES 1 341 TO 1363 OF ANNUAL REPORT COMPENDIUM, GOES TO PROVE THAT TATA I S INTO PROVIDING DIVERSIFIED OPERATIONS VIZ. TATA IS INTO IT INFRASTRUCTURE SERVICES, BPO, ITES, ENGINEERING AND INDUSTRIAL SER VICES; THAT IT IS INTO SALE OF EQUIPMENT AND SOFTWARE LICENCE WITH WI DE CLIENT BASE AND HAS BEEN CONFERRED WITH NUMEROUS AWARDS/RECOGNI TION. PERUSAL OF PAGE 1420 OF THE ANNUAL REPORT COMPENDIUM SHOWS THAT IT IS HAVING INCOME FROM IT AND CONSULTANCY SERVICES, SAL E OF EQUIPMENT AND SOFTWARE LICENCE BUT HAVING NO SEGMEN TAL DATA. THE COMPARABILITY OF TATA HAS BEEN EXAMINED BY THE COOR DINATE BENCH OF THE TRIBUNAL IN ST-ERICSSON INDIA (P.) LTD. VS. ADDL. CIT (2017) 79 TAXMANN.COM 207 (DELHI-TRIB.) WHEREIN IT WAS ORDERED TO BE EXCLUDED AS A COMPARABLE VIS--VIS ST-ERICSSO N INDIA (P.) LTD., A CAPTIVE SOFTWARE DEVELOPMENT PROVIDER BY RE LYING UPON SONY MOBILE COMMUNICATIONS INTERNATIONAL AB VS. DY. DIT (2016) 69 TAXMANN.COM 404 (DELHI TRIB.) FOR AY 2009-10, WHEREIN IT WAS ORDERED TO BE EXCLUDED ON ACCOUNT OF ACQUISITION AND MERGER HAVING TOTAL INCOME OF RS.21535.75 CRORE S AND PAYMENT OF SALE OF EQUIPMENT AND SOFTWARE LICENCE A T RS.668.25 CRORES. TATA HAS ALSO EXPENDED RS.42.31 CRORES ON ITS R&D AND A HIGHLY RISK BEARING COMPANY AND AS SUCH, CANNOT BE A SUITABLE COMPARABLE VIS--VIS TAXPAYER WHICH IS A CAPTIVE SO FTWARE PROVIDER ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 16 BEING REMUNERATED ON COST PLUS MARK UP BASIS FOR RE NDERING SERVICES TO ITS AE. SO, WE ORDER TO EXCLUDE TATA FROM THE FINAL SET OF COMPARABLES. THIRDWARE SOLUTIONS LTD. (THIRDWARE) 22. THE TAXPAYER SOUGHT EXCLUSION OF THIRDWARE ON G ROUND OF FUNCTIONAL DIS-SIMILARITY ON THE GROUND THAT ITS SE GMENTAL INFORMATION IS NOT AVAILABLE AND THAT COMPANY IS AL SO INTO SALE OF USER LICENCE FOR SOFTWARE APPLICATION AND RELIED UP ON SUNLIFE INDIA SERVICES CENTRE PVT. LTD. IN ITA NO.1489/DEL/2014 F OR AY 2009- 10 & ST. ERICSSON INDIA (P.) LTD. VS. ADDL. CIT IN ITA NO.1672/DEL/2014 FOR AY 2009-10 . 23. HOWEVER, THE LD. DR FOR THE REVENUE OPPOSED THE EXCLUSION OF THIRDWARE ON THE GROUND THAT THE TAXPAYER HAS NO T CONTESTED THIRDWARE EITHER BEFORE THE LD. TPO OR BEFORE LD. D RP. 24. THE COORDINATE BENCH OF THE TRIBUNAL IN CASE OF ST. ERICSSON INDIA (P.) LTD. (SUPRA) WHILE EXAMINING THE COMPARABILITY OF THIRDWARE ORDERED TO EXCLUDE THIRDWARE AS A COMPARA BLE VIS--VIS ST. ERICSSON FROM A ROUTINE CAPTIVE SOFTWARE DEVEL OPMENT PROVIDER WORKING ON COST PLUS BASIS ON THE GROUND THAT THE S UBSTANTIAL REVENUE OF THIS COMPANY IS FROM SALES AND OPERATING SALES OF ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 17 LICENCE, SOFTWARE SERVICES, EXPORT FORM SEZ UNIT, E XPORT FROM STPI UNIT AND REVENUE FROM SUBSCRIPTION. 25. ALL THESE FACTS ARE AVAILABLE IN THE ANNUAL REP ORT PAGE 1537 OF THE ANNUAL REPORT COMPENDIUM. SO, IN THESE CIRC UMSTANCES, WE ARE OF THE CONSIDERED VIEW THAT LET THE TPO EXAMINE D THE COMPARABILITY OF THE THIRDWARE IN THE LIGHT OF THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN ST. ERICSSON INDIA (P.) LTD. (SUPRA) AS WELL AS SUNLIFE INDIA SERVICES CENTRE PVT. LTD. (SUPRA). WIPRO LIMITED (WIPRO) 26. THE TAXPAYER SOUGHT EXCLUSION OF WIPRO ON GROUN DS OF FUNCTIONAL DISSIMILARITY; BEING ENGAGED IN R&D ACTI VITIES HAVING SIGNIFICANT INTANGIBLES AND IT IS A GIANT COMPANY W ITH DIFFERENCES IN RISK PROFILE, NATURE OF SERVICES, EXPENDITURE ON R& D ETC. AND RELIED UPON TOLUNA INDIA PVT. LTD. VS. ACIT IN ITA NO.5645/DEL/ 2011 AND CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. IN ITA 1204/2011 (HONBLE DELHI HIGH COURT) . HOWEVER, ON THE OTHER HAND, LD. DR FOR THE REVENUE RELIED UPON THE ORDERS PASSED BY THE AO/DRP. 27. THE TAXPAYER HAS SOUGHT THE EXCLUSION OF WIPRO BEFORE THE LD. TPO/DRP WHO HAVE REJECTED THE ARGUMENT ON THE G ROUND THAT THE MARGIN OF THE STANDALONE ENTITY IS HIGHER THAN THE CONSOLIDATED ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 18 LEVEL. HOWEVER, WHEN WE EXAMINE ANNUAL REPORT OF W IPRO AT PAGE 1604 OF THE ANNUAL REPORT COMPENDIUM, WIPRO IS A LE ADING GLOBAL INFORMATION TECHNOLOGY, OR IT, SERVICES COMPANY, HEADQUARTERED IN BANGALORE, INDIA PROVIDING A COMPREHENSIVE RANGE OF IT SERVICES, SOFTWARE SOLUTIONS AND RESEARCH AND DEVELOPMENT SER VICES IN THE AREAS OF HARDWARE AND SOFTWARE DESIGN TO LEADING CO MPANIES WORLDWIDE; USING ITS DEVELOPMENT CENTERS LOCATED IN INDIA AND AROUND THE WORLD, QUALITY PROCESSES AND GLOBAL RESO URCE POOL TO PROVIDE COST EFFECTIVE IT SOLUTIONS AND DELIVER TIM E-TO-MARKET AND TIME-TO-DEVELOPMENT ADVANTAGES TO ITS CLIENTS. IT ALSO PROVIDES BUSINESS PROCESS OUTSOURCING, OR BPO, SERVICES AND IS A LEADER IN THE INDIAN IT MARKET AND FOCUSES PRIMARILY ON MEETI NG REQUIREMENTS FOR IT PRODUCTS OF COMPANIES IN INDIA AND THE MIDDLE EAST REGION AND HAVE A NOTABLE PRESENCE IN THE MARK ETS FOR CONSUMER PRODUCTS AND LIGHTING AND INFRASTRUCTURE E NGINEERING. 28. FURTHERMORE, IN FORM B TO THE DIRECTORS REPORT , SPECIFIC AREA IN WHICH R&D IS BEING CARRIED OUT BY THE WIPRO IS AS UNDER :- WIPROS R&D FOCUS IS TO STRENGTHEN THE PORTFOLIO O F CENTRES OF EXCELLENCE (COE), SOLUTION ACCELERATION AND SOFTWAR E ENGINEERING TOOLS & METHODOLOGIES. IN FINANCIAL YE AR 2008-09, YOUR COMPANY INCUBATED APPLIED RESEARCH GROUP TO IN VESTIGATE & ANALYZE POTENTIAL IMPACT AND BUSINESS PROSPECT OF TECHNOLOGIES WHICH ARE IN THE EARLY STAGE OF ADOPTION. ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 19 29. MOREOVER, WIPRO IS HAVING HUGE INTANGIBLES AS I S EVIDENT FROM CONSOLIDATED BALANCE SHEET SCHEDULE V, AVAILAB LE AT PAGE 1659 OF THE ANNUAL REPORT COMPENDIUM, TO THE TUNE OF RS. 28213 MILLION. 30. SO KEEPING IN VIEW THE FUNCTIONS, ASSETS AND RI SK PROFILE OF WIPRO AND WHICH IS A FULLY RISK BEARING COMPANY, WE ARE OF THE CONSIDERED VIEW THAT IT IS NOT A SUITABLE COMPARABL E VIS--VIS THE TAXPAYER WHICH IS A ROUTINE CAPTIVE SOFTWARE DEVELO PMENT SERVICE PROVIDER WORKING ON COST PLUS MARK UP MODEL OF BUSI NESS. APPLYING THE RATIO OF THE DECISION RENDERED BY HON BLE HIGH COURT IN AGNITY INDIA TECHNOLOGIES PVT. LTD. (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT WIPRO BEING A GIANT COMPANY IN THE AREA OF DEVELOPMENT OF SOFTWARE ASSUMING FULL-FLEDGED RISK LEADING TO HIGHER PROFIT, HAVING HUGE INTANGIBLES AND R&D ACTI VITIES IS NOT A SUITABLE COMPARABLE TO THE TAXPAYER BEING A CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROVIDER WORKING ON COST PLUS B ASIS HAVING NO R&D ACTIVITIES AND IS A RISK INSULATED COMPANY. SO , WE ORDER TO EXCLUDE WIPRO FROM THE FINAL SET OF COMPARABLES. COMPANIES SOUGHT TO BE INCLUDED QUINTEGRA SOLUTIONS (QUINTEGRA) 31. PRIMARILY, THE LD. TPO HAS REJECTED QUINTEGRA A S A COMPARABLE ON THE GROUND THAT THIS COMPANY FAILS TH E EXPORT FILTER ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 20 OF 75%. THE LD. TPO APPLIED EXPORT FILTER OF 75% O F THE TOTAL INCOME TO SELECT A COMPANY AS COMPARABLE, AS IS EVI DENT FROM PARA 2.2(V) OF THE TP ORDER. HOWEVER, THE TAXPAYER HAS RAISED OBJECTION BEFORE LD. DRP THAT QUINTEGRA PASSES THE EXPORT FIL TER BUT THE LD. DRP HAS NOT DEALT WITH THIS ISSUE. 32. PERUSAL OF THE SUBMISSIONS MADE BY THE TAXPAYER BEFORE LD. DRP ARE AVAILABLE AT PAGES 413 & 414 OF THE PAPER B OOK II. HOWEVER, PERUSAL OF THE PROFIT & LOSS ACCOUNT, AVAI LABLE AT PAGES 1747 AND 1750 OF ANNUAL REPORT COMPENDIUM AND SCHED ULE FORMING PART OF THE BALANCE SHEET TO QUINTEGRA SHOWS THAT Q UINTEGRAS EXPORT REVENUE IS 95.06% AND AS SUCH, PASSES THE TA XPAYERS EXPORT EARNING FILTER APPLIED BY THE LD. TPO. SO, LD. TPO IS DIRECTED TO CONSIDER THE QUINTEGRA ACCORDINGLY WHEN HE HAS NOT DISPUTED THE FUNCTIONAL PROFILE OF QUINTEGRA AND IT HAS ALSO NOT FAILED IN OTHER FILTERS APPLIED BY THE LD. TPO. INFORMATION TECHNOLOGY ENABLED SERVICES (ITES) SEGMENT 33. METHOD AND FUNCTIONAL PROFILE OF THE TAXPAYER I S NOT IN DISPUTE. ALL THE INTERNATIONAL TRANSACTIONS CARRIE D OUT BY THE TAXPAYER DURING THE YEAR UNDER ASSESSMENT ARE AS PE R AGREEMENT DATED 01.01.2007 WHICH IS CONTINUING IN NATURE AS W ERE APPLICABLE ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 21 IN AY 2008-09. TO BENCHMARK INTERNATIONAL TRANSACT IONS, LD. TPO HAS SELECTED 8 COMPARABLES HAVING AVERAGE MEAN OF 3 4.29% AND PROPOSED THE ADJUSTMENT OF RS.17,63,54,842/-. THE COMPARABLES FINALLY SELECTED BY THE LD. TPO ARE AS UNDER :- S.NO. COMPANY NAME OP/TC% 1. ACCENTIA TECHNOLOGIES LTD. 52.52 2. COSMIC GLOBAL LTD. 50.70 3. CROSSDOMAIN SOLUTION PVT. LTD. 25.63 4. INFOSYS BPO 24.28 5. ECLERX SERVICES LTD. 66.01 6. CORAL HUB 37.03 7. ADITYA BIRLA MINAC WORLDWIDE LTD 11.95 8. FORTUNE INFOTECH LTD. 6.27 AVERAGE 34.29 34. OUT OF AFORESAID 8 COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS QUA ITES SERVICES, THE T AXPAYER HAS SOUGHT EXCLUSION OF ACCENTURE TECHNOLOGIES LTD., COSMIC GLOBAL LTD. & ECLERX SERVICES LTD. THE TAXPAYER HAS ALSO SOUGHT INCLUSION OF MICROLAND LTD., R SYSTEMS & CG VAK SOFTWARE & EXPORTS LTD. . 35. NOW, WE WOULD EXAMINE THE COMPARABILITY OF THE AFORESAID COMPANIES VIS--VIS THE TAXPAYER ONE BY ONE. ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 22 COMPANIES SOUGHT TO BE EXCLUDED BY THE TAXPAYER ACCENTURE TECHNOLOGIES LTD. (ACCENTURE) 36. THE TAXPAYER SOUGHT TO EXCLUDE ACCENTURE ON GRO UNDS OF ITS FUNCTIONAL DIS-SIMILARITY; THAT ACCENTURE HAS UNDER GONE EXTRA ORDINARY EVENTS DURING THE YEAR UNDER ASSESSMENT AN D THAT ITS SEGMENTAL DATA IS NOT AVAILABLE IN THE PUBLIC DOMAI N AND RELIED UPON THE TAXPAYERS OWN CASE IN ITA NO.1038/DEL/2015 FOR AY 2010-11, AMERIPRISE INDIA PVT. LTD. VS. ACIT IN ITA NO.2010/DEL/2014 FOR AY 2009-10, CAPITAL IQ INFORMA TION SYSTEMS VS. ACIT IN ITA NO.124/HYD/2014 FOR AY 2009 -10 AND MACQUARIE GLOBAL SERVICES PVT. LTD. VS. DCIT IN ITA NO.6803/DEL/2013 FOR AY 2009-10 . 37. HOWEVER, ON THE OTHER HAND, LD. DR FOR THE REVE NUE RELIED UPON THE ORDERS PASSED BY THE AO/DRP. 38. THE TAXPAYER RAISED OBJECTION FOR INCLUSION OF ACCENTURE BEFORE THE LD. TPO THAT IT IS FUNCTIONALLY DIS-SIMI LAR AND IS INTO DIVERSIFIED BUSINESS AND HAS ACQUIRED OAK TECHNOLOG IES INC. AND, THEREFORE, FAILS THE FILTER OF SOME PECULIAR CIRCUM STANCES BUT TPO HAS NOT DISCUSSED THE OBJECTION OF FUNCTIONAL DIS-S IMILARITY AND HAS RETAINED ACCENTURE AS COMPARABLE ON THE GROUND THAT ITS ACQUISITION WAS COMPLETED BY 31.03.2009 AND IT HAS NO IMPACT ON THE REVENUE ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 23 OF THE COMPANY DURING THE YEAR UNDER ASSESSMENT. L D. DRP RETAINED ACCENTURE BY SIMPLY AGREEING WITH LD. TPO AND WITHOUT CONSIDERING THE OBJECTIONS RAISED BY THE TAXPAYER. 39. ANNUAL REPORT OF THE ACCENTURE, AVAILABLE AT PA GES 605 TO 692, SHOWS THAT ACCENTURE IS INTO THE DIVERSIFYING ACTIVITIES VIZ. KNOWLEDGE PROCESS OUTSOURCING (KPO), LEGAL PROCESS OUTSOURCING, DATA PROCESS OUTSOURCING, HIGH END SOF TWARE SERVICES, WHEREAS THE TAXPAYER IS A ROUTINE SOFTWAR E ITES SERVICE PROVIDER WORKING ON COST PLUS MARK UP AND FULLY RIS K INSULATED COMPANY. 40. FURTHERMORE, ACCENTURE HAS UNDERGONE EXTRA ORD INARY EVENT DURING THE YEAR UNDER ASSESSMENT AS IT HAS ACQUIRED M/S. OAK TECHNOLOGIES INC. WITH CONSIDERATION OF US $ 9 MILL ION EXCLUDING DURING THE COST OF ACQUISITION AND AS ON 31.03.2009 , COMPLETED PURCHASE OF 96% OF THE OUTSTANDING EQUITY SHARES OF M/S. OAK TECHNOLOGIES INC. WHICH HAS CERTAINLY IMPACTED THE PROFITABILITY OF THE TAXPAYER WHICH IS ROUTINE SERVICE PROVIDER. IN VIEW OF THE DECISION RENDERED BY HONBLE DELHI HIGH COURT IN RAMPGREEN SOLUTIONS PVT. LTD. VS. CIT 60 TAXMANN.COM 355 , KPO CANNOT BE COMPARED WITH ROUTINE BPO. 41. ACCENTURE HAS ALSO BEEN ORDERED TO BE EXCLUDED BY THE COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 24 2010-11 IN ITA NO.1038/DEL/2015 ORDER DATED 26.08.2 016 . CONSEQUENTLY, WE ORDER TO EXCLUDE ACCENTURE FROM TH E FINAL SET OF COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRAN SACTIONS. COSMIC GLOBAL LTD. (COSMIC) 42. THE TAXPAYER SOUGHT EXCLUSION OF COSMIC ON THE GROUNDS INTER ALIA THAT IT IS FUNCTIONALLY DIS-SIMILAR; THA T UNDER BPO SEGMENT, NO SEGMENTAL DETAIL OF OPERATING COST IS A VAILABLE; THAT COSMICS OUTSOURCING EXPENDITURE IS 56% OF THE TURN OVER AND RELIED UPON TAXPAYERS OWN CASE FOR AY 2008-09 AND MERCER CONSULTING INDIA P. LTD. VS. DCIT IN ITA NO.966/DEL /2014 FOR AY 2009-10, CAPITAL IQ INFORMATION SYSTEMS VS. ACIT IN ITA NO.124/HYD/2014 FOR AY 2009-10 AND MACQUARIE GLOBAL SERVICES PVT. LTD. VS. DCIT IN ITA NO.6803/DEL/2013 FOR AY 2 009-10 . 43. HOWEVER, ON THE OTHER HAND, LD. DR FOR THE REVE NUE RELIED UPON THE ORDERS PASSED BY THE AO/DRP. 44. BARE PERUSAL OF THE BALANCE SHEET AND PROFIT & LOSS ACCOUNT OF COSMIC, AVAILABLE AT PAGES 701 & 702 OF THE ANNU AL REPORT COMPENDIUM, SHOWS THAT FINANCIAL RESULTS ARE AVAILA BLE ONLY ON ENTITY LEVEL. WHEN WE EXAMINE SCHEDULE VIII TO THE PROFIT & LOSS ACCOUNT SHOWING REVENUE FROM OPERATION, IT IS CLEAR THAT INCOME FROM MEDICAL TRANSCRIPTION AND CONSULTANCY WHICH IS AKIN TO ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 25 TAXPAYER IS ONLY RS.9,90,737/- WHEREAS THE MAJOR CH UNK OF THE BUSINESS ARE FROM TRANSLATION CHARGES I.E. RS.6,99, 35,756/- AND INCOME FROM BPO IS RS.27,76,090/-. 45. MOREOVER, PERUSAL OF THE P&L ACCOUNT FURTHER SH OWS THAT THE TAXPAYER HAS OUTSOURCED 56% OF ITS ACTIVITIES AND I TS OUTSOURCING EXPENSES ARE 56% OF ITS REVENUE WHICH MAKES ITS BUS INESS MODEL DIFFERENT FROM THE TAXPAYER. SO, WE CAN SAFELY CON CLUDE THAT COSMIC IS INTO TRANSLATION BUSINESS WHICH IS NOT CO MPARABLE TO THE TAXPAYER WHICH IS PROVIDING INSURANCE CLAIM PROCESS ING SERVICES TO ITS AE UNDER ITES SEGMENT. 46. COSMIC WAS EXAMINED AS A COMPARABLE IN TAXPAYER S OWN CASE FOR AY 2008-09 AND WAS ORDERED TO BE EXCLUDED BEING FUNCTIONALLY DISSIMILAR VIDE ORDER DATED 28.08.2014 PASSED IN ITA NO.6312/DEL/2012. COSMIC WAS ALSO ORDERED TO BE EX CLUDED AS A COMPARABLE BY THE COORDINATE BENCH OF THE TRIBUNAL IN ITA NO.6803/DEL/2013 VIDE ORDER DATED 22.01.2015 VI-A-VIS MACQUARIE GLOBAL SERVICES PVT. LTD. WHICH WAS ALSO INTO PROVI DING ITES SERVICES TO ITS AE ON GROUND OF ITS FUNCTIONAL DIS- SIMILARITY BY RELYING UPON MERCER CONSULTING (INDIA) PVT. LTD. VS. DCIT (ITA NO.966/DEL/2014) ON THE GROUND THAT COSMIC OUTSOURCES ITS MAJOR ACTIVITIES. SO, WE ORDERED TO EXCLUDE COSMIC FROM THE FINAL SET OF COMPARABLES. ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 26 E-CLERX SERVICES (E-CLERX) 47. THE TAXPAYER SOUGHT TO EXCLUDE E-CLERX FOR BENC HMARKING ITS INTERNATIONAL TRANSACTION ON THE GROUNDS INTER ALIA THAT IT IS FUNCTIONALLY DIS-SIMILAR; THAT IT HAS ONLY ONE SEG MENT AND HAS ORDERED TO BE EXCLUDED IN TAXPAYERS OWN CASE FOR A Y 2008-09 AND ALSO RELIED UPON AMERIPRISE INDIA PVT. LTD. VS. ACIT IN ITA NO.2010/DEL/2014 FOR AY 2009-10, CAPITAL IQ INFORMA TION SYSTEMS VS. ACIT IN ITA NO.124/HYD/2014 FOR AY 2009 -10 AND MACQUARIE GLOBAL SERVICES PVT. LTD. VS. DCIT IN ITA NO.6803/DEL/2013 FOR AY 2009-10 . 48. A PERUSAL OF PAGES 715 & 716 OF THE ANNUAL REPO RT COMPENDIUM SHOWS THAT E-CLERX IS KNOWLEDGE PROCESS OUTSOURCING (KPO) PROVIDING DATA ANALYTICS AND DATA PROCESS SOLUTIONS TO GLOBAL ENTERPRISE CLIENTS, PROVIDING E ND TO END SUPPORT THROUGH TRADE LIFECYCLE INCLUDING TRADE CONFIRMATIO N, SETTLEMENTS, TRANSACTION, MAINTENANCE, RISK ANALYTIC AND REPORTI NG OVER THE LAST YEAR AND ALSO PROVIDING UNIQUE BLEND OF SERVICES, P ROCESS REENGINEERING AND AUTOMATION. FURTHERMORE, PERUSAL OF PAGE 763 OF ANNUAL REPORT COMPENDIUM SHOWS THAT IT IS HAVING NO SEGMENTAL DETAILS RATHER COMPANY OPERATES UNDER SINGLE PRIMAR Y SEGMENT I.E. DATA ANALYTICS AND PROCESS OUTSOURCING SERVICES. L D. DR FOR THE ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 27 REVENUE CONTENDED THAT THE TAXPAYER IS ALSO A KPO P ROVIDING KPO SERVICES UNDER DATA ANALYTICS. 49. HOWEVER, WE ARE OF THE CONSIDERED VIEW THAT E-C LERX IS INTO PROVIDING DATA ANALYTICS AND CUSTOMIZED PROCESS SOL UTION TO DIVERSIFYING GLOBAL CLIENTS AND IS ALSO PROVIDING S ERVICES TO BANKING, MANUFACTURING, RETAIL, TRAVEL AND HOSPITAL ITY VERTICALS. SO, ITS FUNCTIONAL PROFILE IS NOT MATCHED WITH TAXPAYER PARTICULARLY WHEN SEGMENTAL DETAIL IS NOT AVAILABLE. SO, THE SO LE ARGUMENT ADVANCED BY LD. DR THAT THE TAXPAYER IS ALSO A KPO, IS NOT ACCEPTABLE. E-CLERX HAS BEEN EXCLUDED AS A COMPARA BLE IN TAXPAYERS OWN CASE FOR AY 2008-09 BY THE COORDINATE BENCH OF THE TRIBUNAL IN ITA NO.6312/DEL/2012 ORDER DATED 28 .08.2014 AND SINCE THEN THERE IS NO CHANGE IN THE BUSINESS P ROFILE OF THE TAXPAYER TILL TODAY. 50. E-CLERX WAS ALSO ORDERED TO BE EXCLUDED AS A CO MPARABLE IN MACQUAIRE GLOBAL SERVICES PVT. LTD. (SUPRA) WHICH WAS ALSO INTO PROVIDING ITES SERVICES TO ITS AE ON THE GROUND THA T E-CLERX IS A KPO AND IS PROVIDING END TO END SUPPORT THROUGH TRA DE LIFE-CYCLE INCLUDING TRADE CONFIRMATION INCLUDING SETTLEMENT E TC. AND CANNOT BE COMPARED WITH MACQUAIRE GLOBAL SERVICES PVT. LTD. (SUPRA) WHICH IS ALSO A CAPTIVE UNIT RENDERING SERVICES TO ITS AE WITHOUT ANY INTANGIBLES. ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 28 51. SO, IN VIEW OF THE MATTER, WE ARE OF THE CONSID ERED VIEW THAT E-CLERX IS NOT A SUITABLE COMPARABLE VIS--VIS THE TAXPAYER WHO IS ORDERED TO BE EXCLUDED. COMPARABLES SOUGHT TO BE INCLUDED BY THE TAXPAYER MICROLAND LIMITED (MICROLAND) 52. UNDISPUTEDLY, MICROLAND WAS TAKEN AS A COMPARAB LE FIRST TIME BY THE TAXPAYER BEFORE THE LD. DRP. THE LD. A R FOR THE TAXPAYER SUBMITTED THAT MICROLAND PASSES ALL THE FI LTERS APPLIED BY THE TPO. THE LD. DRP HAVE NOT GIVEN ANY FINDING ON THIS COMPARABLE. IN THE GIVEN CIRCUMSTANCES, WHEN MICRO LAND PASSES ALL THE FILTERS APPLIED BY THE TPO, THE TPO IS DIRE CTED TO EXAMINE ITS COMPARABILITY FOR THE PURPOSE OF BENCHMARKING T HE INTERNATIONAL TRANSACTIONS. CG VAK SOFTWARE & EXPORTS LTD. & R. SYSTEMS (CG VAK) (R. SYSTEMS) 53. THE LD. TPO REJECTED CG VAK SOFTWARE & EXPORTS LTD. AS A COMPARABLE ON THE GROUND THAT SIGNIFICANT INCOME OF THIS COMPANY IS FROM SOFTWARE DEVELOPMENT AND THAT INCOME FROM BPO OPERATION IS ONLY RS.86,00,000/-. TPO HAS APPLIED SEGMENT WHILE EXAMINING THE COMPARABLE. PERUSAL OF SEGMENTAL ANA LYSIS, ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 29 AVAILABLE AT PAGE 879 OF THE ANNUAL REPORT COMPENDI UM, SHOWS THAT DATA IS SUFFICIENT. IN AY 2010-11, CG VAK SOFTWARE & EXPORTS LTD. WAS EXAMINED AS A COMPARABLE IN TAXPAYERS OWN CASE AND THE ISSUE WAS SET ASIDE TO THE TPO TO RECONSIDER IN THE LIGHT OF THE DECISION RENDERED IN TECHBOOK INTERNATIONAL PVT. LTD. ITA NO.240/DEL/2015 AND AMERIPRISE INDIA PVT. LTD. VS. ACIT ITA NO.7014/DEL/2014. IN CASE, DATA IS SUFFICIENT, CG VAK SOFTWARE & EXPORTS LTD. MAY BE INCLUDED IN THE FINAL SET OF C OMPARABLES IN THE LIGHT OF THE DECISIONS RENDERED BY THE COORDINATE B ENCH OF THE TRIBUNAL IN TECHBOOK INTERNATIONAL PVT. LTD. AND AMERIPRISE INDIA PVT. LTD. (SUPRA). 54. R. SYSTEMS HAS BEEN REJECTED BY THE TPO AS A CO MPARABLE ON THE GROUND THAT IT IS HAVING DIFFERENT ENDING YEAR THAN MARCH AND AS SUCH, RELIABLE FINANCIAL DATA IS NOT AVAILABLE FOR 12 MONTHS PERIOD. UNDISPUTEDLY, R. SYSTEMS HAS DIFFERENT FINANCIAL YE AR VIS--VIS THE TAXPAYER WHICH HAS ACCOUNTING YEAR FROM APRIL TO MA RCH BUT WE ARE OF THE CONSIDERED VIEW THAT IN CASE FUNCTIONAL SIMILARITIES ARE THERE, ANY COMPARABLE CANNOT BE EXCLUDED MERELY ON ACCOUNT OF DIFFERENT ACCOUNTING YEAR. SO, IN CASE TAXPAYER PR OVIDES RELIABLE DATA TO EXAMINE THE PROFITABILITY, THE LD. TPO MAY CONSIDER IT FOR INCLUSION OF THE SAME. ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 30 GROUNDS NO.1, 2 & 3 55. GROUNDS NO.1, 2 & 3 ARE GENERAL IN NATURE MORE SPECIFICALLY ELABORATED IN THE SUBSEQUENT GROUNDS, NEED NO ADJUD ICATION. GROUND NO.4 56. THE LD. TPO HAS TREATED FOREIGN EXCHANGE GAIN/L OSS AS NON- OPERATING ITEMS IN BOTH THE SEGMENTS I.E. ITES SERV ICES AND SOFTWARE DEVELOPMENT SERVICES WHILE DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS, WHICH ARE NOW UNDER CHALLENGE BEFORE THE TRIBUNAL. THE LD. DRP BY RELY ING UPON SAFE HARBOUR RULE AS PER CBDT NOTIFICATION DATED 18.09. 2013 UPHELD THE FINDINGS RETURNED BY LD. TPO THAT FOREIGN EXCHA NGE GAIN/LOSS IS A NON-OPERATING ITEM WHILE DETERMINING THE ARMS LE NGTH PRICE OF INTERNATIONAL TRANSACTION. 57. HOWEVER, THE LD. AR FOR THE TAXPAYER CONTENDED THAT THE TAXPAYER BEING A CAPTIVE SERVICE PROVIDER PASSES TH E FOREIGN EXCHANGE LOSS/GAIN TO THE RESPECTIVE AE ON CASE TO CASE BASIS WITHOUT ANY MARK UP IN ORDER TO MAKE SUITABLE COMPE NSATION OF THE MARGIN EARNED BY THE TAXPAYER VIS--VIS COMPARABLE COMPANIES. 58. UNDISPUTEDLY, THE REVENUE HAS NOT TREATED FOREI GN EXCHANGE GAIN/LOSS AS NON-OPERATING ITEM WHILE OPERATING ARM S LENGTH PRICE ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 31 OF INTERNATIONAL TRANSACTION OF THE TAXPAYER IN AYS 2008-09 AND 2010-11. 59. HONBLE HIGH COURT OF DELHI IN CASE CITED AS PR. CIT-02 VS. M/S. CASHEDGE INDIA PVT. LTD. IN ITA 279/2016 ORDER DATED 04.05.2016 WHILE UPHOLDING THE DECISION RENDERED BY THE TRIBU NAL HELD THAT SAFE HARBOUR RULE IS NOT APPLICABLE TO AY 2008-09 AS IT CAME INTO FORCE W.E.F. 18.09.2013 SINCE THE LD. DRP HAS PRIMARILY RELIED UPON SAFE HARBOUR RULE WHILE UPHOLDING THE D ECISION OF LD. DRP IN TREATING THE FOREIGN EXCHANGE FLUCTUATION GA IN/LOSS AS NON- OPERATING ITEM, THE FINDINGS ARE NOT SUSTAINABLE. 60. THE COORDINATE BENCH OF THE TRIBUNAL DECIDED TH E IDENTICAL ISSUE IN CASE OF WESTFALIA SEPARATOR INDIA PVT. LTD. VS. ACIT IN ITA NO.4446/DEL/2002 FOR AY 2003-04 BY RETURNING FOLLOWING FINDINGS :- WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E RELEVANT MATERIAL ON RECORD. THE FOREX GAIN OR LOSS IS THE DIFFERENCE BETWEEN THE PRICE AT WHICH AN IMPORT OR EXPORT TRANSACTION WAS RECORDED IN THE BOOKS OF ACCOUNT ON THE BASIS OF RATE OF FOREIGN EXCHANGE THEN PREVAILING A ND THE AMOUNT ACTUALLY PAID OR RECEIVED AT THE RATE OF FOR EIGN EXCHANGE PREVAILING AT THE TIME OF ACTUAL PAYMENT O R RECEIPT. SINCE SUCH FOREX LOSS OR GAIN IS A DIRECT OUTCOME OF THE PURCHASE OR SALE TRANSACTION, IT PARTAKES OF TH E SAME CHARACTER AS THAT OF THE TRANSACTION TO WHICH IT RE LATES. THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ACIT V S. PRAKASH I. SHAH (2008) 115 ITD 167 (MUM) (SB) HAS H ELD THAT FOREIGN EXCHANGE FLUCTUATION GAIN IS A PART OF EXPORT TURNOVER. THOUGH SUCH DECISION WAS RENDERED IN THE CONTEXT OF SECTION 80HHC, BUT THE SAME LOGIC APPLIE S GENERALLY AS WELL. THE ESSENCE OF THE MATTER IS THA T ANY GAIN OR LOSS ARISING OUT OF CHANGE IN FOREIGN CURRENCY R ATE IN ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 32 RESPECT OF TRANSACTION FOR IMPORT OR EXPORT OF GOOD S IS NOTHING, BUT INHERENT PART OF THE PRICE OF IMPORT O R THE VALUE OF EXPORT. THE HON'BLE SUPREME COURT IN SUTLE J COTTON MILLS LTD. VS. CIT 116 ITR 1 (SC) HAS HELD T HAT : 'WHERE PROFIT OR LOSS ARISES TO AN ASSESSEE ON ACCO UNT OF APPRECIATION OR DEPRECIATION ITA NOS.4446 & 4447/DEL/2007 IN THE VALUE OF FOREIGN CURRENCY HELD BY IT, ON CONVERSION INTO ANOTHER CURRENCY, SUCH PROFIT OR LOSS WOULD ORDINARILY BE TRADING PROFIT OR LOSS IF THE F OREIGN CURRENCY IS HELD BY THE ASSESSEE ON REVENUE ACCOUNT OR AS A TRADING ASSET OR AS PART OF CIRCULATING CAPITAL EMB ARKED IN THE BUSINESS'. WHEN WE READ THE RATIO OF THE CASE O F SUTLEJ COTTON (SC)(SUPRA) IN JUXTAPOSITION TO THAT OF THE SPECIAL BENCH IN CASE OF PRAKASH I SHAH (SUPRA), THERE REMA INS NO DOUBT THAT FOREX GAIN OR LOSS FROM A TRADING TRANSA CTION IS NOT ONLY AN ITEM OF REVENUE NATURE, BUT IS, IN FACT , A PART OF THE PRICE OF IMPORT OR VALUE OF EXPORT TRANSACTION, AS THE CASE MAY BE. OPERATING EXPENSE IS ORDINARILY AN EXP ENSE THAT A BUSINESS INCURS AS A RESULT OF PERFORMING IT S NORMAL BUSINESS OPERATIONS. AS THE BUSINESS OF 'ASSEMBLY' DONE BY THE ASSESSEE UNDER THIS SEGMENT IS NOT POSSIBLE WIT HOUT PURCHASES AND FOREX GAIN IS IN RELATION TO SUCH PUR CHASE TRANSACTIONS, WE HAVE NO HESITATION IN HOLDING THAT IT IS AN ITEM OF OPERATING COST. 16 WE FIND THAT THE AFORES AID BASIS THAT FOREIGN EXCHANGE GAIN/LOSS SHOULD BE TREATED A S NON- OPERATING ITEM IS BASED ON THE NOTIFICATION OF CBDT ISSUED ON 18.9.2018 ON SAFE HARBOUR. HOWEVER, SUCH A CONTE NTION HAS BEEN REJECTED IN THE AFORESAID ORDER OF THE COO RDINATE BENCH WHEREIN IT WAS HELD AS UNDER: 4.8. THE LD. A R RELIED ON RULE 10T(J) TO CONTEND THAT LOSS ARISING ON ACCO UNT OF FOREIGN CURRENCY FLUCTUATIONS CANNOT BE INCLUDED IN THE OPERATING EXPENSE. WE ARE NOT PERSUADED TO GIVE ANY MILEAGE TO THE LD. AR ON THIS COUNT FOR THE SIMPLE REASON THAT RULE 10T IS A PART OF SAFE HARBOR RULES NOTIFI ED ON 18.09.2013 WHICH ARE NOT APPLICABLE TO THE ASSESSME NT YEAR UNDER CONSIDERATION. 61. SO, WE ARE OF THE CONSIDERED VIEW THAT FOREIGN EXCHANGE GAIN/LOSS CANNOT BE TREATED AS NON-OPERATING ITEMS WHILE CALCULATING THE MARGIN OF THE TAXPAYER AS WELL AS C OMPARABLES. SO, WE DIRECT TO TREAT THE FOREIGN EXCHANGE GAIN/LOSS A S NON-OPERATING MARGIN AS NON-OPERATING ITEMS WHILE BENCHMARKING TH E ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 33 INTERNATIONAL TRANSACTIONS. CONSEQUENTLY, GROUND N O.4 IS DETERMINED IN FAVOUR OF THE TAXPAYER. GROUND NO.5 62. LD. AO/TPO/DRP HAVE NOT MADE APPROPRIATE ADJUST MENT ON ACCOUNT OF WORKING CAPITAL DIFFERENCES BETWEEN THE TAXPAYER VIS-- VIS COMPARABLE COMPANIES, WHICH ARE UNDER CHALLENGE BEFORE THE TRIBUNAL. LD. DRP DENIED APPROPRIATE ADJUSTMENT ON ACCOUNT OF DIFFERENCE IN WORKING CAPITAL EMPLOYED ON THE GROUN D THAT THE ONUS IS ON THE TAXPAYER TO DEMONSTRATE THE REASON AND CA LCULATION OF WORKING CAPITAL ADJUSTMENT AND THE LD. TPO HAS RIGH TLY DENIED THE SAME TO THE TAXPAYER. 63. IDENTICAL ISSUE HAS COME UP BEFORE THE COORDINA TE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2008-09, OPERATIVE PART OF WHICH IS REPRODUCED AS UNDER FOR READY PERUSAL : - 13.1. NOW, WE ESPOUSE THE NEXT CONTENTION RAISE D BY THE LD. AR ABOUT THE DENIAL OF WORKING CAPITAL ADJUSTMENT, WHICH WAS CLAIMED BEFORE THE TPO. THE DRP ECHOED THE TPOS O RDER ON THIS SCORE BY NOTICING THAT THE ASSESSEE TOOK THE A VERAGE OF THE AMOUNT OF WORKING CAPITAL DEPLOYED BY THE COMPARABL ES ON THE FIRST AND LAST DAY OF ACCOUNTING PERIOD TO COMPUTE THE WORKING CAPITAL ADJUSTMENT AND THERE WERE NO MEANS TO ASCER TAIN THE WORKING CAPITAL DEPLOYED BY THE COMPARABLES THROUGH OUT THE YEAR ON DAILY BASIS. THE ASSESSEE IS AGGRIEVED. 13.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD, IT IS MANIFEST THAT TH E WORKING CAPITAL ADJUSTMENT IS REQUIRED WITH REFERENCE TO ST OCK, TRADE RECEIVABLE AND TRADE PAYABLES. BY CARRYING THE HIGH TRADE RECEIVABLES, A COMPANY ALLOWS ITS CUSTOMERS A RELAT IVELY LONGER ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 34 PERIOD TO PAY THEIR ACCOUNTS, WHICH RESULTS INTO HI GHER INTEREST COST AND LOWER PROFIT. BY CARRYING HIGH TRADE PAYAB LES, A COMPANY BENEFITS FROM A RELATIVELY LONGER PERIOD AV AILABLE TO IT FOR PAYING BACK ITS SUPPLIERS, WHICH RESULTS INTO I TS LOWER INTEREST COST AND HIGHER PROFIT. SIMILARLY, HIGH STOCK MEAN S BLOCKAGE OF FUNDS AND THE RESULTANT LOWER PROFIT. THESE THREE I NGREDIENTS DIRECTLY IMPACT THE WORKING CAPITAL AND RESULTANT P ROFIT OF COMPARABLES VIS--VIS THE ASSESSEE. A WORKING CAPI TAL ADJUSTMENT IS REQUIRED TO BE EFFECTED FOR BRINGING THE COMPARA BLES AND THE ASSESSEE AT THE SAME PEDESTAL. THE LD. DRP UPHELD T HE DENIAL OF SUCH ADJUSTMENT BY NOTICING THAT THERE WERE NO MEAN S TO ASCERTAIN THE WORKING CAPITAL DEPLOYED BY THE COMPA RABLES THROUGHOUT THE YEAR ON DAILY BASIS. IF THE CONTENTI ON OF THE LD. DRP IS TAKEN TO A LOGICAL CONCLUSION, THEN THERE CA N NEVER BE A WORKING CAPITAL ADJUSTMENT, BECAUSE IN NO CASE, THE DAILY FIGURES OF COMPARABLES WOULD COME TO THE FORE. SINCE, THE A UTHORITIES BELOW HAVE DENIED WORKING CAPITAL ADJUSTMENT TO THE ASSESSEE ON FLIMSY GROUND, WE VACATE THEIR ACTION AND HOLD IN P RINCIPLE THAT THE GRANT OF WORKING CAPITAL ADJUSTMENT, IF OTHERWI SE AVAILABLE, CANNOT BE JEOPARDIZED. HOWEVER, AS REGARDS THE QUAN TUM OF WORKING CAPITAL ADJUSTMENT, WE DIRECT THE AO/TPO T O VET THE CORRECTNESS OF THE AMOUNT OF WORKING CAPITAL ADJUST MENT CLAIMED BY THE ASSESSEE AND THEN DECIDE ITS ALLOWABILITY AS PER LAW. 64. FOLLOWING THE DECISION RENDERED BY THE COORDINA TE BENCH OF THE TRIBUNAL, WE ARE OF THE CONSIDERED VIEW THAT TH E TAXPAYER IS ENTITLED FOR WORKING CAPITAL ADJUSTMENT TO BE ON TH E SAME PAGE WITH THE COMPARABLES. SO, THE TAXPAYER IS ENTITLED FOR WORKING CAPITAL ADJUSTMENT, THE QUANTUM OF WHICH IS TO BE CHECKED B Y THE LD. TPO WHO HAS TO PROCEED ON THE LINES OF THE DECISION REN DERED BY THE COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2008-09, CONSEQUENTLY, GROUND NO.5 IS DETERMINED IN FAVOUR OF THE TAXPAYER. ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 35 GROUNDS NO. 6, 7, 8, 9 &10 65. GROUNDS NO.6, 7, 8, 9 &10 ARE GENERAL IN NATURE MORE SPECIFICALLY ELABORATED IN THE SUBSEQUENT GROUNDS, NEED NO ADJUDICATION. GROUNDS NO.11 & 11.1 66. THE AO IN THE DRAFT ORDER, AVAILABLE AT PAGES 1 40 TO 147, DENIED THE DEDUCTION OF RS.125,71,932/- AND RS.22,8 5,957/- CLAIMED U/S 10A OF THE ACT BEING THE INTEREST ON FD R AND MISC. INCOME RESPECTIVELY ON THE GROUND THAT THE SAME IS NOT RELATED TO EXPORTS. LD. DRP ALSO UPHELD THE FINDINGS OF THE A O BY OBSERVING THAT THE INTEREST INCOME CANNOT BE TERMED AS PROFIT DERIVED FROM AN UNDERTAKING AND HAS ALSO NOT FOLLOWED THE DECISION RENDERED BY THE COORDINATE BENCH IN AY 2008-09 ON IDENTICAL ISSUE. 67. UNDISPUTEDLY, IDENTICAL ISSUE HAS COME UP BEFOR E THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2010-11 AND HAS BEEN DECIDED IN FAVOUR OF THE TAXPAYER BY RELYING UPON T HE DECISION RENDERED BY THE HONBLE DELHI HIGH COURT IN RIVIERA HOME FURNISHING VS. ADDITIONAL CIT- 65 TAXMANN.COM 287 ( DELHI). OPERATIVE PART OF THE FINDING RETURNED BY HONBLE D ELHI HIGH COURT IN RIVIERA HOME FURNISHING (SUPRA) IS REPRODUCED FOR READY PERUSAL AS UNDER :- ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 36 9. THE QUESTION AS TO WHAT CAN CONSTITUTE AS PROF ITS AND GAINS DERIVED BY A 100% EOU FROM THE EXPORT OF ARTICLES A ND COMPUTER SOFTWARE CAME FOR CONSIDERATION BEFORE THE KARNATAK A HIGH COURT IN CIT V. MOTOROLA INDIA ELECTRONICS (P.) LTD . [2014] 46 TAXMANN.COM 167/225 TAXMAN 11 (MAG.). THE SAID APPE AL BEFORE THE KARNATAKA HIGH COURT WAS BY THE REVENUE CHALLENGING AN ORDER PASSED BY THE ITAT WHICH HELD THAT THE INTEREST PAYABLE ON FDRS WAS PART OF THE PROFITS OF THE BUSINESS OF THE UNDERTAKING AND THEREFORE INCLUDIBLE IN THE INCOME ELIGIBLE FOR DEDUCTION SECTIONS 10A AND 10B OF THE ACT. THER E THE ASSESSEE HAD EARNED INTEREST ON THE DEPOSITS LYING IN THE EEFC ACCOUNT AS WELL AS INTEREST EARNED ON INTER-CORPORA TE LOANS GIVEN TO SISTER CONCERNS OUT OF THE FUNDS OF THE UNDERTAK ING. THERE WAS A RESTRICTION ON THE ASSESSEE IN THAT CASE FROM MAK ING PRE- PAYMENT OF ITS EXTERNAL COMMERCIAL BORROWINGS ('ECB '). IT COULD REPAY ONLY TO THE EXTENT OF 10% OF THE OUTSTANDING LOAN IN A YEAR. THIS MADE THE ASSESSEE TEMPORARILY PARK THE BALANCE FUNDS AS DEPOSITS OR WITH VARIOUS SISTER CONCERNS AS INTER C ORPORATE DEPOSITS UNTIL THE DATE OF REPAYMENT. THE ASSESSEE CONTENDED THAT THE INTEREST DERIVED FROM THE BUSINESS OF THE INDUS TRIAL UNDERTAKING WAS ELIGIBLE FOR EXEMPTION WITHIN THE M EANING OF SECTION 10B AND APPLIED THE FORMULA UNDER SECTION 1 0B(4) OF THE ACT FOR DETERMINING THE PROFITS FROM EXPORTS. THE A SSESSEE'S CONTENTION THAT THE EXPRESSION 'PROFITS OF THE BUSI NESS OF THE UNDERTAKING' IN SECTION 10B(4) WAS WIDER THAN THE E XPRESSION 'PROFITS AND GAINS DERIVED BY' THE ASSESSEE FROM A 100% EOU OCCURRING IN SECTION 10B(1) WAS ACCEPTED BY THE ITA T. THE ITAT NOTICED THAT UNLIKE SECTION 80HHC, WHERE THERE WAS AN EXPRESS EXCLUSION OF THE INTEREST EARNED FROM THE ' PROFITS OF BUSINESS OF UNDERTAKING', THERE WAS NO SIMILAR PROV ISION AS FAR AS SECTIONS 10A AND 10B WERE CONCERNED. 10. IN MOTOROLA INDIA ELECTRONICS (P.) LTD. (SUPRA) REFERENCE WAS MADE TO THE DECISION OF THE SUPREME COURT IN PANDIA N CHEMICALS LTD. V. CIT [2003] 262 ITR 278/129 TAXMAN 539 WHICH DEALT WITH SECTION 80HH AND LIBERTY INDIA V. CIT [2009] 317 ITR 218/183 TAXMAN 349 (SC), WHICH INTERPRETED SECTION 801B OF THE ACT. REFERENCE WAS ALSO MADE TO THE DEC ISION OF CIT V. STERLING FOODS [1999] 237 ITR 579/104 TAXMAN 204 (SC), WHICH INTERPRETED SECTION 80HH AND THE DECISION OF THE MADRAS HIGH COURT IN CIT V. MENON IMPEX (P.) LTD. [2003] 2 59 ITR 403/128 TAXMAN 11 WHICH INTERPRETED SECTION 10A OF THE ACT. THE KARNATAKA HIGH COURT IN MOTOROLA INDIA ELECTRON ICS (P.) LTD. (SUPRA), AFTER NOTICING THE ABOVE DECISIONS, H ELD THAT 'IT IS CLEAR THAT, WHAT IS EXEMPTED IS NOT MERELY THE PROF ITS AND GAINS FROM THE EXPORT OF ARTICLES BUT ALSO THE INCOME FRO M THE BUSINESS OF THE UNDERTAKING'. SPECIFIC TO THE QUESTION OF IN TEREST EARNED BY THE EOU ON THE FDRS PLACED BY IT AND INTEREST EARNE D FROM THE LOANS GIVEN TO SISTER CONCERNS, IT WAS HELD THAT AL THOUGH IT DID NOT PARTAKE THE CHARACTER OF PROFIT AND GAINS FROM THE SALE OF AN ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 37 ARTICLE 'IT IS INCOME WHICH IS DERIVED FROM THE CON SIDERATION REALIZED BY EXPORT OF ARTICLES.' 11. THE DECISION OF THE KARNATAKA HIGH COURT IN MOT OROLA INDIA ELECTRONICS (P.) LTD. (SUPRA) WAS FOLLOWED BY THIS COURT IN ITS DECISION IN CIT V. HRITNIK EXPORTS (P.) LTD. (DECIS ION DATED 13TH NOVEMBER 2014 IN ITA NOS. 219 AND 239 OF 2014). THI S COURT ALSO REFERRED TO ITS EARLIER DECISION DATED 1ST SEP TEMBER 2014 IN ITA NO. 438 OF 2014 (CIT V. XLNC FASHIONS). WHILE D ECLINING TO FRAME A QUESTION OF LAW IN THE REVENUE'S APPEAL, THIS COURT INHRITNIK EXPORTS (P.) LTD. (SUPRA) QUOTED WITH APP ROVAL THE OBSERVATIONS OF THE SPECIAL BENCH OF THE ITAT IN MA RAL OVERSEAS LTD. V. ADDL. CIT [2012] 136 ITD 177/20 TAXMANN.COM 346 (INDORE) ON THE INTERPRETATION OF SECTION 10B(4) OF THE ACT AS UNDER: '79. THUS, SUB-SECTION (4) OF SECTION 10B STIPULAT ED THAT DEDUCTION UNDER THAT SECTION SHALL BE COMPUTED BY A PPORTIONING THE PROFITS OF THE BUSINESS OF THE UNDERTAKING IN T HE RATIO OF TURNOVER TO THE TOTAL TURNOVER. THUS, NOT-WITHSTAND ING THE FACT THAT SUB-SECTION (1) OF SECTION 10B REFERS THE PROF ITS AND GAINS AS ARE DERIVED BY A 100% EOU, YET THE MANNER OF DETERM INING SUCH ELIGIBLE PROFITS HAS BEEN STATUTORILY DEFINED IN SU B-SECTION (4) OF SECTION 10B OF THE ACT. AS PER THE FORMULA STATED A BOVE, THE ENTIRE PROFITS OF THE BUSINESS ARE TO BE TAKEN WHICH ARE M ULTIPLIED BY THE RATIO OF THE EXPORT TURNOVER TO THE TOTAL TURNOVER OF THE BUSINESS. SUB-SECTION (4) DOES NOT REQUIRE AN ASSESSEE TO EST ABLISH A DIRECT NEXUS WITH THE BUSINESS OF THE UNDERTAKING AND ONCE AN INCOME FORMS PART OF THE BUSINESS OF THE UNDERTAKING, THE SAME WOULD BE INCLUDED IN THE PROFITS OF THE BUSINESS OF THE UNDE RTAKING. THUS, ONCE AN INCOME FORMS PART OF THE BUSINESS OF THE EL IGIBLE UNDERTAKING, THERE IS NO FURTHER MANDATE IN THE PRO VISIONS OF SECTION 10B TO EXCLUDE THE SAME FROM THE ELIGIBLE P ROFITS. THE MODE OF DETERMINING THE ELIGIBLE DEDUCTION U/S 10B IS SIMILAR TO THE PROVISIONS OF SECTION 80HHC INASMUCH AS BOTH TH E SECTIONS MANDATES DETERMINATION OF ELIGIBLE PROFITS AS PER T HE FORMULA CONTAINED THEREIN. THE ONLY DIFFERENCE IS THAT SECT ION 80HHC CONTAINS A FURTHER MANDATE IN TERMS OF EXPLANATION (BAA) FOR EXCLUSION OF CERTAIN INCOME FROM THE 'PROFITS OF TH E BUSINESS' WHICH IS, HOWEVER, CONSPICUOUS BY ITS ABSENCE IN SE CTION 10B. ON THE BASIS OF THE AFORESAID DISTINCTION, SUB-SECTION (4) OF SECTION 10A/10B OF THE ACT IS A COMPLETE CODE PROVIDING THE MECHANISM FOR COMPUTING THE 'PROFITS OF THE BUSINESS' ELIGIBL E FOR DEDUCTION U/S 10B OF THE ACT. ONCE AN INCOME FORMS PART OF TH E BUSINESS OF THE INCOME OF THE ELIGIBLE UNDERTAKING OF THE ASSES SEE, THE SAME CANNOT BE EXCLUDED FROM THE ELIGIBLE PROFITS FOR TH E PURPOSE OF COMPUTING DEDUCTION U/S 10B OF THE ACT. AS PER THE COMPUTATION MADE BY THE ASSESSING OFFICER HIMSELF, THERE IS NO DISPUTE THAT BOTH THESE INCOMES HAVE BEEN TREATED BY THE ASSESSI NG OFFICER AS BUSINESS INCOME. THE CBDT CIRCULAR NO. 564 DATED 5T H JULY, ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 38 1990 REPORTED IN 184 ITR (ST.) 137 EXPLAINED THE SC OPE AND AMBIT OF SECTION 80HHC AND THE MODE OF DETERMINATION OF P ROFITS DERIVED BY AN ASSESSEE FROM THE EXPORT OF GOODS. I. T.A.T., SPECIAL BENCH IN THE CASE OF INTERNATIONAL RESEARCH PARK LA BORATORIES V. ACIT, 212 ITR (AT) 1, AFTER FOLLOWING THE AFORESAID CIRCULAR, HELD THAT STRAIGHT JACKET FORMULA GIVEN IN SUB-SECT ION (3) HAS TO BE FOLLOWED TO DETERMINE THE ELIGIBLE DEDUCTION. TH E HON'BLE SUPREME COURT IN THE CASE OFP.R. PRABHAKAR; 284 ITR 584 HAD APPROVED THE PRINCIPLE LAID DOWN IN THE SPECIAL BEN CH DECISION IN INTERNATIONAL RESEARCH PARK LABORATORIES V.ACIT (SUPRA). IN THE ASSESSEE'S OWN CASE THE I.T.A.T. IN THE PRECEDI NG YEARS, AFTER CONSIDERING THE DECISION IN THE CASE OF LIBERTY IND IA HELD THAT PROVISIONS OF SECTION 10B ARE DIFFERENT FROM THE PR OVISIONS OF SECTION 80IA WHEREIN NO FORMULA HAS BEEN LAID DOWN FOR COMPUTING THE ELIGIBLE BUSINESS PROFIT.' 12. RECENTLY, IN A DECISION DATED 6TH OCTOBER 2015 IN ITA NO. 392 OF 2015 (PRINCIPAL CIT V. UNIVERSAL PRECISION S CREWS), THIS COURT HAD OCCASION TO AGAIN CONSIDER WHETHER INTERE ST EARNED ON FIXED DEPOSITS KEPT BY AN ASSESSEE WHICH WAS ELIGIB LE UNDER SECTION 10B OF THE ACT, AS A CONDITION FOR UTILIZAT ION OF LETTER OF CREDIT AND BANK GUARANTEE LIMITS, WOULD QUALIFY FOR DEDUCTION. THAT QUESTION WAS DECIDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. THE COURT HELD AS UNDER: '9. ON THE QUESTION OF INTEREST ON THE FDRS, THE I TAT HAS REFERRED TO SECTION 10B(4) WHICH STATES THAT FOR TH E PURPOSES OF SECTION 10B(1), THE PROFITS DERIVED FROM EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE 'SHALL BE THE AMOUNT WH ICH BEARS TO THE PROFITS OF THE BUSINESS OF THE UNDERTAKING', TH E SAME PROPORTION AS THE EXPORT TURNOVER IN RESPECT OF SUC H ARTICLES OR THINGS OR COMPUTER SOFTWARE BEARS TO THE TOTAL TURN OVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING.' AS NOTED B Y THIS COURT IN CIT V. HRITNIK EXPORTS PVT. LTD. (DECISION DATED 13TH NOVEMBER, 2014 IN ITA NO. 219 & 239 OF 2014), SECTI ON 10B(4) MANDATES THE APPLICATION OF THE FORMULA FOR DETERMI NING THE PROFITS DERIVED FROM EXPORTS FOR THE PURPOSES OF SE CTION 10B(1). IN OTHER WORDS, THE FORMULA WOULD READ THUS: PROFITS DERIVED FROM EXPORT = PROFITS OF THE BUS INESS OF THE UNDERTAKING 9A. IN TERMS OF THE ABOVE FORMULA, THE QUESTION THA T WOULD ARISE IS WHETHER THE INTEREST ON THE FDRS COULD FORM PART OF THE 'PROFITS OF THE BUSINESS OF THE UNDERTAKING'. THE A TTENTION OF THE COURT HAS BEEN DRAWN TO THE DECISION OF THE KARNATA KA HIGH COURT IN CIT V. MOTOROLA INDIA ELECTRONICS PVT. LTD . (2014) 46 TAXMANN.COM 167 (KAR.) WHICH HELD THAT THERE WAS A DIRECT NEXUS BETWEEN THE INTEREST RECEIVED FROM THE FDRS C REATED BY A SIMILARLY PLACED ASSESSEE FROM THE AMOUNTS BORROWED BY IT. THE ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 39 HIGH COURT APPROVED THE ORDER OF THE ITAT IN THAT C ASE WHICH HELD THAT THE ENTIRE PROFITS OF THE BUSINESS OF THE UNDERTAKING SHOULD BE TAKEN INTO CONSIDERATION WHILE COMPUTING THE ELIGIBLE DEDUCTION UNDER SECTION 10B OF THE ACT BY ITA 392/2 015 APPLYING THE MANDATORY FORMULA. 10. IN THE PRESENT CASE, THE ASSESSEE HAS STATED TH AT THE INTEREST ON FDRS WAS RECEIVED ON 'MARGIN KEPT IN THE BANK FO R UTILIZATION OF LETTER OF CREDIT AND BANK GUARANTEE LIMITS'. IN THOSE CIRCUMSTANCES, THE DECISION OF THE ITAT THAT SUCH I NTEREST BEARS THE REQUISITE CHARACTERISTIC OF BUSINESS INCOME AND HAS NEXUS TO THE BUSINESS ACTIVITIES OF THE ASSESSEE CANNOT BE F AULTED. IN OTHER WORDS, INTEREST EARNED ON THE FDRS WOULD FORM PART OF THE 'PROFITS OF THE BUSINESS OF THE UNDERTAKING' FOR TH E PURPOSES OF COMPUTATION OF THE PROFITS DERIVED FROM EXPORT BY A PPLYING FORMULA UNDER SECTION 10B(4) OF THE ACT.' 13. MR. ASHOK MANCHANDA, LEARNED SENIOR STANDING CO UNSEL FOR THE REVENUE, URGED THAT NONE OF THE EARLIER DECISIO NS OF THE HIGH COURTS HAVE CONSIDERED THE EFFECT OF SECTIONS 80I, 801A AND 801B OF THE ACT WHICH OCCUR IN CHAPTER VIA OF THE A CT. HE REFERRED IN PARTICULAR TO SECTION 80A(4) OF THE ACT , WHICH READS AS UNDER: '4) NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAI NED IN SECTION 10A OR SECTION 10AA OR SECTION 10B OR SECTION 10BA OR IN ANY PROVISIONS OF THIS CHAPTER UNDER THE HEADING 'CDED UCTIONS IN RESPECT OF CERTAIN INCOMES', WHERE, IN THE CASE OF AN ASSESSEE, ANY AMOUNT OF PROFITS AND GAINS OF AN UNDERTAKING O R UNIT OR ENTERPRISE OR ELIGIBLE BUSINESS IS CLAIMED AND ALLO WED AS A DEDUCTION UNDER ANY OF THOSE PROVISIONS FOR ANY ASS ESSMENT YEAR, DEDUCTION IN RESPECT OF, AND TO THE EXTENT OF, SUCH PROFITS AND GAINS SHALL NOT BE ALLOWED UNDER ANY OTHER PROVISIO NS OF THIS ACT FOR SUCH ASSESSMENT YEAR AND SHALL IN NO CASE EXCEE D THE PROFITS AND GAINS OF SUCH UNDERTAKING OR UNIT OR ENTERPRISE OR ELIGIBLE BUSINESS, AS THE CASE MAY BE.' 14. MR. MANCHANDA'S ATTEMPT WAS TO SHOW THAT SECTIO N 80A(4), WHICH INTER ALIA STATED THAT ANY DEDUCTION ALLOWABL E UNDER SECTION 10B CANNOT IN ANY CASE 'EXCEED THE PROFITS AND GAINS OF SUCH UNDERTAKING OR UNIT OR ENTERPRISE OR ELIGIBLE BUSINESS, AS THE CASE MAY BE' MADE IT CLEAR THAT A UNIT SEEKING DEDU CTION UNDER SECTION 10B WOULD BE ELIGIBLE TO DO SO ONLY INSOFAR AS SUCH INCOME WAS DIRECTLY ATTRIBUTABLE TO THE BUSINESS OF EXPORT. ANY INCOME THAT MIGHT BE MERELY INCIDENTAL TO THE BUSIN ESS OF THE UNDERTAKING, NOT DIRECTLY RELATED TO THE ACTIVITY O F EXPORT, WOULD NOT BE ELIGIBLE FOR SUCH DEDUCTION. HE ALSO TOOK TH E COURT AGAIN THROUGH THE DECISION OF THE SUPREME COURT IN LIBERT Y INDIA (SUPRA) AND SUBMITTED THAT THE EARLIER DECISIONS OF THIS COURT IN HRITNIK EXPORTS (P.) LTD. (SUPRA) AND UNIVERSAL PRE CISION SCREWS ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 40 (SUPRA) MIGHT REQUIRE TO BE RECONSIDERED. WHEN A QU ESTION WAS POSED TO HIM AS TO WHETHER THE REVENUE HAD CHALLENG E THE AFOREMENTIONED DECISIONS OF THIS COURT, AND OF THE ITAT IN THE PRESENT CASE TO THE EXTENT IT HAS ALLOWED THE PLEA OF THE ASSESSEE AS REGARDS 'DEEMED EXPORT DRAWBACK', MR. MANCHANDA STATED THAT THE REVENUE OUGHT TO HAVE CHALLENGED THE ABOVE DECISIONS AS WELL AS THE IMPUGNED ORDER OF THE ITAT IN THE PRESE NT CASE AND PERHAPS HE WOULD ADVISE IT TO DO SO HEREAFTER. HE H AS ALSO HANDED OVER A WRITTEN NOTE OF SUBMISSIONS, REITERATING THE ABOVE SUBMISSIONS. 15. IN THE CONSIDERED VIEW OF THE COURT, THE SUBMIS SIONS MADE ON BEHALF OF THE REVENUE PROCEED ON THE BASIC MISCONCE PTION REGARDING THE TRUE PURPORT OF THE PROVISIONS OF CHA PTER VIA OF THE ACT AND ON AN INCORRECT UNDERSTANDING OF SECTIO N 80A(4) OF THE ACT. THE OPENING WORDS OF SECTION 80A(4) READ 'NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN SECTION 10A OR SECTION 10AA OR SECTION 10B OR SECTION 10BA OR IN ANY PROVISIONS OF THIS CHAPTER . . . . . '. WHAT IS SOU GHT TO BE UNDERSCORED, THEREFORE, IS THAT SECTION 80A, AND TH E OTHER PROVISIONS IN CHAPTER VIA, ARE INDEPENDENT OF SECTI ONS 10A AND 10B OF THE ACT. IT APPEARS THAT THE OBJECT OF SECTI ON 80A(4) WAS TO ENSURE THAT A UNIT WHICH HAS AVAILED OF THE BENEFIT UNDER SECTION 10B WILL NOT BE ALLOWED TO FURTHER CLAIM RELIEF UND ER SECTION 80IA OR 80IB READ WITH SECTION 80A(4). THE INTENTIO N DOES NOT APPEAR TO BE TO DENY RELIEF UNDER SECTION 10B(1) RE AD WITH SECTION 10B(4) OR TO WHITTLE DOWN THE AMBIT OF THOS E PROVISIONS AS IS SOUGHT TO BE SUGGESTED BY MR. MANCHANDA. ALSO , HE IS NOT RIGHT IN CONTENDING THAT THE DECISIONS OF THE HIGH COURTS REFERRED TO ABOVE HAVE NOT NOTICED THE DECISION OF THE SUPRE ME COURT IN LIBERTY INDIA. THE KARNATAKA HIGH COURT IN MOTOROLA INDIA ELECTRONICS (P.) LTD. (SUPRA) MAKES A REFERENCE TO THE SAID DECISION. THAT DECISION OF THE KARNATAKA HIGH COURT HAS BEEN CITED WITH APPROVAL BY THIS COURT IN HRITNIK EXPORT S (P.) LTD. (SUPRA) AND UNIVERSAL PRECISION SCREWS (SUPRA). IN HRITNIK EXPORTS (P.) LTD. (SUPRA) THE COURT QUOTED WITH APP ROVAL THE OBSERVATIONS OF THE SPECIAL BENCH OF THE ITAT IN MA RAL OVERSEAS LTD. (SUPRA) THAT 'SECTION 10A/10B OF THE ACT IS A COMPLETE CODE PROVIDING THE MECHANISM FOR COMPUTING THE 'PROFITS OF THE BUSINESS' ELIGIBLE FOR DEDUCTION U/S 10B OF THE ACT . ONCE AN INCOME FORMS PART OF THE BUSINESS OF THE INCOME OF THE ELIGIBLE UNDERTAKING OF THE ASSESSEE, THE SAME CANNOT BE EXC LUDED FROM THE ELIGIBLE PROFITS FOR THE PURPOSE OF COMPUTING D EDUCTION U/S 10B OF THE ACT.' 16. THIS THEN BRINGS US TO THE QUESTIONS FRAMED FOR CONSIDERATION IN THE PRESENT CASE AND THE DECISION OF THE ITAT IN NOT ACCEPTING THE ASSESSEE'S PLEA IN REGARD TO 'CUSTOMER CLAIMS' 'FREIGHT SUBSIDY' AND 'INTEREST ON FIXED DEPOSIT RECEIPTS' E VEN WHILE IT ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 41 ACCEPTED THE ASSESSEE'S CASE AS REGARDS 'DEEMED EXP ORT DRAWBACK'. 17. THE CONTENTION OF THE ASSESSEE AS REGARDS CUSTO MER CLAIMS WAS THAT IT HAD RECEIVED THE CLAIM OF RS. 28,27,224 FROM A CUSTOMER FOR CANCELLING THE EXPORT ORDER. LATER ON THE CANCELLED ORDER WAS COMPLETED AND GOODS WERE EXPORTED TO ANOT HER CUSTOMER. THE SUM RECEIVED AS CLAIM FROM THE CUSTOM ER WAS NONSEVERABLE FROM THE INCOME OF THE BUSINESS OF THE UNDERTAKING. THE COURT FAILS TO APPRECIATE AS TO HO W THE ITAT COULD HAVE HELD THAT THIS TRANSACTION DID NOT ARISE FROM THE BUSINESS OF THE EXPORT OF GOODS. EVEN AS REGARDS FR EIGHT SUBSIDY, THE ASSESSEE'S CONTENTION WAS THAT IT HAD RECEIVED THE SUBSIDY IN RESPECT OF THE BUSINESS CARRIED ON AND THE SAID SUB SIDY WAS PART OF THE PROFIT OF THE BUSINESS OF THE UNDERTAKING. I F THE ITAT WAS PREPARED TO CONSIDER THE DEEMED EXPORT DRAW BACK AS ELIGIBLE FOR DEDUCTION THEN THERE WAS NO JUSTIFICATION FOR EXCLU DING THE FREIGHT SUBSIDY. EVEN AS REGARDS THE INTEREST ON FD R, THE COURT HAS BEEN SHOWN A NOTE OF THE BALANCE SHEET OF THE A SSESSEE [WHICH WAS PLACED BEFORE THE AO] WHICH CLEARLY STAT ES THAT 'FIXED DEPOSIT RECEIPTS (INCLUDING ACCRUED INTEREST) VALUI NG RS. 15,05,875 ARE UNDER LIEN WITH BANK OF INDIA FOR FAC ILITATING THE LETTER OF CREDIT AND BANK GUARANTEE FACILITIES.' IN TERMS OF THE RATIO OF THE DECISIONS OF THIS COURT BOTH IN HRITNI K EXPORTS (P.) LTD. (SUPRA) AND UNIVERSAL PRECISION SCREWS (SUPRA) , THE INTEREST EARNED ON SUCH FDR OUGHT TO QUALIFY FOR DEDUCTION U NDER SECTION 10B OF THE ACT. 68. SO, FOLLOWING THE FINDINGS RETURNED BY THE COOR DINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2010- 11 BASED ON THE DECISION OF HONBLE HIGH COURT IN RIVIERA HOME FURNISHING (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT THE TAX PAYER IS ENTITLED FOR DEDUCTION U/S 10A ON THE INTEREST EARNED ON FIX ED DEPOSIT RECEIPTS TO THE TUNE OF RS.125,71,932/- AND RS.22,8 5,957/-. 69. SIMILAR VIEW AS TO ALLOWING THE DEDUCTION U/S 1 0A OF THE ACT ON EXCESS PROVISION RETURNED BACK AMOUNTING TO RS.7 ,42,769/- HAS BEEN EXPRESSED BY THE COORDINATE BENCH OF THE TRIBU NAL IN BIRLASOFT (INDIA) LTD. VS. DCIT 44 SOT 664 (DELHI). FOLLOWING ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 42 THE DECISION RENDERED BY THE COORDINATE BENCH OF TH E TRIBUNAL, WE ARE OF THE CONSIDERED VIEW THAT NOTICE PAY RECOVERI ES FROM THE EMPLOYEES IS ALSO PART OF THE BUSINESS PROFIT OF TH E TAXPAYER ON WHICH THE TAXPAYER IS ALSO ELIGIBLE FOR DEDUCTION U /S 10A OF THE ACT. CONSEQUENTLY, GROUNDS NO.11 & 11.1 ARE ALSO D ETERMINED IN FAVOUR OF THE TAXPAYER. GROUND NO.12 70. THE AO HAS NOT GIVEN CREDIT OF TAX DEDUCTED AT SOURCE OF RS.58,922/- TO THE TAXPAYER. AO IS DIRECTED TO PRO VIDE THE CREDIT TO THE TAXPAYER QUA THE TAX DEDUCTED AT SOURCE AFTER D UE VERIFICATION. GROUND NO.13 71. THE AO HAS ALSO NOT GIVEN CREDIT OF ADVANCE TAX OF RS.27,50,000/- DEPOSITED BY THE TAXPAYER DURING THE YEAR UNDER ASSESSMENT. THE TAXPAYER IS ENTITLED FOR CREDIT OF ADVANCE TAX SUBJECT TO VERIFICATION BY THE AO. SO, THE AO IS D IRECTED TO PROCEED ACCORDINGLY. GROUND NO.14 72. AO HAS ALSO NOT GRANTED SET OFF OF MINIMUM ALTE RNATE TAX (MAT) CREDIT OF RS.216,54,947/- BROUGHT FORWARD DUR ING THE YEAR UNDER ASSESSMENT U/S 115JAA OF THE ACT. WHEN IT IS NOT IN DISPUTE THAT THE TAXPAYER HAS CLAIMED THE CREDIT OF RS.216, 54,947/- BEING ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 43 BROUGHT FORWARD FIGURE, THE TAXPAYER IS ENTITLED FO R SET OFF OF MAT CREDIT OF THE SAME. SO, THE AO IS DIRECTED TO PROC EED ACCORDINGLY AFTER DUE VERIFICATION. GROUND NO.15 & 15.1 73. GROUNDS NO.15 & 15.1 QUA LEVY OF INTEREST U/S 2 34B AND 234C OF THE ACT NEED NO SPECIFIC FINDING BEING CONS EQUENTIAL IN NATURE. REVENUES APPEAL (ITA NO.419/DEL/2014) GRO8UND NO.I 74. GROUNDS NO.I IS GENERAL IN NATURE AND NEED NO A DJUDICATION BEING MORE SPECIFICALLY ELABORATED IN THE SUBSEQUEN T GROUNDS. SOFTWARE DEVELOPMENT SERVCIES SEGMENT GROUND NO.II READ WITH GROUND NOS.IV & V 75. THE REVENUE HAS CHALLENGED THE ORDER PASSED BY LD. DRP TO THE EXTENT OF EXCLUDING M/S. ARICENT TECH, M/S. BODHTREE CONSULTING AND CAT TECHNOLOGIES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS QUA SERVICES PROVIDED BY THE TAXPAYER TO ITS AE IN SOFTWARE DEVELOPMENT SERVICES SEGMENT. W E WOULD EXAMINE THE COMPARABILITY OF THE AFORESAID 3 COMPAR ABLES VIS--VIS THE TAXPAYER ONE BY ONE. ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 44 ARICENT TECH (ARICENT) 76. PERUSAL OF PARA 3.1 OF THE TP ORDER APPARENTLY SHOWS THAT ARICENT WAS REJECTED BY THE TPO ITSELF ON GROUND OF RELATED PARTY TRANSACTIONS (RPT) WHICH ARE TO THE TUNE OF 33.61%, BUT SOMEHOW AGAIN ARICENT FIND PLACE IN FINAL SET OF COMPARABLE S FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS. THIS FACTUAL POSITION HAS NOT BEEN CONTROVERTED BY THE LD. SENIOR DR. SO , WE ARE OF THE CONSIDERED VIEW THAT THERE IS NO SCOPE FOR FURTHER DELIBERATIONS ON THE COMPARABILITY OF ARICENT AS IT FAILS RPT FILTER APPLIED BY THE TPO HIMSELF. SO, LD. DRP HAS RIGHTLY REJECTED ARIC ENT AS A COMPARABLE VIS--VIS TAXPAYER. BODHTREE CONSULTING (BODHTREE) 77. BEFORE THE LD. TPO, THE TAXPAYER SOUGHT TO REJE CT BODHTREE ON THE GROUNDS INTER ALIA THAT IT HAS ONLY ONE SEGM ENT I.E. SOFTWARE DEVELOPMENT IN FY 2006-07 BEING ENGAGED IN PROVIDIN G OPEN AND END TO END WEB SOLUTIONS, SOFTWARE CONSULTANCY, DES IGN AND DEVELOPMENT OF SOLUTIONS, USING THE LATEST TECHNOLO GIES AND BESIDES SPECIALIZED IT AND DATA MANAGEMENT SERVICES, THE CO MPANY HAD DEVELOPED AND SPUN OFF ITS STRATEGIC BUSINESS UNITS IN E-PUBLISHING (E-PAPER SOLUTION), E-LEARNING (WEB BASED ASSESSMEN T SERVICES ) AND MOBILE CLASSIFIED SPACE (MOBILE SEARCH AND CLAS SIFIED ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 45 ADVERTISING PLATFORM FOR THE USED CAR INDUSTRY IN M ALAYSIA) INTO PRESSMART MEDIA LIMITED, LEARN SMART (INDIA) PVT. L TD. AND TRYLAH SDN BHD RESPECTIVELY. IT IS ALSO MENTIONED THAT TH E COMPANY HAS SOFTWARE SOLUTIONS OF ITS OWN (HYGIA 2.3 ENTERPRI SE DATA QUALITY SOLUTION, BUSIN ESSENCE 4.0 BUSINESS INTELLIGENCE DASHBOARD SOLUTION, DIGIDOC DOCUMENT MANAGEMENT FRAMEWORK) AND SEVICES (WEB SERVICES AND CUSTOMIZED IT PROFESSIONA L SERVICES. 78. HOWEVER, TPO RETAINED BODHTREE AS A COMPARABLE ON THE GROUND THAT THE COMPANY HAS SHOWN FIXED ASSETS IN T HE FORM OF COMPUTER SOFTWARE OF RS.96,03,610/- ONLY WHICH IS I NSIGNIFICANT AND THERE IS NO CAPITALIZED EXPENDITURE ON SOFTWARE DEVELOPMENT ON SOFTWARE PRODUCTS AND AS SUCH, IT DOES NOT HAVE ANY SIGNIFICANT PRODUCT BUSINESS. 79. HOWEVER, THE LD. DRP EXCLUDED BODHTREE ON THE G ROUND OF ABNORMAL RESULTS DURING THIS YEAR BY TABULATING THE MARGIN OF THIS COMPANY OF EARLIER AND SUBSEQUENT YEARS AS UNDER :- COMPANY NAME 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 OP/TC MARGIN BODHTREE CONSULTING LIMITED 14.66% 33.20% 20.86% 64.04% 34.39% -29.65% 80. THE LD. DR FOR THE REVENUE CHALLENGING THE IMPU GNED ORDER PASSED BY LD. DRP BY RELYING UPON CHRYSCAPITAL INVE STMENT ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 46 ADVISORS (INDIA)_(P.) LTD. VS. DCIT (2015) 56 TAXMA NN.COM 417 (DELHI) CONTENDED THAT FUNCTIONALLY SIMILAR COMPARA BLES CANNOT BE EXCLUDED ONLY ON THE GROUND OF SUPER NORMAL PROFIT. 81. HOWEVER, LD. AR FOR THE TAXPAYER RELIED UPON DE CISIONS OF THE COORDINATE BENCH OF THE TRIBUNAL IN CIENA INDIA PVT. LTD. IN ITA NO.1453/DEL/2014 ORDER DATED 24.04.2015 AND INF INERA INDIA PVT. LTD. IN ITA(TA) A.NO.1008 (BNG.)/2014 ORDER DA TED 30.06.2016 WHEREIN BODHTREE HAS BEEN ORDERED TO BE EXCLUDED ON THE BASIS OF FLUCTUATING PROFIT MARGIN. 82. NO DOUBT, HIGH OR LOW PROFIT MARGIN OF THE COMP ANY IS NOT A GROUND FOR TREATING IT AS UNCOMPARABLE BUT IN CASE HIGH OR LOW PROFIT IS DUE TO ABNORMAL CIRCUMSTANCES THEN CERTAI NLY FLUCTUATING PROFIT MARGIN IS A GROUND TO REJECT THE COMPANY AS A SUITABLE COMPARABLE. COORDINATE BENCH OF THE TRIBUNAL IN CIENA INDIA PVT. LTD. FOR AY 2009-10 (SUPRA) EXAMINED THE ISSUE AT LENGTH AND TREATED FLUCTUATING PROFIT MARGIN OF BODHTREE AS A GROUND FOR REJECTING AS A COMPARABLE BY RETURNING FOLLOWING FI NDINGS :- 9.6. COMING BACK TO THE FACTS OF THE INSTANT CA SE, WE FIND FROM SCHEDULE 12 THAT THERE IS A MENTION OF SIGNIFICANT ACCOUNTING POLICY AT SL. NO.3, WHICH PROVIDES THAT : REVENUE FROM SOFTWARE DEVELOPMENT IS RECOGNIZED BASED ON SOFTWARE DEVELOP MENT AND BILLED TO CLIENTS. IF SOME SOFTWARE DEVELOPMENT PROJECT IS INCOMPLETE AT THE END OF THE YEAR, THIS NOTE MAY EN TAIL TWO SITUATIONS , VIZ., THE FIRST, IN WHICH THE EXPENSES INCURRED IN RESPECT OF SUCH SOFTWARE DEVELOPMENT MAY BE CAPITAL IZED, WHICH APPEARS TO BE A MORE RATIONAL MANNER OF DEPICTING T HE TRUE AND FAIR VIEW OF THE PROFITABILITY OF THE ENTERPRISE; AND THE SECOND, IN ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 47 WHICH SUCH EXPENSES MAY BE STRAIGHTWAY TAKEN AS REV ENUE COST FOR THE YEAR OF ITS INCURRING ITSELF, WHICH MAY NO T REFLECT A TRUE AND FAIR VIEW OF THE PROFITS ON YEAR TO YEAR BASIS. THE CONTENTION OF THE LD. AR IS THAT WHEREAS BODHTREE FELL INTO TH E SECOND SITUATION, THE ASSESSEE WAS IN THE FIRST SITUATION . THOUGH THIS CONTENTION ABOUT BODHTREE ACCOUNTING FOR EXPENSES I N THE YEAR OF INCURRING BUT CONSIDERING INCOME ONLY ON THE CONCLU SION OF THE PROJECT IN THE SUBSEQUENT YEAR SOUNDED A LITTLE AWK WARD, WE ATTEMPTED TO FIND OUT THE AMOUNT OF CAPITALIZED EXP ENSES IN RESPECT OF INCOMPLETE PROJECTS AT THE END OF THE YE AR. APPARENTLY, WE COULD NOT FIND OUT ANY SUCH CAPITALIZED VALUE OF WORK-IN- PROGRESS IN THE BALANCE SHEET OF THE COMPANY ON STA NDALONE BASIS. WE DIRECTED THE LD. DR TO EXAMINE THE ANNU AL REPORT OF THIS COMPANY AND POINT OUT THE AMOUNT OF EXPENSES C APITALIZED IN RESPECT OF INCOMPLETE WORK AT THE END OF THE YEAR. ON THE NEXT DATE OF HEARING, THE LD. DR FAILED TO SPECIFICALLY POINT OUT ANY AMOUNT OF SUCH CAPITALIZED EXPENSES WITH THE OPENIN G OR CLOSING BALANCE. THIS PRIMA FACIE SHOWS THAT THE EXPENSES INCURRED IN RESPECT OF INCOMPLETE PROJECTS OF SOFTWARE DEVELOPM ENT AT THE END OF THE YEAR, BUT BILLED IN THE SUBSEQUENT YEAR, WER E, IN FACT, TREATED AS EXPENSES FOR THE CURRENT YEAR ALONE. IN THE SAME MANNER, EXPENSES INCURRED IN THE PRECEDING YEAR FOR THE CONTRACTS OF SOFTWARE DEVELOPMENT REMAINING INCOMPL ETE AT THE END OF THE YEAR, ALSO MUST HAVE BEEN INCLUDED IN T HE EXPENSES OF THE LAST YEAR ALONE, BUT, THE INCOME GETTING RECOGN IZED ON THE RAISING OF BILLS IN THE CURRENT YEAR. THIS ALBEIT, PATENTLY DEFORMS THE CORRECT PROFITABILITY ON YEAR TO YEAR BASIS, YE T, BUT WE CANNOT HELP THE SITUATION. WHEN THE POSITION OF ACCOUNTS O F BODHTREE IS SUCH THAT IT DOES NOT PROPERLY MATCH EXPENSES WITH REVENUE, IT LOSES ITS CREDIBILITY FOR MAKING A LOGICAL COMPARIS ON WITH A COMPANY THAT ACCOUNTS FOR EXPENSES MATCHING WITH TH E REVENUE. ONCE IT IS HELD THAT THE PROFITS OF BODHTREE CONSUL TING LTD. DO NOT REPRESENT FAIR PROFITABILITY ON YEAR TO YEAR BASIS, THIS COMPANY LOSES ITS TAG OF AN EFFECTIVE COMPARABLE. WE, THERE FORE, ORDER FOR THE EXCLUSION OF THIS COMPANY FROM THE FINAL LIST O F COMPARABLES. 83. PERUSAL OF ANNUAL REPORT, AVAILABLE AT PAGE 179 8 OF THE PAPER BOOK VOL.V, ALSO GOES TO PROVE THAT THE COMPANY IS ENGAGED IN BOTH SOFTWARE SOLUTION AND SOFTWARE SERVICES. MORE OVER, AS DISCUSSED BY THE COORDINATE BENCH OF THE TRIBUNAL I N CIENA INDIA PVT. LTD. (SUPRA), WHEN THE POSITION OF ACCOUNTS OF BODHTREE IS ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 48 SUCH THAT IT DOES NOT PROPERLY MATCH EXPENSES WITH REVENUE, IT LOSES ITS CREDIBILITY FOR MAKING A LOGICAL COMPARISON WIT H A COMPANY THAT ACCOUNTS FOR EXPENSES MATCHING WITH THE REVENUE , IT CANNOT BE A SUITABLE COMPARABLE. SO LD. DRP HAS RIGHTLY EXCLUD ED BODHTREE AS UNSUITABLE COMPARABLE VIS--VIS TAXPAYER. CAT TECHNOLOGY 84. BEFORE THE LD. TPO, TAXPAYER HAS SOUGHT EXCLUSI ON OF CAT TECHNOLOGY ON GROUND OF FUNCTIONAL DIS-SIMILARITY B ECAUSE THE COMPANY IS EXCLUSIVELY IN THE BUSINESS OF MEDICAL T RANSCRIPTION, TRAINING, SOFTWARE DEVELOPMENT AND CONSULTING SERVI CES. PERUSAL OF ANNUAL REPORT, AVAILABLE AT PAGE 1871, ALSO SHOW S THAT CAT TECHNOLOGY IS ENGAGED IN JOB PORTAL SERVICES. 85. LD. DR CONTENDED THAT THE CAT TECHNOLOGY IS ONL Y INTO SOFTWARE DEVELOPMENT AS DISCUSSED BY THE TPO. HOWE VER, AS PER DATA AVAILABLE IN THE ANNUAL REPORT AT PAGE 1871, I T IS CATEGORICALLY MENTIONED THAT DURING THE YEAR UNDER ASSESSMENT, TH E COMPANY LAUNCHED JOB PORTAL VIZ. LOGTALENT.COM WHICH WAS IN STANT SUCCESS WITH JOB ASPIRANTS. ENCOURAGED WITH SUCCESS OF THIS PORTAL COMPANY PROPOSED TO LAUNCH 3 TO 4 PORTAL DURING THE CURRENT FINANCIAL YEAR IN THE DIFFERENT FIELDS. SO, IN THE GIVEN CIRCUMSTANC ES, CONTENTION ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 49 MADE BY LD. SENIOR DR IS MISPLACED AND LD. DRP HAS RIGHTLY EXCLUDED CAT TECHNOLOGY FROM THE FINAL SET OF COMPA RABLES. ITES SEGMENT GROUND NO.III READ WITH GROUNDS NO.IV & V 86. THE REVENUE HAS CHALLENGED THE EXCLUSION OF CORAL HUB BY LD. DRP ON THE GROUND THAT THE SAME HAS BEEN EXCLUD ED WITHOUT ANY VALID REASON. BEFORE THE LD. TPO, THE TAXPAYER HAS SOUGHT EXCLUSION OF CORAL ON GROUND OF FUNCTIONAL DIS-SIMI LARITY AND LOW EMPLOYEE COST RATIO. BOTH THESE OBJECTIONS HAVE BE EN OVERRULED BY THE LD. TPO. 87. HOWEVER, THE LD. DRP REJECTED CORAL HUB AS A CO MPARABLE ON GROUND OF ITS OUTSOURCING ACTIVITIES. PERUSAL O F ANNUAL REPORT, AVAILABLE AT PAGE 945 (P&L ACCOUNT FOR THE YEAR END ING JUNE, 2010), SHOWS THAT CORAL HAS OUTSOURCED ITS ACTIVITI ES TO THE EXTENT OF 90% AND ITS OPERATING EXPENSES ON ACCOUNT OF DAT A ENTRY CHARGES, VENDOR PAYMENT AND EXPENSES ON CONVERSION OF BOOKS INTO POD TITLES IS TO THE TUNE OF ABOUT RS.56 CRORES. 88. CORAL HUB HAS BEEN ORDERED TO BE EXCLUDED ON GR OUND OF FUNCTIONAL DIS-SIMILARITY BY THE COORDINATE BENCH O F THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2008-09. THE RELEVANT F INDINGS ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 50 RETURNED BY THE COORDINATE BENCH OF THE TRIBUNAL AR E REPRODUCED AS UNDER :- 12.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD, WE FIND FROM THE ANNUA L REPORT OF THIS COMPANY THAT IT IS MAINLY ENGAGED IN E-PUBLISH ING BUSINESS. IT HAS MORE THAN 10,000 CLASSIC BOOKS TO ITS CREDIT WHICH ARE ALSO CONVERTED INTO LARGE FONT TITLES FOR VISUALLY CHALL ENGED. APART FROM E-PUBLISHING, THIS COMPANY IS ALSO ENGAGED IN DOCUMENTS SCANNING & INDEXING. IT CAN BE SEEN FROM THE FINAN CIAL RESULTS OF THIS COMPANY THAT BOTH THE SEGMENTS VIZ., E-PUBL ISHING AND DOCUMENTS SCANNING ETC. HAVE BEEN COMBINED AND THER E ARE NO SEPARATE FINANCIAL RESULTS IN RESPECT OF DOCUMENTS SCANNING WORK, WHICH MAY BE COMPARABLE WITH THE ASSESSEE TO SOME EXTENT. AS THE ASSESSEE IS NOT ENGAGED IN ANY E-PUBLISHING BUSINESS AND THE FINANCIALS GIVEN BY THIS COMPANY ARE ON CONSOLI DATED BASIS, WE DIRECT TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. THE ASSESSEE SUCCEEDS. 89. SO, KEEPING IN VIEW THE FUNCTIONAL DIS-SIMILARI TY OF CORAL HUB (VISHAL INFORMATICS) VIS--VIS THE TAXPAYER, TH E LD. DRP HAS RIGHTLY EXCLUDED THE CORAL FROM THE FINAL SET OF CO MPARABLES GROUNDS NO.VI & VII 90. GROUNDS NO.VI & VII ARE GENERAL IN NATURE, HENC E NEED NO SPECIFIC ADJUDICATION. 91. RESULTANTLY, THE APPEAL OF THE TAXPAYER STANDS ALLOWED FOR STATISTICAL PURPOSES AND THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 9 TH DAY OF FEBRUARY, 2018. SD/- SD/- (R.S. SYAL) (KULDIP SI NGH) VICE PRESIDENT JUDICIAL MEMBER DATED THE 9 TH DAY OF FEBRUARY, 2018 TS ITA NO.825/DEL/2014 ITA NO.419/DEL/2014 51 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.