3i INFOTECH LTD, NAVI MUMBAI V. ITO RG 10(3)(1), MUMBAI

ITA 9131/MUM/2010

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 70737 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-08-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 14-08-2013
• Assessment Year: 2005-2006
• Appeal Filed On: 29-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJIT KUAMR JAIN
• Assessee Lawyers: P J PARDIWALA
• Keywords: Capital asset; Depreciation; Transfer pricing; International transaction; Earning of tax free income; Question of law; Initiation of penalty proceedings; Wholly owned subsidiary; Valuation report; Capital receipt; Revenue expenditure; Capital expenditure
• Section: 28; 15; 92C; 143(3); 92; 92D; 14A; 10B

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES K MUMBAI . . , / !' , # $ % BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER /AND SHRI N.K.BILLAIYA, ACCOUNTANT MEMBER . / ITA NO. 3354 & 3355/MUM/2010 ' ' ' ' / ASSESSMENT YEARS 2003-04& 2004-05 . / ITA NO. 9131 & 9011/MUM/2010 ' ' ' ' / ASSESSMENT YEARS 2005-06 & 2006-07 3I INFOTECH LIMITED, TOWER NO.5, 3 RD FLOOR TO 6 TH FLOOR, INTERNATIONAL INFOTECH PARK, VASHI, NAVI MUMBAI 400 703. VS. THE ADDITIONAL COMMISSIONER OF INCOME TAX 10(3)/ ITO, RANGE - 10(3)(1), MUMBAI. PAN :AAACI 5205Q APPELLANT RESPONDENT . / ITA NO. 2616/MUM/2010 & 128/MUM/2011 ' ' ' ' / ASSESSMENT YEARS 2003-04 & 2005-06 THE ASSTT. COMMISSIONER OF INCOME TAX 10(3)/ ITO, RANGE - 10(3)(1), MUMBAI. VS. 3I INFOTECH LIMITED, TOWER NO.5, 3 RD FLOOR TO 6 TH FLOOR, INTERNATIONAL INFOTECH PARK, VASHI, NAVI MUMBAI 400 703. PAN.AAACI 5205Q APPELLANT RESPONDENT ASSESSEE BY: SHRI P.J.PARDIWALA REVENUE BY : SHRI AJIT KUAMR JAIN ( )# / DATE OF HEARING : 14/08/2013 *+' ( )# / DATE OF PRONOUNCEMENT : 21/08/2013 ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 2 J / O R D E R PER BENCH: APPEALS FOR ASSESSMENT YEAR 2003-04 ARE CROSS APP EALS AND ARE DIRECTED AGAINST THE ORDER PASSED BY LD. CIT(A)-15, MUMBAI D ATED 11/1/2010. APPEAL FOR ASSESSMENT YEAR 2004-05 IS ASSESSEES APPEAL, W HICH IS DIRECTED AGAINST ORDER PASSED BY LD. CIT(A)-15, MUMBAI DATED 11/1/20 10. APPEALS FOR A.Y 2005-06 ARE CROSS APPEALS AND THEY ARE DIRECTED AGA INST ORDER PASSED BY LD. CIT(A)-15, MUMBAI DATED 26/10/2010. APPEAL FOR ASSE SSMENT YEAR 2006-07 IS APPEAL FILED BY THE ASSESSEE WHICH IS DIRECTED AGAI NST ASSESSMENT ORDER DATED 25/10/2010 PASSED UNDER SECTION 143(3) R.W.S. 144C( 13) OF THE INCOME TAX ACT, 1961 (THE ACT). THE GROUNDS OF APPEAL IN ALL THESE APPEALS READ AS UNDER: GROUNDS OF ITA NO.3354/MUM/2010,A.Y.2003-04-ASSESS EES APPEAL: THE APPELLANT OBJECTS TO THE ORDER OF THE COMMISSI ONER OF INCOME-TAX (APPEALS) - 15, MUMBAI (CIT(A)) DATED 11 JANUARY 2010 FOR THE AFORESAID ASSESSMENT YEAR ON THE FOLLOWING AMONG OTHER GROUNDS: SOFTWARE DEVELOPMENT EXPENSES 1. THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISAL LOWANCE OF EXPENSES OF RS. 16,74,93,240 INCURRED ON DEVELOPMENT/UP-GRADAT ION OF VARIOUS SOFTWARE PRODUCTS. 2.THE LEARNED CIT(A) ERRED IN REJECTING THE ALTERN ATIVE CLAIM OF APPELLANT THAT THE SOFTWARE DEVELOPMENT EXPENSES INCURRED BY THE APPEL LANT WAS IN THE NATURE OF RESEARCH AND DEVELOPMENT EXPENDITURE AND THEREFORE ALLOWABLE AS A REVENUE EXPENDITURE. 3.THE LEARNED CIT(A) ERRED OBSERVING THAT IT IS NO T CLEAR FROM MATERIAL ON RECORD AS TO WHETHER ALL THE CONDITIONS GIVEN IN SECTION 3 5(1) (IV) IS SATISFIED IN THIS CASE OR NOT TRANSFER OF EMPLOYEES TO FOREIGN SUBSIDIARIES 4. THE LEARNED CIT (A) ERRED IN CONFIRMING THE ACTI ON OF THE ASSESSING OFFICER IN ADDING AN AMOUNT OF RS.13,34,0 18 TO THE TOTAL INCO ME OF THE APPELLANT, AS CONSIDERATION FOR TRANSFERRING CERTAIN EMPLOYEES TO ASSOCIATE ENTERPRISES (ICICI INFOTECH INC., ICICI INFOTECH PTE LTD AND SEMANTIC SOLUTIONS GMBH), WITHOUT APPRECIATING THE FACT OF THE CASE THAT THE APPELLAN T IS NOT ENGAGED IN THE BUSINESS OF THAT OF A PLACEMENT AGENCY. THESE EMPLOYEES WERE MAINLY MARKETING PERSONNEL AND THEIR TRANSFER IS A PRUDENT BUSINESS DECISION CONSIDERING THE ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 3 OVERALL BENEFIT OF THE BUSINESS AND NO SIGNIFICANT COST WAS INCURRED FOR TRAINING THEM. 5. THE LEARNED CIT (A) ERRED IN NOT ALLOWING RELIEF TO THE APPELLANT WITH REGARD TO TRANSFER OF A MANAGING DIRECTOR TO USA WITHOUT APPR ECIATING THE FACT THAT THE MANAGING DIRECTOR CONTINUED TO BE THE EMPLOYEE OF T HE APPELLANT COMPANY AND HAS BEEN SENT TO THE USA FOR DEVELOPMENT OF APPELLA NTS OWN BUSINESS. GROUNDS OF ITA NO.2616/MUM/2010,A.Y.2003-04-REVENU ES APPEAL: 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, AND IN LAW, THE LD. CIT(A) WAS NOT CORRECT IN HOLDING THAT BOTH ON FACT AND IN LAW THE COMPENSATION RECEIVED BY THE ASSESSEE COMPANY OF RS.15.00 CRORES IS A CAPITAL RECEIPT AND DIRECTED TO DELETE SUCH ADDITION. 2. AT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, AND IN LAW, THE LD. CIT(A) COULD NOT APPRECIATE THE FACT THAT THE AGREEMENT DA TED 10.10.2002 BETWEEN THE ASSESSEE COMPANY AND ICICI BANK ENTAILS COMPENSATIO N TO BE PAID TO THE ASSESSEE FOR THE LOSS OF BUSINESS/FUTURES EARNINGS AND SUCH COMPENSATION RECEIVED BY THE ASSESSEE COMPANY OF RS.15.00 CRORES IS A REVENUE RECEIPT AS HELD BY THE A.O. AND IN THAT VIEW OF THE MATTER ERR ED IN DIRECTING THE A.O. TO DELETE THE SAME. GROUNDS OF ITA NO.3355/MUM/2010,A.Y.2004-05-ASSESS EES APPEAL: THE APPELLANT OBJECTS TO THE ORDER OF THE COMMISSI ONER OF INCOME-TAX (APPEALS) - 15, MUMBAI (CIT(A)) DATED 11 JANUARY 2010 FOR THE AFORESAID ASSESSMENT YEAR ON THE FOLLOWING AMONG OTHER GROUNDS: SOFTWARE DEVELOPMENT EXPENSES 1. THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISAL LOWANCE OF EXPENSES OF RS. 12,76,66,915 INCURRED ON DEVELOPMENTAL UP-GRADATION OF VARIOUS SOFTWARE PRODUCTS. 2. THE LEARNED CIT(A) ERRED IN REJECTING THE ALTERN ATIVE CLAIM OF APPELLANT THAT THE SOFTWARE DEVELOPMENT EXPENSES INCURRED BY THE APPEL LANT WAS IN THE NATURE OF RESEARCH AND DEVELOPMENT EXPENDITURE AND THEREFORE ALLOWABLE AS A REVENUE EXPENDITURE. TRANSFER OF EMPLOYEES TO FOREIGN SUBSIDIARIES 3. THE LEARNED CIT (A) ERRED IN CONFIRMING THE ACTI ON OF THE ASSESSING OFFICER IN ADDING AN AMOUNT OF RS. 11,60,692 TO THE TOTAL INCO ME OF THE APPELLANT, AS CONSIDERATION FOR TRANSFERRING CERTAIN EMPLOYEES TO ITS ASSOCIATED ENTERPRISES (ICICI INFOTECH INC., 3I INFOTECH (UK) LTD., ICICI INFOTECH PTE LTD., SEMANTIC SOLUTIONS GMBH) WITHOUT APPRECIATING THE FACT THAT THESE EMPLOYEES WERE NEITHER HIGHLY QUALIFIED NOR SIGNIFICANT COST WAS INCURRED FOR TRAINING THEM. ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 4 GROUNDS OF ITA NO.9131/MUM/2010,A.Y.2005-06- ASSES SEES APPEAL: THE APPELLANT OBJECTS TO THE ORDER OF THE COMMISSI ONER OF INCOME-TAX (APPEALS) - 15, MUMBAI (CIT(A)) DATED 26 OCTOBER 2010 FOR THE AFORESAID ASSESSMENT YEAR ON THE FOLLOWING AMONG OTHER GROUNDS: SOFTWARE DEVELOPMENT EXPENSES 1. THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISAL LOWANCE OF EXPENSES OF RS.15,61,07,344 INCURRED ON DEVELOPMENT/UP-GRADATIO N OF VARIOUS SOFTWARE PRODUCTS. 2. THE LEARNED CIT(A) ERRED IN REJECTING THE ALTERN ATIVE CLAIM OF APPELLANT THAT THE SOFTWARE DEVELOPMENT EXPENSES INCURRED BY THE APPEL LANT WAS IN THE NATURE OF RESEARCH AND DEVELOPMENT EXPENDITURE AND THEREFORE ALLOWABLE AS A REVENUE EXPENDITURE. GROUNDS OF ITA NO.128/MUM/2011,A.Y.2005-06- REVENU ES APPEAL: 1.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT IF THE ASSESSEE HAD CHARGED I CICI INFOTECH, USA (ASSOCIATED ENTERPRISE) , THE COST OF DEPUTATION OF EMPLOYEES, THE COST OF ICICI INFOTECH, USA WILL AUTOMATICALLY GO UP AND ON SUCH INCREASED COST , THE APPELLANT WILL HAVE TO REMUNERATE THEM THE FIXED PERCENTAGE AND IN THAT EV ENT, THERE WILL BE EROSION OF THE TAX BASE IN INDIA. (I) THE APPELLANT CRAVES LEAVE TO ADD, AMEND, VARY OMIT OR SUBSTITUTE ANY OF THE AFORESAID GROUNDS OF APPEAL AT ANY TIME BEFORE OR A T THE TIME OF HEARING OF APPEAL. GROUNDS OF ITA NO.9011/MUM/2010,A.Y.2006-07- ASSES SEES APPEAL: THE APPELLANT OBJECTS TO THE ORDER UNDER SECTION 1 43(3) R.W.S. 144C(13) OF THE INCOME-TAX ACT, 1961, DATED 25TH OCTOBER 2010 (RECE IVED ON 1ST NOVEMBER 2010 ) PASSED BY THE ASSISTANT COMMISSIONER OF INCOME-TAX, RANGE 10(3), MUMBAI (ACIT) FOR THE AFORESAID ASSESSMENT YEAR ON THE F OLLOWING AMONG OTHER GROUNDS: 1. THE LEARNED ACIT ERRED IN ASSESSING THE TOTAL IN COME OF THE APPELLANT AT RS. 12,46,11,66/-. 2. THE ORDER OF THE LEARNED ACIT IS BAD IN LAW, CON TRARY TO THE PROVISIONS OF LAW AND FACTS OF THE CASE AND WITHOUT FOLLOWING THE DIR ECTIONS OF THE DISPUTE RESOLUTION PANEL (DRP) IN THE RIGHT PERSPECTIVE. 3. DISALLOWANCE OF SOFTWARE EXPENSES 3.1 THE LEARNED ACIT ERRED IN DISALLOWING A SUM OF RS.22,24,13,341 INCURRED ON SOFTWARE DEVELOPMENT. ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 5 3.2 THE LEARNED ACIT ERRED IN NOT APPRECIATING THE FACT THAT THE SAID EXPENDITURE WAS INCURRED BY THE APPELLANT MAINLY ON ACCOUNT OF SALARY, ELECTRICITY, PRINTING AND STATIONARY, RENT, ETC. WHICH WAS PRIMARILY REVE NUE EXPENDITURE INCURRED ON A PARTICULAR SOFTWARE PRODUCT AND HENCE ALLOWABLE AS A DEDUCTION. 3.3 THE LEARNED ACIT ERRED IN OBSERVING THAT THE EX PENSES FOR RESEARCH AND DEVELOPMENT OF COMPUTER SOFTWARE ARE NOTHING BUT CA PITAL IN NATURE AS THE APPELLANT HAS BEEN DERIVING THE ENDURING BENEFIT. 3.4 THE LEARNED ACIT ERRED IN NOT ALLOWING THE DEPR ECIATION ON SOFTWARE EXPENSES CAPITALIZED IN THE BOOKS OF ACCOUNT UNDER THE HEAD SOFTWARE PRODUCTS. THE LEARNED ACIT ERRED IN NOT APPRECIATING THE FACT THA T IF THE SOFTWARE EXPENSES ARE TREATED AS CAPITAL IN NATURE, THE DEPRECIATION OUGH T TO BE ALLOWED ON THE EXPENSES WHICH ARE CAPITALIZED IN THE YEAR OF COMMERCIALIZAT ION. 3.5 THE LEARNED ACIT ERRED IN OBSERVING THAT THE AP PELLANT HAS NOT FURNISHED THE APPROPRIATE DETAILS CALLED FOR NOR HAS IT SUBMITTED DETAILS AND EVIDENCES OF PUTTING THE SAID CAPITAL-WORK-IN-PROGRESS OF SOFTWA RE TO USE. 3.6 HE ERRED IN NOT APPRECIATING THE FACT THAT THE WITHOUT PREJUDICE CLAIM OF THE APPELLANT FOR ALLOWING DEPRECIATION IS NOT MADE ON THE AMOUNT WHICH IS LYING IN CAPITAL-WORK-IN- PROGRESS BUT IS MADE ON THE AMOUNT WHICH IS CAPITALIZED IN THE BOOKS OF ACCOUNT IN THE YEAR OF COMMERCIALIZATION. 3.7 THE LEARNED ACIT ERRED IN NOT ALLOWING THE DEPR ECIATION ON OPENING WDV OF SOFTWARE EXPENSES DISALLOWED AND TREATED AS CAPITAL EXPENDITURE IN EARLIER ASSESSMENT YEARS. 3.8 HE ERRED IN OBSERVING THAT THE DEPRECIATION ON SOFTWARE EXPENSES IS CLAIMED IN RESPECT OF CERTAIN OPENING BALANCES WITHOUT APPR ECIATING THE FACT IN ITS PROPER PERSPECTIVE. 3.9 WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED ACI T ERRED IN NOT CORRECTLY COMPUTING THE DEDUCTION UNDER SECTION 10A. HE ERRED IN NOT APPRECIATING THE A FACT THAT DUE TO DISALLOWANCE OF SOFTWARE EXPENSES, THE DEDUCTION UNDER SECTION 1OA WOULD BE REVISED TO RS. 22,98,46,640 AS AGAINST RS.7,84,12,263 COMPUTED IN THE RETURN OF INCOME. 3.10 ALTERNATIVELY AND WITHOUT PREJUDICE TO THE ABO VE, THE LEARNED ACIT ERRED IN NOT APPRECIATING THAT THE ABOVE EXPENDITURE INCURRE D BY THE APPELLANT WAS IN THE NATURE OF RESEARCH AND DEVELOPMENT EXPENDITURE AND THEREFORE ALLOWABLE AS DEDUCTION UNDER SECTION 35(1)(IV) IN VIEW OF THE FA CT THAT IN ORDER TO BE IN TUNE WITH THE FAST CHANGING TECHNOLOGY, THE APPELLANT WAS CON STANTLY IN THE PROCESS OF DEVELOPING AND UPGRADING ITS SOFTWARE PRODUCTS. 4. DISALLOWANCE OF EXPENSES UNDER SECTION 14A 4.1 THE LEARNED ACIT ERRED IN DISALLOWING A SUM OF RS. 544,750 UNDER SECTION 14A AS EXPENSES INCURRED IN RESPECT OF TAX FREE INC OME. ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 6 4.2 THE LEARNED ACIT ERRED IN NOT APPRECIATING THAT RULE 8D HAS BEEN INSERTED WITH EFFECT FROM 24 MARCH 2008 AND HENCE IT SHOULD ONLY APPLY PROSPECTIVELY I.E. FROM ASSESSMENT YEAR 2008-09 AND NOT RETROSPECTIVEL Y AND THEREFORE IT WOULD NOT BE APPLICABLE TO ASSESSMENT YEAR UNDER CONSIDERATIO N. 4.3 THE LEARNED ACIT ERRED IN NOT APPRECIATING THE FACT THAT THE ASSESSEE HAS NOT OBTAINED ANY LOAN FOR MAKING INVESTMENTS AND THEREF ORE NO INTEREST CAN BE ATTRIBUTABLE TO TAX FREE INCOME. 4.4 THE LEARNED ACIT ERRED IN NOT APPRECIATING THE FACT THAT THE INVESTMENT MADE IN SDG SOFTWARE TECHNOLOGIES PVT. LTD. WAS FOR THE PURPOSE OF AMALGAMATION EFFECTIVE FROM 1 APRIL 2006. THEREFORE, INVESTMENT IN SDG SOFTWARE TECHNOLOGIES PVT. LTD. SHALL NOT GENERATE ANY EXEMPT INCOME AND HENCE IT SHOULD NOT BE CONSIDERED FOR WORKING OUT AVERAGE INVESTMENT FOR C OMPUTING DISALLOWANCE UNDER SECTION 14A R. W. RULE 8D. 5. ADJUSTMENT IN RESPECT O4NTERNATIONAL TRANSACTION OF TRANSFER OF EMPLOYEES 5.1 THE LEARNED ACIT / TRANSFER PRICING OFFICER (T PO) ERRED IN MAKING THE ADJUSTMENT OF RS. 24,26,618 TO THE TOTAL INCOME OF THE APPELLANT, AS CONSIDERATION FOR TRANSFERRING CERTAIN EMPLOYEES TO ITS ASSOCIATE D ENTERPRISES WITHOUT APPRECIATING THE FACT THAT THESE EMPLOYEES WERE NEI THER HIGHLY QUALIFIED NOR SIGNIFICANT COST WAS INCURRED FOR TRAINING THEM. 6. SHORT CREDIT OF TDS THE LEARNED ACIT ERRED IN GRANTING CREDIT FOR TDS O F RS.4,22,4788 AS AGAINST RS. 6,64,07,564 CLAIMED BY THE APPELLANT IN THE RET URN OF INCOME. 7. LEVY OF INTEREST UNDER SECTION 234D THE LEARNED ACIT ERRED IN INCORRECTLY LEVYING INTER EST UNDER SECTION 234D 8. INITIATION OF PENALTY UNDER SECTION 271(1)(C) THE LEARNED ACIT ERRED IN INITIATING PENALTY UNDER SECTION 271(1)(C) 2. ALL THESE APPEALS WERE ARGUED TOGETHER BY THE PA RTIES AS SOME OF THE ISSUES ARE COMMON. ON COMMON ISSUE REFERENCE TO FA CTS WAS MADE MAINLY IN RESPECT OF ASSESSMENT YEAR 2003-04. IT WAS THE COM MON CONTENTION OF THE PARTIES THAT FACTS AND CIRCUMSTANCES OF OTHER YEARS IN RESPECT OF COMMON ISSUES ARE SIMILAR. THEREFORE, WHILE DECIDING CO MMON ISSUES REFERENCE WILL BE MADE TO THE FACTS FOR THE ASSESSMENT YEAR 2003-04 A ND THE DECISION TAKEN THEREIN WILL BE APPLICABLE TO THOSE ISSUES ON OTHER YEARS ALSO. ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 7 3. THE FIRST COMMON ISSUE FOUND IN THESE APPEALS IS REGARDING ALLOWABILITY OR OTHERWISE OF SOFTWARE EXPENSES. ALTERNATIVELY, IT IS CLAIMED THAT SUCH EXPENDITURE ARE ALLOWABLE BEING IN THE NATURE OF RE SEARCH AND DEVELOPMENT EXPENDITURE SHOULD BE ALLOWED AS REVENUE EXPENDITUR E UNDER THE PROVISIONS OF SECTION 35(1)(IV) OF THE ACT. 4. AT THE OUTSET IT MAY BE POINTED OUT THAT SIMILAR ISSUE WAS EXAMINED BY THE TRIBUNAL AT LENGTH IN ASSESSEES OWN CASE IN RE SPECT OF ASSESSMENT YEAR 2002-03. COPY OF THIS ORDER IS PLACED AT PAGES 1 T O 35 OF THE PAPER BOOK. IN THE SAID CASE IT WAS THE CLAIM OF THE ASSESSEE THAT AMOUNT OF RS.12,59,33,429/- INCURRED ON DEVELOPMENT AND UP-GR ADATION OF VARIOUS SOFTWARE PRODUCTS SHOULD BE ALLOWED AS REVENUE. AL TERNATIVELY, IT WAS CLAIMED THAT THESE EXPENDITURE BEING IN THE NATURE OF RESEA RCH AND DEVELOPMENT SHOULD BE ALLOWED UNDER SECTION 35(1)(IV) OF THE ACT . AS THE FACTS AND CIRCUMSTANCES ARE SAME AND IT IS THE CASE OF BOTH THE PARTIE S THAT THERE IS NO CHANGE IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, THERE FORE, THIS ISSUE IS COVERED BY ITAT ORDER FOR A.Y 2002-03. FOR THE SAKE OF CO MPLETION OF FACTS, THE RELEVANT PORTION OF THE AFOREMENTIONED ORDER OF TRI BUNAL DATED 30/07/2010 IN ITA NO.2831/MUM/2007 FOR ASSESSMENT YEAR 2002-03 A RE REPRODUCED BELOW: 10. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LEAR NED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS AS WERE MADE BE FORE THE AO. IT WAS SUBMITTED BY HIM THAT ONE HAS TO SEE THE NATURE OF BUSINESS OF THE ASSESSEE. IN THE HANDS OF THE ASSESSEE WHO IS A SOFTWARE DEVELOP ER THE EXPENDITURE CANNOT BE SAID TO BE CAPITAL EXPENDITURE. HE REFERRED TO BE DECISION OF THE SPECIAL BENCH OF ITAT DELHI IN THE CASE OF AMWAY INDIA LTD. 111 ITD 112 (SB)(DEL), WHEREIN AT PAGE-168 THE SPECIAL BENCH HAS EXPLAINED THAT THE E XPENDITURE ON SOFTWARE, WHETHER CAPITAL OR REVENUE WILL DEPEND ON THE NATUR E OF BUSINESS OF AN ASSESSEE. HE REFERRED TO THE DETAILS OF THE EXPENSES WHICH WE RE CLAIMED BY THE ASSESSEE AS DEDUCTION AND SUBMITTED THAT THOSE EXPENSES WERE SA LARY, RENT ETC., FOR DEVELOPMENT OF SOFTWARE AND BY THEIR NATURE THEY WE RE REVENUE EXPENDITURE. HE DREW OUR ATTENTION TO PARA 1.3 (B) OF THE SIGNIFICA NT ACCOUNTING POLICIES AND NOTES TO ACCOUNTS. THE SAME RELATES TO METHOD OF DEPRECI ATION/AMORTIZATION. IN SO FAR AS BUSINESS AND COMMERCIAL RIGHTS AND SOFTWARE PROD UCTS ARE CONCERNED THE ACCOUNTING POLICY ADOPTED BY THE ASSESSEE WAS AS FO LLOWS: BUSINESS AND COMMERCIAL RIGHTS AND SOFTWARE PRODUC TS ARE AMORTIZED OVER A PERIOD OF FIVE YEARS, AS CONSIDERED APPROPRI ATE BY THE MANAGEMENT ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 8 HIS SUBMISSION WAS THAT TREATMENT OF A PARTICULAR I TEM OF EXPENDITURE IN THE BOOKS OF ACCOUNTS IS NOT CONCLUSIVE AS TO WHETHER A N ITEM OF EXPENDITURE IS IN THE NATURE OF CAPITAL OR REVENUE. 11. THE LEARNED D.R. SUBMITTED THAT THE ASSESSEE D ID NOT GIVE ENOUGH MATERIAL TO SHOW AS TO WHETHER THE SOFTWARE IN QUESTION IS FOR OWN USE OR FOR SALE. IF IT IS FOR OWN USE THEN THE ALLOWABILITY OF THE EXPENSES IN QU ESTION HAS TO BE ADJUDICATED AFRESH BY THE AO IN THE LIGHT OF THE PRINCIPLES LAI D DOWN BY THE SPECIAL BENCH DECISION IN THE CASE OF AMWAY INDIA LTD. (SUPRA). HIS FURTHER SUBMISSION WAS THAT IF THE SOFTWARE IS FOR SALE EVEN THEN THE CLAI M OF THE ASSESSEE IS CONTRARY TO ITS OWN TREATMENT IN THE BOOKS OF ACCOUNTS AND THE ACCOUNTING POLICY ADOPTED BY THE ASSESSEE. IT WAS ALSO SUBMITTED BY HIM THAT TH E ALTERNATIVE CLAIM MADE BY THE ASSESSEE THAT THE EXPENDITURE ON COMPUTER SOFTW ARE WAS IN THE NATURE OF RESEARCH AND DEVELOPMENT EXPENDITURE IS CONTRARY TO ITS CLAIM THAT THE EXPENDITURE WAS REVENUE EXPENDITURE. 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN T HE BUSINESS OF DEVELOPMENT OF COMPUTER SOFTWARE, THERE IS SOME UNCERTAINTY TILL S UCH TIME TECHNOLOGICAL FEASIBILITY IS ESTABLISHED FOR A PRODUCT. TECHNOLOG ICAL FEASIBILITY IS ESTABLISHED UPON COMPLETION OF A DETAIL PROGRAM DESIGN OR, IN I TS ABSENCE, COMPLETION OF A WORKING MODEL. ASSESSEES WHO ARE IN THE BUSINESS OF DEVELOPMENT OF COMPUTER SOFTWARE, THEREFORE ADOPT DIFFERENT METHOD OF ACCOU NTING FOR SOFTWARE DEVELOPMENT EXPENSES DURING THE PERIOD OF ITS DEVEL OPMENT TILL TECHNOLOGICAL FEASIBILITY AND SALE OF THE SOFTWARE. THE METHOD O F ACCOUNTING ADOPTED BY THE ASSESSEE IN RESPECT OF COMPUTER SOFTWARE DEVELOPMEN T EXPENSES IS TO ACCUMULATE EXPENSES AS WORK-IN-PROGRESS. THIS IS DONE TILL SU CH TIME THE ASSESSEE THINKS THAT THE TECHNOLOGICAL FEASIBILITY IS ACHIEVED AND THE PRODUCT IS READY FOR SALE. THEREAFTER THE ENTIRE EXPENDITURE INCURRED ON DEVEL OPMENT OF COMPUTER SOFTWARE IS AMORTIZED OVER A PERIOD OF FIVE YEARS OR AS CONS IDERED APPROPRIATE BY THE MANAGEMENT. CAPITALIZATION OCCURS ONCE TECHNOLOGICA L FEASIBILITY HAS BEEN REACHED AND COSTS ARE DETERMINED TO BE RECOVERABLE. CAPITALIZATION ENDS AND AMORTIZATION BEGINS WHEN THE PRODUCT IS AVAILABLE F OR GENERAL RELEASE TO CUSTOMERS. 14. INSTEAD OF CLAIMING EXPENDITURE ON COMPUTER SO FTWARE BY AMORTIZATION OF EXPENDITURE INCURRED UPTO THE STAGE OF DEVELOPMENT OVER A PERIOD OF TIME, DEPRECIATION CAN ALSO BE ALLOWED ON THE CAPITALISED COST OF THE COMPUTER SOFTWARE. IN SUCH CASES AN ASSESSEE INSTEAD OF AMMORTIZATION GETS THE BENEFIT OF DEPRECIATION, WHICH IS ONE WAY ALLOWS DEDUCTION OF EXPENSES/COSTS, JUST AS ONE WOULD GET DEDUCTION BY AMMORTIZATION OF COST. WE H AVE ALREADY SEEN THAT IN RESPECT OF SOME EXPENDITURE INCURRED ON DEVELOPMENT /UP-GRADATION OF SOFTWARE IN THE EARLIER ASSESSMENT YEAR A SUM OF RS.3,92,90,000 /- HAD BEEN TREATED AS CAPITAL WORK-IN-PROGRESS IN THE EARLIER ASSESSMENT YEAR. THIS YEAR THE SAID EXPENDITURE WAS CAPITALIZED ON REACHING COMMERCIALI ZATION. THE AO ALLOWED DEPRECIATION AT 60% ON SUCH CAPITALIZED VALUE OF EX PENDITURE AND THE ASSESSEE HAS ACCEPTED THE SAME. HOWEVER IN RESPECT OF THE E XPENDITURE TREATED AS WORK- IN-PROGRESS IN THE PRESENT ASSESSMENT YEAR, THE ASS ESSEE WANTS A DIFFERENT TREATMENT. IT IS TRUE THAT ENTRIES IN THE BOOKS OF ACCOUNTS ARE NOT CONCLUSIVE WHEN ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 9 IT COMES TO COMPUTING INCOME UNDER THE INCOME TAX A CT, 1961 BUT IT CANNOT BE SAID THAT THEY ARE TOTALLY IRRELEVANT. THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE GOES WELL WITH THE MATCHING CONCEPT OF ACC OUNTING WHICH MANDATES THAT INCOMES SHALL, AS FAR AS POSSIBLE, BE MATCHED WITH THE CORRESPONDING EXPENSES TO EARN THEM. IN THE PRESENT CASE, THE DISPUTE IS AS TO WHETHER THE ASSESSEE WILL GET THE BENEFIT OF DEDUCTION OF THE ENTIRE EXPENDIT URE IN ONE YEAR OR A DEDUCTION OF PROPORTIONATE EXPENDITURE SPREAD OVER SEVERAL YEARS . AS WE HAVE ALREADY OBSERVED THE METHOD OF ACCOUNTING FOLLOWED BY THE A SSESSEE AND THE METHOD OF COMPUTATION OF TOTAL INCOME IN THE CASE OF THE ASSE SSEE AS ACCEPTED BY THE ASSESSEE IS TO TREAT EXPENDITURE ON DEVELOPMENT OF COMPUTER SOFTWARE AS PART OF WORK-IN-PROGRESS DURING THE PERIOD OF DEVELOPMENT O F SOFTWARE AND ON ATTAINING TECHNICAL FEASIBILITY AND ON THE SOFTWARE BEING REA DY FOR SALE, THE EXPENDITURE IS CAPITALIZED AND DEPRECIATION IS CLAIMED AND ALLOWED ON SUCH CAPITILZED COST. THIS WAY OF ALLOWING EXPENDITURE IS ALSO AN ACCEPTED MET HOD BOTH FOR ACCOUNTING PURPOSES AS WELL AS FOR COMPUTING INCOME UNDER THE ACT. ON THE FACTS OF THIS CASE, WE SEE NO REASON TO TAKE A DIFFERENT VIEW. W E THEREFORE UPHOLD THE ORDER OF THE CIT(A) TREATING THE EXPENDITURE IN QUESTION AS CAPITAL EXPENDITURE. WE HAVE NOT CONSIDERED THE APPLICABILITY OF THE DECISION OF THE SPECIAL BENCH IN THE CASE OF AMWAY INDIA LTD. (SUPRA) IN VIEW OF OUR DECISION AS ABOVE. WE HOWEVER MAKE IT CLEAR THAT THE AO WILL ALLOW DEPRECIATION IN THE YE AR OF CAPITALIZATION AS WAS DONE IN RESPECT OF THE EXPENDITURE OF RS.3,92,90,000/- W HICH WAS THE EXPENDITURE ON DEVELOPMENT OF COMPUTER SOFTWARE INCURRED IN THE EA RLIER YEAR AND WHICH WAS CAPITALIZED IN THE PREVIOUS YEAR. THIS DECISION WI LL OFF COURSE BE SUBJECT TO THE DECISION ON THE ALTERNATE GROUND OF THE ASSESSEE BE FORE US THAT THE ENTIRE EXPENDITURE IS TO BE ALLOWED AS DEDUCTION AS RESEAR CH AND DEVELOPMENT EXPENDITURE U/S. 35(1)(IV) OF THE ACT. 15. THE LEARNED COUNSEL FOR THE ASSESSEE POINTED O UT THAT AS PER THE PROVISIONS OF SECTION 35(1)(IV) OF THE ACT, DEDUCTION IN RESPECT OF ANY EXPENDITURE OF A CAPITAL NATURE ON SCIENTIFIC RESEARCH RELATED TO THE BUSINE SS CARRIED ON BY THE ASSESSEE IS ALLOWED IN THE YEAR IN WHICH SUCH EXPENDITURE IS IN CURRED. THE WHOLE OF THE CAPITAL EXPENDITURE INCURRED IN A PREVIOUS YEAR IS ALLOWABLE AS A DEDUCTION AGAINST INCOME, IF ANY, FOR THAT PREVIOUS YEAR. THE DEFINITION OF THE TERM SCIENTIFIC RESEARCH AS PER SECTION 43(4) OF THE ACT IS AS UND ER :- (I) SCIENTIFIC RESEARCH MEANS ANY ACTIVITIES FOR THE EXTENSION OF KNOWLEDGE IN THE FIELDS OF NATURAL OR APPLIED SCIENCE INCLUDI NG AGRICULTURE, ANIMAL HUSBANDRY OR FISHERIES; (III) REFERENCES TO SCIENTIFIC RESEARCH RELATED TO A BUSINESS OR CLASS OF BUSINESS INCLUDE (A) ANY SCIENTIFIC RESEARCH WHICH MAY LEAD TO OR FA CILITATE AN EXTENSION OF THAT BUSINESS OR, AS THE CASE MAY BE, ALL BUSINESSE S OF THAT CLASS; AS PER SECTION 35(2), WHERE SUCH CAPITAL EXPENDITUR E [REFERRED TO IN SECTION 35(1)(IV)] IS INCURRED AFTER MARCH 31, 1967, THE WH OLE OF SUCH CAPITAL EXPENDITURE INCURRED IN ANY PREVIOUS YEAR IS DEDUCTIBLE FOR THA T PREVIOUS YEAR, WITH EXCEPTION BEING EXPENDITURE INCURRED ON ACQUISITION OF LAND. IT IS THE PLEA OF THE ASSESSEE THAT EVEN IF THE EXPENDITURE IS CONSIDERED AS OF CA PITAL NATURE THE SAME WOULD BE ELIGIBLE FOR DEDUCTION UNDER SECTION 35, PROVIDED S UCH EXPENDITURE IS INCURRED ON SCIENTIFIC RESEARCH. THE SUBMISSION OF THE ASSESSEE IS BASED ON THE DECISION OF ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 10 THE INCOME TAX APPELLATE TRIBUNAL (DELHI), IN THE C ASE OF DCIT VS. TCIL BELLSOUTH LTD., 89 TTJ 851, WHEREIN IT HAS BEEN RECOGNIZED TH AT THE EXPENSES INCURRED ON SOFTWARE PRODUCT DEVELOPMENT WOULD QUALIFY AS BEING IN THE NATURE OF SCIENTIFIC RESEARCH AND THUS, BE ADMISSIBLE DEDUCTION UNDER TH E PROVISIONS OF SECTION 35. IT IS THE PLEA OF THE ASSESSEE THE EXPENDITURE IS NOTH ING BUT IN THE NATURE OF RESEARCH AND DEVELOPMENT EXPENDITURE AND THEREFORE ALLOWABLE AS A REVENUE EXPENDITURE. 16. THIS ARGUMENT IN OUR VIEW DESERVES TO BE REJEC TED. IN THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE CIT(A), THE ASSESSEE HAD EXP LAINED THE NATURE OF SOFTWARE DEVELOPED BY IT IN RESPECT OF WHICH THE EXPENDITURE OF RS.12,55,81,222 WAS INCURRED AND CLAIMED AS DEDUCTION AS REVENUE EXPEND ITURE. THE ASSESSEE HAD CLEARLY MENTIONED THEREIN (COPY AT PAGES 69 TO 80 O F PAPER BOOK) THAT THE EXPENDITURE IN QUESTION WAS INCURRED FOR DEVELOPMEN T OF SOFTWARE PRODUCT FOR A CLIENT. THE ASSESSEE GAVE DESCRIPTION OF THE SOFTW ARE PRODUCTS AS HERCULES, E- KASTLE PHASEII, M-KASTLE, TANGIBLE, PINNACLE, RISK FREE, TRITON, KNOWLEDGE MANAGEMENT PORTAL, QUALITY PORTAL AND IISS. THE AS SESSEE NOW WANTS TO SAY THAT IT DID RESEARCH AND DEVELOPMENT AND WANTS TO CLAIM THE EXPENDITURE AS DEDUCTION. IN OUR VIEW THERE IS NO FACTUAL BASIS F OR THE ASSESSEES CLAIM FOR DEDUCTION U/S.35(1)(IV) OF THE ACT AND ON THIS GROU ND THE PLEA OF THE ASSESSEE DESERVES TO BE REJECTED. THE DECISION IN THE CASE OF DCIT VS. TCIL BELLSOUTH LTD. (SUPRA) IS THEREFORE NOT APPLICABLE TO THE FACTS OF THE ASSESSEES CASE AS IN THAT CASE THE SOFTWARE EXPENSES WERE INCURRED FOR USE IN TELECOMMUNICATION INDUSTRY IN GENERAL AND NOT TO ANY SPECIFIC ORDER BY ANY CLI ENT. THIS WOULD BE CLEAR FROM PARA-9 OF THE SAID ORDER WHEREIN THE ASSESSEE HAS E XPLAINED THE NATURE OF ITS BUSINESS AS NOT ONE OF SALE OF THE SOFTWARE PACKAGE DEVELOPED THROUGH SCIENTIFIC RESEARCH. THE ASSESSEE GIVES COPIES OF SOFTWARE SO DEVELOPED AFTER CUSTOMIZING THEM AS PER REQUIREMENTS OF THE CUSTOMERS AND ONLY LICENSE TO USE SUCH CUSTOMIZED SOFTWARE IS GIVEN TO THE CUSTOMERS. MOR EOVER THE BUSINESS OF THE ASSESSEE IS DEVELOPMENT OF SOFTWARE FOR ITS CLIENTS . UNDER SEC.35(1)(IV) DEDUCTION IS ALLOWED IN RESPECT OF ANY EXPENDITURE OF A CAPIT AL NATURE ON SCIENTIFIC RESEARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE. THE BUSINESS CARRIED ON BY THE ASSESSEE CANNOT ITSELF BE CONSIDERED AS RESEARC H AND DEVELOPMENT. IT IS NOT THE PURPOSE OF SEC.35(1)(IV) TO ALLOW SUCH DEDUCTIO N. IN THE PRESENT CASE THE BUSINESS OF THE ASSESSEE WAS DEVELOPMENT OF SOFTWAR E FOR ITS CLIENTS. ANY EXPENDITURE INCURRED IN DOING SO CANNOT BY ITSELF F ALL WITHIN THE PARAMETERS OF SEC. 35(1)(IV) OF THE ACT. THE ALLOWABILITY OF SUCH EXP ENSES WILL BE GOVERNED BY THE PROVISIONS OF SEC.37(1) OF THE ACT BECAUSE THERE IS NO OTHER PROVISION UNDER CHAPTER-IV SECTION 28 TO 44 OF THE ACT UNDER WHICH THE ALLOWABILITY OF THE AFORESAID EXPENDITURE CAN BE CONSIDERED. 17. FOR THE REASONS GIVEN ABOVE, WE DISMISS GROUND NO.1TO 3 RAISED BY THE ASSESSEE. ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 11 5. IT MAY BE FURTHER MENTIONED THAT AGAINST THE AFO REMENTIONED ORDER OF THE TRIBUNAL AN APPEAL WAS FILED BY THE ASSESSEE BEFO RE THE HONBLE BOMBAY HIGH COURT WHICH HAS BEEN ADMITTED VIDE ORDER DATED 18/1 /2012 IN INCOME TAX APPEAL NO.1013 OF 2011 AND FOLLOWING SUBSTANTIAL QU ESTIONS OF LAW HAVE BEEN ADMITTED WITH THE FOLLOWING OBSERVATIONS: 1. HEARD. ADMIT ON THE FOLLOWING SUBSTANTIAL QUES TIONS OF LAW. (I) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE TRIBUNAL ERRED IN HOLDING THAT EXPENDITURE OF R S.12,59,33,429/- INCURRED BY THE APPELLANT ON DEVELOPMENT / UPGRADAT ION OF SOFTWARE IS CAPITAL IN NATURE? (II) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE TRIBUNAL ERRED IN DENYING THE APPELLANTS ALTER NATIVE CLAIM FOR DEDUCTION OF RS.12,59,33,429/-AS SCIENTIFIC RESEARC H EXPENDITURE UNDER SECTION 35 OF THE ACT ? 6. DURING THE COURSE OF HEARING THOUGH IT WAS NOT D ISPUTED BY LD. AR THAT FACTS AND CIRCUMSTANCES ARE THE SAME BUT IT WAS HI S CONTENTION THAT THE AFOREMENTIONED DECISION OF TRIBUNAL SHOULD NOT BE FOLLOWED IN VIEW OF THE TWO SUBSEQUENT DECISIONS OF HONBLE BOMBAY HIGH COURT, IN WHICH IT HAS BEEN HELD THAT SOFTWARE EXPENSES ARE ALLOWABLE AS REVENUE EXP ENDITURE. FOR THIS PURPOSE SR.A.R OF THE ASSESEE HAS RELIED UPON THE FOLLOWIN G DECISIONS: (1) CIT VS. RAYCHEM RPG LTD., 346 ITR 138(BOM) I N THIS CASE THE TRIBUNAL WAS HELD TO BE RIGHT IN DELETING THE ADDITION IN R ESPECT OF DISALLOWANCE OF SOFTWARE EXPENDITURE OF RS.23,62,368/-, WHICH WAS T REATED BY THE REVENUE AS CAPITAL EXPENDITURE. IT WAS FOUND BY HONBLE BOMBAY HIGH COURT THAT IN RESPECT OF ASSESSMENT YEAR 2001-02 REVENUES APPEAL ON THIS ISSUE WAS DISMISSED FOR WANT OF REMOVAL OF OFFICE OBJECTIONS AND THEREFORE, ORDER OF TRIBUNAL GRANTING SIMILAR RELIEF TO ASSESSEE IN RE SPECT OF ASSESSMENT YEAR 2001-02 HAS ATTAINED FINALITY AND THEREAFTER RELYING UPON THE F INDING RECORDED BY THE TRIBUNAL THE CLAIM HAS BEEN ALLOWED AS TRIBUNAL HAD FOUND THAT T HE IMPUGNED SOFTWARE DID NOT FORM PART OF PROFIT MAKING APPARATUS OF TH E ASSESSEE AND HENCE THE SAME IS ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 12 TO BE ALLOWED AS REVENUE EXPENDITURE. IT WAS FOU ND THAT BUSINESS OF THE ASSESSEE WAS THAT OF MANUFACTURING OF TELECOMMUNICA TION AND POWER CABLE ACCESSORIES AND TRADING IN OIL RETRACING SYSTEM A ND OTHER PRODUCTS AND SOFTWARE WAS AN ENTERPRISE RESOURCES PLANNING (ERP) PACKAGE WHICH FACILITATE THE ASSESSEES TRADING OPERATIONS OR ENABLING MANAG EMENT TO CONDUCT ITS BUSINESS MORE EFFICIENTLY OR MORE PROFITABLY. IT I S IN THIS MANNER TRIBUNAL HAD ALLOWED THE CLAIM REGARDING ACQUISITION OF SOFTWARE EXPENSES, WHICH HAS BEEN UPHELD BY THEIR LORDSHIPS. (2) CIT VS. KOTAK SECURITIES LTD (2012) 340 ITR 33 3(BOM) : IN THIS CASE THE RELEVANT QUESTION WHICH WAS RAISED BY THE REVENUE W AS THAT WHETHER TRIBUNAL WAS RIGHT IN SETTING ASIDE THE ORDER OF LD. CIT(A) ON THE ISSUE OF CLAIM OF ASSESSEE FOR SOFTWARE EXPENSES AND THE MATTER W AS REMITTED BACK TO THE FILE OF AO TO DECIDE THE ISSUE AFRESH IN THE LIGHT OF DE CISION OF SPECIAL BENCH IN THE CASE OF DCIT VS. AMWAY INDIA ENTERPRISES, 111 ITD 1 12 (DEL) (SB), AFTER GIVING REASONABLE OPPORTUNITY TO THE ASSESSEE. THE SAID D ECISION OF TRIBUNAL WAS NOT ACCEPTED BY THE REVENUE. ON APPEAL IT WAS OBSERVE D BY THEIR LORDSHIPS THAT NO QUESTION OF LAW AROSE OUT OF THE APPEAL DECIDED BY THE TRIBUNAL. THEIR LORDSHIPS HAVE ALSO OBSERVED THAT SPECIAL BENCH DEC ISION WAS CONSIDERED BY THE HIGH COURT IN THE CASE OF CIT VS. AMWAY INDIA E NTERPRISES AND IT WAS HELD THAT ENTIRE EXPENDITURE WAS LIABLE TO BE ALLOWED AS REVENUE EXPENDITURE. 7. WE HAVE CAREFULLY CONSIDERED SUCH SUBMISSION OF LD. AR IN THE LIGHT OF AFOREMENTIONED TWO DECISIONS OF HONBLE HIGH COURT. HOWEVER, WE ARE OF THE OPINION THAT NONE OF THE AFOREMENTIONED TWO DECISIO NS ARE APPLICABLE TO THE FACTS OF THE CASE OF THE ASSESSEE AS THE EXPENDITUR E INCURRED BY THE ASSESSEE ON DEVELOPMENT OF SOFTWARE RELATES TO ASSESSEES OWN B USINESS ACTIVITY OF DEVELOPMENT OF COMPUTER SOFTWARE AND ALL PROCESSES THEREON, ASSEMBLING AND RECORDING OF PROGRAMMES ON ANY TAPES, DISC, PERFOR ATED MEDIA ETC. ASSESSEES RANGE OF OFFERINGS INCLUDES SOFTWARE PRODUCTS AND SOLUTIONS FOR THE BANKING, ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 13 FINANCIAL SERVICES AND INSURANCE (BFSI) INDUSTRIES. THE ASSESSEE COMPANY HAS ALSO RANGE OF ENTERPRISE SOFTWARE SOLUTIONS AND IT DEVELOPS AND KEEP READY BEST VERSION OF SOFTWARE PRODUCTS AND CUSTOMIZES IT BASED ON CUSTOMERS SPECIFIC REQUIREMENTS. THOUGH SUCH EXPENDITURE IS INCURRED MAINLY ON ACCOUNT OF SALARY, COMMUNICATION, ELECTRICITY, PRIN TING AND STATIONARY, RENT ETC. BUT TILL THE PRODUCT IS IN THE STATE OF DEVELOPMENT , THE AMOUNTS SPENT ON DEVELOPMENT OF SOFTWARE PRODUCT IS DEBITED TO CAPIT AL WORK IN PROGRESS IN THE BOOKS OF ACCOUNTS MAINTAINED BY THE COMPANY. ONLY IN THE YEAR OF COMMERCIALIZATION, SUCH EXPENDITURE IS CAPITALIZED IN THE BOOKS OF ACCOUNTS UNDER THE HEAD SOFTWARE PRODUCTS. IT IS IN THES E CIRCUMSTANCES IT WAS HELD BY THE TRIBUNAL THAT LD. CIT(A) WAS RIGHT IN TREATI NG THE EXPENDITURE AS CAPITAL EXPENDITURE. THE CASES RELIED UPON BY LD. AR RELAT E TO OUTRIGHT PURCHASES OF SOFTWARE TO FACILITATE THE BUSINESS OF THE RESPECTI VE ASSESSEES. THEREFORE, KEEPING IN VIEW THE FACTS AND CIRCUMSTANCES OF THE CASE IT WAS HELD BY THE TRIBUNAL IN THE CASE OF PRESENT ASSESSEE VIDE AFOR EMENTIONED ORDER THAT ASSESSEE WILL BE ENTITLED TO DEPRECIATION IN THE YE AR OF CAPITALIZATION. THEREFORE, ACCORDING TO THE AFOREMENTIONED ORDER OF THE TRIBUNAL THE EXPENDITURE INCURRED BY THE ASSESSEE DURING THE YE ARS UNDER CONSIDERATION WHICH HAS BEEN TREATED AS WORK-IN-PROGRESS IS HELD TO BE CAPITAL EXPENDITURE AND DEPRECIATION IS HELD TO BE ALLOWABLE TO THE ASSESSEE ONLY IN THE YEAR OF CAPITALIZATION OF SUCH EXPENDITURE. WE HOLD SO. 8. LD. AR HAS FURTHER RELIED UPON THE DECISION OF P UNE BENCH OF TRIBUNAL IN THE CASE OF OPUS SOFTWARE SALES PVT. LTD., VS. ACI T (2012) 26 TAXAMANN.COM 47 (PUNE), ORDER DATED 27/7/2012, COPY PLACED ON RE CORD AND WAS ALSO GIVEN TO LD. DR. ACCORDING TO LD. AR TRIBUNAL IN THE SAID CASE, UNDER SIMILAR CIRCUMSTANCES HAS ALLOWED THESE EXPENDITURE OF THE ASSESSEE. ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 14 9. WE HAVE CAREFULLY CONSIDERED SUCH SUBMISSION OF LD. AR. WE FOUND THAT IN ASSESSEES OWN CASE TRIBUNAL HAS ALREADY TAKEN A VIEW AGAINST WHICH SUBSTANTIAL QUESTION OF LAW HAS ALREADY BEEN ADMIT TED BY HONBLE JURISDICTIONAL HIGH COURT. THEREFORE, AS PER THE P RINCIPLE OF CONSISTENCY, WE ARE BOUND BY EARLIER DECISION. RESPECTFULLY FOLLO WING THE SAME WE HOLD THAT THE EXPENDITURE INCURRED BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION TREATED AS CAPITAL WORK-IN-PROGRESS ARE CAPITAL EXP ENDITURE. HOWEVER, THE ASSESSEE WILL BE ELIGIBLE FOR DEPRECIATION ON THES E EXPENDITURE IN THE YEAR WHEN THESE HAVE BEEN CAPITALIZED. 10. ON THE ALTERNATIVE CLAIM OF THE ASSESSEE REGARD ING ALLOWABILITY OF THESE EXPENDITURE AS PER SECTION 35(1)(IV), RESPECTFULLY FOLLOWING THE AFOREMENTIONED DECISION OF TRIBUNAL IN ASSESSEES OWN CASE WE REJE CT SUCH CLAIM. 10.1 THE ABOVE ADJUDICATION WILL COVER GROUND NO. 1,2 & 3 OF ASSESSEES APPEAL FOR A.Y 2003-04, GROUND NO.1&2 OF ASSESSEE S APPEAL FOR A.Y 2004-05 AND GROUND NOS.1 & 2 OF ASSESSEES APPEAL FOR A.Y 2 005-06 AND THESE GROUNDS ARE TREATED TO BE PARTLY ALLOWED. 11. SO FAR AS IT RELATES TO ASSESSEES SIMILAR CLAI M IN RESPECT OF A.Y 2006-07, IT MAY BE MENTIONED HERE THAT CERTAIN ADDITIONAL AS PECTS ON THIS ISSUE HAVE BEEN RAISED WHICH ARE AS UNDER: (1) DEPRECIATION HAS NOT BEEN ALLOWED BY THE AO ON CAPITALIZED SOFTWARE EXPENSES. (2) THE ASSESSEE IS ENTITLED FOR ADDITIONAL DEDUCT ION UNDER SECTION 10A ON THE DISALLOWED PORTION OF SOFTWARE EXPENSES. 12. SO FAR AS IT RELATES TO ALLOWABILITY OF DEPRECI ATION ON CAPITAL WORK IN PROGRESS WHICH HAS BEEN CAPITALIZED IN THE BOOKS OF ACCOUNT IN THE YEAR OF COMMERCIALIZATION, THE AFOREMENTIONED ORDER OF THE TRIBUNAL IS CLEAR THAT THE DEPRECIATION IS ALLOWABLE TO THE ASSESSEE. THEREFO RE, WE DIRECT THE AO TO GRANT SUCH DEPRECIATION TO THE ASSESSEE. ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 15 13. SO FAR AS IT RELATES TO CLAIM OF EXEMPTION UNDE R SECTION 10A OF THE ACT, IT IS THE CASE OF THE ASSESSEE THAT DISALLOWANCE OF SO FTWARE EXPENSES WILL ENHANCE THE INCOME OF THE ASSESSEE WHICH IS ELIGIBLE FOR AD DITIONAL EXEMPTION UNDER SECTION 10A. ACCORDING TO ASSESSEE SUCH CLAIM IS S UPPORTED BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS.GEM PLUS JEWELLERY INDIA LTD., 330 ITR 175 (BOM). 14. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. HONBLE JURISDICTIONAL HIGH COURT IN THE AFOREMENTIONED DECISION OF CIT VS . GEMPLUS JEWELLERY INDIA LTD. (SUPRA) HAS HELD THAT ASSESSEE IS ENTITLED TO EXEMPTION UNDER SECTION 10A WITH REFERENCE WITH REFERENCE TO ADDITION OF DISALL OWANCE OF PF/ESIC PAYMENTS AS THE PLAIN CONSEQUENCE OF THE DISALLOWANCE AND AD D BACK MADE BY THE AO HAS INCREASED THE BUSINESS PROFITS OF THE ASSESSEE. THEREFORE, RESPECTFULLY FOLLOWING THE SAID DECISION OF HONBLE BOMBAY HIGH COURT WE HOLD THAT THE EXEMPTION UNDER SECTION 10A IS TO BE CALCULATED ACC ORDINGLY. THE AO IS DIRECTED TO DO SO. 15. IN THIS MANNER GROUND NO.3 TOUCHING TO ALL THE ASPECTS OF DISALLOWANCE OF SOFTWARE EXPENSES IS DISPOSED OFF IS CONSIDERED TO BE PARTLY ALLOWED. 16. GROUND NO. 4 & 5 OF ASSESSEES APPEAL FOR A.Y 2 003-04, GROUND NO.3 OF ASSESSEES APPEAL FOR A.Y 2004-05, GROUND NO.5 OF ASSESSEES APPEAL FOR ASSESSMENT YEAR 2006-07 AND GROUND NO. 1 OF REVENUE S APPEAL FOR A.Y 2005- 06 RAISE A COMMON ISSUE I.E. WITH REGARD TO TP ADJU STMENT IN RESPECT OF TRANSFER OF CERTAIN EMPLOYEES BY THE ASSESSEE TO IT S AES. THIS ISSUE WAS STATED TO BE COVERED BY THE AFOREMENTIONED DECISION OF THE TRIBUNAL RENDERED IN RESPECT OF A.Y 2002-03. ADMITTEDLY, THE FACTS AND CIRCUMSTANCES OF ALL THE YEARS ARE SIMILAR TO THE FACTS AND CIRCUMSTANCES FO R A.Y 2002-03. THEREFORE, IT ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 16 WILL BE RELEVANT TO REPRODUCE THE ENTIRE RELEVANT P ORTION OF THE AFOREMENTIONED ORDER OF THE TRIBUNAL FOR THE SAKE OF COMPLETENESS AND CLARITY: 25. GROUND NO. 7 RAISED BY THE ASSESSEE READS AS FOLLOWS: LEARNED CIT(A) ERRED IN CONFIRMING THE ACTION OF TH E ASSESSING OFFICER IN ADDING AN AMOUNT OF RS. 2,71,773/- TO THE TOTAL INC OME OF THE APPELLANT, AS CONSIDERATION FOR TRANSFERRING CERTAIN EMPLOYEES TO ITS SUBSIDIARY (ICICI INFOTECH INC.) NOT APPRECIATING THAT THESE EMPLOYEE S WERE NEITHER HIGHLY QUALIFIED NOR SIGNIFICANT INVESTMENTS WERE MADE FOR TRAINING THEM. 26. WE HAVE ALREADY SEEN THAT THE ASSESSEE IS AN INFORMATION TECHNOLOGY COMPANY. IT WAS ORIGINALLY PROMOTED BY ICICI GROUP. 29.5% OF THE EQUITY IS HELD BY ICICI BANK, 63% BY ICICI VENTURES, A SUBSIDIARY OF ICICI BANK AND THE BALANCE IS HELD BY THE DUBAI BASED GROUP. THE ASSES SEE IS A SOFTWARE DEVELOPING COMPANY. THE FOUR KEY BUSINESS LINES ARE SOFTWARE D EVELOPMENT & CONSULTANCY SERVICES, SOFTWARE PRODUCT, IT INFRASTRUCTURE, NETW ORKING & FACILITIES MANAGEMENT SERVICES LTD. AND BUSINESS PROCESS OUTSOURCING. THE ASSESSEE ENTERED INTO SOME INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRI SES. THE FOLLOWING ARE THE DETAILS OF ASSOCIATE ENTERPRISES. (I) ICICI INFOTECH INC. (HEREINAFTER INFOTECH, USA), IN CORPORATED IN DELAWARE, USA IS A WHOLLY OWNED SUBSIDIARY OF THE A SSESSEE. (II) ICICI INFOTECH PTE. LTD., SINGAPORE IS ALSO A WHOLL Y OWNED SUBSIDIARY OF THE ASSESSEE AND IS ENGAGED IN THE BU SINESS OF INFORMATION TECHNOLOGY RELATED PRODUCTS AND SERVICE S. (III) TRICOLOR INFOTECH INTERNATIONAL INC, MAURITIUS IS A JOINT VENTURE COMPANY OF THE ASSESSEE (50% EQUITY) AND EMIRATES B ANK GROUP (50% EQUITY). THE COMPANY IS ENGAGED IN THE S ALES, MARKETING AND BUSINESS DEVELOPMENT ACTIVITIES FOR S OFTWARE DEVELOPMENT IN UAE & WEST ASIA 27. THE ASSESSEE HAD ENTERED INTO THE FOLLOWING IN TERNATIONAL TRANSACTIONS WITH THE AFORESAID ASSOCIATED ENTERPRISES:- SL. NO . NAME & ADDRESS OF ASSOCIATED ENTERPRISES (AES) COUNTR Y OF TAX RESIDEN CE OF AES NATURE OF RELATION SHIP DESCRIPTION OF TRANSACTION WITH AES AMOUNT RECEIVED/R ECEIVABLE, PAID/PAYA BLE AS PER BOOKS OF ACCOUNTS 1 ICICI INFOTECH INC., 450, RARITAN CENTRE PARKWAY, EDISON NEW JERSEY, 08837 USA AE AS PER SEC. 92A(1)( A) I) PROVISION OF TECHNICAL (SOFTWARE) SERVICES. (RECEIPT BY THE ASSESSEE) II) MARKETING SERVICES PROVIDED BY INFOTECH INC. TO 62,684,77 7 218,548,6 95 ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 17 INFOTECH INDIA. (PAYMENT BY THE ASSESSEE) III) CONTRACT SERVICE PROVIDER EXPENSES INCURRED BY INFOTECH INDIA. (PAYMENT BY THE ASSESSEE) IV) INTEREST RECEIVED ON LOAN GRANTED (RECEIPT BY THE ASSESSEE) 31,737,25 9 844,346 2 ICICI INFOTECH PTE. LTD. 8 TH CROSS STREET #11-00 PWC BUILDING SINGAPORE 048424. SINGAP ORE AE AS PER SEC. 92A(1)( A) PROVISION OF TECHNICAL SERVICES. (RECEIPT BY THE ASSESSEE) 3,002,811 3 TRICOLOUR INFOTECH INTERNATIONAL INC., 3 RD FLOOR, LES CASCADES EDITH CAVELL STREET PORT LOUIS MAURITIUS MAURITI US AE AS PER SEC. 92A(1)( A) PROVISION OF TECHNICAL SERVICES. (RECEIPT BY THE ASSESSEE) 16,135,99 8 28. AS PER AUDIT REPORT, THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS COMPUTED BY THE ASSESSEE IS SAME, AS RECORDED IN TH E BOOKS OF ACCOUNTS. THE ASSESSEE HAS USED COMPARABLE UNCONTROLLED PRICE MET HOD FOR DETERMINING THE ARMS LENGTH PRICE IN RESPECT OF INTERNATIONAL TRAN SACTIONS WITH SINGAPORE & MAURITIUS ENTITY. COSTPLUS METHOD WAS USED IN CASE OF TRANSACTIONS REFERRED AT (II) AND (III) AND TRANSACTIONAL NET MARGIN METHOD WAS U SED FOR TRANSACTIONS REFERRED IN (I), IN CASE OF INFOTECH USA. THE ASSESSEE HAD S UBMITTED COPY OF THREE TRANSFER PRICING MEMORANDUMS (HEREINAFTER: T.P. REPORT), IN RESPECT OF INTERNATIONAL TRANSACTIONS WITH THREE ASSOCIATED ENTERPRISE. THE TP REPORT DEALT WITH DESCRIPTION OF INTER-COMPANY TRANSACTIONS, FUNCTION AL ANALYSIS AND ECONOMIC ANALYSIS. THE DETAILS OF BENCH MARKING THE INTERNAT IONAL TRANSACTIONS WITH INDEPENDENT ENTERPRISES WERE ALSO SUBMITTED. THE AG REEMENTS WITH ALL THE THREE ASSOCIATED ENTERPRISES, DETAILS OF COSTS INCURRED B Y INFOTECH USA WITH REGARD TO MARKETING SERVICES AND AS A CONTRACT SERVICE PROVID ER WERE ALSO SUBMITTED. 29. THE AO BY HIS LETTER DATED 29/9/03 HAD REFERRE D FOR COMPUTATION OF ARMS LENGTH PRICE TO THE TPO THE TRANSACTIONS REFERRED T O FORM NO.3CEB FILED BY THE ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 18 ASSESSEE PURSUANT TO PROVISIONS OF SEC.92E OF THE A CT. THE TPO CONSIDERING THE FACTS OF THE INTERNATIONAL TRANSACTIONS FOR THE YEA R AND ECONOMIC ANALYSIS CARRIED OUT BY HIM WAS OF THE VIEW THAT NO ADJUSTMENT REQUI RES TO BE MADE TO THE VALUE OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE. 30. THE TPO AFTER HAVING HELD THAT THE VALUE AT W HICH THE INTERNATIONAL TRANSACTIONS REPORTED BY THE ASSESSEE IN ITS FORM N O.3CEB U/S.92-E READ WITH RULE 10-E OF THE RULES, CARRIED OUT BY THE ASSESSEE DOES NOT REQUIRE ANY ADJUSTMENT, HOWEVER PROCEEDED TO MAKE AN ADJUSTMENT IN RESPECT OF AN ISSUE WHICH WAS NOT REPORTED BY THE ASSESSEE AS AN INTERN ATIONAL TRANSACTION IN FORM NO.3CEB FILED PURSUANT TO SEC.92-E OF THE ACT. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TPO IN HIS REPORT IN THIS REGAR D: THE ASSESSEE HAS ALSO TRANSFERRED THREE EMPLOYEES OF THE COMPANY TO INFOTECH US VIDE THIS OFFICE LETTER DATED 23.10.200 4, THE ASSESSEE WAS ISSUED A SHOW CAUSE LETTER, THE RELEVANT PORTION RE AD AS : INFOTECH INDIA HAS DEPUTED THREE EMPLOYEES TO INFO TECH US, DURING FINANCIAL YEAR 2001-02 WHO HAVE BECOME EMPLOYEES OF INFOTECH INC. IN THE MATTER PLEASE SUBMIT WHETHER IN RESPECT OF S UCH TRANSFERRED EMPLOYEES, INFOTECH INDIA HAS LEVIED ANY CHARGE. IF NOT, WHY AND ALSO STATE WHY SUCH CHARGE @ 12.5% OF THE TOTAL ANN UAL COMPENSATION LAST PAID TO EMPLOYEES IN INDIA, BE CA LCULATED AS THE ARMS LENGTH PRICE. THIS ARMS LENGTH RATE IS ADOPT ED AS PER THE AGREEMENT INFOTECH INDIA HAD WITH TRICOLOR INFOTECH INC. FOR THE SIMILAR SERVICES. THE TOTAL COST TO THE COMPANY INC URRED ON THE EMPLOYEES DURING THE MONTH PRIOR TO THEIR TRANSFER BE SUBMITTED. THE ASSESSEE, IN THE LETTER DATED 5.11.2004, HAS ON LY SUBMITTED THAT AS PER MONTH COST TO THE COMPANY OF THE THREE EMPLOYEES TRANSFERRED AND THIS IS RS. 181,182/- AND DID NOT CONTEST THE I SSUE RAISED BY THIS OFFICE REGARDING COMPENSATION. THE EMPLOYEES TRANSFERRED ARE RECRUITED BY THE COMP ANY AND SUCH PERSONS ARE GIVEN PROPER TRAINING, BEFORE THEY ARE ACTUALLY ENTRUSTED THE WORK OF SOFTWARE DEVELOPMENT. EMPLOYEES TRANSFERRED TO FOREIGN LOCATIONS ARE GENERALLY BETTER QUALIFIED AND THE BEST PERFORM ERS. THE TRANSFER OF SUCH EMPLOYEES, RESULTS INTO BENEFIT TO THE TRANSFEREE E NTITY, AS THEY ARE NOT TO INCUR ANY EXPENSES ON THE RECRUITMENT AND TRAINING AND THE SALARY PACKAGES TO SUCH EMPLOYEES ARE ALSO LESS IN COMPARI SON TO FOREIGN EMPLOYEES, RESULTING INTO SAVINGS TO THE TRANSFEREE COMPANY. CONSIDERING THIS, EITHER THE COMPANY TO WHOM THE PERSONS ARE TR ANSFERRED, SHOULD SHARE THE PROFIT EARNED OR ATLEAST COMPENSATE THE T RANSFEROR ENTITY FOR LOSING THE VALUABLE RESOURCES. INFOTECH INDIA, IN I TS AGREEMENT WITH TRICOLOUR MAURITIUS HAS PROVISION FOR RECEIPT OF SU CH TRANSFER FEES AND THE SAME IS IN THE FORM OF A ONE TIME CHARGE OF 12.5% O F THE ANNUAL COMPENSATION PAID TO THE EMPLOYEES TRANSFERRED/SECO NDED. CONSIDERING THE SAME RATE, THE ARMS LENGTH COMPENSATION TO ICI CI INFOTECH IS COMPUTED AT RS. 2,71,773/-. THE ASSESSING OFFICER I S REQUIRED TO ADD THIS AMOUNT TO THE TOTAL INCOME OF THE ASSESSEE AND THIS AMOUNT IS NOT ELIGIBLE ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 19 FOR ANY DEDUCTION U/S. 10A OR SECTION 10B OR UNDER CHAPTER-VIA IN VIEW OF PROVISO TO SECTION 92C(4) OF THE I.T. ACT, 1961. 31. FOLLOWING THE ABOVE REPORT OF THE TPO, THE AO MADE AN ADDITION OF RS.2,71,773 TO THE TOTAL INCOME OF THE ASSESSEE. 32. BEFORE CIT(A), THE ASSESSEE SUBMITTED THAT TH E FIRST STEP, WHEN APPLYING THE CPU METHOD, IS TO FIND A COMPARABLE TRANSACTION . THIS COULD BE DONE IN TWO DIFFERENT WAYS. THE EASIEST AND MOST PREFERABLE WAY IS TO COMPARE THE CONTROLLED TRANSACTIONS (I.E. TRANSACTION BETWEEN TWO RELATED PARTIES) WITH ANOTHER TRANSACTION MADE BY THE SAME MNE BUT WITH AN UNRELA TED PARTY. THIS IS AN INTERNAL COMPARABLE. THE REASON WHY IT IS PREFERA BLE IS THAT THE QUALITY OF THE DATA IS MORE ACCURATE SINCE THE MNE IS PART OF THE TRANSACTION AND THUS HAS ACCESS TO ALL THE FACTS OF THE TRANSACTIONS. IT WA S SUBMITTED THAT TO TEST THE ARMS LENGTH PRICING IN THE CASE OF TRANSFER/SECONDING OF THE EMPLOYEES, IT MAY BE POSSIBLE TO USE THE CUP METHOD WHERE THE SAME ENTIT Y HAS UNDERTAKEN SIMILAR TRANSACTION UNDER COMPARABLE CIRCUMSTANCES TO INDEP ENDENT ENTERPRISES (PARA 6.23 OF OECD GUIDELINES ON TRANSFER PRICING). CUP M ETHOD COULD NOT BE APPLIED UNDER THE FACTS OF THE CASE AS THE ASSESSEE COMPANY HAS NOT TRANSFERRED/SECONDED EMPLOYEES TO ANY OTHER INDEPEN DENT ENTERPRISES. THE ASSESSEE REFERRED TO PARA 6.25 OF THE OECD GUIDELIN ES, THE RELEVANT EXTRACT OF WHICH IS AS UNDER :- 6.25 FOR EXAMPLE, IT MAY BE THE CASE THAT A BRAND ED ATHLETIC SHOE TRANSFERRED IN A CONTROLLED TRANSACTION IS COMPARAB LE TO AN ATHLETIC SHOE TRANSFERRED UNDER A DIFFERENT BRAND NAME IN AN UNCO NTROLLED TRANSACTION BOTH IN TERMS OF THE QUALITY AND SPECIFICATION OF T HE SHOE ITSELF AND ALSO IN TERMS OF THE CONSUMER ACCEPTABILITY AND OTHER CHARA CTERISTICS OF THE BRAND NAME IN THAT MARKET. WHERE SUCH A COMPARISON IS NOT POSSIBLE, SOME HELP ALSO MAY BE FOUND, IF ADEQUATE EVIDENCES IS AVAILAB LE, BY COMPARING THE VOLUME OF SALES AND THE PRICES CHARGEABLE AND PROFI TS REALIZED FOR TRADEMARKED GOODS WITH THOSE FOR SIMILAR GOODS THA T DO NOT CARRY THE TRADEMARK. HOWEVER, IN CASE INTERNAL COMPARABLE IS NOT AVAILAB LE THE TRANSACTION MUST BE TESTED WITH TRANSACTIONS MADE BY OTHER INDEPENDENT PARTIES, CALLED EXTERNAL COMPARABLES. SINCE, THE MNE IS NOT PART OF THE COM PARABLE TRANSACTIONS IT IS INCREASINGLY DIFFICULT TO FIND ACCURATE DATA. IN T HE CASE OF THE ASSESSEE, THE DATA OF WHETHER OTHER COMPANIES ARE RECEIVING FOR SUCH T YPES OF SERVICES WAS NOT AVAILABLE. HENCE, EXTERNAL COMPARABLE WAS ALSO NOT POSSIBLE. THE ASSESSEE THEREFORE SUBMITTED THAT THE TRANSFER PRICING REGUL ATIONS OBLIGES TO TEST THE COMPLIANCE WITH ARMS LENGTH PRINCIPLE BY TESTING T HE CONTROLLED TRANSACTIONS WITH THAT OF COMPARABLE UNCONTROLLED TRANSACTIONS (INTER NAL/EXTERNAL COMPARABLE). IN OTHER WORDS, IT WAS SUBMITTED THAT THE TRANSACTIONS ENTERED INTO INTER SE BETWEEN ASSOCIATED ENTERPRISES-CONTROLLED TRANSACTIONS CANN OT BE APPLIED TO TEST THE COMPLIANCE WITH ARMS LENGTH PRINCIPLE. HENCE, IT W AS SUBMITTED THAT CUP METHOD CANNOT BE SELECTED AS THERE ARE NO COMPARABLE TRANS ACTIONS TO BENCHMARK SUCH TRANSACTIONS. THEREFORE CUP METHOD CANNOT BE APPLI ED. ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 20 33. IT WAS FURTHER CONTENDED THAT SUCH TRANSFER/SE CONDED EMPLOYEES WAS GENERAL INDUSTRY PRACTICE AND THAT THERE WAS NO COS T INCURRED ON TRAINING AND DEVELOPMENT OF EMPLOYEES TRANSFERRED. HENCE, THERE WAS NO NEED TO RECOVER ANY COST. IT WAS ALSO ARGUED THAT THE ASSESSEE IS NOT IN THE BUSINESS OF TRANSFERRING EMPLOYEES. IT WAS POINTED OUT THAT THE EMPLOYEES T RANSFERRED WERE MAINLY HANDLING MARKET DEVELOPMENT RESPONSIBILITIES AND TH AT THEIR TRANSFER TO THE WHOLLY OWNED SUBSIDIARY US COMPANY WAS TO HELP MARKETING O F THE ASSESSEES PRODUCT BY THE WHOLLY OWNED SUBSIDIARY US COMPANY AND THAT THE ASSESSEE WOULD GENERATE INCOME IN THE FORM OF IMPROVED BUSINESS AN D THIS FACTOR HAS BEEN COMPLETED LOST SIGHT BY THE TPO. 34. THE CIT(A) HOWEVER CONFIRMED THE ORDER OF THE AO FOR THE FOLLOWING REASONS:- I HAVE CAREFULLY CONSIDERED THE FINDINGS OF THE AS SESSING OFFICER AND SUBMISSIONS OF THE APPELLANT. THE ARGUMENT OF THE A PPELLANT THAT NO SUBSTANTIAL AMOUNT WAS INCURRED FOR TRAINING AND DE VELOPMENT OF EMPLOYEES IS NOT ACCEPTABLE. THE EMPLOYEES TRANSFER RED WERE RECRUITED AND TRAINED BY THE APPELLANT COMPANY BEFORE THEY WE RE ACTUALLY INTEREST THE WORK OF SOFTWARE DEVELOPMENT. GENERALLY MOST QU ALIFIED EMPLOYEES ARE TRANSFERRED TO FOREIGN LOCATION. BY AFORESAID TRAN SFER THE TRANSFEREE ENTITY WAS BENEFITED BECAUSE THEY HAVE NOT INCURRED ANY EX PENSES ON SUCH EMPLOYEES. I AGREE WITH THE OBSERVATIONS OF THE ASS ESSING OFFICER THAT THE TRANSFEREE COMPANY SHOULD COMPENSATE THE TRANSFEROR FOR USING THE VALUABLE RESOURCES. THEREFORE TPO/ASSESSING OFFICER WAS FULLY JUSTIFIED IN MAKING ADJUSTMENT OF RS. 2,71,773/-IN VIEW OF THE P ROVISO OF SECTION 92C(4) OF I.T. ACT, 1961. IN VIEW OF THE ABOVE FACT S, NO INTERFERENCE IS CALLED FOR IN THE ORDER OF THE ASSESSING OFFICER. THUS, GR OUND NO. 8 IS DISMISSED. 35. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE HAS RAISED GROUND NO.7 BEFORE THE TRIBUNAL. 36. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT UNDER THE PROVISIONS OF SEC.92CA(1) OF THE ACT, WHERE ANY PERSON, BEING THE ASSESSEE, HAS ENTERED INTO AN INTERNATIONAL TRANSACTION IN ANY PREVIOUS YEAR, AND THE ASSESSING OFFICER CONSIDERS IT NECESSARY OR EXPEDIENT SO TO DO, HE MA Y, WITH THE PREVIOUS APPROVAL OF THE COMMISSIONER, REFER THE COMPUTATION OF THE A RMS LENGTH PRICE IN RELATION TO THE SAID INTERNATIONAL TRANSACTION UNDER SECTION 92 C, TO THE TRANSFER PRICING OFFICER. U/S.92CA(2) WHERE A REFERENCE IS MADE UND ER SUB-SECTION (1), THE TRANSFER PRICING OFFICER SHALL SERVE A NOTICE ON TH E ASSESSEE REQUIRING HIM TO PRODUCE OR CAUSE TO BE PRODUCED ON A DATE TO BE SPE CIFIED THEREIN, ANY EVIDENCE ON WHICH THE ASSESSEE MAY RELY IN SUPPORT OF THE CO MPUTATION MADE BY HIM OF THE ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION REFERRED TO IN SUB- SECTION (1). HE POINTED OUT THAT THE AO BY HIS LET TER DATED 29/9/03 HAD REFERRED FOR COMPUTATION OF ARMS LENGTH PRICE TO THE TPO IN RESPECT OF TRANSACTIONS REFERRED TO FORM NO.3CEB FILED BY THE ASSESSEE PURSUANT TO P ROVISIONS OF SEC.92E OF THE ACT. HE POINTED OUT THAT THE INTERNATIONAL TRANSAC TIONS REFERRED TO IN FORM NO.3CEB DID NOT INCLUDE THE INTERNATIONAL TRANSACTI ON OF THE ASSESSEE DEPUTING THREE OF ITS EMPLOYEES TO INFOTECH US DURING THE PR EVIOUS YEAR. ACCORDING TO HIM THE TPOS JURISDICTION TO DETERMINE ARMS LENGTH PR ICE OF AN INTERNATIONAL TRANSACTION IS RESTRICTED TO THE INTERNATIONAL TRAN SACTIONS SET OUT IN THE ORDER OF ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 21 REFERENCE OF THE AO. IT WAS HIS ARGUMENT THAT THE TPO EXCEEDED HIS JURISDICTION IN DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE INT ERNATIONAL TRANSACTION OF THE ASSESSEE DEPUTING THREE OF ITS EMPLOYEES TO INFOTEC H US DURING THE PREVIOUS YEAR AND TO THIS EXTENT THE ORDER OF THE TPO SHOULD BE C ONSIDERED NON EST. IN THIS REGARD HE ALSO BROUGHT TO OUR NOTICE INSTRUCTION NO .3 OF 2003 DATED 20-5-2003 ISSUED BY THE CBDT REGARDING COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTION HAVING REGARD TO ARMS LENGTH PRICE WHE REIN THE CBDT EXPLAINING THE ROLE OF TPO HAS INSTRUCTED THAT IN TERMS OF SEC.92C A OF THE ACT, THE TPOS ROLE IS LIMITED TO THE DETERMINATION OF ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTIONS REFERRED TO HIM BY THE AO AND IF DURIN G THE COURSE OF PROCEEDINGS BEFORE HIM IT IS FOUND THAT THERE ARE CERTAIN OTHER TRANSACTIONS WHICH HAVE NOT BEEN REFERRED TO HIM BY THE AO, HE WILL HAVE TO TAK E UP THE MATTER WITH THE AO SO THAT A FRESH REFERENCE IS RECEIVED WITH REGARD TO S UCH TRANSACTION. THE BOARD HAS FURTHER OPINED THAT REFERENCE TO THE TPO IS TRANSAC TION AND NOT ENTERPRISE SPECIFIC. HIS FURTHER SUBMISSION WAS THAT SINCE THE AO MADE T HE IMPUGNED ADDITION BY RELYING ON THE ORDER OF THE TPO THE SAME CANNOT BE SUSTAINED. 37. THE LEARNED D.R. SUBMITTED THAT THE DEFINITION OF INTERNATIONAL TRANSACTION IS WIDE ENOUGH TO INCLUDE THE ACT OF DEPUTATION OF THR EE EMPLOYEES BY THE ASSESSEE TO INFOTECH US. ACCORDING TO HIM, THE ASSESSEE OUG HT TO HAVE DISCLOSED THIS TRANSACTION IN THE REPORT IN FORM NO.3CEB. HAVING FAILED TO DO SO, THE ASSESSEE CANNOT TAKE ADVANTAGE OF ITS OWN WRONG. ANOTHER SU BMISSION MADE BY HIM WAS THAT TWO OF THE TRANSACTIONS REPORTED IN FORM 3CEB BETWEEN THE ASSESSEE AND INFOTECH US RELATED TO (A) MARKETING SERVICES PROVI DED BY INFOTECH INC TO INFOTECH INDIA (ASSESSEE) AND (B) CONTRACT SERVICE PROVIDER EXPENSES INCURRED BY INFOTECH INDIA (ASSESSEE). SINCE THE TRANSACTIONS REFERRED TO IN FORM 3CEB WERE REFERRED TO TPO FOR DETERMINING ALP BY IMPLICATION EVEN THE ACT OF DEPUTATION OF THE THREE EMPLOYEES BY ASSESSEE TO INFOTECH US SHOULD BE CONS IDERED AS HAVING BEEN REFERRED TO TPO FOR DETERMINING ALP. 38. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. U NDER THE PROVISIONS OF SEC.92-E, AN ASSESSEE WHO HAS ENTERED INTO AN INTER NATIONAL TRANSACTION DURING A PREVIOUS YEAR HAS TO OBTAIN A REPORT FROM AN ACCOUN TANT AND FURNISH SUCH REPORT IN THE PRESCRIBED FORM, I.E., FORM NO.3CEB. SEC.92 C (3) PROVIDES AS FOLLOWS: (3)WHERE DURING THE COURSE OF ANY PROCEEDING FOR T HE ASSESSMENT OF INCOME, THE ASSESSING OFFICER IS, ON THE BASIS OF MATERIAL OR I NFORMATION OR DOCUMENT IN HIS POSSESSION, OF THE OPINION THAT (A) THE PRICE CHARGED OR PAID IN AN INTERNATIONAL T RANSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2); OR (B) ANY INFORMATION AND DOCUMENT RELATING TO AN INT ERNATIONAL TRANSACTION HAVE NOT BEEN KEPT AND MAINTAINED BY THE ASSESSEE IN ACCORDA NCE WITH THE PROVISIONS CONTAINED IN SUB-SECTION (1) OF SECTION 92D AND THE RULES MADE IN THIS BEHALF; OR (C) THE INFORMATION OR DATA USED IN COMPUTATION OF THE ARMS LENGTH PRICE IS NOT RELIABLE OR CORRECT; OR ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 22 (D) THE ASSESSEE HAS FAILED TO FURNISH, WITHIN THE SPECIFIED TIME, ANY INFORMATION OR DOCUMENT WHICH HE WAS REQUIRED TO FURNISH BY A NOTI CE ISSUED UNDER SUB- SECTION (3) OF SECTION 92D , THE ASSESSING OFFICER MAY PROCEED TO DETERMINE THE ARMS LENGTH PRICE IN RELATION TO THE SAID INTERNATIONAL TRANSACTION IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2), ON THE BASIS OF SUCH MATERIAL OR INFORMATION OR DOC UMENT AVAILABLE WITH HIM: PROVIDED THAT AN OPPORTUNITY SHALL BE GIVEN BY THE ASSESSIN G OFFICER BY SERVING A NOTICE CALLING UPON THE ASSESSEE TO SHOW CAUSE, ON A DATE AND TIME TO BE SPECIFIED IN THE NOTICE, WHY THE ARMS LENGTH PR ICE SHOULD NOT BE SO DETERMINED ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN THE POSSESSION OF THE ASSESSING OFFICER. SECTION 92CA(1) TO (3) EMPOWERS THE AO TO MAKE A R EFERENCE TO THE TRANSFER PRICING OFFICER AND IT READS AS FOLLOWS: REFERENCE TO TRANSFER PRICING OFFICER. 92CA. (1) WHERE ANY PERSON, BEING THE ASSESSEE, HAS ENTERED INTO AN INTERNATIONAL TRANSACTION IN ANY PR EVIOUS YEAR, AND THE ASSESSING OFFICER CONSIDERS IT NECESSARY OR EXPEDIENT SO TO D O, HE MAY, WITH THE PREVIOUS APPROVAL OF THE COMMISSIONER, REFER THE COMPUTATION OF THE ARMS LENGTH PRICE IN RELATION TO THE SAID INTERNATIONAL TRANSACTION UNDE R SECTION 92C TO THE TRANSFER PRICING OFFICER. (2) WHERE A REFERENCE IS MADE UNDER SUB-SECTION (1) , THE TRANSFER PRICING OFFICER SHALL SERVE A NOTICE ON THE ASSESSEE REQUIRING HIM TO PRODUCE OR CAUSE TO BE PRODUCED ON A DATE TO BE SPECIFIED THEREIN, ANY EVI DENCE ON WHICH THE ASSESSEE MAY RELY IN SUPPORT OF THE COMPUTATION MADE BY HIM OF THE ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION REFERRED TO IN SUB-SECTION (1). (3) ON THE DATE SPECIFIED IN THE NOTICE UNDER SUB-S ECTION (2), OR AS SOON THEREAFTER AS MAY BE, AFTER HEARING SUCH EVIDENCE A S THE ASSESSEE MAY PRODUCE, INCLUDING ANY INFORMATION OR DOCUMENTS REFERRED TO IN SUB-SECTION (3) OF SECTION 92D AND AFTER CONSIDERING SUCH EVIDENCE AS THE TRANSFE R PRICING OFFICER MAY REQUIRE ON ANY SPECIFIED POINTS AND AFTER TAKING IN TO ACCOUNT ALL RELEVANT MATERIALS WHICH HE HAS GATHERED, THE TRANSFER PRICING OFFICER SHALL, BY ORDER IN WRITING, DETERMINE THE ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION IN ACCORDANCE WITH SUB-SECTION (3) OF SECTION 92C AND SEND A COPY OF HIS ORDER TO THE ASSESSING OFFICER AND TO THE ASSESSEE. IN THE PRESENT CASE, THE AO REFERRED TO THE TPO FOR DETERMINATION OF ALP THE TRANSACTIONS SET OUT IN FORMNO.3CEB BY HIS LETTER D ATED 29-9-2003. THE DETAILS OF THESE TRANSACTIONS HAVE ALREADY BEEN SET OUT ABOVE IN THE EARLIER PARAS. THE TRANSACTION BY WHICH THE ASSESSEE DEPUTED THREE OF ITS EMPLOYEES TO ICICI INFORTECH, USA, WAS NOT CONSIDERED AS AN INTERNATIO NAL TRANSACTION TO BE SET OUT IN FORM NO.3CEB BY THE ASSESSEE. THE AO THEREFORE NEV ER REFERRED THE COMPUTATION OF ALP TO THE TPO THE TRANSACTION OF DE PUTATION OF THREE OF ITS EMPLOYEES BY THE ASSESSEE TO ICICI INFOTECH, USA. THE JURISDICTION OF THE TPO IS THEREFORE RESTRICTED TO THE TRANSACTIONS REFERRED T O HIM BY THE AO U/S.92CA(1). THE TPO THEREFORE COULD NOT UNDER SECTION 92CA(3) D ETERMINE THE ALP IN RELATION TO AN INTERNATIONAL TRANSACTION NOT REFERRED TO HIM BY THE AO U/S.92CA(1). IN THIS REGARD INSTRUCTION NO.3 OF 2003 DATED 20-5-2003 ISS UED BY THE CBDT REGARDING COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTIO N HAVING REGARD TO ARMS ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 23 LENGTH PRICE, IS VERY CLEAR. IN THE SAID INSTRUCTI ONS, THE CBDT EXPLAINING THE ROLE OF TPO HAS INSTRUCTED THAT IN TERMS OF SEC.92CA OF THE ACT, THE TPOS ROLE IS LIMITED TO THE DETERMINATION OF ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTIONS REFERRED TO HIM BY THE AO AND IF DURIN G THE COURSE OF PROCEEDINGS BEFORE HIM IT IS FOUND THAT THERE ARE CERTAIN OTHER TRANSACTIONS WHICH HAVE NOT BEEN REFERRED TO HIM BY THE AO, HE WILL HAVE TO TAK E UP THE MATTER WITH THE AO SO THAT A FRESH REFERENCE IS RECEIVED WITH REGARD TO S UCH TRANSACTION. THE BOARD HAS FURTHER OPINED THAT REFERENCE TO THE TPO IS TRANSAC TION AND NOT ENTERPRISE SPECIFIC. IN THE PRESENT CASE, THE DETERMINATION OF ALP IN RE SPECT OF THE TRANSACTION BY WHICH THE ASSESSEE DEPUTED THREE OF ITS EMPLOYEES T O ICICI INFOTECH, USA, BY THE TPO IS THEREFORE NON EST TO THAT EXTENT AND CANNOT FORM THE BASIS FOR MAKING AN ADDITION TO THE TOTAL INCOME. THE AO THEREFORE COUL D NOT HAVE MADE THE IMPUGNED ADDITION ON THE BASIS OF THE ORDER OF THE TPO. SIN CE THE IMPUGNED ADDITION HAS BEEN MADE BY THE AO ONLY BY PLACING RELIANCE ON THE REPORT OF THE TPO, THE ADDITION CANNOT BE SUSTAINED. 39. THE NEXT QUESTION IS WHETHER THE REPORT OF THE TPO CAN BE CONSIDERED AS MATERIAL, INFORMATION OR DOCUMENT BASED ON WHICH TH E ADDITION MADE BY THE AO COULD BE SUSTAINED. U/S.92C(3) THE AO HAS POWER TO DETERMINE ALP ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSI ON . BUT EXERCISE OF SUCH POWER IS CONDITIONAL ON THE AO BEING SATISFIED THAT : (A) THE PRICE CHARGED OR PAID IN AN INTERNAT IONAL TRANSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2); OR (B) ANY INFORMATION AND DOCUMENT RELATING TO AN INT ERNATIONAL TRANSACTION HAVE NOT BEEN KEPT AND MAINTAINED BY THE ASSESSEE IN ACCORDA NCE WITH THE PROVISIONS CONTAINED IN SUB-SECTION (1) OF SECTION 92D AND THE RULES MADE IN THIS BEHALF; OR (C) THE INFORMATION OR DATA USED IN COMPUTATION OF THE ARMS LENGTH PRICE IS NOT RELIABLE OR CORRECT; OR (D) THE ASSESSEE HAS FAILED TO FURNISH, WITHIN THE SPECIFIED TIME, ANY INFORMATION OR DOCUMENT WHICH HE WAS REQUIRED TO FURNISH BY A NOTI CE ISSUED UNDER SUB- SECTION (3) OF SECTION 92D , THE PROVISIONS OF CLAUSE(A) (B) AND (D) ABOVE WOU LD NOT APPLY BECAUSE NO PRICE HAD BEEN CHARGED BY THE ASSESSEE IN THIS CASE, IN R ESPECT OF THE INTERNATIONAL TRANSACTION IN QUESTION, NEITHER WAS THE ASSESSEE C ALLED UPON TO FURNISH ANY DETAILS IN RESPECT OF THE SAID TRANSACTION NOR WAS THERE ANY FAILURE TO FURNISH ANY DETAILS. IT IS NEITHER THE COMPLAINT OF THE AO OR THE TPO THAT THERE WAS ANY FAILURE WITHIN THE MEANING OF CLAUSE(B) ABOVE. FURTHER THE AO DID NOT COMPLY WITH THE MANDATE OF THE PROVISO TO SEC.92C(3) WHICH LAYS DOW N AS FOLLOWS: PROVIDED THAT AN OPPORTUNITY SHALL BE GIVEN BY THE ASSESSIN G OFFICER BY SERVING A NOTICE CALLING UPON THE ASSESSEE TO SHOW CAUSE, O N A DATE AND TIME TO BE SPECIFIED IN THE NOTICE, WHY THE ARMS LENGTH PRICE SHOULD NOT BE SO DETERMINED ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN THE POSSESSION OF THE ASSESSING OFFICER. ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 24 SINCE THE CONDITIONS LAID DOWN IN SEC.92C(3) WERE N OT SATISFIED THE IMPUGNED ADDITION CANNOT ALSO BE SUSTAINED ON THE PREMISE TH AT THE AO HAS DETERMINED THE ALP ON THE BASIS OF MATERIAL OR INFORMATION OR DOCU MENT IN HIS POSSESSION. 39. SEC.92CA(4) READS AS FOLLOWS: (4) ON RECEIPT OF THE ORDER UNDER SUB-SECTION (3), THE ASSESSING OFFICER SHALL PROCEED TO COMPUTE THE TOTAL INCOME OF THE ASSESSEE UNDER SUB-SECTION (4) OF SECTION 92C IN CONFORMITY WITH THE ARMS LENGTH PRICE AS SO DE TERMINED BY THE TRANSFER PRICING OFFICER. THE REPORT OF THE TPO IS NO DOUBT BINDING ON THE AO IN TERMS OF THE ABOVE PROVISIONS BUT ONLY IF THE SAME IS IN CONFORMITY WITH THE OTHER PR OVISIONS OF SEC. 92CA VIZ., THERE BEING A VALID REFERENCE MADE TO THE TPO BY THE AO. 40. ON MERITS OF THE ADDITION SUSTAINED BY THE CIT (A) THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED SUBMISSIONS MADE BEFORE CIT(A) AND FURTHER SUBMITTED AS FOLLOWS: A) THAT THE TPO DETERMINED THE ALP ON ASSUMPTIONS THAT THE EMPLOYEES TRANSFERRED WERE RECRUITED BY THE ASSESSEE AND THAT THE ASSESSEE GAVE PROPER TRAINING, BEFORE THEY WERE ACTUALLY ENTRUSTED THE W ORK OF SOFTWARE DEVELOPMENT. THE NEXT ASSUMPTION OF THE TPO WAS THA T EMPLOYEES TRANSFERRED TO FOREIGN LOCATIONS ARE GENERALLY BETTER QUALIFIED AND THE BEST PERFORMERS. THE THIRD ASSUMPTION WAS THAT THE TRANSFER OF SUCH EMPL OYEES, RESULTS INTO BENEFIT TO THE TRANSFEREE ENTITY, AS THEY ARE NOT TO INCUR ANY EXPENSES ON THE RECRUITMENT AND TRAINING AND THE SALARY PACKAGES TO SUCH EMPLOYEES ARE ALSO LESS IN COMPARISON TO FOREIGN EMPLOYEES, RESULTING INTO SAVINGS TO THE TRANSFEREE COMPANY. IT WAS HIS SUBMISSION THAT THER E IS NO BASIS FOR THESE ASSUMPTIONS. THE THREE PERSONNEL TRANSFERRED BY TH E ASSESSEE ON DEPUTATION TO INFOTECH INC. USA HAD THE FOLLOWING EXPERIENCE: NAME EXPERIENCE WITH THE PER MONTH COST TO TH E ASSESSEE ASSESSEE 1. K.N.MADHAVA 2 YEARS RS. 1,36,141 2. VIVEK PILLAI 1 AND YEARS RS.24,821 3. MR.ALEX -DO- RS.20,220 ACCORDING TO HIM THE PERSONNEL TRANSFERRED TO INFOT ECH INC. USA CANNOT BE SAID TO POSSESS ANY OF THE SKILLS AS ASSUMED BY THE AO. B) HE DREW ATTENTION TO PAGE-33 OF THE ASSESSEES PAPER BOOK WHICH CONTAINS NOTE 2.18 BEING NOTES TO THE ACCOUNTS OF THE ASSESS EE FOR THE PREVIOUS YEAR RELEVANT TO AY 02-03. IT HAS BEEN MENTIONED THEREI N THAT THE ASSESSEE HAS ENGAGED ICICI INFOTECH INC. USA THE WHOLLY OWNED SU BSIDIARY FOR PROVIDING MARKET DEVELOPMENT AND SALES SUPPORT IN THE US FOR PROJECT SOFTWARE AND IMPLEMENTATION SERVICES FOR ONSITE PROJECTS. THAT THE ASSESSEE REMUNERATES INFOTECH INC. ON A COST PLUS BASIS FOR THE AFORESAI D SERVICES AND ALL THE PROJECT REVENUES ACCURES TO THE ASSESSEE. THE LEARNED COUN SEL SUBMITTED THAT, IF THE ASSESSEE CHARGES INFOTECH USA THE COST OF DEPUTATIO N OF EMPLOYEES, THE COST ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 25 OF INFOTECH USA WILL GO UP AND ON SUCH INCREASED CO ST THE ASSESSEE WILL HAVE TO REMUNERATE THEM THE FIXED PERCENTAGE. IN THAT E VENT THERE WILL BE EROSION OF TAX BASE OF INDIA. 41. THE LEARNED D.R. RELIED ON THE ORDER OF THE C IT(A) AND SUBMITTED THAT THE TPO WAS RIGHT IN HIS CONCLUSIONS AND RELYING ON THE AGREEMENT BETWEEN THE ASSESSEE AND TRICOLOUR MAURITIUS, AN ASSOCIATE ENTE RPRISE WHERE THERE WAS PROVISION FOR RECEIPT OF SUCH TRANSFER FEES IN THE FORM OF A ONE TIME CHARGE OF 12.5% OF THE ANNUAL COMPENSATION PAID TO THE EMPLOY EES TRANSFERRED/SECONDED WAS RIGHT IN DETERMINING THE IMPUGNED ALP. 42. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE DEFINITION OF INTERNATIONAL TRANSACTION AS GIVEN IN SEC.92-B(1) OF THE ACT IS: INTERNATIONAL TRANSACTION MEANS A TRANSACTION BET WEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDEN TS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, O R PROVISION OF SERVICES, OR LENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES, AND S HALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTER PRISES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE OR F ACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES. THE ABOVE DEFINITION IS WIDE ENOUGH AND INCLUDES AN Y ARRANGEMENT BETWEEN TWO ASSOCIATED ENTERPRISES FOR ALLOCATION OF COST IN CO NNECTION WITH A BENEFIT, SERVICE OR FACILITY PROVIDED. THEREFORE THE ACT OF DEPUTATION OF THREE EMPLOYEES BY THE ASSESSEE TO INFOTECH US WILL BE COVERED WITHIN THE AFORESAID DEFINITION. THE FACT THAT THERE IS NO CONSIDERATION PAID FOR THE TRANSFE R OF EMPLOYEES WILL NOT TAKE THE TRANSACTION OUT OF THE PURVIEW OF THE PROVISIONS OF SEC.92 OF THE ACT. THE DECIDING FACTOR AS TO WHETHER ALP HAS TO BE DETERMINED IN SU CH CASES WILL BE TO SEE IF THE INDIAN TAX BASE IS ERODED. IF THERE IS LIKELY TO B E EROSION OF INDIAN TAX BASE THEN THE AO WILL BE WELL WITHIN HIS POWERS TO DETERMINE INCOME ARISING OUT OF AN INTERNATIONAL TRANSACTION. THEREFORE THE AO WAS WE LL WITHIN HIS POWERS TO EXAMINE THE TRANSACTION WITH A VIEW TO DETERMINE TH E ALP OF THIS TRANSACTION AND DETERMINE INCOME WHICH THE ASSESSEE OUGHT TO HAVE E ARNED ON THE TRANSACTION. 43. IN THE PRESENT CASE, WE FIND THAT THE ARRANGEM ENT BETWEEN THE ASSESSEE AND INFOTECH USA WAS THAT THE ASSESSEE REMUNERATES INFO TECH INC. ON A COST PLUS BASIS FOR THE AFORESAID SERVICES AND ALL THE PROJEC T REVENUES ACCURES TO THE ASSESSEE. IF THE ASSESSEE CHARGES INFOTECH USA THE COST OF DEPUTATION OF EMPLOYEES, THE COST OF INFOTECH USA WILL GO UP AND ON SUCH INCREASED COST THE ASSESSEE WILL HAVE TO REMUNERATE THEM THE FIXED PER CENTAGE. IN THAT EVENT THERE WILL BE EROSION OF TAX BASE OF INDIA. IN SUCH CAS ES, WE FEEL THAT THE AO OUGHT NOT TO RESORT TO THE PROVISIONS OF SEC.92 TO DETERMINE INCOME OF INTERNATIONAL TRANSACTIONS. THERE MAY BE CASES WHERE APPARENTLY THERE IS NO EROSION OF INDIAN TAX BASE BUT THE AO MAY FIND THE VALUE OF THE BENEF IT IS PART OF SOME OTHER INTERNATIONAL TRANSACTION AND DETERMINATION OF ALP OF THE OTHER TRANSACTION WILL DEPEND DETERMINATION OF ALP OF THE BENEFIT, IN SUCH CASES HE MAY RESORT TO THE ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 26 PROVISIONS OF SEC.92. WE THEREFORE AGREE WITH THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT ON THE FACTS AND CIRC UMSTANCES OF THE PRESENT CASE, THERE WAS NO NECESSITY TO HAVE DETERMINED ALP OF TH E TRANSACTION IN QUESTION. WE ALSO AGREE WITH THE LEARNED COUNSEL FOR THE ASSE SSEE THAT THE TPO HAS PROCEEDED TO DETERMINE ALP OF THE TRANSACTION ON TH E BASIS OF ASSUMPTIONS NOT SUPPORTED BY ANY EVIDENCE. WE ALSO AGREE WITH HIS SUBMISSION THAT CUP METHOD COULD NOT BE APPLIED UNDER THE FACTS OF THE CASE AS THE ASSESSEE HAS NOT TRANSFERRED/SECONDED EMPLOYEES TO ANY OTHER INDEPEN DENT ENTERPRISES. TO TEST THE ARMS LENGTH PRICING IN THE CASE OF TRANSFER/SE CONDING OF THE EMPLOYEES, IT MAY BE POSSIBLE TO USE THE CUP METHOD WHERE THE SAM E ENTITY HAS UNDERTAKEN SIMILAR TRANSACTION UNDER COMPARABLE CIRCUMSTANCES TO INDEPENDENT ENTERPRISES. IN THE PRESENT CASE, THE SIMILAR TRANSACTION ON THE BASIS OF WHICH THE TPO DETERMINED ALP WAS NOT WITH AN INDEPENDENT ENTERPRI SE AND THE SAID TRANSACTION WAS ALSO WITH AN ASSOCIATED ENTERPRISE. IN SUCH CI RCUMSTANCES, EVEN THE DETERMINATION OF ALP BY THE TPO WAS NOT PROPER. WE THEREFORE DELETE THE ADDITION MADE BY THE AO. GROUND NO.7 OF THE APPEAL OF THE ASSESSEE IS ALSO ALLOWED. 17. WE HAVE SEEN THAT WHILE UPHOLDING THE ACTION OF AO IN RESPECT OF ASSESSMENT YEAR 2004-05. LD. CIT(A) HAS RELIED UPON THE ORDER PASSED BY TPO FOR ASSESSMENT YEAR 2002-03 AND 2003-04 AND AS ALR EADY MENTIONED THAT IT IS NOT THE CASE OF REVENUE THAT THE FACTS OF THE PRESE NT YEARS ARE DIFFERENT IN ANY MANNER, THEREFORE RESPECTFULLY FOLLOWING THE AFORE MENTIONED ORDER OF THE TRIBUNAL WE DECIDE ALL THESE GROUNDS IN FAVOUR OF A SSESSEE AND THESE GROUNDS ARE ALLOWED. REVENUES APPEAL FOR A.Y. 2003-04: 18. ON THE BASIS OF MUTUAL AGREEMENT, THE ASSESSEE HAS BEEN PROVIDING BACK OFFICE SUPPORT SERVICES TO ICICI BANK IN RESPE CT OF RETAIL LENDING BUSINESS OF ICICI BANK (THE BANK) COMPRISING OF HOUSING LOAN S, AUTO LOANS, CREDIT CARDS ETC., EVER SINCE THE BANK HAS STARTED ITS RETAIL LE NDING BUSINESS IN THE YEAR 1999. FOR THE SAKE OF CONVENIENCE THESE ACTIVITIES OF THE ASSESSEE ARE REFERRED TO AS RFCO ACTIVITIES. 18.1 FOR PROVIDING SUCH SERVICES THE ASSESSEE HAD PUT IN PLACE ADEQUATE RESOURCES IN THE TERMS OF (A) OFFICE SPACE; (B) SOF T WARE; (C) IT INFRASTRUCTURE; (D) MANPOWER SOURCES WITH TECHNICAL SKILL; (E) MANAGERI AL AND OTHER SKILLS REQUIRED ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 27 TO HANDLE SUCH ACTIVITY. HOWEVER, IN THE YEAR 2002 , WITH A VIEW TO EXERCISE DIRECT CONTROL OVER THESE ACTIVITIES AND TO REDUCE COST, THE BANK DECIDED TO CARRY ON THESE ACTIVITIES INDEPENDENTLY. THEREFORE , THE BANK PROPOSED TO APPOINT SENIOR PERSONNEL OF THE ASSESSEE, WHO WAS H ANDLING THESE ACTIVITIES ON THEIR ROLLS. IT IS IN THESE CIRCUMSTANCES IT WAS M UTUALLY AGREED BETWEEN THE ASSESSEE AND THE BANK THAT THE BANK SHALL DISCONTIN UE THE ARRANGEMENT OF RFCO ACTIVITIES BEING HANDLED BY THE ASSESSEE W.E.F . 1/9/2002. AS MENTIONED EARLIER THAT THE ASSESSEE HAD ALREADY PUT IN PLACE ADEQUATE RESOURCES MENTIONED ABOVE TO HANDLE THESE ACTIVITIES, THE BAN K AGREED TO PAY A SUM OF RS.15.00 CRORES TO THE ASSESSEE AS COMPENSATION FO R THE LOSS OF BUSINESS/FUTURE EARNING/ TRANSFER OF KNOWLEDGE, WHI CH IS SUBJECT TO CONFIRMATION THROUGH VALUATION OF RFCO BUSINESS ACT IVITIES BY THE TWO INDEPENDENT AGENCIES. COPY OF THE AGREEMENT DATED 9/10/2002 WAS FILED WHICH WAS ENTERED INTO BETWEEN THE ASSESSEE AND BAN K ALONGWITH A COPY OF VALUATION REPORT IN RESPECT OF RETAIL ASSET BUSINE SS OF THE ASSESSEE. 18.2 THE AFOREMENTIONED AMOUNT OF RS.15.00 CRORES W AS TREATED AS CAPITAL RECEIPT BY THE ASSESSEE ON THE GROUND THAT AFTER HA VING PRE-DETERMINED THE CONTRACT WITH THE BANK, THE ASSESSEE HAS GIVEN UP O NE SOURCE OF INCOME COMPLETELY FOR WHICH THE COMPENSATION HAS BEEN RECE IVED. SUCH COMPENSATION IS TOWARDS LOSS OF BUSINESS ORDER TOWARDS LOSS OF O NE SOURCE OF INCOME WHICH HAS AFFECTED THE PROFIT MAKING STRUCTURE OF THE ASS ESSEE AND THE SAME IS ACCORDINGLY A CAPITAL RECEIPT. THE AO DID NOT ACCE PT SUCH CLAIM OF THE ASSESSEE AND CONSIDERED THE SAID AMOUNT AS REVENUE RECEIPT. THE MAIN BASIS ON WHICH AO HAS HELD THIS ISSUE AGAINST THE ASSESSEE IS THA T THERE IS NO TRANSFER OF ANY ASSET OR BUSINESS EXPERTISE OR IPR OR SUCH ITEM WHICH NORMALLY BE TRANSFERRED WHEN SUCH TYPE OF BUSINESS IS TRANSFERR ED BY ONE ENTITY TO ANOTHER. IN THIS REGARD REPLY OF THE ASSESSEE WAS THAT THE A SSESSEES IS A SERVICE ORIENTED BUSINESS AND ACCORDINGLY ITS MAJOR ASSET IS MANPOWE R. AS PER TERMS OF THE AGREEMENT, THE ASSESSEE HAS TRANSFERRED COMPLETE SE NIOR STAFF AND MANY OF ITS ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 28 JUNIOR STAFF TO THE BANK. REFERENCE IN THIS REGARD WAS MADE TO THE LIST OF 105 EMPLOYEES, WHO WERE TRANSFERRED TO THE BANK, THEREF ORE, IT WAS CONTENDED THAT THERE WAS A TRANSFER OF ASSET. 18.3 THE SECOND GROUND ON WHICH THE AO HAS REJECTED THE CLAIM OF THE ASSESSEE WAS THAT THERE IS NO CLAUSE IN THE AGREEME NT WHICH RESTRAIN OR RESTRICT THE ASSESSEE FROM CONTINUING RFCO ACTIVIT Y AND ASSESSEE IS FREE TO CARRY ON SUCH ACTIVITY, IF IT SO DESIRED. IN THIS REGARD IT WAS SUBMITTED THAT ASSESSEE COMPANY IS NOT PROVIDING SUCH SERVICES TO ANY OTHER COMPANY AND AFTER TERMINATION OF CONTRACT WITH THE BANK THE ASS ESSEE DID NOT ENTERED INTO ANY OTHER SIMILAR AGREEMENT WITH ANY OTHER COMPANY. IN VIEW OF THE FACT THAT THERE WAS A PROPOSED CHANGE IN THE BUSINESS MODEL A ND REDUCTION IN THE FUTURE REVENUE AND ALSO CONSIDERING THE FACT THAT ALL KEY PERSONNEL WERE TRANSFERRED TO BANK, IT WAS NOT FELT FEASIBLE FOR THE ASSESSEE TO CONTINUE SUCH ACTIVITY. THEREFORE, IT WAS PLEADED THAT AFTER TERMINATION O F CONTRACT OF THE ASSESSEE WITH THE BANK, THE ASSESSEE HAS GIVEN UP ONE SOURCE OF INCOME COMPLETELY. 18.4 FURTHER, AO HAS RELIED UPON THE DECISION OF HO NBLE SUPREME COURT IN THE CASE OF OBROI HOTELS PT. LTD., VS. CIT, 236 IT R 903(SC). ACCORDING TO AO WHERE PAYMENT IS MADE TO ASSESSEE FOR COMPENSATION OF CANCELLATION OF A CONTRACT WHICH DOES NOT AFFECT THE TRADING STRUCTUR E OF BUSINESS AND DOES NOT DEPRIVE HIM OF WHAT IN SUBSTANCE IS HIS SOURCE OF I NCOME THEN TERMINATION OF THE CONTRACT IS A NORMAL INCIDENT OF BUSINESS. IF SUCH CANCELLATION LEAVES HIM FREE TO CARRY ON HIS TRADE THEN RECEIPT WILL BE OF REVENUE IN NATURE. IN THIS REGARD IT WAS THE SUBMISSION OF THE ASSESSEE THAT I N THE CASE OF THE ASSESSEE, AS A RESULT OF CANCELLATION OF AGREEMENT THE ASSESS EE HAS INCURRED A LOSS OF A SOURCE OF INCOME AND THEREFORE, THE COMPENSATION R ECEIVED IS CAPITAL IN NATURE. ALL THESE ISSUES HAVE BEEN DISCUSSED IN THE ORDER O F LD. CIT(A) IN PARA NO.3. APART FROM AFOREMENTIONED ARGUMENTS ASSESSEE HAS AL SO RELIED UPON OTHER DECISIONS ALSO AND AFTER CONSIDERING ALL OF THEM LD . CIT(A) HAS ARRIVED AT A ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 29 CONCLUSION THAT THE COMPENSATION RECEIVED BY THE AS SESSEE IS CAPITAL RECEIPT. LD. CIT(A) HAS MENTIONED THAT THE BUSINESS OF THE A SSESSEE CAN BE BROADLY SEGREGATED INTO TWO MAIN ACTIVITIES VIZ. (A) SOFTWA RE DEVELOPMENT; (B) PROVIDING BACK OFFICE SUPPORT SERVICES IN RESPECT OF RETAIL L ENDING BUSINESS OF THE BANK. ADMITTEDLY, ASSESSEE DOES NOT PROVIDE SUCH SUPPORT SERVICES TO ANY OTHER COMPANY OTHER THAN ICICI BANK. THE ASSESSEE ALSO DID NOT ENTER INTO OTHER SIMILAR AGREEMENT WITH ANY OTHER COMPANY. DUE TO TERMINATION OF CONTRACT WITH THE BANK, THE ASSESSEE HAD TO CLOSE ITS RETAIL ASSET BUSINESS DIVISION WHICH ESSENTIALLY MANAGED RETAIL ASSET PORTFOLIO OF THE BANK. THEREFORE, IT HAS TO BE ACCEPTED THAT THE TERMINATION OF CONTRACT RES ULTED IN CLOSURE OF RETAIL ASSET BUSINESS. IN EFFECT THE ASSESSEE HAD GIVEN U P ONE SOURCE OF INCOME COMPLETELY FOR WHICH THE ASSESSEE HAD RECEIVED COMP ENSATION. FOR ALL PURPOSES THE COMPENSATION IS TOWARDS LOSS OF BUSINESS OR TOW ARDS ONE SOURCE OF INCOME WHICH WAS GENERATED 10 TO 13% OF THE TOTAL TURNOVER OF THE ASSESSEE AND, THEREFORE, HAS DEFINITELY AFFECTED THE PROFIT MAKIN G STRUCTURE OF THE ASSESSEE AND IS CAPITAL RECEIPT. RELIANCE PLACED BY THE AO ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF OBEROI HOTELS PVT. LTD . VS. CIT(SUPRA) IS MISPLACED. IN FACT THE SAID JUDGMENT SUPPORT THE C ASE OF THE ASSESSEE. ON THE BASIS OF FOLLOWING DECISIONS THE ISSUE WAS TO BE DE CIDED IN FAVOUR OF ASSESSEE. (1) OBEROI HOTELS PT. LTD., VS. CIT, 236 ITR 903(S C). (2) KARAMCHAND TAPPAR & BROTHERS PVT. LTD.80 ITR 16 7 (3) CIT VS. AMBADI ENTERPRISES LTD., 267 ITR 7 02. (4) CIT VS. VAZIR SULTAN , 36 ITR 175 (SC) (5) KETTLEWELL BULLEN AND CO. V. CIT, 53 ITR 261 (S C) (6) CIT V. TI & M SALES LTD., 259 ITR 116 (MAD) (7) JCIT VS. KHANNA & ANDHANAM, 305 ITR 336 (DE L) (8) CIT V. BOMBAY BURMAH TRADING CORPORATION, 1 61 ITR 386(SC) IN THIS MANNER LD. CIT(A) HAS DELETED THE ADDITION OF RS.15.00 CRORES. AGGRIEVED, THE REVENUE HAS FILED AFOREMENTIONED GR OUND. ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 30 19. AFTER NARRATING THE FACTS IT WAS SUBMITTED BY L D. DR THAT LD. CIT(A) HAS ERRED IN CONCLUDING THAT THE COMPENSATION RECEIVED BY THE ASSESSEE WAS IN RESPECT OF LOSS OF BUSINESS OR TOWARDS ONE SOURCE OF INCOME. HE SUBMITTED THAT RFCO ACTIVITIES OF THE ASSESSEE WERE CONTINUED IN RESPECT OF SUBSEQUENT PERIOD ALSO AND THERE WAS NO LOSS OF BUSINESS OR ON E SOURCE OF INCOME. IN THIS REGARD LD. DR HAS PRODUCED BEFORE US FINANCIAL REPO RTS OF THE ASSESSEE, WHEREIN REVENUE FROM SUCH ACTIVITY HAS NOT ALTOGETH ER STOPPED IN FINANCIAL YEAR2004. THUS HE SUBMITTED THAT THERE WAS NO ABSO LUTE EROSION OF SUCH SOURCE. HE REFERRED TO THE FOLLOWING TABLE FROM T HE ABOVE FINANCIAL REPORT. REVENUE MIX. FY 2004 % OF SALE FY 2003 % OF SALES FY 2002 % OF SLAES FY 2001 % OF SALES SOFTWARE DEVELOPMENT SERVICES 559.62 31% 580.70 32% 539.43 37% 423.24 39% SOFTWARE PRODUCTS 499.48 28% 334.85 19% 36.76 3% - - IT INFRA NETWORKING AND FACILITIES MANAGEMENT 493.43 27% 274.00 15% 229.09 16% 158.93 15% BUSINESS PROCESSING OUTSOURCING SERVICES 244.64 14% 454.12 25% 661.97 45% 496.35 46% COMPENSATION PERTAINING TO BPO DIVISION - - 150 8% - - - - TOTAL 1797.17 100% 1793.67 100% 1467.23 100% 1078.52 100% 19.1 LD. DR FURTHER SUBMITTED THAT THERE WAS NO TRA NSFER OF ASSET AS ASSETS OF THE ASSESSEE HAS NEVER DECREASED. FOR THIS HE RELI ED UPON THE FIGURES OF FIXED ASSETS GIVEN IN FINANCIAL REPORT, COPY OF WHICH WAS PLACED ON OUR RECORD AND WAS ALSO GIVEN TO LD. A.R. 19.2 LD. DR FURTHER SUBMITTED THAT THE DECISION O F HONBLE SUPREME COURT IN THE CASE OF OBEROI HOTELS PVT. LTD. (SUPRA) MAINLY REFERRED TO THE EARLIER DECISION OF HONBLE SUPREME COURT IN THE CASE OF KETTLEWEL L BULLEN AND CO. LTD. VS. CIT, 53 ITR 261(SC). HE REFERRED TO THE FOLLOWING OBSERVATIONS OF HONBLE ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 31 SUPREME COURT TO CONTEND THAT SIMPLE TERMINATION OF THE CONTRACT IS NORMAL INCIDENTS OF THE BUSINESS AND IF CANCELLATION LEAVE S THE ASSESSEE FREE TO CARRY ON HIS TRADE THEN THE RECEIPT WILL BE OF REVENUE IN NATURE. 21. ON AN ANALYSIS OF THESE CASES WHICH FALL ON TW O SIDES OF THE DIVIDING LINE, SATISFACTORY MEASURE OF CONSISTENCY IN PRINCIPLE IS DISCLOSED. WHERE ON A CONSIDERATION OF THE CIRCUMSTANCES, PAYMENT IS MAD E TO COMPENSATE A PERSON FOR CANCELLATION OF A CONTRACT WHICH DOES NOT AFFECT THE TRADING STRUCTURE OF HIS BUSINESS, NOR DEPRIVE HIM OF WHAT IN SUBSTANCE I S HIS SOURCE OF INCOME, TERMINATION OF THE CONTRACT BEING A NORMAL INCIDENT OF THE BUSINESS, AND SUCH CANCELLATION LEAVES HIM FREE TO CARRY ON HIS TRADE (FREED FROM THE CONTRACT TERMINATED) THE RECEIPT IS REVENUE : WHERE BY THE C ANCELLATION OF AN AGENCY THE TRADING STRUCTURE OF THE ASSESSEE IS IMPAIRED, O R SUCH CANCELLATION RESULTS IN LOSS OF WHAT MAY BE REGARDED AS THE SOURCE OF THE A SSESSEES INCOME, THE PAYMENT MADE TO COMPENSATE FOR CANCELLATION OF THE AGENCY AGREEMENT IS NORMALLY A CAPITAL RECEIPT. IN THE PRESENT CASE, ON A REVIEW OF ALL THE CIRCUMS TANCES, WE HAVE NO DOUBT THAT WHAT THE ASSESSEE WAS PAID WAS TO COMPENSATE HIM FO R LOSS OF A CAPITAL ASSET. IT MATTERS LITTLE WHETHER THE ASSESSEE DID CONTINUE A FTER THE DETERMINATION OF ITS AGENCY WITH THE FORT WILLIAM JUTE CO. LTD. TO CONDU CT THE REMAINING AGENCIES. THE TRANSACTION WAS NOT IN THE NATURE OF A TRADING TRANSACTION, BUT WAS ONE IN WHICH THE ASSESSEE PARTED WITH AN ASSET OF AN ENDUR ING VALUE. WE ARE, THEREFORE, UNABLE TO AGREE WITH THE HIGH COURT THAT THE AMOUNT RECEIVED BY THE APPELLANT WAS IN THE NATURE OF A REVENUE RECEIPT. THUS LD. DR PLEADED THAT THE CLAIM HAS WRONGLY BEEN ALLOWED BY LD.CIT(A) AND HIS ORDER ON THIS ISSUE SHOULD BE SET ASIDE AND THA T OF AO BE RESTORED. 20. ON THE OTHER HAND, IN ADDITION TO RELYING UPON THE ORDER PASSED BY LD. CIT(A), COUNTERING THE ARGUMENTS OF LD. DR IT WAS S UBMITTED BY LD.SR. COUNSEL THAT THE DECISION OF HONBLE SUPREME COURT IN THE C ASE OF KETTLEWELL BULLEN AND CO. LTD. VS. CIT(SUPRA) WAS RENDERED IN RESPECT OF COMPENSATION RECEIVED BY THE ASSESSEE IN RESPECT OF ONE OF THE AGENCIES. HE SUBMITTED THAT IN THAT VERY DECISION IT HAS BEEN CLARIFIED BY HONBLE SUPR EME COURT THAT WHERE OUT OF SEVERAL AGENCIES THE ACTIVITY OF THE ASSESSEE IN RE SPECT OF AGENCY OF FORT WILLIAM JUTE COMPANY LTD. WAS STOPPED AND ON THE BA SIS OF THE FACT THAT ASSESSEE CONTINUED SIMILAR ACTIVITY WITH OTHER REM AINING AGENCIES WAS NOT CONSIDERED RELEVANT. LD. AR DREW OUR ATTENTION TOWARDS OB SERVATION OF THEIR LORDSHIPS IN ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 32 PARA-21 WHICH HAVE ALREADY BEEN REPRODUCED IN THE A BOVE PART OF THIS ORDER WHERE THEIR LORDSHIPS OF HONBLE SUPREME COURT HAS OBSERVED THAT IT MATTERS LITTLE WHETHER THE ASSESSEE DID CONTINUE AFTER THE DETERMINATION OF ITS AGENCY WITH THE FORT WILLIAM JUTE CO. LTD. TO CONDUCT THE REMAININ G AGENCIES. THE TRANSACTION WAS NOT IN THE NATURE OF A TRADING TRANSACTION, BUT WAS ONE IN WHICH THE ASSESSEE PARTED WITH AN ASSET OF AN ENDURING VALUE. 20.1 COMING TO THE DECISION OF HONBLE SUPREME COUR T IN THE CASE OF OBEROI HOTELS PVT. LTD. VS. CIT (SUPRA), SR. COUNSEL SUBMI TTED THAT IN THAT CASE ALSO ASSESSEE WAS OPERATING ACTIVITIES WITH VARIOUS HOTE LS AND COMPENSATION WAS RECEIVED BY IT IN RESPECT OF OPERATION OF ONLY ONE HOTEL NAMELY HOTEL OBEROI IMPERIAL, SINGAPORE AND SIMILAR ACTIVITY WITH OTHER HOTELS WERE CONTINUED. IT WAS HELD THAT THE COMPENSATION RECEIVED BY THE ASSE SSEE WAS A CAPITAL RECEIPT. HE SUBMITTED THAT AMOUNT IN THE PRESENT CASE WAS RE CEIVED BY THE ASSESSEE BECAUSE ASSESSEE HAS TO GIVE UP ITS RIGHT TO RENDER SERVICES IN RESPECT OF ITS AGREEMENT WITH THE BANK. IT WAS LOSS OF SOURCE OF INCOME TO THE ASSESSEE AND FOR SUCH LOSS OF SOURCE OF INCOME CONSIDERATION WAS PAID TO THE ASSESSEE WHICH IS CAPITAL IN NATURE. LD. SR. COUNSEL OF THE ASSESSEE ALSO RELIED UPON THE DECISIONS WHICH HAVE BEEN MENTIONED IN THE ORDER OF LD. CIT(A) AND WHICH HAVE BEEN DESCRIBED IN THE ABOVE PART OF THIS ORDER. 21. WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTEN TIONS HAVE CAREFULLY BEEN CONSIDERED. IN THE PRESENT CASE ASSESSEE WAS PROVI DING BACK OFFICE SUPPORT SERVICES TO ICICI BANK IN RESPECT OF RETAIL LENDING BUSINESS OF ICICI BANK AND WAS RECEIVING PAYMENT AS PER AGREEMENT ENTERED INTO BY THE ASSESSEE WITH THE SAID BANK. THIS WAS ONE OF THE ACTIVITY OF THE ASS ESSEE. IN RESPECT OF TERMINATION OF THE SAID AGREEMENT THE SUM OF RS.15. 00 CRORES HAD BEEN GIVEN TO THE ASSESSEE BY THE BANK. AS POINTED BY LD. SR. COUNSEL OF THE ASSESSEE THAT ASSESSEE COMPANY HAS ALSO DEPARTED WITH THE PERSO NNEL WHO WERE HANDLING THIS ACTIVITY OF THE ASSESSEE COMPANY TO GIVE THEM ON TH E ROLE OF THE BANK. THUS IT WAS A CASE WHERE THE COMPENSATION HAS BEEN RECEIVED BY T HE ASSESSEE ON LOSING ITS RIGHT ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 33 TO RECEIVE INCOME IN RESPECT OF SERVICES BEING REND ERED BY THE ASSESSEE TO THE BANK. IN THE FACTS AND CIRCUMSTANCES OF THE CASE I T IS A LOSS OF SOURCE OF INCOME TO THE ASSESSEE AND COMPENSATION HAS BEEN DE TERMINED ON THE BASIS OF THE SAID LOSS. ACCORDING TO ARGUMENTS OF LD. DR, T HE ASSESSEE COMPANY HAS NOT GIVEN UP ITS ENTIRE ACTIVITY OF RENDERING BACK OFFICE SERVICES AS THE ASSESSEE HAS BEEN EARNING INCOME FROM SUCH ACTIVITY EVEN AFT ER TERMINATION OF SUCH AGREEMENT. THEREFORE, IT IS THE CASE OF LD. DR THA T THE AMOUNT RECEIVED BY THE ASSESSEE SHOULD BE CONSIDERED AS INCOME IN THE NATU RE OF REVENUE. HOWEVER, SUCH ARGUMENTS OF THE LD. DR DOES NOT FIND SUPPORT FROM THE AFOREMENTIONED TWO DECISIONS OF HONBLE SUPREME COURT NAMELY KETT LEWELL BULLEN AND CO. LTD. VS. CIT(SUPRA) AND OBEROI HOTEL PVT. LTD. VS. CIT (SUPRA). IT HAS BEEN CLEARLY OBSERVED BY HONBLE SUPREME COURT IN THE CASE OF K ETTLEWELL BULLEN AND CO. LTD. VS. CIT(SUPRA) THAT IT IS IRRELEVANT THAT THE ASSESSEE CONTINUED SIMILAR ACTIVITY WITH THE REMAINING AGENCIES. SO RELEVA NT CRITERIA TO DECIDE SUCH ISSUE IS THAT WHETHER OR NOT THE ASSESSEE HAS LOST ONE OF ITS SOURCE OF INCOME. IN THE PRESENT CASE THE ASSESSEE HAS LOST ITS SOURCE OF I NCOME WITH RESPECT TO ITS AGREEMENT ENTERED INTO BY IT WITH THE BANK. IT IS ALSO THE CASE OF THE ASSESSEE THAT IT HAS NEVER RENDERED SUCH SERVICES TO ANY OTH ER PERSON RIGHT FROM THE INCEPTION AND THERE IS NO MATERIAL ON RECORD TO CO NTRADICT SUCH ARGUMENT OF THE ASSESSEE. THEREFORE, IF HE FACTS OF THE PRESEN T CASE ARE SEEN IN THE LIGHT OF AFOREMENTIONED TWO DECISIONS OF HONBLE SUPREME COU RT NAMELY KETTLEWELL BULLEN AND CO. LTD. VS. CIT(SUPRA) AND OBEROI HOTEL PVT. LTD. VS. CIT (SUPRA), THEN WE FIND NO INFIRMITY IN THE ORDER PASSED BY LD . CIT(A) ON THIS ISSUE, WHEREBY IT HAS BEEN HELD THAT THE COMPENSATION RECE IVED BY THE ASSESSEE WAS IN THE NATURE OF CAPITAL. WE DECLINE TO INTERFERE AND THIS GROUND OF THE REVENUE IS DISMISSED. 22. NOW WE ARE LEFT WITH THE REMAINING GROUNDS OF A SSESSEES APPEAL FOR A.Y 2006-07. ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 34 23. GROUND NO.4 IS WITH RESPECT TO DISALLOWANCE MAD E UNDER SECTION 14A OF THE ACT. THE AO APPLIED RULE 8D AND DISALLOWED A S UM OF RS.1,14,52,987/- IN THE DRAFT ORDER AND LD. DRP AFTER REFERRING TO THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. COMPA NY LTD VS. DCIT, 328 ITR 81(BOM) HAS GIVEN THE FOLLOWING DIRECTIONS TO THE A .O. 3.1 THE BOMBAY HIGH COURT HAS HELD THAT THE PROVI SIONS OF RULE 8D ARE PROSPECTIVE AND CAN BE APPLIED FROM A.Y 2007-08 ONW ARDS, HOWEVER, DISALLOWANCE 14A IS TO BE MADE IN THE EARLIER YEARS BASED ON REASONABLE BASIS FOR COMPUTATION OF EXPENSES RELATING TO EARNING OF EXEMPT INCOME. THE ASSESSING OFFICER SHALL DISALLOW ALL THE DIRECT EXPENSES INCU RRED IN CONNECTION WITH THE EARNING OF EXEMPT INCOME AS WELL AS DISALLOW INTERE ST IN THE RATIO OF VALUE OF ASSETS USED IN EARNING EXEMPT TAX FREE INCOME TO TH E TOTAL ASSETS. THE ASSESSING OFFICER IS DIRECTED TO MAKE THE DISALLOWANCE U/S.14 A ACCORDINGLY. 24. BEFORE AO IT WAS THE CONTENTION OF THE ASSESSEE THAT THE ONLY INVESTMENT MADE BY THE ASSESSEE IN THE SHARES FROM WHICH DIVID END INCOME HAS BEEN RECEIVED IN INDIA IS AN AMOUNT OF RS.9.90 CRORES IN VESTED IN SDG SOFTWARE TECHNOLOGIES PVT. LTD. FINDING THIS CONTENTION OF THE ASSESSEE AS TRUE, LD. AO HAS OBSERVED THAT AMOUNT OF RS.9.90 CRORES INVESTED BY THE ASSESSEE IN SDG SOFTWARE TECHNOLOGIES PVT. LTD. WILL BE COVERED UND ER SECTION14A OF THE ACT. ACCORDINGLY, AO HAS COMPUTED DISALLOWANCE OF RS.5,4 4,750/-. IT IS THE CASE OF THE ASSESSEE THAT SUCH DISALLOWANCE HAS BEEN CALCUL ATED BY THE AO WITHOUT APPRECIATING THE FACT THAT ASSESSEE DID NOT INVEST ANY INTEREST BEARING BORROWED FUNDS FOR THE PURPOSE OF INVESTMENT IN SDG SOFTWARE TECHNOLOGIES PVT. LTD. IT WAS SUBMITTED BY LD. AR THAT THIS MAT TER MAY BE SENT BACK TO THE FILE OF AO WITH A DIRECTION TO GIVE PROPER OPPORTUN ITY TO THE ASSESSEE TO EXPLAIN ITS CASE THAT DISALLOWANCE OF RS.5,44,750/- UNDER SECTION 14A WAS NOT CALLED FOR. 25. HOWEVER, ON THE OTHER HAND, LD. DR RELIED UPON THE ORDER PASSED BY THE AO. ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 35 26. AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE P ARTIES WE CONSIDER IT JUST AND PROPER TO RESTORE THIS ISSUE TO THE FILE OF AO WITH A DIRECTION TO READJUDICATE THIS ISSUE AS PER LAW IN ACCORDANCE WITH THE DECISI ON OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. COM PANY VS. DCIT (SUPRA) AFTER GIVING THE ASSESSEE OPPORTUNITY OF HEARING. WE DIRECT ACCORDINGLY. THIS GROUND IS CONSIDERED AS ALLOWED FOR STATISTICAL PU RPOSES IN THE MANNER AFORESAID. 27. FOR GROUND NO.6 OF ASSESSEES APPEAL FOR ASSESS MENT YEAR 2006-07, IT WAS SUBMITTED BY LD. A.R THAT AO MAY BE DIRECTED TO GIVE THE CREDIT OF TDS TO THE ASSESSEE IN RESPECT OF TAX DEDUCTED FROM THE P AYMENTS RECEIVED BY THE ASSESSEE. 28. ON THIS ISSUE AFTER HEARING BOTH THE PARTIES W E DIRECT THE AO TO GIVE CREDIT TO THE ASSESSEE IN RESPECT OF TAX DEDUCTED O N THE PAYMENTS MADE TO THE ASSESSEE WHICH ARE ACCOUNTED FOR AS INCOME DURING T HE YEAR UNDER CONSIDERATION AFTER VERIFICATION OF SUCH TDS. WE D IRECT ACCORDINGLY. THIS GROUND IS ALSO CONSIDERED AS ALLOWED FOR STATISTICA L PURPOSES IN THE MANNER AFORESAID. 29. GROUND NO.7 OF ASSESSEES APPEAL FOR A.Y 2006-0 7 IS REGARDING LEVY OF INTEREST UNDER SECTION 234D. IT WAS SUBMITTED BY L D. AR THAT THE LEVY OF INTEREST UNDER SECTION 234D IS CONSEQUENTIAL AND AO MAY BE DIRECTED TO RE- COMPUTE INTEREST LEVIABLE UNDER SECTION 234D AS PER INCOME DETERMINED AFTER GIVING EFFECT TO THE PRESENT APPEAL. THEREFORE, AFTER HEARING BOTH THE PARTIES WE DIRECT THE AO TO RECOMPUTE INTEREST UNDER SECTIO N 234D AS PER INCOME COMPUTED AFTER GIVING EFFECT TO THIS ORDER. WE DIR ECT ACCORDINGLY. THIS GROUND IS ALLOWED IN THE MANNER AFORESAID. ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 36 30. GROUND NO.8 OF ASSESSEES APPEAL FOR ASSESSMENT YEAR 2006-07 IS REGARDING INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. SUCH GROUND OF THE ASSESSEE IS PREMATURE, THEREFORE , THE SAME IS DISMISSED. 31. NO OTHER GROUNDS WERE ARGUED BEFORE US. 32. IN THE RESULT, APPEALS FILED BY THE ASSESSEE AR E PARTLY ALLOWED IN THE MANNER AFORESAID AND REVENUES APPEALS ARE DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT ON 21/08/2013 J ( *+' # K LM 21 /08/2013 + ( N % SD/- SD/ - ( !' / N.K.BILLAIYA ) ( . . / I.P. BANSAL ) # / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; L DATED 21/08/2013 J J J J ( (( ( O)PQ O)PQ O)PQ O)PQ RQ') RQ') RQ') RQ') / COPY OF THE ORDER FORWARDED TO : 1. ST / THE APPELLANT 2. OUST / THE RESPONDENT. 3. V ( ) / THE CIT(A)- 4. V / CIT 5. QWN O) , , / DR, ITAT, MUMBAI 6. NX Y / GUARD FILE. J J J J / BY ORDER, UQ) O) //TRUE COPY// Z ZZ Z / [ [ [ [ \ \ \ \ (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI . . ./ VM , SR. PS ITA NOS.3354/MUM/2010 & OTHERS 3I INFOTECH LIMITED. 37 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 14 & 16/08/13 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 19/08/2013 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER