M/s.US Technology International P. Ltd, Trivandrum V. The ACIT,Cir-1(1), Trivandrum

ITTPA 592/COCH/2018

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 0606 (ITAT-COCHIN)
• Duration Of Justice: 11 month(s) 21 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 11-12-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 05-11-2019
• Assessment Year: 2014-2015
• Appeal Filed On: 21-12-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SHANTAM BOSE
• Assessee Lawyers: RAGHUNATHAN S
• Keywords: Related party transaction; Capital asset; Depreciation; Transfer pricing; Business expenditure; Principle of natural justice; International transaction; Source of fund; Services rendered outside India; Proportionate interest; Retrospective amendment; Question of law; Wholly owned subsidiary; Commercial expediency; Revenue expenditure; TDS; Set aside; Liquidation
• Section: 92C; 92B; 40(a)(ia); 133(6); 194C; 10B; 201; 251; 208; 64; 43; 48; 194J; 73; 72; 13; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFOR E S/ SHRI CHANDRA POOJARI, AM & GEORGE GEORGE K., J M I .T . (TP) A. NO. 592/ COCH /201 8 ASSESSMENT YEAR : 201 4 - 15 US TECHNOLOG Y INTERNATIONAL PVT. LTD., 721 NILA, TECHNOPARK CAMPUS , KARYAVATTOM P.O., T RIVANDRUM - 695 581. PAN:AA A C U 5628B] VS. THE ASSISTANT COMMISSIONER OF INCOME - TAX, CIRCLE - 1(1), TRIVANDRUM (ASSESSEE - APPELLANT) (REVENUE - RESPONDENT) ASSESSEE BY SHRI RAGHUNATHA N S., ADV. REVENUE BY S HRI SHANTAM BOSE, CIT(DR) DATE OF HEARING 05/11 / 201 9 DATE OF PRONOUNCEMENT 11 / 1 2 /2019 O R D E R PER CHANDRA POOJARI: AM THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE DIRECTIONS PASSED U/S. 144C(5) OF THE INCOME TAX ACT, 1961 BY DISPUTE RESOLUTION PANEL - 2, B ENGALURU DATED 11/09/2018 AND PERTAIN TO THE ASSESSMENT YEAR 201 4 - 15. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: GROUND NO. 1 - ASSESSMENT AND REFERENCE TO TRANSFER PRICING OFFICER ARE BAD IN LAW 1.1 THE DRAFT ORDER ISSUED BY THE ASSISTANT COMMISSIONER OF INCOME TAX. CIRCLE 1(1) ('ASSESSING OFFICER' OR ' ASSESSING OFFICER ) IS BAD ON FACTS AND IN IT(TP)A NO.592/COCH/2018 2 LAW, AND IS IN VIOLATION OF THE PRINCIPLES OF NATURAL JUSTICE THAT THE AO DID NOT ISSUE TO THE APPELLANT, A SHOW CAUSE NOTICE, AS PER PROVISO TO SEC TION 92C(3) OF THE ACT; THE AO HAS ERRED IN MAKING A REFERENCE TO THE JOINT COMMISSIONER OF INCOME - TAX, (TRANSFER PRICING) ('TPO'), INTER ALIA, SINCE THE TPO HAS NOT RECORDED AN OPINION THAT ANY OF THE CONDITIONS IN SECTION 92C(3) OF THE A C T, WERE SATISFI ED IN THE INSTANT CASE. ACCORDINGLY, THE ORDER PASSED BY THE TPO IS WITHOUT JURISDICTION; ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TPO AND ACCORDINGLY, THE LEARNED AO ERRED IN NOT DEMONSTRATING THAT THE MOTIVE OF THE APPEL LANT WAS TO SHIFT PROFITS OUTSIDE OF INDIA BY MANIPULATING THE PRICES CHARGED IN ITS INTERNATIONAL TRANSACTIONS, WHICH IS A PRE - REQUISITE CONDITION TO MAKE ANY ADJUSTMENT UNDER THE PROVISION OF CHAPTER X OF THE ACT; AND 1.4 THE DRAFT ORDER PASSED BY THE A O IS WITHOUT JURISDICTION, INTER ALIA, INSOFAR AS IT PURPORTS TO GIVE EFFECT TO AN INVALID ORDER OF THE TPO. GROUND NO. 2 - ERRONEOUS COMPUTATION OF MARGIN OF THE APPELLANT 2.1 THE AO/TPO ERRED IN CONSIDERING SEZ UNIT SETTING UP EXPENSES AND IRELAND BR ANCH SETTING UP EXPENSES AS OPERATING IN NATURE WHILE COMPUTING THE MARGIN OF THE APPELL ANT. 2.2 THE AO/ TPO ERRED IN CONSIDERING UNREALIZED FOREIGN EXCHANGE GAIN/L OSS MARGIN OF THE APPELLANT. GROUND NO. 3 - DETERMINATION OF ARM'S LENGTH PRICE BY THE TPO IN RELATION TO THE 'IT SERVICES' 3.1 T HE AO/DRP ERRED ON FACTS AND IN LAW IN CONDUCTING A FRESH BENCHMARKING ANALYSIS USING NON CONTEMPORANEOUS DATA AND SUBSTITUTING THE ASSESSEE'S ANALYSIS WITH FRESH BENCHMARKING ANALYSIS ON HIS OWN CONJECTURES AND SURMI SES. 3.2 THE TPO/AO GROSSLY ERRED ON FACTS IN BENCHMARKING THE TRANSACTIONS OF THE CAPTIVE IT SERVICES OF THE ASSESSEE WITH COMPANIES OPERATING AS FULL - FLEDGED ENTREPRENEURS WITHOUT CONSIDERING THE DIFFERENCES IN THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISK UNDERTAKEN BY IHE ASSESSEE VIS - A - VIS COMPARABLE COMPANIES. IT(TP)A NO.592/COCH/2018 3 3.3 THE LD. AO/ TPO ERRED ON FACTS IN ARBITRA RILY REJECTING THE FOLLOWING COMPARABLE COMPANIES SELECTED BY THE APPELLANT IN THE TRANSFER PRICING DOCUMENTATION WITHOUT CONSIDERING THE FUNCTIONAL AND RISK ANALYSIS OF THE APPELLANT AND THE LD. PANEL ALSO ERRED IN CONFIRMING THE SAME. A) AKSHAY SOFTWARE TECHNOLOGIES LIMITED B) E ZEST SOLUTIONS LIMITED C) EVOKE TECHNOLOGIES PRIVATE LIMITED 3.4 THE LD. PANEL AND THE LD. AO/ TPO ERRED IN LAW IN APPLYING ARBITRARY FILTERS TO ARRIVE AT A FRESH SET OF COMPANIES AS COMPARABLES TO THE APPELLANT, WITHO UT ESTABLISHING FUNCTIONAL COMPARABILITY, SUCH AS, (I) COMPANIES WHOSE DATA FOR FINANCIAL YEAR ('FY') 2013 - 14 WAS NOT AVAILABLE, (II) COMPANIES WITH SOFTWARE DEVELOPMENT SERVICE REVENUE LESS THAN 75% OF TOTAL OPERATING REVENUE, (III) COMPANIES WITH RELATED PARTY TRANSACTIONS GREATER THAN 25% OF SALES (IV) COMPANIES WITH EXPORT SERVICE INCOME LESS THAN 75% OF TOTAL OPERATING REVENUES, (V) COMPANIES WITH EMPLOYEE COST LESS THAN 25% OF TURNOVER, AND (VI) COMPANIES WITH DIFFERENT FINANCIAL YEAR ENDING (I.E. OTH ER THAN 31 MARCH 2014) (VII) COMPANIES WITH PERSISTENT LOSSES 3.5 TH E LD. AO / TPO ERRED IN NOT APPLYING THE TURNOVER FILTER AT THE UPPER LIMIT SO AS TO REJECT HIGH TURNOVER COMPANIES. THE LD. PANEL ALSO ERRED IN CONFIRMING THE SAME. 3.6 THE LD. AO / TPO ERRED IN LAW IN APPLYING AN ARBITRARY FILTER TO REJECT COMPANIES HAVING RELATED PARTY TRANSACTIONS GREATER THAN 25% OF SALES. 3.7 THE LD. AO/ TPO ERRED IN INCLUDING INFOSYS LIMITED. LARSEN & TOUBRO INFOTECH LIMITED , MIND T REE LIMITED, PERSISTENT SYSTEMS LTD , CIGNITI TECHNOLOGIES LTD . AND THIRDWARE SOLUTIONS LTD AS COMPARABLE, DESPITE THESE COMPANIES BEING FUNCTIONALLY DISSIMILAR TO THE APPELLANT. THE LD. PANEL ALSO ERRED IN CONFIRMING THE SAME. 3.8 THE LD. AO/ TPO ALSO ERRED IN TREATING PROVISIONS FOR DOUB TFUL DEBTS AS NON - OPERATING IN NATURE WHILE CALCULATING THE NET MARGINS OF THE COMPARABLE COMPANIES. THE LD. PANEL ALSO ERRED IN CONFIRMING THE SAME. 3.9 THE LD. AO/TPO ERRED IN CONSIDERING DATA OBTAINED U/S 133(6) . THE LD. PANEL ERRED IN CONFIRMING THE SAME. 3.10 THE TPO/AO HAS ERRED ON FACTS IN WRONGLY COMPUTING THE MARGINS OF CERTAIN COMPANIES IDENTIFIED AS COMPARABLE BY THE TPO. THE HON'BLE DRP PANEL HAS NOT PASSED A SPEAKING ORDER ON THE ERRONEOUS MARGIN COMPU TATION. IT(TP)A NO.592/COCH/2018 4 3.11 THE TPO HAS ERRONEOUSLY CONSIDERED HIGH PROFIT MAKING COMPANIES AND THUS THE TREATMENT OF THE COMPANIES BY THE TPO CONTRADICTS. 3.12 THE TPO/AO ERRED IN SELECTING COMPANIES HAVING EXCEPTIONAL YEAR OF OPERATION. AO ERRED IN ACCEPTING THE ACTION OF TPO. GROUND NO. 4 - ERRONEOUS DATA USED BY THE TPO 4.1 THE TPO / AO HAS ERRED IN LAW IN USING DATA, WHICH WAS NOT CONTEMPORANEOUS AND WHICH WAS NOT AVAILABLE IN THE PUBLIC DOMAIN AT THE TIME OF CONDUCTING THE TRANSFER PRICING STUDY BY THE ASSESSEE . 4.2 THE TPO AO ERRED IN LAW AND ON FACTS IN DISREGARDING THE APPLICATION OF MULTIPLE - YEAR DATA WHILE COMPUTING THE MARGINS OF ALLEGED COMPARABLE COMPANIES AS SUCH DATA HAD AN INFLUENCE IN, DETERMINING THE TRANSFER PRICING POLICY OF THE ASSESSEE. GROUND NO 5 ERRONEOUS DISALLOWANCE OF WORKING CAPITAL ADJUSTMENT 5.1 THE LD. TPO/AO, BY DENYING ON FLIMSY GROUNDS THE BENEFIT OF WORKING CAPITAL ADJUSTMENT TO THE APPELLANT AND HAVE IGNORED THE PRINCIPLES OF COMPUTATION OF THE WORKING CAPITAL ADJUSTMENT THAT HAS BEEN ACCEPTED BY VARIOUS TRIBUNALS TILL DATE. GROUND NO. 6 - TO PROVIDE APPROPRIATE ADJUSTMENTS TO THE COMPARABLE COMPANIES 6.1 ASSESSEE REQUEST THE HON'BLE PANEL TO PROVIDE APPROPRIATE ADJUSTMENTS UNDER RULE 10B TO ACCOUNT FOR , INT ER ALIA, DIFFERENCES IN (A) ACCOUNTING PRACTICES, (B) MARKETING EXPENDITURE ADJUST M ENT , (C ) RESEARCH AND DEVELOPMENT EXPENDITURE ADJUSTMENT, (D) RISK PROFILE BETWEEN THE ASSESSEE AND PIE COMPARABLE COMPANIES. GROUND NO 7 - VARIATION OF 5% FROM THE ARITHME TIC MEAN 7.1 THE TPO/AO ERRED IN LAW IN NOT GRANTING THE VARIATION AS PER THE PROVISO TO SECTION 92C (2) OF ACT. GROUND NO 8 - IMPUTATION OF INTEREST ON RECOVERY OF EXPENSES 8.1 THE TPO/AO ERRED IN IMPUTING INTEREST ON RECOVERY OF EXPENSES AT DOMESTIC BORROWING RA T E OF THE APPELLANT INSTEAD OF L1BOR/EURIBOR. IT(TP)A NO.592/COCH/2018 5 GROUND NO. 9 ERRONEOUS DISALLOWANCE OF FINANCE LEASE PAYMENTS 9.1 THE LEARNED AO/ DISPUTE RESOLUTION PANEL ('DRP') ERRED IN LAW AND ON FACTS IN DISALLOWING THE FINANCE LEASE PAYMENTS AMOUNTING TO INR 2,42,78 , 880 UNDER SECTION 37 OF THE INCOME TAX ACT, 1961 ( 'THE ACT ) BY CONSIDERING SUCH PAYMENTS TO BE CAPITAL IN NATURE BASED ON THE ACCOUNTING TREATMENT ADOPTED IN THE BOOKS OF ACCOUNTS. 9.2 THE LEARNED AO/ DRP FAILED TO CONSIDER THE PRINCIPLE TH AT THE ENTRIES MADE IN THE BOOKS OF ACCOUNTS IS NOT A DETERMINING FACTOR FOR ALLOWABILITY OF THE EXPENDITURE UNDER THE ACT . THE LEARNED DRP ERRED IN NOT CONSIDERING THE CBDT CIRCULAR NO. 2/2001 DATED 09 FEBRUARY 2001 WHICH PROVIDED THAT THE TREATMENT OF LE ASES AS PER ACCOUNTING STANDARDS WILL HAVE NO IMPLICATION FOR THE PURPOSES OF THE ACT. 9.3 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED DRP ERRED IN RELYING ON THE RULING OF THE SUPREME COURT IN THE CASE OF ASEA BROWN BOVERI V. INDUSTRIAL FINANCES CORPORATION OF INDIA CASE NO. APPEAL (CIVIL) 3574/1998 TO CONCLUDE ON THE TAX TREATMENT OF FINANCE LEASE. THE LEARNED DRP FAILED TO NOTE THAT THE APEX COURT HAD ONLY DISCUSSED THE CHARACTERISTICS OF A FINANCE LEASE IN THE RULING AND DID NOT CONSIDER THE TAXABILITY OF FINANCE LEASE PAYMENT, 9.4 WITHOUT PREJUDICE, THE LEARNED AO/ DRP DISREGARDED THE PRINCIPAL OF CONSISTENCY BE DISALLOWING LEASE EXPENSES WHICH WERE OTHERWISE ALLOWED AS DEDUCTION IN THE EARLIER YEARS. 9.5 WITHOUT PR EJUDICE TO THE ABOVE GROUNDS, THE LEARNED AO HAS ERRED IN DISREGARDING THE DIRECTIONS ISSUED BY DISPUTE RESOLUTION PANEL ('DRP') TO ALLOW DEPRECIATION ON THE UNDERLYING L EASED ASS ETS. GROUND NO. 10 - ERRONEOUS DISALLOWANCE OF INTEREST EXPENSES ON ACCOUNT OF INTEREST FREE LOANS ADVANCED TO RELATED PARTIES 10.1 THE LEARNED AO/ DRP ERRED IN LAW AND ON FACTS IN DISALLOWING INTEREST EXPENSE AMOUNTING TO INR 14,14.43 , 932 ON ACCOUNT OF INTEREST FREE LOANS GRANTED BY USTIPL TO ITS RELATED PARTIES . 10.2 THE LE ARNED AO/ DRP ERRED IN DISREGARDIN G THE PROVISIONS OF SECTION 36( 1 )(III ) OF THE ACT THAI THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSES OF BUSINESS SHALL BE ALLOWED AS DEDUCTION IN COMPUTING THE BUSINESS PROFITS. IT(TP)A NO.592/COCH/2018 6 10.3 THE LEARNED AO/DRP HAS ERRED IN DISREGARDING THE FACT THAT THE LOANS WERE GRANTED BY THE APPELLANT TO ITS SISTER CONCERNS IN THE NORMAL COURSE OF BUSINESS AND WAS BY WAY OF COMMERCIAL EXPEDIENCY. THE LEARNED AO/ DRP FAILED TO CONSIDER THE PRINCIPLE ON COMM ERCIAL EXPEDIENCY LAID DOWN BY THE SUPREME COURT IN THE CASE OF SA BUILDERS L TD. VS CIT ( 2007) 289 ITR 26 (SC). 10.4 THE LEARNED AO/ DRP HAS ERRED IN NOT CONSIDERING THE FACT THAT THE COMPANY HAD SUFFICIENT OWN FUNDS IN THE FORM OF RESERVES WHICH WERE AD EQUATE TO COVER THE AGGREGATE INTEREST FREE LOANS/ADVAN CES GRANTED, THE LEARNED AO/ DR P FAILED TO CONSIDER THE DECISION RENDERED BY THE HON'BLE JURISDICTIONAL 1TAT IN THE APPELLANT'S OWN CASE FOR AY 2008 - 09 WHEREIN IT WAS HELD THAT INTEREST PAID IN RESPECT OF CAPITAL BORROWED IS OUGHT TO BE ALLOWED AS EXPENDITURE AS THE COMPANY HAD SUFFICIENT OWN FUNDS MORE THAN THE LOANS /ADVANCES GRANTED TO RELATED PARTIES. 10.5 WITHOUT PREJUDICE, THE LEARNED AO/ DRP ERRED IN DISREGARDING THE FACT THAT MAJORITY OF THE LO ANS AVAILED BY THE APPELLANT ARE SPECIFIC PURPOSE LOANS AND CANNOT BE ADVANCED TO SISTER CONCERNS. THE LEARNED AO/ DRP ERRONEOUSLY COMPUTED THE INTEREST DISALLOWANCE BY INCLUDING SUCH SPECIFIC PURPOSE LOANS AVAILED BY THE APPELLANT. 10.6 WITHOUT PREJUDIC E TO THE ABOVE GROUNDS, THE LEARNED AO/ DRP ERRED IN COMPUTING TH E PROPORTIONATE INTEREST OF INR 14,14,43,932 AND IN DISALLOWING THE SAME WITHOUT APPRECIATING THE FACT THAT SUCH DISALLOWANCE IS MORE THAN THE ACTUAL INTEREST EXPENSE INCURRED BY THE APPELLANT. GROUND NO. 11 - ERRONEOUS DISALLOWANCE OF ADDITIONAL EXPENDITURE INCURRED OWING TO THE MISCONDUCT OF THE EMPLOYEES 11.1 THE LEARNED AO/DRP HAS ERRED IN DISALLOWING INR 45 , 00,000 BEING ADDITIONAL EXPENDITURE INCURRED BY THE APPELLANT OWING TO T HE MISCONDUCT OF THE EMPLOYEES. THE LEARNED AO/ DRP FAILED TO CONSIDER THAT OWING TO THE COLLUSION OF ITS EMPLOYEE WITH THE VENDOR WITH WHOM AGREEMENT WAS ENTERED FOR RECRUITING CONTRACT BASED EMPLOYEES, THE APPELLANT HAD TO PAY A HIGHER AMOUNT TO THE VEND OR THAN IS IDEAL. 11.2 THE LEARNED AO/ DRP ERRONEOUSLY FAILED TO CONSIDER THE FACT THAT THE EXPENDITURE IS IN THE NATURE OF REVENUE AND IS ACTUALLY INCURRED IN THE NORMAL COURSE OF BUSINESS WHOLLY/EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND HENCE ALLOWABLE UNDER SECTION 37 OF THE ACT. 11.3 THE LEARNED AO/DRP HAS FAILED TO CONSIDER THE CBDT CIRCULAR (CIRCULAR NO. 35D (XLV1120) [ F .NO. I 0 /4 8/ 65IT (AI), DATED 24/11/1965) IT(TP)A NO.592/COCH/2018 7 WHEREIN IT IS HELD THAT LOSSES ARISING DUE TO EMBEZZLEMENT OF EMPLOYEES OR DU E TO NEGLIGENCE OF EMPLOYEES SHOULD BE ALLOWED IF THE LOSS TOOK PLACE IN THE NORMAL COURSE OF BUSINESS. 11.4 WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE LEARNED DRP ERRONEOUSLY FAILED TO CONSIDER THE FACT THAT THE APPELLANT FOLLOWS A COST PLUS BILLING MO DEL, HENCE THE ADDITIONAL EXPENDITURE DOESN'T RESULT IN A FALL IN PROFIT. GROUND NO. 12 - NON - CONSIDERATION OF INADVERTENT DISALLOWANCE OF THE SAME EXPENSE T WICE 12.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED AO FAILED TO CONSIDER THAT THE APPELLANT HAD INADVERTENTLY DISALLOWED AN AMOUNT OF INR 41,75,973 TWICE UNDER SECTION 40(A)(IA) OF THE ACT. 12.2 THE LEARNED AO ERRED IN NOT COMPLYING WITH THE INTENT OF THE CBDT CIRCULAR NO. 14 (XL - 35) DATED 11 APRIL 1955 WHICH RE ITERATED TH AT THE TAX OFFICERS SHOULD NOT TAKE ADVANTAGE OF AN ASSESSEE'S IGNORANCE TO COLLECT MORE TAX OUT OF HIM THAN IS LEGITIMATELY DUE FROM HIM. THE APPELLANT CRAVES LEAVE TO ADD TO OR ALTER, BY DELETION, SUBSTITUTION, MODIFICATION OR OTHERWISE, THE ABOVE GROUN DS OF APPEAL, EITHER BEFORE OR DURING THE HEARING OF THE APPEAL. 3. THE FIRST GROUND, GROUND 1 TO 1.4 ARE TOO GENERAL IN NATURE AND DOES NOT REQUIRE ADJUDICATION. 4. THE NEXT GROUND, GROUND NOS. 2.1 & 2.2 IS WITH REGARD TO CONSIDERATION OF SEZ UNIT SETTING UP EXPENSES AND IRELAND BRANCH EXPENSES AS OPERATING IN NATURE WHILE COMPUTING THE MARGIN OF THE ASSESSEE AND CONSI DERATION OF UNREALIZED FOREIGN EXCHANGE GAIN/LOSS WHILE COMPUTING THE MARGIN OF THE ASSESSEE. IT(TP)A NO.592/COCH/2018 8 4.1 THE FACTS OF THE CASE ARE THAT THE ASSESSEE HAD INCURRED CERTAIN EXPENSES IN CONNECTION WITH THE SETTING UP OF THE SEZ UNIT IN FY 2013 - 14. HOWEVER, THE SEZ UNIT HAD COMMENCE D ONLY IN FY 2014 - 15, THE EXPENSES CANNOT BE SAID TO BE OPERATING IN NATURE IN FY 2013 - 14. HENCE THE SAME SHOULD NOT BE INCLUDED AS OPERATING COST. THE ASSESSEE ALSO OBJECTED TO THE INCLUSION OF FOREX FLUCTUATION AS OPERATING BY THE TPO. THE ASSESSEE REQUESTED TO CONSIDER ONLY THE REALIZED PORTION OF FOREX EXPENSES. 4.2 ON APPEAL, THE DRP TREATED THE IRELAND BRANCH AND SEZ EXPENSES AS OPERATING EXPENSES. ACCORDING TO THE DRP, THE FACT THAT THESE EXPENSES ARE INCLUDED IN THE P&L ACCOUNT OF THE YEAR GOES TO SHOW THAT THEY ARE NORMAL BUSINESS EXPENSES OF THE ASSESSEE AND THEY ARE NEITHER CAPITAL NOR PRIOR PERIOD EXPENSES AND THE ASSESSEE DOES NOT HAVE SEPARATE SEGMENTAL FOR IRELAND AND SEZ. LOOKING AT THE NATURE OF THESE EXPENSES, THE DR P OBSERVED THAT THEY ARE BUSINESS EXPENSES AND FORM PART AND PARCEL OF THE SAME P&L ACCOUNT. THEREFORE, THEY HAVE TO BE CONSID ERED WHILE WORKING OUT THE MARGIN. HENCE, THE DRP REJECTED THE CONTENTIONS OF THE ASSESSEE. 4.3 AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 4. 4 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. REGARDING EXPENSES INCURRED FOR SET OFF OF SEZ UNIT EXPENSES WHICH COMMENCED FROM FY IT(TP)A NO.592/COCH/2018 9 2014 - 15, THE ASSESSEE HAS FILED DETAILS OF EXPENDITURE WHICH WERE NOT MADE AVAILABLE TO THE DRP OR TPO OR ASSESSING OFFICER. THE DETAILS OF SEZ UNIT EXPENSES ARE AS FOLLOWS: NATURE OF EXPENSES AMOUNT FAC ILITIES RENT 1,16,89,789 SOFTWARE LICENSE FEES 78,24,594 LEASE CIRCUIT CHARGES 14,42,889 PROFESSIONAL FEE & CONSULTANCY 11,18,379 OTHER EXPENSE 10,11,225 ANNUAL MAINTENANCE CONTRACT FEE 8,07,411 CLEARING CHARGES 44,057 RATES & TAXES 10,300 TOTAL 2,39,48,644 BEING SO, THE ASSESSING OFFICER IS REQUIRED TO EXAMINE WHETHER THESE EXPENSES ARE RELATING TO SETTING OF OFF SEZ UNIT EXPENSES OR INCURRED TOWARDS OPERATION OF SEZ IN THE ASSESSMENT YEAR UNDER CONSIDERATION AND DECIDE ACCORDINGLY. HENCE, WE REMIT THIS ISS UE TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE ISSUE AFRESH IN THE LIGHT OF THE ABOVE DETAILS OF EXPENSES FURNISHED BEFORE US. THIS GROUND OF APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 4. 5 REGARDING TREATMENT OF FOREIG N EXCHANGE FLUCTUATION, THE DRP OBSERVED THAT SIM ILAR OBJECTION WAS RAISED BY THE ASSESS EE BEFORE DRP IN RELATION TO AY 2 012 - 13 AND AY 13 - 14 . H OWEVER, THE OBJECTION OF THE ASSESSES WAS NOT ACCEPTED AS TRIBUNAL IN THE CASE OF SAP LABS INDIA (P) LTD. VS. ACIT ( 44 SOT 156 ) (BANG.) HELD THAT THE FOREIGN EXCHANGE FLUCTUATION INCOME CANNOT BE EXCLUDED FROM THE COMPUTATION OF THE OPERATING MARGIN OF THE ASSESSEE - IT(TP)A NO.592/COCH/2018 10 COMPANY. THE DRP RELIED ON THE DECISION OF THE ITAT, CHENNAI IN THE CASE OF PE T ROF A C ENGINEERING SER VICE S INDIA (P) LTD V ITO [2014] 46 TAXMANN.COM 126 ( CHENNAI - T RIB.) WHEREIN IT WAS HELD THAT I N CASE OF INTE RNATIONAL TRANSACTIONS ENTERED INTO BY ASSSSEE WITH ITS A E , FOREIGN EXCHANGE GAIN/LOSS IS A RELEVANT FACTOR IN COMPUTATION OF ASSESSE E 'S ALP. THE DRP RELIED ON THE JUDGMENT OF THE MADRAS HIGH COURT IN THE CASE OF CIT V. P E NTASOFT TECHNOLOGIES LTD.[2012] 347 ITR 578 WHEREIN IT WAS HE LD THAT GAINS DUE TO FLUCTUATION IN FOREIGN EXCHANGE IS DIRECTLY RELATED TO EXPORT SALES OF THE ASSESSEE AND THEREFORE, IT CANNOT BE TREATED AS OTHER THAN PART OF PROFIT FROM EXPORT. THE DRP RELIED ON THE DECISION OF THE TRIBUNAL I N THE CASE OF DY. CIT V. WE L SPUN ZUCCHI TEXTILES L T D. (3 8 TAXMANN.COM 243) (MUM.) WHEREIN I T WAS HELD THAT LOSS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION LOSS HAS TO BE TREATED AS BUSINESS LOSS AND IN THE CASE OF CO RDYS R & D (INDIA) (P.) L T D. V. DY. CIT [201 1] (4 3 TA X MANN.COM 64 (HYDERA BAD - TRIB.), ALSO IT WAS HELD THAT IN COMPUTING NET MARG IN, FOREX FLUCTUATION GAIN / LOSS IS TO BE TREATED AS PART OF OPERATING INCOME OF COMPARABLE COMPANIES. AS REGARDS SAFE H ARBOUR RULES, THE SAME ARE APPLICABLE ONLY IF THE ASSESS E E OP T S FOR SAFE HARBOUR AS PER PROCEDURE PRESCRIBED IN R ULE 10T E. HOWEVER, THE DRP OBSERVED THAT IN THE CASE UNDER CONSIDERATION, NO SUCH OPTION WAS EXERCISED BY THE ASSESS E E. SO, THE DRP HELD THAT THE ASSESSEE CANNOT CLAIM THE BENEFIT OF SUCH RULES. IT(TP)A NO.592/COCH/2018 11 4.7 ON THE ISSUE OF NATURE OF FOREX LOSS/GAIN BEING PART OF SALE/PURCHASE TRANSACTION OR OTH ERWISE, THE DRP OBSERVED THAT VARIOUS DECISIONS OF IT AT AND COURTS REQUIRE IT TO BE TREATED AS PART OF SALES/PURCHASE TRANSACTION. THE DRP ALSO RELIED ON THE DECISION OF THE TRIBUNAL IN THE CASE OF WES TFALIA SEPARATOR INDIA (P.) LTD . V. ASST. C1T [2( 0 14] ( 52 T AXM ANN .COM 35 ) (DELHI) WHEREIN IT WAS HELD THAT FOREX LOSS/GAIN IS OPERATING IN NATURE. THE TRIBUNAL HELD AS FOLLOWS: '4.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE 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 BOO KS OF ACCOUNT ON THE BASIS OF RATE OF FOREIGN EXCHANGE THEN PREVAILING AND THE AMOUNT ACTUALLY PAID OR RECEIVED AT THE RULE OF FOREIGN EXCHANG E PREVAILING AT THE TIME OF ACTUAL PAYMENT OR RECEIPT. SINCE SUCH FOREX LOSS OR GAIN IS A DIRECT OUTCOME OF THE PURCHASE OR SALE TRANSACTION, IT PARTAKES OF THE SAME CHARACTER AS THAT OF THE TRANSACTION TO WHICH IT RELATES. THE SPECIAL BENCH OF THE TRIBUNA L IN THE CASE OF ACIT V. PRAKASH I. SHAH (2008) 115 ITD 167 (MUM) (SB) HAS HELD 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 APPLIES GENERALLY AS WE LL. THE ESSENCE OF THE MATTER IS THAT ANY GAIN OR LOSS ARISING OUT OF CHANGE IN FOREIGN CURRENCY RA T E IN RESPECT OF TRANSACTION FOR IMPORT OR EXPORT OF GOODS IS NOTHING, HUT INHERENT PART OF THE PRICE OF IMPORT OR THE VALUE OF EXPORT. THE HON'BLE SUPREME COURT IN S UT LEJ COTTON MILLS LTD V. CIT 116 ITR I HAS HELD THAT WH ERE PROFIT OR LOSS ARISES TO AN ASSESSEE ON ACCOUNT OF APPRECIATION OR DEPRECIATION IN THE VALUE OF FOREIGN CURRENCY HELD BY IT , ON CONVERSION INTO ANOTHER CURRENCY, SUCH PROFIT OR LOSS WO ULD ORDINARILY B E TRADING PROFIT OR LOSS IF THE FOREIGN CURRENCY IS HELD BY THE ASSESSEE ON REVENUE ACCOUNT OR AS A TRADING ASSET OR A S PART OF CIRCULATING CAPITAL EMBARKED IN THE BUSINESS'. WHEN WE READ THE RATIO OF THE CA S E OF SUTLEJ COTTON (SC) (SUPRA) IN JUXTAPOSITION TO THAT OF THE SPECIAL BENCH IN CASE OF PRAKASH I SHAH (SUPRA), THERE REMAINS NO DOUBT THAT FOREX GAIN OR LOSS FROM A TRADING TRANSACTION 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 EXPENSE THAT A BUSINESS INCURS AS A RESULT OF PERFORMING ITS NORMAL BUSINESS OPERATION S . AS THE BUSINESS OF 'ASSEMBLY' DONE B V THE ASSESSEE UNDER THIS SE GMENT IS NOT POSSIBLE WITHOUT PURCHASES AND FOREX GAIN IS IN RELATION TO SUCH PURCHASE TRANSACTIONS, IRE - HAVE NO HESITATION IN HO/DING THAT IT IS AN ITEM OF OPERATING COST. ' ' IT(TP)A NO.592/COCH/2018 12 4.8. THE L D. AR RELIED ON RULE 10 T( J ) TO CONTEND THAT LOSS ARISING ON ACCOUNT OF FOREIGN CURRENCY FLUCTUATIONS CANNOT HE INCLUDED IN THE OPERATING EXPENSE. W E ARE NOT PERSUADED TO GIVE ANY MILEAGE TO THE LD. AR ON THIS COUNT FOR THE SIMPLE REASON THAT RULE 10 T IS A PA RT OF SAFE H ARBO U R R ULES NOTIFIED ON 18.09.2013 WHICH ARE NOT APP LICABLE TO THE ASSESSMENT YEAR UNDER CONSIDERATION. ' '4.10 IN CONTRAST TO THE ABOVE, WE FIND THAT THERE IS A PLETHORA OF DECISIONS RENDERED BY VARIOUS BENCHES OF THE TRIBUNAL ACROSS THE COUNTRY HOLDING THAT FOREX GAIN/LOSS IS PART OF OPERATING REVENUE/CO ST. TO CITE A FEW, THE DELHI BENCH OF THE TRIBUNAL IN TECHNO INTERNATIONAL (P.) LTD. V. ACIT (TO W HICH ONE OF US, NAMELY, THE AM IS PARTY) HAS HELD VIDE AN ORDER DATED 28 - 04 - 2014 TH AT FOREIGN EXCHANGE GAIN OR LOSS IS A PART AND PARCEL OF OPERATING REV ENUE/OPERATING COST. THE BANGALORE BENCH OF THE TRIBUNAL IN SAP LABS INDIA (P.) LTD. VS. ACIT (2010) 6 ITR (TRIB) 81 (BANG) HAS ALSO HELD THAT FOREIGN EXCHANGE GAIN SHO ULD BE ADDED TO THE OPERATING REVENUE. THE M UMBAI I BENCH OF THE TRIBUNAL IN RUSHABH DIAM ONDS MUMBAI VS. ACIT IN ITA NO. 7217 VIDE ITS ORDER DATED 26 - 04 - 2013 (TO WHICH THE AM IS PARTY) HAS ALSO HELD FOREIGN EXCHANGE GAIN AS A PART OF OPERATING PROFIT. THUS, THE DRP HELD THAT FOREIGN EXCHANGE LOSS/GAIN WAS RIGHTLY CONSIDERED AS OPERATING IN N ATURE BY THE TPO. FURTHER, THE ASSESSEES REQUEST TO CONSIDER UNREALIZED FOREX GAIN/LOSS AS OPERATING ITEM IN COMPUTING THE MARGIN OF THE ASSESSEE WAS ALSO NOT ALLOWED AS THE ASSESSEE HAD NOT PRODUCED ENOUGH MATERIAL TO VERITY THE FIGURES. 5. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. AR SUBMITTED THAT THE ASSESSEE COMPUTED OPERATING MARGIN AT 16.43% IN ITS TRANSFER PRICING DOCUMENTATION. THE TPO IN THE TP ORDER HA D RE COMPUTED THE MARGIN OF THE ASSESSEE AS 13 . 58%. IN CO MPUTING THE ABOVE MARGIN THE TPO HAS ERRONEOUSLY CONSIDERED SETTING UP CHARGES OF IRELAND BRANCH EXPENSES AND SEZ UNIT EXPENSES AS OPERATING COSTS. FURTHER, THE TPO HAD AL SO ERRED IN CONSIDERING UNREALIZED IT(TP)A NO.592/COCH/2018 13 FOREX GAIN/ LOSS AS OPERATING ITEM IN COMPUTING TH E MARGINS OF THE ASSESSEE. THE DRP UPHELD THE ORDER PASSED BY THE TPO. THE LD. AR REQUESTED THE TRIBUNAL TO DIRECT THE ASSESSING OFFICER TO CO NSIDER UNREALIZED FOREX GAIN/LOSS AS NON - OPERATING, A SUMMARY OF MARGIN COMPUTATION OF THE APPELLANT AT VARIOUS STAGES OF THE ASSESSMENT IS AS FOLLOWS: PARTICULARS AS PER TP ORDER AS PER TP STUDY COMPUTED BY ASSESSEE INCOME REVENUE 8,12,73,10,889 8,127,310,889 8,127,310,889 REALISED FOREX GAIN/LOSS 53,451,996 TOTAL OPERATING INCOME(A) 8,127,310,889 8,127,310,889. 8,180,762,885 EXPENDITURE EMPLOYEE BENEFIT EXPENSES 5,17,95,49,738 5,179,549,738 5,179,549,738 OTHER EXPENSES 1,61,96,04,171 1,444,597,579 1,444,597,579 DEPRECIATION AND AMORTIZATION EXPENSE 35,00,73,279 35,073,279 350,073,279 BANK CHARGES 61,88,776 6,188,776 6,188,776 TOUR OPERATING EXPENSES(B) 7,15,54,15,964 6,980,409,372 6,980,409,372 OPERATING PROFIT(A+B) 97,18,94,925 1,146,91,517 1,200,353,513 NET COST PLUS 9%) 13.58% 16.5% 17.20% EXCLUDED FINANCE CHARGES AMOUNTING TO INR AMOUNTING TO INR 51, 00,000 / - . FOREIGN EXCHAN GE LOSS AMOUNTING TO INR 148,51 8,170 / - PROVISION FOR LOANS AND ADVANCES AMOUNTING TO I N R 47,285,166 /, IRELAND EXPENSES OF INR 2,539,778 / - AND SEZ UNIT EXPENSES OF INR 23,948.644 - 5.1 WITH RESPECT TO THE TREATMENT OF FOREX GAIN/LOSS THE LD. AR DREW ATTENTION TO THE STATUTORY DEFINITION OF OPERATING EXPENSES' RULE 10 TA(J)(IV), THE RELEVANT PORTION OF THE RULE IS REPRODUCED BELO W: - 'SAFE HARBOUR S ALES FOR INTERNATIONAL TRANSACTIONS DEFINITIONS 10TA FOR THE PURPOSES OF THIS RULE AND RULE 10TB TO RULE 10TG, IT(TP)A NO.592/COCH/2018 14 (I) OPERATION EXPENSE MEANS THE COSTS INCURRED IN THE PREVIOUS YEAR BY THE ASSESSEE IN RELATION TO THE INTERNATIONAL TRANSACTIONS DURING THE COURSE OF ITS NORMAL OPERATIONS INCLUDING DEPRECIATION AND AMORTIZATION EXPENSES RELATING TO THE ASSETS USED BY THE ASSESSEE, BUT NOT INCLUDING THE FOLLOWING NAMELY: - (I) INTEREST EXPENSES; ( II ) PRO VISION FOR UNASCERTAINED LIABILITIES ; ( III ) PRE - OPERATING EXPENSES; (IV) LOSS ARISING ON ACCOUNT OF FOREI GN CURRENCY FLUCTUATIONS (V) EXTRAORDINARY EXPENSES; (VI) LOSS ON TRANSFER OF ASSETS OR INVESTMENTS; ( VII) EXPENSE ON ACCOUNT OF INCOME - TAX; AND (VIII) OTHER EXPENSES NOT RELATING TO NORMAL OPERATIONS OF THE ASSESSEE; SIMILAR EXCLUSION OF GAIN ARISING ON ACCOUNT OF FOREIGN CURRENCY FLUCTUATION FROM OPERATING REVENUE' WAS FOUND PROVIDED. SO THE ABOVE MENTIONED DEFINITION TO THE 'SAFE HARBOUR RULES' VERY CLEARLY EXCLUDES 'LOSS/GAIN ARISING ON FOREX FLUCTUATION', FROM OPERATING EXPENSES OR OPERATING INCOME, AS THE CASE MAY BE. 5. 2 ALSO, THE LD. AR DREW ATTENTION THAT UNDER THE ACT AND RULES, WHAT HAS BEEN SUBJECTED TO ARM'S LENGTH PRICE DETE RMINATION IS THE OPERATING PROFIT, OPERATING EXPENDITURE AND OPERATING INCOME RELATED TO TRANSACTIONS WITH AN ASSOCIATED ENTERPRISE. THE LD. AR SUBMITTED THAT THE DEFINITION OF 'OPERATING PROFIT' AS PER UNITED NATIONS PRACTICAL MANUAL ON TRANSFER PRICING FOR DEVELOPING COUNTRIES - PARA 6.3.7.2 , AS REPRODUCED BELOW : OPERATING PROFIT OR OPERATING INCOME IS THE INCOME OF A COMPANY NET OF DIRECT AND INDIRECT EXPENSES BUT BEFORE DEDUCTION FOR INTEREST AND TAXES. IT IS DEFINED AS SALES MINUS COGS MINUS OPERATIN G EXPENSES (ALTERNATIVELY EXPRESSED AS GROSS PROFIT MINUS OPERATING EXPENSES). IT(TP)A NO.592/COCH/2018 15 OPERATING PROFIT IS A BETTER TERM THAN NET PROFIT BECAUSE NET PROFIT IS ALSO USED TO REPRESENT THE P ROFIT OF A COMPANY AFTER INTEREST AND T AXES HAVE BEEN SUBTRACTED. FURTHER, THE TERM OPERATING PROFI T INDICATES MORE CLEARLY THAT ONLY PROFITS RESULTING FROM OPERATING ACTIVITIES ARE RELEVANT FOR TRANSFER PRICING PURPOSES. OPERATING EXPENSE HAS BEEN DEFINED IN; HTTP://WWW.ITIVESTOPEDIA.COM/TERMS/O/OPERATING_EXPENSE.ASP AS FOLLOWS: DEFINITION OF 'OPERATING EXPENSE' 'A CATEGORY OF EXPENDITURE THAT A BUSINESS INCURS AS A RESULT OF PERFORMING ITS NORMAL BUSINESS OPERATIONS. ONE OF THE TYPICAL RESPONSIBILITIES THAT MANAGEMENT MUST CONTEND WITH IS DETERMINING HOW LOW OPERATING EXPENSES CAN HE REDUCED WITHOUT SIGNIFICANTLY AFFECTING THE FIRM'S ABILITY TO COMPETE WI TH ITS COMPETITORS. ' HENCE, IT WAS SUBMITTED THAT AN OPERATING EXPENSE MUST BE INCURRED IN THE COURSE OF A COMPANY'S NORMAL BUSINESS OPERATIONS AND CAPABLE OF BEING CONTROLLED BY THE MANAGEMENT. 5.3 IT WAS SUBMITTED THAT DIFFERENCE IN EXCHANGE RATE DOES NOT SATISFY EITHER OF THE TWO LIMBS . THE DEFINITION OF 'OPERATING EXPENSE RATIO' IN HTTP://WWW.MONEY - ZINE.COM/DEFINITIONS/INVESTING - DICTIO NARY/OPERATINGEXPENSE - RATIO/ ALSO EMPHASIZE THE CONTROLLABLE ASPECT OF THESE EXPENSES BY THE MANAGEMENT - OPERATING EXPENSE RATIO THE FINANCIAL RATIO KNOWN AS THE OPERATING EXPENSE RATIO OR OER, IS CONSIDERED A MEASURE MENT OF MANAGEMENT EFFICIENCI ES. USING I NFORMATION FOUND ON THE INCOME STATEMENT, THIS METRIC LOOKS A T THE RATIO OF OPERATING EXPENSES TO NET SALES. CALCULATION IT(TP)A NO.592/COCH/2018 16 OPERATING EXPENSE RATIO = TOTAL OPERATING EXPENSES / REVENUES EXPLANATION WHILE MANAGEMENT CAN TAKE CERTAIN ACTIONS TO C ONTROL EXPENSES, THE PRICE OF A PRODUCT OR SERVICE IS TYPICALLY A FUNCTION OF MARKET DEMAND. THE OPERATING EXPENSE RATIO ALLOWS INVESTORS AND ANALYSTS TO UNDERSTAND HOW EFFICIENTLY A BUSINESS IS ABLE TO PRODUCE GOOD S OR SUPPLY SERVICES. WHEN VIEWED OVER T IME, THE OPERATING EXPENSE RATIO CAN A L SO REVEA L IF MANAGEMENT IS ABLE TO EXPAND OPERATIONS WITHOUT DRAMATICALLY INCREASING EXPENSES. IF REVENUES WERE TO EXPAND YEAR - OVER - YEAR AND THE OER GOES DOWN , THIS WOULD INDI CATE THAT MANAGEMENT IS ABLE TO SCALE PRODUCTION EFFICIENTLY; REVENUES EXPANDED MORE QUICKLY THAN EXPENSES INCREASED. THIS IS A VERY POSITIVE OUTCOME F ROM A PROFITABILITY STANDPOINT. ' THUS, IT WAS SUBMITTED THAT AN EXPENSE QUALIFIES AS AN OPERATING EXPENS E ONLY WHEN THESE EXPENSES ARE WITHIN THE CONTROL OF THE ENTITY'S OPERATING BUSINESS. THUS, ACCORDING TO THE LD. AR, A FOREIGN EXCHANGE DIFFERENCE, WHICH IS IN NOT IN THE CONTROL OF THE OPERATING ENTITY CANNOT BE CONSIDERED FOR THE PURPOSE OF COMPUTING THE ALP FOR THE PURPOSE OF ANALYZING THE INTERNATIONAL TRANSACTION . IT WAS SUBMITTED THAT THE GAIN OR LOSS ARISING OUT OF EXCHANGE FLUCTUATION IS NOT IN THE CONTROL OF THE OPERATING ENTITY OR RELATING TO THE INTERNAL FACTORS OF THE OPERATING ENTITY. ON THE CONTRARY , IT ARISES DUE TO THE VARIOUS EXTERNAL ECONOMIC FACTORS PREVAILING LIKE FISCAL AND TRADE DEFICIT, INFLATIO N, BORROWINGS, INVESTMENT FLOW , BETA RATING, ETC., OF THE RESPECTIVE COUNTRIES, WHOSE CURRENCIES ARE A T CROSS ENDS. THESE DIFFERENCES ARE REFLECTIVE OF THE POOR ADMINISTRATION AND ECONOMIC CONDITIONS OF RUPEE VIS A VIS DOLLAR AND HAS NOTHING TO DO WITH TH E OPERATION OF IT(TP)A NO.592/COCH/2018 17 THE COMPANY. HENCE, IT WAS SUBMITTED THAT GAIN/LOSS ARISING OUT CANNOT BECOME TRANSACTION FOR THE PURPOSE OF COMPUTING THE OPM OF THE ENTITY. 5.4 FURTHER, IT WAS SUBMITTED THAT PRICING APPLIES ONLY IN RESPECT OF AN INTERNATIONAL TRANSAC TION AND A TRANSACTION THAT IS CONSEQUENTIAL TO THE ORIGINAL TRANSACTION (LIKE PAYABLES AND RECEIVABLES) AND ANY ADJUSTMENT LIKE EXCHANGE CONTROL DIFFERENCE MADE TOWARDS THE CARRIED FORWARD CLOSING BALANCES OF RECEIVABLES AND PAYABLES IS NOT A TRANSACTION. WHAT CONSTITUTES 'TRANSACTION' IN TERMS OF 92B HAS BEEN VERY CLEARLY DISCUSSED BY THE ITAT, MUMBAI IN THE CASE CASE OF NIMBUS COMMUNICATION LIMITED IN ITA NO. 6597/MUM/09, WHERE IN TRIBUNAL CLARIFIED THAT 'A CONTINUING DEBIT BALANCE, IN OUR HUMBLE UNDERSTANDING, IS NOT AN INTERNATIONAL TRANSACTION PER SE, BUT IS A RESULT OF THE INTERNATIONAL TRANSACTION. IN PLAIN WORDS, A CONTINUING DEBIT BALANCE ONLY REFLECTS THAT THE PAYMENT, EVEN THOUGH DUE, HAS NOT BEEN MADE BY THE DEBTOR. IT IS NOT, HOWEVER, NE CESSARY THAT A PAYMENT IS TO BE MADE AS SOON AS IT BECOMES DUE. MANY FACTORS, INCLUDING TERMS OF PAYMENT AND NORMAL BUSINESS PRACTICES, INFLUENCE THE FACT OF PAYMENT IN RESPECT OF A COMMERCIAL TRANSACTION.........WHAT CAN BE EXAMINED ON THE TOUCHSTONE OF A RM'S LENGTH PRINCIPLES IS THE COMMERCIAL TRANSACTION ITSELF, AS A RESULT OF WHICH THE DEBIT BALANCE HAS COME INTO EXISTENCE, AND THE TERMS AND CONDITIONS, INCLUDING TERMS OF PAYMENT, ON WHICH THE SAID COMMERCIAL TRANSACTION HAS BEEN ENTERED INTO. THE PA YM E NT T ERMS ARE AN IT(TP)A NO.592/COCH/2018 18 INTEGRAL PAN OF ANY COMMERCIAL TRANSACTION, AND THE TRANSACTION VALUE, TAKES INTO ACCOUNT THE TERMS OF PAYMENT SUCH AS PERMISSIBLE CREDIT PERIOD, AS WELL.' THUS , IT WAS SUBMITTED THAT ANY ADJUSTMENT LIKE EXCHANGE CONTROL DIFFERENCE MADE TOW ARDS THE CARRIED FORWARD CLOSING BALANCES O F RECEIVABLES AND PA YABLES IS NOT A TRANS ACTION . 5. 5 IT WAS SUBMITTED THAT THE INSTITUTE OF COST ACCOUNTANTS OF INDIA HA D RELEASED 'GENERALLY ACCE PTED COST ACCOUNTING PRINCIPLES , (GACAP) - THE APPENDIX 1 THEREOF DEALS WITH APPLICATION GUIDANCE - RELATING TO ''MATERIAL COS T ' 'IN PARA 13 OF THE SAID GUIDANCE IT HAS BEEN PROVIDED THAT - EXCHANGE LOSSES OR GAINS INCURRED AFTER THE PURCHASE TRANSACTON I S COMPLETED IS NOT TREATED AS MA COST BUT IS TREA TED AS FINANCE COST' 5.6 THE LD. AR ALSO DR E W ATTENTION TO AN EXTRACT FROM GUIDANCE NOTE ON MAINTENANCE OF COST ACCOUNTING RECORDS OF THE INSTITU TE OF COST ACCOUNTANTS OF INDIA - C HAPTER 16 - RECONCILING THE PROFIT/LOSS AS PER FINANCIAL ACCOUNTS AND THE PROFITS /LOSS AS PER COST RECORDS - YOUR ATTENTION IS DRAWN IN PARTICULAR TO THE INCOMES/ EXPENSES PURELY FINANCIAL IN NATURE - SPECIFICALLY COVERING - GAIN ON FOREIGN EXCHANGE FLUCTUATIONS/ LOSS ON FOREIGN EXCHANGE FLUCTUATIONS . IT(TP)A NO.592/COCH/2018 19 5.7 IT WAS SUBMITTED THAT FINANCE COSTS ARE NOT OPERATING COSTS. THE LD. AR RELIED ON THE RECENT DECISION OF ITAT, NEW DELHI IN THE CASE OF SUMITOMO CORPORATION OF INDIA P LTD VS DCIT (ITA N O . 2307/D/2009) PARA 3 AND PARA 5. 3 PROVIDING THAT ALL COSTS ASSOCIATED WITH FINANCING ACTIVITIES ARE EXCLUDED (FROM OPERATING EXPENSES). XXXX ALBEIT THE INTEREST EXPENSE IS INCURRED FOR THE PURPOSE OF BUSINESS (OTHER THAN FINANCING) AND IS ALSO AN ALLOWABLE DEDUCTION AGAINST THE BUSINESS IN COME, BUT THE SAME DOES NOT ASSUME T HE CHARACTER OF OPERATING EXPENSE AS IT IS NOT CONCER N ED WITH THE OPERATIONS OF THE HUB ACTIVITY OF BUSINESS. THE LD. AR ALSO RELIED ON THE DECISION OF THE ITAT, MUMBAI IN THE CASE OF D HL EXPRESS (INDIA) P. LTD . IN ITA NO. 7360/M UM/2010 FOR A.Y 2006 - 07, WHERE IN THE TRIBUNAL CONFIRMED THAT 'EXCHANGE FLUCTUATION DO NOT FORM PART OF THE OPERATIONAL INCOME BECAUSE THESE ITEMS HAVE NOTHING TO DO WITH THE MAIN OPERATIONS OF THE ASSESSEE ' . FURTHER, IT WA S SUBMITTED THAT WHILE COMPARAB L ES ARE CHOSEN BY THE COMPANY, NO ADJUSTMENT IS DONE ON COMPARABLES OPERATING RESULTS FOR ARRIVING AT THE ECONOMIC CONDITIONS IN WHICH THE ASSESSEE COMPANY OPERATES. THE ASSESSEE COMPANY IMPORTS RAW MATERIALS AND COMPONENTS AND INCURS MANUFACTURI NG EXPENSES AT RUPEE TERMS. THE COMPARABLES OPERATING ENTIRELY UNDER RUPEE TERMS CANNOT BE A DIRECT COMPARABLE UNLESS A SIMILAR ECONOMIC CONDITION IS MAINTAINED BETWEEN THE OPERATING RESULTS OF THE ASSESSEE COMPANY AND THAT OF COMPARABLES. THIS COULD BE AC HIEVED EITHER ADOPTING A FILTER OF CERTAIN PERCENT OF IMPORT COMPARED TO SALES OR BY ELIMINATING IN THE PROCESS OF COMPARISON ANY GAIN OR LOSS ARISING FROM EXCHANGE FLUCTUATION. GIVEN THIS IT(TP)A NO.592/COCH/2018 20 CONTEXT, THE LD. AR SUBMITTED THAT ADJUSTMENT RELATING TO FOREIGN E XCHANGE DIFFERENCES , EITHER RESULTING IN GAIN OR LOSS SHOULD BE EXCLUDED AS AN EXTRAORDINARY ITEM ONLY. IF THE IMPORTED PURCHASES /EXPORTS ARE THUS MARKED TO THE PREVAILING RUPEE VALUE ON THE DATE OF IMPORT/EXPORT, THE PARITY OF A SIMILAR ECONOMIC CONDITIO N OF OTHER COMPARABLES COULD ARISE. A FURTHER ADJUSTMENT TO THE RUPEE'S CARRY VALUE AT THE TIME OF PAYMENT OR RECEIPT OF SUCH IMPORT OR EXPORT WOULD VITIATE AND LEAD TO A DIFFERENT ECONOMIC CONDITION, FOR WHICH NO COMPARABLE ADJUSTMENT COULD BE CARRIED OUT ON THE COMPARABLES. THEREFORE, IN ORDER TO BRING THE COMPARABLES AS PARIMATERIA TO THE OPERATIONS OF THE ASSESSEE COMPANY, THE TREATMENT OF BOOKING IMPORTS AND EXPORTS MUST BE ON THE BASIS OF VALUE OF SUCH IMPORTS AND EXPORTS ON DATE OF SUCH TRANSACTIONS AND OPERATING PROFIT MUST BE ARRIVED AT BASED ON THE SAME. 5 .8 FURTHER, THE LD. AR RELIED ON THE FOLLOWING JUDGMENTS OF VARIOUS TRIBUNALS ON THE TREATMENT OF FOREIGN EXCHANGE GAIN/LOSS; A) THE DY. COMMISSIONER OF INCOME TAX VS M/S HANIL TUBE INDIA P VT LTD ITA NO. 1 037/MDS/20 1 4 DATED 22/02/2017 B) M/S I N FAC INDIA PRIVATE LIMITED VS DCIT ITA NO. 3182/MDS/20 1 6 BASED ON THE ABOVE, IT WAS SUBMITTED THAT NON - INCLUSION OF EXCHANGE LOSS FOR THE PURPOSE OF A.L.P. CALCULATION WAS A PPROPRIATE . 6. THE LD. DR RELIED ON THE ORDER OF THE DRP. IT(TP)A NO.592/COCH/2018 21 7 . WE HAVE HEARD THE RIVAL SUBMISSIONS. THE ISSUE WITH REGARD TO FOREIGN FLUCTUATION EXPENSES, THE CHENNA I BENCH IN THE CASE OF INFAC INDIA PVT. LTD. VS. DCIT IN IT(TP)A NO. 27/CHENY /2018 FOR THE ASSESSMENT YEAR 2014 - 15 DATED 05/10/2018 HELD AS UNDER: 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. AN IDENTICAL ISSUE WAS CONSIDERED BY THE CO - ORDINATE BENCH OF THIS TRIBUNAL AFTER REFERRING TO SAFE HARBOUR RULES, FOUND THAT THE LOSS INCUR RED BY THE ASSESSEE IN FOREIGN EXCHANGE FLUCTUATION DUE TO INTERNATIONAL TRANSACTION DOES NOT GIVE ANY EXTRA BENEFIT TO THE ASSOCIATED ENTERPRISE WHO SUPPLIES THE MATERIAL. THE LOSS AROSE DUE TO EXCHANGE DIFFERENCE BETWEEN THE FOREIGN CURRENCY AND INDIAN CURRENCY. THEREFORE, THE CO - ORDINATE BENCH OF THIS TRIBUNAL FOUND THAT THE FOREIGN EXCHANGE LOSS OR GAIN HAS TO BE EXCLUDED FROM OPERATING INCOME. IN VIEW OF THE DECISION OF CO - ORDINATE BENCH OF THIS TRIBUNAL IN HANIL TUBE INDIA PVT. LTD.(SUPRA), THIS TR IBUNAL IS OF THE CONSIDERED OPINION THAT THE PROFIT OR LOSS DUE TO FOREIGN EXCHANGE FLUCTUATION HAS TO BE EXCLUDED FROM THE OPERATING INCOME FOR THE PURPOSE OF PLI. ACCORDINGLY, THE ORDERS OF THE AUTHORITIES BELOW ARE SET ASIDE AND THE ASSESSING OFFICER IS DIRECTED TO EXCLUDE THE LOSS OR GAIN IN FOREIGN EXCHANGE FLUCTUATION FROM THE OPERATING INCOME FOR COMPUTING PLI. 7.1 FURTHER, IN TH E CASE OF DCIT VS. HANIL TUBE INDIA PVT. LTD. IN ITA NO. 1037/MDS/2014 DATED 22/02/2017 , IT WAS HELD AS FOLLOWS: 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND PERUSED 1THE RELEVANT MATERIAL AVAILABLE ON RECORD. AN IDENTICAL ISSUE WAS CONSIDERED BY THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN HANIL TUBE INDIA PVT. LTD. (SUPRA). THIS TRIBUNAL AFTER REFERRING TO SAFE HARBOR RULES, FOUND THAT THE LOSS INCURRED BY THE ASSESSEE IN FOREIGN EXCHANGE FLUCTUATION DUE TO INTERNATIONAL TRANSACTION DOES NOT GIVE ANY EXTRA BENEFIT TO THE ASSOCIATED ENTERPRISE WH O SUPPLIES THE MATERIAL. THE LOSS AROSE DUE TO EXCHANGE DIFFERENCE BETWEEN THE FOREIGN CURRENCY AND INDIAN CURRENCY. THEREFORE, THE CO - ORDINATE BENCH OF THIS TRIBUNAL FOUND THAT THE FOREIGN EXCHANGE LOSS OR GAIN HAS TO BE EXCLUDED FROM OPERATING INCOME. IN VIEW OF THE DECISION OF CO - ORDINATE BENCH OF THIS TRIBUNAL IN HANIL TUBE INDIA PVT. LTD. (SUPRA), THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE PROFIT OR LOSS DUE TO FOREIGN EXCHANGE FLUCTUATION HAS TO BE EXCLUDED FROM THE IT(TP)A NO.592/COCH/2018 22 OPERATING INCOME FOR THE PURPOSE OF PLI. ACCORDINGLY, THE ORDERS OF THE AUTHORITIES BELOW ARE SET ASIDE AND THE ASSESSING OFFICER IS DIRECTED TO EXCLUDE THE LOSS OR GAIN IN FOREIGN EXCHANGE FLUCTUATION FROM THE OPERATING INCOME FOR COMPUTING PLI. 7.2 IN VIEW OF THE ABOVE DEC ISION S OF THE TRIBUNAL, WE DIRECT THE ASSESSING OFFICER TO EXCLUDE THE LOSS ON ACCOUNT OF FOREIGN FLUCTUATION FROM THE OPERATING EXPENSES FOR COMPUTING THE PLI (PROFIT LEVEL INDICATOR) . THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 8 . THE NEXT GRO UND, GROUND NOS. 3.4 TO 3.12 IS WITH REGARD TO REJECTION OF FOLLOWING COMPARABLES: 1. EVOKE TECHNOLOGIES LTD. 2. LARSEN & TOUBRO INFOTECH LIMITED 3. MINDTREE LIMITED 4. CIGNITI TECHNOLOGIES LTD. 5. THIRDWARE SOLUTIONS LTD. 6. INFOSYS LTD. 8 .1 EVOKE TECHNOLOGIES PVT. LTD . T HE TPO OBSERVED THAT THIS COMPANY HAS FAILED FOREX AND EMPLOYEE COST FILTER S . THE DRP EXAMINED THE FINANCIALS. FROM THE PERUSAL OF THE STATUTORY AUDITORS REPORT, IT WAS STATED THAT THE FINANCIAL STATEMENTS INCLUDE BRANCH REVENUE O F RS.9,24,86,670/ - AND PROFIT OF RS.1,41,11,040/ - BASED ON UNAUDITED FINANCIAL STATEMENT OF THE BRANCH OUTSIDE INDIA. IT WAS ALSO NOTED AS PER THE GEOGRAPHIC SEGMENTATION INFORMATION, THE REVENUE FROM INDIA WAS GIVEN TO BE RS.3621.72/ - LAKHS AND THAT THE REVENUE FROM WAS GIVEN TO BE RS.924.87/ - LAKHS. THUS, IT CAN BE SEEN THAT THE EXPORT IT(TP)A NO.592/COCH/2018 23 REVENUE CONSTITUTE ONLY 20.34% OF THE TOTAL REVENUE. THEREFORE, THE DRP HELD THAT THIS COMPANY CANNOT BE CONSIDERED AS COMPARABLE. 8 .2 AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. AR SUBMITTED THAT THIS COMPANY PASSES BOTH FOREX FILTER AND EMPLOYEE COST AND FUNCTIONALLY COMPARABLE. 8 .3 THE LD. DR RELIED ON THE ORDER OF THE DRP. 8.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. M/S. EVOKE TECHNOLOGIES P. LTD. HAS BEEN CONSIDERED AS FUNCTIONALLY COMPARABLE IN THE ASSESSMENT YEAR 2011 - 12 BY THE TPO. HOW IT IS NOT PASSING THE FOREX FILTER AND THE EMPLOYEE COST F ILTER HAS NOT BEEN EXPLAINED BY THE TPO. WE HAVE GONE THROUGH THE FOREX FILTER AND EMPLOYEE FILTER OF THIS COMPANY WHICH IS AS FOLLOWS: FOREX FILTER FOREX CALCULATION MARCH 14 PARTICULARS AMOUNT IN RS. FOREX INCOME 361,891,528 TOTAL O PERATING I NCOME 456,330,307 FOREX INCOME/ S ALES 79.32% EMPLOYEE CO ST FILTER EMPLOYEE COST CALCULATION MARCH 14 PARTICULARS AMOUNT IN RS. PERSONAL EXPENSES 319,556,453 TOTAL O PERATING I NCOME 454,659,098 IT(TP)A NO.592/COCH/2018 24 EMPLOYEE COST/ S ALES 70.38% THEREFORE, THE ASSESSING OFFICER HAS TO APPRAISE THE ABOVE DATA AFTER GOING THROUGH THE ANNUAL REPORT OF THE COMPARABLE. HENCE, WE REMIT THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR TP STUDY BY THE TPO AND DECIDE ACCORDINGLY. THUS, THIS GROUND OF A PPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 9. LAR SEN & TOUB R O INFOTECH LTD. T HE DRP HELD THAT THE INTANGIBLES OWNED BY THIS COMPANY ARE MOSTLY SOFTWARE, BUSINESS RIGHTS AND CAPITAL WORK IN PROGRESS WHICH IS THE INTERNAL SOFTWARE. IT WAS OBSERVED THA T T HE ASSESSEE ALSO WORKS ON HUGE PLATFORM AND ENJOY SIGNIFICANT BRAND VALUE AS PART OF THE LARGE MNC GROUP. THE DRP OBSERVED THAT WITH REGA RD TO IPR, BRAND AND OTHER DIFFERENCES, THE ASSESSEE HAD FAILED TO ESTABLISH THAT SUCH DIFFERENCES HAVE MATERIAL EFFECT ON THE MARGIN OF THE COMPANY. ACCORDINGLY, THE DRP UPHELD THE SELECTION OF THE ABOVE COMPANY AS COMPARABLE BY THE TPO. THE TPO CONSIDER ED THE REVENUE AND EXPENSES FOR THE ENTITY AS A WHOLE, THEREFORE, THE DRP HELD THAT DISCONTINUATION OF ONE VERTICAL LINE OF BUSINESS HAD NOT MATERIALLY AFFECTED THE PROFIT MARGIN. THE RE - ORGANISATION HAD TAKEN PART ONLY IN THE LAST QUARTER OF THE FINANCIA L YEAR AND SOME OF THE CHANGES WERE EFFECTED AS LATE AS 28 TH MARCH, 2014. THE DRP HELD THAT DECISION RENDERED FOR THE EARLIER YEAR CANNOT BE AUTOMATICALLY APPLIED TO DETERMINE AS TO WHETHER THE COMPANY IS FUNCTIONALLY COMPARABLE AND THE COMPARABILITY OF A COMPANY HAS TO BE DECIDED ON THE BASIS OF THE INFORMATION IT(TP)A NO.592/COCH/2018 25 AVAILABLE IN THE ANNUAL REPORT OF THE ASSESSMENT YEAR IN RESPECT OF WHICH THE COMPANY WAS SELECTED AS A COMPARABLE. 9.1 AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. AR SUBMITTED T HAT THE ASSESSEE IS ENGAGED IN PRODUCT ENGINEERING SERVICES AND L&T INFOTECH LTD. IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEES CASE IN VIEW OF THE DECISION OF THE ITAT, DELHI IN THE CASE OF PITNEY BOWES SOFTWARE INDIA (P) LTD. VS. ADDL. CIT WHEREIN IT WAS HELD AS UNDER: A PERUSAL OF THE ANNUAL ACCOUNT OF THIS COMPANY SHOWS THAT UNDER THE HEAD SEGMENTAL REPORTING THIS COMPANY (L& T) HAS SHOWN REVENUE FROM THREE SEGMENTS, NAMELY, SERVICE CLUSTERS, INDUSTRIAL CLUSTERS AND TELECOM CLUSTERS (PRS). FROM THE TOTAL SEGMENTAL OPERATING PROFIT, THIS COMPANY HAS DEDUCTED UNALLOCABLE EXPENSES, WHICH MEANS THAT THE OPERATING MARGIN OF INDUSTR IAL CLUSTER SEGMENT SELECTED BY THE TPO IS DEVOID OF UNALLOCABLE EXPENSES AS THE SAME HAS BEEN DEDUCTED FROM THE TOTAL SEGMENTAL PROFIT. 9.2 FURTHER, HE RELIED ON THE ORDER OF THE ITAT, BANGALORE IN THE CASE OF GXS INDIA TECHNOLOGY CENTRE VS. ITO IN IT A NO. IT(TP)A NO. 1444/BANG/2012 DATED 31/07/2015 WHEREIN IT WAS HELD AS FOLLOWS: 14.2 HAVING CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD , WE NOTE THAT THAT THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN CASE OF 3DPLM SOFTWARE SOLUTIONS LTD. (SUPRA) HAS EXAMINED THE FUNCTIONAL PROFILE OF THIS COMPANY IN PARA 18.3.1. TO 18.3.3 AS UNDER: 18.3.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS BROUGHT ON RECORD THAT THIS COMPANY, I.E, QUINTEGRA SOLUTIONS LTD. IS ENGAGED IN PRODUCT ENGINEERING SERVICES AND IS NOT PUR ELY A SOFTWARE DEVELOPMENT SERVICE PROVIDE AS IS THE ASSESSEE IN THE CASE ON HAND. IT IS ALSO SEEN THAT THIS COMPANY IS ALSO IT(TP)A NO.592/COCH/2018 26 ENGAGED IN PROPRIETARY SOFTWARE PRODUCTS AND HAS SUBSTANTIAL R&D ACTIVITY WHICH HAS RESULTED IN CREATION OF ITS IPRS. HAVING APPL IED FOR TRADE MARK REGISTRATION OF ITS PRODUCTS, IT EVIDENCES THE FACT THAT THIS COMPANY OWNS INTANGIBLE ASSETS. THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD. (ITA NO.227/BANG/2010 DATED 09/11/2012) HAS HELD THAT IF A C OMPANY POSSESSES OR OWNS INTANGIBLES OR IPRS, THEN IT CANNOT BE CONSIDERED AS A COMPARABLE COMPANY TO ONE THAT DOES NOT OWN INTANGIBLES AND REQUIRES TO BE OMITTED FROM THE LIST OF COMPARABLES, AS IN THE CASE ON HAND. 18.3.2 WE ALSO FIND FROM THE ANNUAL R EPORT OF QUINTEGRA SOLUTIONS LTD. THAT THERE HAVE BEEN ACQUISITIONS MADE BY IT IN THE PERIOD UNDER CONSIDERATION. IT IS SETTLED PRINCIPLE THAT WHERE EXTRAORDINARY EVENTS HAVE TAKEN PLACE, WHICH HAS AN EFFECT ON THE PERFORMANCE OF THE COMPANY, THEN THAT CO MPANY SHALL BE REMOVED FROM THE LIST OF COMPARABLES. 18.3.3 RESPECTFULLY FOLLOWING THE DECISION OF THE CO - ORDIANTE BENCH OF THE TRIBUNAL IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD. (SUPRA), WE DIRECT THAT THIS COMPANY I.E. QUINTEGRA SOLUTIONS LTD. BE EXCLUDED FROM THE LIST OF COMPARABLES IN THE CASE OF HAND SINCE IT IS ENGAGED IN PROPRIETARY SOFTWARE PRODUCTS AND OWNS ITS OWN INTANGIBLES UNLIKE THE ASSESSEE IN THE CASE ON HAND WHO IS A SOFTWARE SERVICE PROVIDER. 14.3 THUS, IT IS CL EAR FROM THE FINDING OF THIS TRIBUNAL THAT THIS COMPANY IS ENGAGED IN THE PRODUCT ENGINEERING SERVICES AND ALSO OWNS INTANGIBLE/INTELLECTUAL PROPERTY RIGHTS. FOLLOWING THE FINDING OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL (SUPRA) WE DIRECT THE AO/TPO TO E XCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. 9.3 FURTHER, THE LD. AR RELIED ON THE ON THE ORDER OF THE ITAT, BANGALORE IN THE CASE OF METRIC STREAM INFOTECH (INDIA) PVT. LTD. VS. DCIT IN IT(TP)A NOS. 1418 & 2735/BANG/2017 DATED 27/02/2019 WHERE IN IT WAS HELD AS FOLLOWS: 11. AS FAR AS L&T INFOTECH LTD. AND PERSISTENT SYSTEMS LTD. ARE CONCERNED, OUR ATTENTION WAS DRAWN TO THE DECISION OF ITAT, HYDERABAD BENCH IN THE CASE OF M/S. EPAM SYSTEMS (I) LTD. VS. ACIT IN ITA NO.2122/HYD /2017 FOR AY 2013 - 14, ORDER DATED 20/11/2017. VIDE PARA 12 OF THE DECISION, THE TRIBUNAL TOOK THE VIEW THAT PERSISTENT SYSTEMS LTD. IT(TP)A NO.592/COCH/2018 27 WAS INTO SOFTWARE PRODUCTS AND SOFTWARE SOLUTIONS AND NO SEGMENTAL DETAILS WERE AVAILABLE AND THEREFORE THE PROFIT MARGIN I N THE SOFTWARE DEVELOPMENT SERVICES SEGMENT COULD NOT BE COMPARED WITH THE ASSESSEES PROFIT MARGIN. AS FAR AS L&T INFOTECH LTD., IS CONCERNED, THE TRIBUNAL VIDE PARA 17 OF THE AFORESAID ORDER CAME TO A SIMILAR CONCLUSION TO HOLD THAT L&T INFOTECH SHOULD NOT BE REGARDED AS A COMPARABLE COMPANY. IN THE LIGHT OF JUDICIAL PRECEDENTS WHICH REMAIN UNCONTROVERTED, WE ARE OF THE VIEW THAT THE AFORESAID TWO COMPARABLE COMPANIES SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. 9.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IN VIEW OF THE ABOVE ORDER S OF THE ITAT, DELHI AND ITAT, BANGALORE CITED SUPRA, WE DIRECT THE AO/TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLE S ON THE SAME REASON GIVEN BY THE CO - ORDINATE BE NCH OF BANGALORE. 10 . PERSISTENT SYSTEMS LTD. T HE TPO OBTAINED INFORMATION U / S. 133(6) BASED ON WHICH IT WAS CONCLUDED THAT THE COMPARABLE IS PREDOMINANTLY ENGAGED IN THE BUSINESS OF RENDERING SOFTWARE DEVELOPMENT TO VARIOUS CUSTOMERS WORLDWID E . THE TPO OBSERVED THAT THE COMPANY IS ENGAGED IN DEVELOPING PRODUCTS WHICH HAVE BEEN OUTSOURCED BY CLIENTS AND THE COMPANY DOES NOT OWN IP TO THESE PRODUCTS AND THE PRODUCT DEVELOPMENT IS NOTHING BUT SOFTWARE DEVELOPMENT SERVICES. WITH RESPECT TO THE INT ANGIBLES OF THE COMPARABLE COMPANY, IT WAS FOUND THAT OVERSEAS SUBSIDIARY COMPANIES HAVE ACQUIRED CERTAIN IP PRODUCTS AND THAT THE COMPARABLE IS PREDOMINANTLY ENGAGED IN THE SOFTWARE DEVELOPMENT SERVICES. FURTHER, THE INTANGIBLES WITH THE COMPARABLE ARE IN THE NATURE OF SOFTWARE LICENSE ACQUIRED FOR USE IN THE OPERATION OF THE COMPANY AND THEY ARE NOT THE SOFTWARE PRODUCTS GENERATING REVENUE. THE DISCLOSURE IN THE ANNUAL IT(TP)A NO.592/COCH/2018 28 REPORT REGARDING THE ACQUISITION OF THE PRODUCTS RELATE TO THE GROUP AS A WHOLE AND NO T TO THE STAND ALONE AS ENTITY WHOSE FINANCIALS ARE COMPARED. THE R&D EXPENDITURE OF THE COMPARABLE RELATES TO CROSS IMPROVEMENTS AND NOT TO INNOVATE ON NEW PRODUCTS OR EARNING ADDITIONAL REVENUE. HENCE, THE R&D IS NOT AFFECTING THE MARGIN OF THE COMPANY . THE TPO HAD APPLIED RELATED PARTY FILTER OF GREATER THAN 25% AND CLEARLY THIS COMPANY PASSED THE FILTERS. HENCE, THE TPO REJECTED THE CONTENTIONS OF THE ASSESSEE AND HELD THE COMPANY AS COMPARABLE. THE DRP HELD THAT THE COMPANY IS FUNCTIONALLY SIMILAR T O THE ASSESSEE. 10. 1 AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. AR SUBMITTED THAT IT WAS NOT FUNCTIONALLY COMPARABLE AS IT WAS ENGAGED IN SIGNIFICANT PRODUCT DEVELOPMENT. THE LD. AR RELIED ON THE ORDER OF THE ITAT, CHENNAI IN THE CASE OF SYMANTEC S OFTWARE & SERVICES INDIA (P) LTD. VS. DCIT 79 TAXMANN.COM (CHENNAI TRIB.) WHEREIN IT WAS HELD AS FOLLOWS: 10. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON RECORD. WE FOUND THAT THE COMPANY IS ENGAGED IN PRODUCT DEVELOPMENT AND CANNOT BE COMPARABLE TO THE SOFTWARE DEVELOPMEN T SERVICES AND HAS INCOME FROM LICENSE FEE. THE REVENUE RECOGNITION P OLICY IN NOTES OF ACCOUNTS AND SEGMENTAL INFORMATION IS AVAILABLE IN RESPECT OF INFRASTRUCTURE AND SYSTEMS, TELECOM AND WIRE LESS LIFE SCIENCE S AND HEALTH CARE. FURTHER, IT RENDERS SERVICES IN COST PLUS TO ITS ASSO CIATE ENTERPRISE AND SAIL WITH PARTNERSHIP AND ALLIANCES, INTELLECTUAL PRO PERTY LED SOLUTIONS AND END - TO - END SOLUTIONS, STRATEGIC ACQUISITIONS AND FINANCIAL YEA R 2010 - 11 IS AN EXCEPTIONAL YEAR OF OPERATION OF PERSISTENT SYSTEMS. WE FIND SUPPORT FROM THE DECISION OF 3DPLM SOFTWARE SOLUTIONS LTD. (SUPRA) AT PARA 17 PAGE 13 OF THE PAPER BOOK AS UNDER: 17. PERSISTENT SYSTEMS LTD. 17.1.1 THIS COMPANY WAS SELECTED BY THE TPO AS A COMPARABLE. THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMPANY AS A COMPARABLE FOR IT(TP)A NO.592/COCH/2018 29 THE REASON THAT THIS COMPANY BEING ENGAGED IN SOFTWARE PRODUCT DESIGNING AND ANALYTIC SERVICES, IT IS FUNCTIONALLY DIFFERENT AND FURTHER THAT SEGMENTAL RESULTS ARE NOT AVAILABLE. THE TPO REJECTED THE ASSESSEES OBJECTIONS ON THE GROUND THAT AS PER THE ANNUAL REPORT FOR THE COMPANY FOR FINANCIAL YEAR 2007 - 08, IT IS MAINLY A SOFTWARE DEVELOPMENT COMPANY AND AS PER T HE DETAILS FURNISHED IN REPLY TO THE NOTICE U/S. 133(6) OF THE ACT, SOFTWARE DEVELOPMENT CONSTITUTES 90% OF ITS REVENUE. IN THIS VIEW OF THE MATTER, THE ASSESSING OFFICER INCLUDED THIS COMPANY, I.E., PERSISTENT SYSTEMS LTD. IN THE LIST OF COMPARABLES A S IT QUALIFIED THE FUNCTIONALITY CRITERION. 17.1.2 BEFORE US, THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMPAN Y AS A C OMPARABLE SUBMITTING THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT AND ALSO THAT THERE ARE SEVERAL OTHER FACTORS ON WHICH THIS C OMPANY CANNOT BE TAKEN AS A COMPARABLE. IN THIS REGARD, THE LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT: I) THIS COMPANY IS ENGAGED IN SOFTWARE DESIGNING SERVICES AND ANALYTIC SERVICES AND THEREFORE IT IS NOT PURELY A SOFTWARE DEVELOPMENT SERVICE PR OVIDER AS IS THE ASSESSEE IN THE CASE ON HAND. II) PAGE 60 OF THE ANNUAL REPORT OF THE COMPANY FOR F.Y. 2007 - 08 INDICATES THAT THIS COMPANY IS PREDOMINANTLY ENGAGED IN OUTSOURCED SOFTWARE PRODUCT DEVELOPMENT SERVICE FOR INDEPENDENT SOFTWARE VENDORS AND ENTERPRISES. III) WEBSITE EXTRACTS INDICATE THAT THE COMPANY IS IN THE BUSINESS OF PRODUCT DESIGN SERVICES. IV) THE ITAT, MUMBAI BENCH IN THE CASE OF TELECORDIA TECHNOLOGIES INDIA PVT. LTD. (SUPRA) WHILE DISCUSSING THE COMPARABILITY OF ANOTHER C OMPANY NAMELY LUCID SOFTWARE LTD. HAD RENDERED A FINDING THAT IN THE ABSENCE OF SEGMENTAL INFORMATION, A COMPANY BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS. THIS PRINCIPLE IS SQUARELY APPLICABLE TO THE COMPANY PRESENTLY UNDER CONSIDERATION, WHICH IS INTO PRODUCT DEVELOPMENT AND PRODUCT DESIGN SERVICES AND FOR WHICH THE SE GMENTAL DATA IS NOT AVAILABLE. THE LEARNED AUTHORISED REPRESENTATIVE PRAYS THAT IN VIEW OF THE ABOVE, THE COMPANY, I.E. PERSISTENT SYSTEMS LTD. BE OMITTED FROM THE LIST OF COM PARABLES. 17.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORT THE ACTION OF THE TPO IN INCLUDING THIS COMPANY IN THE LIST OF COMPARABLES. 17.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE IT(TP)A NO.592/COCH/2018 30 DETAILS ON RECORD THAT THIS COMPANY I.E., PERSISTENT SYSTE MS LTD., IS ENGAGED IN PRODUCT DEVELOPMENT AND PRODUCT DESIGN SERVICES WHILE THE ASSESSEE IS A SOFTWARE DEVELOPMENT SERVICES PROVIDER. WE FI ND THAT, AS SUBMITTED BY THE ASSESSEE, THE SEGMENTAL DETAILS ARE NOT GIVEN SEPARATELY. THEREFORE, FOLLOWING THE PRINCIPLE ENUNCIATED IN THE DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF TELECORDIA TECHNOLOGIES INDIA PVT. LTD. (SUPRA) THAT IN THE ABSENCE O F SEGMENTAL DETAILS/INFORMATION A COMPANY CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS. WE HOLD THAT THIS COMPANY, I.E., PERSISTENT SYSTEMS LTD. OUGHT TO BE OMITTED FROM THE SET OF COMPARABLES FOR THE YEAR UNDER CONSIDERATION. IT IS ORDERED A CCORDINGLY. WE RELY ON THE ABOVE FACTS AND TRIBUNAL DECISION AND WE DIRECT THE TPO TO E XCLUDE PERSISTENT SYSTEMS LTD. FROM THE LIST OF COMPARABLE COMPANIES. 10.2 FURTHER, THE LD. AR RELIED ON THE ORDER OF THE ITAT, DELHI IN THE CASE OF M/S. ALCATEL - LUCENT INDIA LTD. VS. ADDL. CIT IN ITA NO.6979/DEL/2017 DATED 09/05/2019 WHEREIN IT WAS HELD AS UNDER: WE ARE OF THE VIEW THAT A COMPANY ENGAGED IN DEVELOPMENT OF THE SOFTWARE PRODUCTS CANNOT BE COMPARED WITH THE ASSESSEE WHO IS ENGAGED IN CONT RACT S OFTWARE DEVELOPMENT SERVICES. ACCORDINGLY, WE DIRECT THE LD. A.O./TPO TO EXCLUDE THE COMPANY FROM THE FINAL SET OF THE COMPARABLES. 10.3 FURTHER, T HE LD. AR RELIED ON THE ON THE ORDER OF THE ITAT, BANGALORE IN THE CASE OF GXS INDIA TECHNOLOGY CENTRE VS. ITO IN ITA NO. IT(TP)A NO. 1444/BANG/2012 DATED 31/07/2015 WHEREIN IT WAS HELD AS FOLLOWS: 13.2 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. AS POINTED OUT BY THE LEARNED AR OF THE ASSESSEE THAT THE F UNCTIONAL COMPARABILITY OF THE COMPANY HAS BEEN EXAMINED BY THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN CASE OF 3DPLM SOFTWARE SOLUTIONS (SUPRA) IN PARA 17.3 AS UNDER: 17.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATE RIAL ON RECORD. IT IS SEEN FROM THE DETAILS ON RECORD IT(TP)A NO.592/COCH/2018 31 THAT THIS COMPANY, I.E., PERSISTENT SYSTEMS LTD., IS ENGAGED IN PRODUCT DEVELOPMENT SERVICES PROVIDER. WE FIND THAT, AS SUBMITTED BY THE ASSESSEE, THE SEGMENTAL DETAILS ARE NOT GIVEN SEPARATELY. THERE FORE, FOLLOWING THE PRINCIPLE ENUNCIATED IN THE CASE OF TELECORDIA TECHNOLOGIES INDIA PVT. LTD. (SUPRA) THAT IN THE ABSENCE OF SEGMENTAL DETAILS/INFORMATION A COMPANY CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABLE ANALYSIS, WE HOLD THAT THIS COMPANY, I.E., PERSISTENT SYSTEMS LTD. OUGHT TO BE OMITTED FROM THE SET OF COMPARABLES FOR THE YEAR UNDER CONSIDERATION. IT IS ORDERED ACCORDINGLY. 13.3 IT IS CLEAR FROM THE FINDING OF THIS TRIBUNAL THAT THIS COMPANY IS ENGAGED IN THE PRODUCT DEVELOPING AND PRODUCT DE SIGN SERVICES WHICH IS SIMILAR WITH THE SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE ASSESSEE. ACCORDINGLY, FOLLOWING THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL (SUPRA) WE DIRECT THE TPO/A.O. TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABL ES. 10 .4 THE LD. AR RELIED ON THE ORDER OF THE ITAT, BANGALORE IN THE CASE OF METRICSTREAM INFOTECH (INDIA) PVT. LTD. VS. DCIT IN IT(TP)A NOS. 1418 & 2735/BANG/2017 DATED 27/02/2019 WHICH WE HAVE DISCUSSED IN EARLIER PARA. 10.5 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IN VIEW OF THE ABOVE ORDERS OF THE ITAT C ITED IN PARA 10.1 TO 10.4 OF THIS ORDER , WE DIRECT THE AO/TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES ON THE SAME REASON GIVEN BY THE CO - ORDINATE BE NCH OF BANGALORE. 11. MINDTREE LTD. T HE DRP HELD THAT THE COMPARABLE LIKE THE ASSESSEE IS ENGAGED IN SOFTWARE DEVELOPMENT ONLY. THE PRODUCTS ARE PLATFORMS USED BY THE COMPARABLE TO ENABLE DESIGN AND DEVELOPING SOFTWARE FOR USE BY THE CUSTOMER IN A PARTICULAR INDUSTRY. THE COMPARABLE ENJOYS SIGNIFICANT BRAND VALUE AS PART OF IT(TP)A NO.592/COCH/2018 32 THE HUGE GLOBAL MNC GROUP. THE COMPARABLE IS ENGAGED IN DEVELOPMENT OF IP AND OWNS INTANGIBLES. SCALE OF OPERATION IS NO ANAPPROPRIATE FILTER. 11.1 AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. AR SUBMITTED THAT IT WAS NOT FUNCTIONALLY COMPARABLE AS IT WAS LEADER IN PRODUCT ENGINEERING SERVICES AND INCURRED HUGE BRANCH EXPENSES AND OFFICE EXPENSES AND ACQUIRED TANGIBLES. THE LD. AR RELIED ON THE DECISION OF THE ITAT, DELHI IN THE CASE OF M/S. ALCATEL - LUCENT INDIA LTD. VS. ADDL. CIT IN ITA NO.6979/DEL/20 17 DATED 09/05/2019 WHEREIN IT WAS HELD AS UNDER: (V) IN VIEW OF THE ABOVE OBSERVATION, IT IS EVIDENT THAT THE SERVICES RENDERED BY THE COMPANY ARE NOT LIMITED TO SOFTWARE DEVELOPMENT, BUT ALSO ARE IN THE FIELD OF CONSULTING AND TECHNICAL SUPPORT, MANA GEMENT ETC. IN OUR OPINION THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY THE ASSESSEE CANNOT BE COMPARED WITH A WHOLE BASKET OF SERVICES OF CONSULTING , TECHNICAL SUPPORT OR MANAGEMENT SERVICES RENDERED BY THE COMPANY. AS THERE IS NO SEPARATE SEGMENT OF SOFTWARE DEVELOPMENT SERVICES AVAILABLE IN THE FINANCIAL STATEMENT OF THE COMPANY, THE COMPANY AT ENTITY LEVEL CANNOT COMPARE FUNCTIONALLY WITH THE CSD SEGMENT OF ASSESSES AND ACCORDINGLY, WE DIRECT THE LD. A.O./TPO TO EXCLUDE THE COMPANY FROM FINAL SET OF THE COMPARABLES. 11.2 THE LD. AR ALSO RELIED ON THE ORDER OF THE ITAT , BANGALORE IN THE CASE OF GXS INDIA TECHNOLOGY CENTRE VS. ITO IN ITA NO. IT(TP)A NO. 1444/BANG/2012 DATED 31/07/2015 WHICH WE HAVE DISCUSSED IN EARLIER PARA. 11.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IN VIEW OF THE ABOVE ORDERS OF THE ITAT, DELHI AND ITAT, BANGALORE CITED IN PARA IT(TP)A NO.592/COCH/2018 33 11.1 TO 11.2 OF THIS ORDER , WE DIRECT THE AO/TPO TO EXCLUDE THIS COMPANY FR OM THE LIST OF COMPARABLES ON THE SAME REASON GIVEN BY THE CO - ORDINATE BENCH OF BANGALORE. 12. REGARDING CIGNITI TECHNOLOGIES LTD. , THE DRP OBSERVED THAT THE COMPANY IS ENGAGED IN GENERIC IT SERVICES AND HEALTH RELATED SERVICES WHICH FALLS UNDER THE SOFTWARE DEVELOPMENT AND IS COMPARABLE TO THE ASSESSEE COMPANY. ON EXAMINATION OF THE ANNUAL REPORT OF M/S. CIGNITI TECHNOLOGIES LTD., I.E., SCHEDULE NON CURRE NT INVESTMENTS REPORTED IN PAGE 71, IT CAN BE SEEN THAT GALLOP SOLUTIONS INC AND M/S. GALLOP SOLUTIONS PVT. LTD. WERE SHOWN AS 100% SUBSIDIARY HELD AS INVESTMENT BY M/S. CIGNITI TECHNOLOGIES LTD. FROM WHICH IT IS EVIDENT THAT ABOVE MENTIONED COMPANIES HAD NOT BEEN MERGED WITH M/S. CIGNITI TECHNOLOGIES LTD. THEREFORE, THEY DO NOT IMPACT THE STANDALONE PROFIT MARGINS OF M/S. CIGNITI TECHNOLOGIES LTD. THE DRP OBSERVED THAT THE ASSESSEE HAS ERRONEOUSLY COMPARED AND CONSIDERED THE CONSOLIDATED FIGURES OF THE CIGNITI GROUP REPORTED IN PAGE 3 OF THE ANNUAL REPORT, INSTEAD OF CONSIDERING THE STANDALONE FINANCIAL OF M/S. CIGNITI TECHNOLOGIES LTD. THE DRP HELD THAT THE MARGINS OF THE COMPARABLE COMPANY ARE NOT AFFECTED BY ANY EXTRAORDINARY EVENTS. THE DRP HELD THA T DECISION RENDERED FOR THE EARLIER YEAR CANNOT BE AUTOMATICALLY APPLIED TO DETERMINE AS TO WHETHER THE COMPANY IS FUNCTIONALLY COMPARABLE AND THE COMPARABILITY OF A COMPANY HAS TO BE DECIDED ON THE BASIS OF THE INFORMATION AVAILABLE IN THE ANNUAL REPORT O F THE ASSESSMENT YEAR IN RESPECT OF WHICH THE IT(TP)A NO.592/COCH/2018 34 COMPANY WAS SELECTED AS A COMPARABLE. THUS, THE DRP REJECTED THE CONTENTIONS OF THE ASSESSEE. 12.1 AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. AR SUBMITTED THAT THE COMPARABLE IS WORLDS THIRD LARGEST SOFTWARE TESTING SERVICES AND ACQUISITION DURING F.Y. 2013 - 14 RESULTED IN SUBSTANTIAL IMPACT ON PROFIT. THUS, IT WAS SUBMITTED THAT M/S. CIGNITI TECHNOLOGIES LTD. IS NOT FUNCTIONALLY COMPARA BLE TO THE ASSESSEES CASE. THE LD. AR RELIED ON THE DECISION OF THE ITAT, BANGALORE IN THE CASE OF TRILOGY E - BUSINESS INDIA PRIVATE LIMITED VS. DCIT IN ITA NO.1054/BANG/2011 DATED 23/11/2012 WHEREIN IT WAS HELD AS FOLLOWS: 71. M/S. INDIU M INDIA L TD., A C OMPARABLE CONSIDERED BY THE ASSESSEE IN THE TP STUDY WAS REJECTED BY THE TPO AS NOT COMPARABLE ON THE GROUND THAT THE SAID COMPANY WAS RENDERING TESTING SERVICES. IT IS THE PLEA OF THE ASSESSEE THAT SOFTWARE TESTING IS AN INTEGRAL PART OF SOFTWARE DEV ELOPMENT CYCLE. IT IS FURTHER POINTED OUT THAT THE TPO IN HIS ANALYSIS HAS SELECTED ISHIR INFOTECH LTD., WHICH RENDERS S O FTWARE TESTING ACTIVITIES AS COMPARABLE. THIS CONTENTION OF THE ASSESSEE IS NOT CORRECT. AT PAGE 98 OF THE TPOS ORDER , THE OBJECT ION OF THE ASSESSEE FOR SELECTING ISHIR INFOTECH LTD. AS COMPARABLE IS FOR THE REASON THAT THIS COMPANY WAS OUTSOURCING SOFTWARE DEVELOPMENT AND THAT THE COMPANY DOES NOT SATISFY 25% EMPLOYEE COST FILTER. BOTH THESE OBJECTIONS HAVE BEEN FOUND TO BE NOT SUSTAINABLE BY THE TPO. THE QUESTION THEREFORE WOULD BE AS TO WHETHER SOFTWARE TESTING SERVIC E S WOULD BE EQUIVALENT TO SOFTWARE DEVELOPMENT SERVICES. SOFTWARE TESTING IS ONLY PART OF SOFTWARE DEVELOPMENT LIFE CYCLE. IT CANNOT BE EQUATED WITH SOFTWARE DEVELOPMENT SERVICES. THE TPO IN OUR VIEW RIGHTLY EXCLUDED THIS COMPANY FOR COMPARABILITY PURPOSES. 12.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. IN VIEW OF THE ABOVE ORDER OF THE ITAT, BANGALORE IN THE CASE OF TRILOGY E - BUSINE SS INDIA IT(TP)A NO.592/COCH/2018 35 PRIVATE LIMITED VS. DCIT CITED SUPRA, WE DIRECT THE A.O./TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. 13. THIRDWARE SOLUTIONS LTD. T HE TPO HELD THAT THE COMPANYS OPERATION COMPRISES OF SOFTWARE DEVELOPMENT, IMPLEMENTATION AND SUPPORT SERVICES. THE COMPANY EARNED REVENUE OUT OF SALE OF SOFTWARE SERVICES ONLY. THE DRP OBSERVED THAT THE COMPARABLE IS FUNCTIONALLY SIMILAR TO THE ASSESSEE AS THE PRODUCTS ARE PLATFORMS USED BY THE COMPARABLE TO ENABLE DESIGN AND DEVELOPING SOFTWARE FOR USE BY THE CUSTOMER IN A PARTICULAR INDUSTRY. THE TPO HAD A PPLIED RELATED PARTY FILTER OF GREATER THAN 25% AND CLEARLY THIS COMPANY PASSES THAT FILTER. THE T PO OBSERVED THAT THE METHOD OF COMPUTATION ADOPTED BY THE ASSESSEE IS WRONG AND THE RPT BY SALES FOR THIS COMPARABLE WORKS OUT TO ONLY 6.4%. THE DRP OBSERVED THAT SLOWDOWN OF BUSINESS WOULD LEAD TO REDUCED MARGINS. ACCORDING TO THE DRP, PURCHASE OF LICENSE D SOFTWARE FOR INTERNAL USE IS DONE BY ALL COMPANIES INCLUDING THE ASSESSEE AS IT WILL BE HIT BY PIRACY LAWS. THE DRP HELD THAT DECISION RENDERED FOR THE EARLIER YEAR CANNOT BE AUTOMATICALLY APPLIED TO DETERMINE AS TO WHETHER THE COMPANY IS FUNCTIONALLY C OMPARABLE AND THE COMPARABILITY OF A COMPANY HAS TO BE DECIDED ON THE BASIS OF THE INFORMATION AVAILABLE IN THE ANNUAL REPORT OF THE ASSESSMENT YEAR IN RESPECT OF WHICH THE COMPANY WAS SELECTED AS A COMPARABLE. THUS, THE DRP REJECTED THE CONTENTIONS OF THE ASSESSEE AND HELD THE COMPANY AS FUNCTIONALLY COMPARABLE TO THE ASSESSEE. IT(TP)A NO.592/COCH/2018 36 13.1 AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. AR SUBMITTED THAT THIS COMPANY WAS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AS IT WAS ENGAGED IN SALE OF PRODUC TS, SUBSCRIPTION CONTRACTS, SALE OF USER LICENSES AND REVENUE GENERATED FROM ACTIVITIES OTHER THAN SOFTWARE DEVELOPMENT. IT WAS SUBMITTED THAT THE RELATED PARTY TRANSACTIONS WAS 23.26%. IT WAS SUBMITTED THAT THE SINGAPORE ENTITY THIRDWARE SOLUTIONS SINGAP ORE PVT. LTD. WAS LIQUIDATED DUE TO SOLVENCY OF BUSINESS ACTIVITIES AND THIS LIQUIDATION HAD LED TO SLOWDOWN OF GOODWILL IN THIRDWARE SOLUTIONS. IT WAS SUBMITTED THAT THE COMPARABLE HAD ACQUIRED INTANGIBLE ASSETS FOR INTERNAL USE AND THEREFORE, IT IS INVOL VED IN DEVELOPMENT PRODUCTS. THE LD. AR RELIED ON THE DECISION OF THE ITAT, DELHI IN THE CASE OF NXP INDIA PRIVATE LIMITED IN ITA NO.5140/DEL/2018 DATED 28/02/2019 WHEREIN IT WAS HELD AS UNDER: 13.14. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE FIND FROM THE PROFIT AND LOSS ACCOUNT OF THE COMPANY AVAILABLE ON PAGE 616 OF THE ANNUAL REPORT COMPILATION, THAT REVENUE OF RS.20,675.74 OF THE COMPANY HAS BEEN SHOWN FROM SALE OF PRODUCTS AND EXPENSES INCLUDE PURCHASE OF STOCK IN TRADE AM OUNTING TO RS . 4021.19. BUT ON FURTHER ANALYSIS OF THE PROFIT AND LOSS ACCOUNT, WE FIND THAT THERE IS NO CHANGE IN THE INVENTORY OF STOCK - IN - TRADE DURING THE YEAR UNDER CONSIDERATION. THUS, THERE IS NO EFFECT OF PURCHASE OF STOCK - IN - TRADE DURING THE YEAR UN DER CONSIDERATION. THUS, THERE IS NO EFFECT OF PURCHASE OF STOCK - IN - TRADE ON THE REVENUE STREAM, WHEN IT HAS NOT BEEN SOLD DURING THE YEAR UNDER CONSIDERATION. THUS, THERE IS NO EFFECT OF PURCHASE OF STOCK - IN - TRADE ON THE REVENUE STREAM, WHEN IT HAS NOT BEEN SOLD DURING THE YEAR UNDER CONSIDERATION. AS FAR AS CONTENTION OF THE LD. COUNSEL THAT ASSESSEE IS HAVING DIVERSITY BUSINESS OPERATION IS CONCERNED, WE FIND THAT FOR THIS ARGUMENT, THE LD. COUNSEL HAS RELIED ON THE POLICIES FOLLOWED BY THE ASSESSEE FOR RECOGNISING REVENUE FROM DIFFERENT STREAMS OF THE REVENUE MENTIONED ON PAGE 627 OF THE ANNUAL REPORT COMPILATION. THIS DISCLOSURE OF ACCOUNTING POLICIES, NOWHERE ESTABLISHED THAT ASSESSEE WAS HAVING INCOME FROM SUBSCRIPTION CONTRACT OR SALE OF USER LI CENSE AS CLAIMED BY THE LD. COUNSEL OF THE ASSESSEE. ON PERUSAL OF PAGE 598 OF IT(TP)A NO.592/COCH/2018 37 THE ANNUAL REPORT COMPILATION ( P AGE 78 OF THE ANNUAL REPORT OF THE COMPANY) , IT IS EVIDENT THAT OPERATION OF THE COMPANY COMPRISES OF SOFTWARE DEVELOPMENT, IMPLEMENTATION AND S UPPORT SERVICES. FURTHER REVENUE FROM DIFFERENT GEOGRAPHICAL SEGMENT HAS ALSO BEEN REPORTED. BUT AS FAR AS, FUNCTIONS OF THE COMPANY ARE CONCERNED WE DO NOT FIND ANY SEGMENT OTHER THAN SOFTWARE DEVELOPMENT, IMPLEMENTATION AND SUPPORT SERVICES. IN VIEW OF THE ABOVE DISCUSSION, WE REJECT THE CONTENTION OF THE LD. COUNSEL THAT THE COMPANY IS NOT FUNCTIONALLY SIMILAR TO THE ASSESSEE AND DIRECT THE LD. A.O./TPO TO RETAIN THE COMPANY IN THE SET OF COMPARABLES. 13.2 FURTHER, THE LD. AR RELIED ON THE ORDER OF ITAT, PUNE IN THE CASE OF JOHN DEERE INDIA PVT. LTD. IN ITA NO.518/PUN/2015 DATED 25/04/12019 WHEREIN IT WAS HELD AS FOLLOWS: WE HAVE HEARD THE RIVAL SUBMISSIONS AND GONE THROUGH THE RELEVANT MATERIAL ON RECORD. THE ANNUAL REPORT OF THIS COMPANY IS AVAIL ABLE AT PAGE 415 ONWARDS OF THE PAP E R BOOK. PROFIT AND LOSS ACCOUNT OF THIS COMPANY SHOWS SALES OF RS.67,56,06,505/ - . BREAK - UP OF SUCH SALE HAS BEEN GIVEN IN SCHEDULE 12, WHICH RECORDS EXPORT FROM SEZ UNITS - RS.47,58,40,447/ - ; EXPORT FROM STPI UNITS - RS.11,20,90 .633; REVENUE FROM SUBSCRIPTION RS.1,53,13,736/ - ; SALE OF LICENCE RS.1,51,38,618/ - AND SOFTWARE SERVICES RS.5,72,23,072/ - . THIS COMPANY HAS SEGMENTS ONLY ON GEOGRAPHICAL BASIS AND NOT ON FUNCTIONAL LEVEL. AS SUCH, THERE IS NO BIFURCATION OF OPERATING PROFIT FROM SOFTWARE SERVICES AND OTHERS INCLUDING SALE OF LICENCE AND REVENUE FROM SUBSCRIPTION ETC. EVEN THE FIRST TWO MAJOR ITEMS OF EXPORTS FROM SEZ UNITS AND EXPORT FROM STPI UNITS DO NOT SHOW AS TO WHETHER THESE WE RE EXPORTS OF SOFTWARE PRODUCTS OR SOFTWARE SERVICES. IN THE ABSENCE OF THE AVAILABILITY OF ANY CONCRETE INFORMATION IN RESPECT OF SOFTWARE SERVICES, WE FAIL TO COMPREHEND AS TO HOW THIS COMPANY, ALSO HAVING SOFTWARE PRODUCTS IN ITS PORTFOLIO, CAN BE CONST RUED AS COMPARABLE. THE SAME IS ACCORDINGLY DIRECTED TO BE EXCLUDED. 13.3 THE LD. AR RELIED ON THE ORDER OF THE ITAT, BANGALORE IN THE CASE OF DCIT VS. CSG SYSTEMS INTERNATIONAL PVT. LTD. IN IT(TP)A NO. 1086/BANG/2013 DATED 16.11.2018 WHEREIN IT WAS HELD AS FOLLOWS: IT(TP)A NO.592/COCH/2018 38 45.3 WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE COMPARABILITY OF THIRDWARE SOLUTIONS LTD. HAS COME UP FOR CONSIDERATION BEFORE CO - ORDIN A TE BENCH OF THIS TRIBUNAL IN THE CASE OF M/S. HEWLETT - PACKARD (INDIA) SOFTWARE OPERATION P. LTD. (SUPRA) . THE RELEVANT PORTION IS AS FOLLOWS: '28. VIS - - VIS M/S. THIRDWARE SOLUTIONS LTD , FINDINGS OF THIS COORDINATE BENCH IN THE CASE OF M/S. BROADCOM COMMUNICATIONS TECHNOLOGIES P. LTD (SUPRA), APPEAR AT PARA 16 WHI CH IS REPRODUCED HEREUNDER: 16. THIRDWARE SOLUTIONS LTD. 16.1 THIS COMPANY WAS INCLUDED IN THE LIST OF COMPARA BLES DESPITE THE OBJECTION OF THE ASSESSEE TO ITS INCLUSION IN THE LIST OF COMPARABLES ON THE GROUND THAT IT S TURNOVER WAS IN EXCESS OF RS.500 CRORES. 16.2 BEFORE US, THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMPANY AS A COMPARABLE THAT APART FROM SOFTWARE DEVELOPMENT SERVICES, IT IS IN THE BUSINESS OF PRODUCT DEV ELOPMENT, TRADING IN SOFTWARE, GIVING LICENSES FOR USE OF SOFTWARE AND THAT S EGMENTA L DETAILS ARE NOT AVAILABLE. IT WAS ALSO SUBMITTED THAT A CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF 3DPLM SOFTWARE SOLUTIONS L TD. (SUPRA) IN ITS ORDER FOR ASSESSMENT YEAR 2008 - 09 HAS HELD THAT THIS COMPANY IS TO BE OMITTED FROM THE LIST OF C OMPARABLES FOR PROVIDERS OF SOFTWARE DEVELOPMENT SERVICES. 1 6.3 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDERS OF THE TPO INCLUDING THIS COMPANY IN THE LIST OF COMP ARABLES. 16.4.1 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED AND CAREFULLY CONSIDERED THE RECORD; INCLUDING THE JUDICIAL DECISION RELIED UPON. WE FIND THAT A CO - ORDINATE BENCH OF THIS IN THE CASE OF DPLM SOFTWARE SOLUTIONS PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2008 - 09 THAT SINCE THIS COMPANY IS ENGAGED IN PRODUCT DE VELOPMENT AND EARNS REVENUE FROM SALE OF LICENSES I T IS TO BE OMITTED FROM THE LIST OF COMPARAB LE S FOR SOFTWARE DEVELOPMENT SERVICES, HOLDING AS UNDER AT PARA 15.3 OF THE ORDER: IT(TP)A NO.592/COCH/2018 39 15 . 3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERE D THE MATERIAL ON RECORD. IT IS SEEN FROM THE MATERIAL ON RECORD THAT THE COMPA NY ENGAGED IN PRODUCT DEVELOPMENT AND EARNS REVENUE FROM SALE OF LICENSES A ND , SUBSCRIPTION. HOWEVER, THE SEG M ENTAL PROFIT AND LOSS ACCOUNTS FOR SOFTWARE DEVELOPMENT SERVICES AND PRODUCT DEVELOPMENT ARE NOT GIVEN SEPARATELY. FURTHER, AS POINTED O UT BY THE LEARNED AUTHORISED REPRESENTATIVE, THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF E - GAIN COMMUNICATIONS PVT. LT D. (SUPRA) HAS DIRECTED THAT SINCE THE INCOME OF THIS COMPANY INCLUDES INCOME FROM SALE OF LICENSES, IT OUGHT TO BE REJECTED AS A COMPARABLE FOR SOFTWARE DEVELOPMENT SERVICES. IN THE CASE ON HAND, THE ASSESSEE IS RENDERING SOFTWARE DEVELOPMENT SERVICES. IN THIS FACTUAL VIEW OF THE MATTER AND FOLLOWING THE AFORE CITED DECISION OF THE PUNE TRIBUNAL (SUPRA), WE DIRECT THAT THIS COMPANY BE O MITTED FROM THE LIST OF COMPARABLES FOR THE P ERIOD UNDER CONSIDERATION IN THE CASE ON HAND.' 16.4.2 FOLLOWING THE ABOVE D ECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF 3DPLM SOFTWARE SOLUTIONS PVT. LTD. (SUPRA) FOR ASSESSMENT YEAR 2008 - 09, WE DIRECT THE ASSESSING OFFICER/TPO TO OMIT THIS COMPANY FROM THE LIST OF COMPARABLES IN THE CASE ON HAND.' RESPECTFUL LY FOLLOWING THE RATIO OF THE DECISION OF THE CO - ORDINATE BENCH IN THE CASE OF M/S.HEWLETT - PACKARD (INDIA) SOFTWARE OPERATION P. LTD . (SUPRA) WE DIRECT THE AO/TPO TO EXCLUDE THIRDWARE SOLUTIONS LTD., FROM THE LIST OF COMPARABLES.' FOLLOWING THE DECISIONS OF THE TRIBUNAL REFERRED TO ABOVE, WE HOLD THAT THE ABOVE SAID 3 COMPANIES SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. 13.4 THE L D. AR RELIED ON THE ORDER OF THE ITAT, DELHI IN THE CASE OF ST - ERICSSON INDIA PVT. LTD. VS. DCIT IN ITA NO.4434/DEL/2018 DATED 26/09/2018 WHEREIN IT WAS HELD AS FOLLOWS: 24. THE ANNUA L REPORT OF THIS COMPANY IS EXHIBITED AT PAGES 811 TO 916 OF THE PAPER BOOK VOLUME - II. THE COMPANY IS ENGAGED IN THE BUSINESS OF INFORMATION TECHNOLOGY AN D INFORMATION TECHNOLOGY ENABLED SERVICES. THE COMPANY CATERS TO BOTH DOMESTIC AND INTER NATIONAL MARKETS. A PERUSAL OF IT(TP)A NO.592/COCH/2018 40 THE ANNUAL REPORT SHOWS THAT SEGMENTAL INFORMATION OF THE REVENUE FROM INFORMATION TECHNOLOGY AND INFORMATION TECHNOLOGY ENABLE SERVICES IS NOT AVAILABLE. FROM PAGE 882 OF THE PAPER BOOK, WE FIND THAT THE REVENUE RECOGNITION POLICY IS THAT REVENUE FROM SUBSCRIPTION CONTRACT IS RECOGNIZED ON ACCEPTANCE OR RENEWAL OF THE CONTRACT AND IS ACCRUED OVER THE PERIOD OF THE CONTRACT. R EVENUE FROM SALE OF USER LICENSES FOR SOFTWARE APPLICATIONS IS RECOGNISED ON E - DELIVERY OF SOFTWARE LICENCE KEY TO END USER. THIS COMPA NY HAS INTANGIBLES WORTH RS. 108.22 CRORES. 25 . WE FURTHER FIND THAT THIS COMPARABLE HAS BEEN REJECTED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2010 - 11 IN ITA NO. 609/DEL/2015 AND THE RELEVANT FINDING IS GIVEN AT PAGE 1644 VOLUME IV. CONSIDERING THE FUNCTIONAL PROFILE OF THIS COMPANY IN THE LIGHT OF THE FINDING OF THE CO - ORDINATE BENCH (SUPRA), WE DIRECT FOR EXCLUSION OF THIS COMPANY FROM THE FINAL LIST OF COMPARABLES. 13.5 THE LD AR RELIED ON THE ORDER OF THE IT AT , DELHI IN THE CASE OF OPERA SOLUTIONS VS. ITO IN ITA NO.5761/DEL/2014 DATED 16/11/2018 WHEREIN IT WAS HELD A S FOLLOWS: 9.2 WE HAVE HEARD THE SUBMISSION OF THE RIVAL PARTIES AND PERUSED RELEVANT MATERIAL ON RECORD. THE DETAIL OF T HE SALES OF THE COMPANY IN THE YEAR UNDER CONSIDERATION ARE AVAILABLE ON PAGE 285 OF THE PAPER BOOK, VOLUME II, WHICH ARE REPRODUCED AS UNDER: SCHEDULE 12 SALES AS ON 31.03.09 AS ON 31.03.08 TOTAL SALE OF LICENCE 23,237,58 8 3,916,427 SOFTWARE SERVICES 89,177,023 76 , 724.371 EXPO RT FROM SEZ UNIT 478, 5 72,420 263,971,033 EXPORT FROM STPI UNIT 162 , 900,630 168,863,049 REVENUE FROM SUBSCRIPTION 16,433,714 9 , 293 , 874 770 , 321,375 522,768,754 . 9.3 IT I S EVIDENT FROM THE ABOVE DETAIL THAT THE REVENUE STREAMS OF THE COMPANY CONSIST FROM SALE OF LICENSE AND REVENUE FROM SUBSCRIPTION ALONG WITH SOFTWAR E SERVICES AND EXPORT OF SERVICES. THE ACTIVITY OF SALE OF LICENSE AND SUBSCRIPTION AR E FUNCTIONALLY DIFFERENT FROM THE ACTIVITY OF SOFTWARE DEVELOPMENT OR SOFTWARE SERVICES. WE FIND THAT NO SEGMENT RESULT F OR SOFTWARE DEVELOPMENT/SERVICES ARE AVAILABLE IN THE CASE OF COMPANY, AND, THEREFORE, IT CANNOT BE COMPARED WITH THE ASSESSE E AT ENTITY LEVEL . ACCORDINGLY , WE DIRECT THE LD. TPO/ AO TO EXCLUDE THIS COMPAN Y FROM THE SET OF COMPARABLE. IT(TP)A NO.592/COCH/2018 41 13.6 THE LD. AR RELIED ON THE ORDER OF THE ITAT, DELHI IN THE CASE OF WIPRO ENERGY IT SERVICES INDIA PRIVATE LIMITED VS. DCIT IN ITA NO.1594/DEL/2014 DATED 11.04/2018 WHERE IN IT WAS HELD AS FOLLOWS: AS REGARDS THIRDWARE SOLUTIONS LTD. THE SAME DEALS WITH SAL E OF LICENSES SOFTWARE, SERVICES EXPORT AND REVENUE FROM SUBSCRIPTION. THUS, THE THIRDWARE SOLUTIONS IS NOT EXCLUSIVELY DEALING WITH THE SOFTWARE SERVICES. INFACT, THE TPO HIMSELF STATED THAT MAJORITY OF EXPENSES ARE IN THE FORM OF SOFTWARE SERVICE CHARGES AND SALARIES, BUT HE HAS NOT CONSIDERED EXACT EXPENSES FOR THE SOFTWARE CHARGES AND SALARIES. THIS HAS NOT COME UP FROM THE ANNUAL REPORT TO DEAL WITH THE ASSESSEE COMPANY AS A COMPARABLE AS THERE IS NO SEGMENTAL RESULTS PROVIDED BY THE SAID COMPANY. THUS , WE DIRECT THE TPO/A.O TO EXCLUDE THIS COMPARABLE AS IT IS NOT HAVING SIMILAR FUNCTIONS TO THAT OF THE ASSESSEE COMPANY AND ALSO THERE IS NO SEGMENTAL RECORD GIVEN IN THE ANNUAL REPORT OF THAT COMPANY. 13.7 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IN VIEW OF THE ABOVE ORDERS OF THE CO - ORDINATE BENCHES CITED IN PARA 13.1 TO 13.6 OF THIS ORDER, WE DIRECT THE AO/TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. 14. I NFOSYS LIMITED . DRP HELD THAT COMPANY WAS ENGAGED IN BUSINESS CONSULTING, TECHNOLOGY, ENGINEERING AND OUTSOURCING SERVICES AND OFFERED SOFTWARE PRODUCTS, SOLUTIONS AND PLATFORM S AND HENCE, FUNCTIONALLY SIMILAR. THE DRP HELD THAT DECISION RENDERED FO R THE EARLIER YEAR CANNOT BE AUTOMATICALLY APPLIED TO DETERMINE AS TO WHETHER THE COMPANY IS FUNCTIONALLY COMPARABLE AND THE COMPARABILITY OF A COMPANY HAS TO BE DECIDED ON THE BASIS OF THE INFORMATION AVAILABLE IN THE ANNUAL REPORT OF THE ASSESSMENT YEAR IN RESPECT OF WHICH THE IT(TP)A NO.592/COCH/2018 42 COMPANY WAS SELECTED AS A COMPARABLE. THE TOTAL REVENUE OF THE COMPANY WAS FROM THE SALE OF SOFTWARE SERVICES AND PRODUCTS. ONLY 4% OF SALES ARE ATTRIBUTABLE TO PRODUCTS WHICH IS VERY INSIGNIFICANT AND THE COMPANY ALSO ENJOYS SIGNIFICANT BRAND VALUE BEING PART OF GLOBAL MNC GROUP. THE COMPANY EARN ED 36.13% MARGIN WHICH IS ABNORMALLY HIGH AND THE SALES AND MARKETING EXPENSES IS INSIGNIFICANT AND ONLY AT 0.07% OF SALES. THE SCALE OF OPERATIONS IS NOT AN APPROPRIATE FILTER. A COMPARABLE CANNOT BE REJECTED SOLELY ON THE BASIS OF A HIGH TURNOVER. THUS, THE DRP REJECTED THE CONTENTIONS OF THE ASSESSEE AND HELD THE COMPANY AS FUNCTIONALLY COMPARABLE TO THE ASSESSEE. 1 4 .1 AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. AR SUBMITTED THAT THE COMPANY IS NOT FUNCTIONALLY C OMPARABLE WITH THE ASSES SEE AS IT IS ENGAGED IN PRODUCT DEVELOPMENT AND SEGMENTAL DATA IS NOT AVAILABLE . THE COMPANY IS ENGAGED IN DIVERSIFIED ACTIVITIES AND HAS HIGH BRAND VALUE. THE COMPANY IS ENGAGED IN PROVIDING BUSINESS CONSULTING, TECHNOLOGY, ENGINEERING AND OUTSOURCING S ERVICES. THE ASSESSEE CLAIMED THAT THE TPO HAD TAKEN INCONSISTENT APPROACH IN DIFFERENT YEARS FOR THIS COMPARABLE. IT WAS CONTENDED THAT THE COMPANY DERIVE D 51% OF ITS REVENUE FROM ONSITE ACTIVITIES AND THE COMPA N Y HA D EARNED ABNORMAL PROFITS. THE COMPAN Y HA D INCURRED SALES AND MARKETING EXPENSE S AND IT HA D HUGE TURNOVER. THE LD. AR RELIED ON THE DECISION OF THE ITAT, DELHI IN THE CASE OF LIME LABS (I) (P) LTD. VS. ITO IN ITA NO.1703/DEL/2015 DATED 12/12/2018. IT(TP)A NO.592/COCH/2018 43 14.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE INFOSYS LTD. HAS NOT BEEN CONSIDERED AS A COMPARABLE BY THE TRIBUNAL IN THE CASE OF M/S. LIME LABS (I) PVT. LTD. VS. ITO IN ITA NO.1703/DELHI/2015 DATED 12/12/2018 WHERE IN IT WAS HELD AS FOLLOWS: 17. WHEN WE EXAMINE THE FUNCTIONAL PROFILE OF INFOSYS IN ITS ANNUAL REPORT, AVAILABLE AT PAGES 208 OF THE PAPER BOOK, IT SHOWS THAT THE INFOSYS PROVIDES END - TO - END BUSINESS SOLUTIONS THAT LEVERAGE CUTTING EDGE TECHNOLOGY, THEREBY ENABLING CLIENTS TO ENHANCE BUSINESS PERFORMANCE. THE COMPANY PROVIDES SOLUTIONS THAT SPAN THE ENTIRE SOFTWARE LIFECYCLE ENCOMPASSING TECHNICAL CONSULTING, DESIGN, DEVELOPMENT, RE - ENGINEERING, MAINTENANCE, SYSTEMS INTEGRATION, PACKAGE EVALUATION AND IMPLE MENTATION, TESTING AND INFRASTRUCTURE MANAGEMENT SERVICES. IN ADDITION, THE COMPANY OFFERS SOFTWARE PRODUCTS FOR THE BANKING INDUSTRY. FURTHERMORE, INFOSYS SPENT 2.1% OF THE TOTAL REVENUE ON ITS R&D EXPENDITURE DURING THE YEAR UNDER ASSESSMENT AS IS EVIDEN T FROM PAGES 187 & 188 OF THE PAPER BOOK. MOREOVER, INFOSYS IS HAVING HUGE INTANGIBLE ASSETS, IT BEING A BRAND IN ITSELF. 18. COMPARABILITY OF INFOSYS VIS - - VIS ROUTINE SOFTWARE DEVELOPMENT AND SUPPORT SERVICES PROVIDER HAS BEEN EXAMINED BY HONBLE DEL HI HIGH COURT IN CASE CITED AS CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. (ITA 1204/2011) AFFIRMED THE FINDINGS OF THE TRIBUNAL THAT INFOSYS IS NOT A VALID COMPARABLE AND REFERRED TO PARA 3.3 OF THE ORDER OF THE TRIBUNAL WHICH IS AS UNDER : - BASIC PARTICULAR INFOSYS TECHNOLOGIES LTD. AGNITY INDIA RISK PROFILE OPERATE AS FULL - FLEDGED RISK TAKING ENTREPRENEURS OPERATE AT MINIMAL RISKS AS THE 100% SERVICES ARE PROVIDED TO AES NATURE OF SERVICES DIVERSIFIED - CONSULTING, APPLICATION DESIGN, DEVELOPMENT, REENGINEERING AND MAINTENANCE SYSTEM INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION AND BUSINESS PROCESS MANAGEMENT, ETC. (REFER CONTRACT SOFTWARE DEVELOPMENT SERVICES. IT(TP)A NO.592/COCH/2018 44 PAGE 117 OF THE PAPER BOOK) REVENUE RS.9, 028 CRORES RS.16.09 CRORES OWNERSHIP OF BRANDED/PROPRIETARY PRODUCTS. DEVELOPS/OWNS PROPRIETARY PRODUCTS LIKE FINACLE, INFOSYS ACTICE DESK, INFOSYS IPROWE, INFOSYS MCONNECT, ALSO, THE COMPANY DERIVES S UBSTANTIAL PORTION OF I TS PROPRIETARY PRODUCTS (INCLUDING ITS FLAGSHIP BANKING PRODUCT SUITE FINACLE ) ONSITE VS. OFFSHORE A S MUCH AS HALF OF THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY INFOSYS ARE ONSITE (I.E.,SERVICES PERFORMED AT THE CUSTOMERS LOCATION OVERSEAS). AND OFFSHORE (50.20%) (REFER PAGE 117 OF THE PAPER BOOK) THAN HALF OF ITS SERVICE, INCOME FROM ONSITE SERVICES. THE APPELLANT PROVIDES ONLY OFFSHORE SERVICES (I.E., REMOTELY FROM INDIA) EXPENDITURE ON ADVERTISING/SALES PROMOTION AND BRAND BUILDING RS.61 CRORES RS. NIL (AS THE 100% SERVICES ARE PROVIDE D TO AES) 6. LEARNED COUNSEL FOR THE REVENUE HAS SUBMITTED THAT THE TRIBUNAL AFTER RECORDING THE AFORESAID TABLE HAS NOT AFFIRMED OR GIVEN ANY FINDING ON THE DIFFERENCES. THIS IS PARTLY CORRECT AS THE TRIBUNAL HAS STATED THAT INFOSYS TECHNOLOGIES LTD. SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES FOR THE REASON LATTER WAS A GIANT COMPANY IN THE AREA OF DEVELOPMENT OF SOFTWARE AND IT ASSUMED ALL RISKS LEADING TO HIGHER PROFITS, WHEREAS THE RESPONDENT - ASSESSEE WAS A CAPTIVE UNIT OF THE PARENT COMPA NY AND ASSUMED ONLY A LIMITED RISK. IT HAS ALSO STATED THAT INFOSYS TECHNOLOGIES LTD. CANNOT BE COMPARED WITH THE RESPONDENT ASSESSEE AS SEEN FROM THE FINANCIAL DATA ETC. TO THE TWO COMPANIES MENTIONED EARLIER IN THE ORDER I.E. THE CHART. IN THE GROUNDS OF APPEAL THE REVENUE HAS NOT BEEN ABLE TO CONTROVERT OR DENY THE DATA AND DIFFERENCES MENTIONED IN THE TABULATED FORM. THE CHART HAS NOT BEEN CONTROVERTED. 19. KEEPING IN VIEW THE FUNCTIONAL DISSIMILARITY BETWEEN INFOSYS VIS - - VIS T HE TAXPAYER AND THE FAC T THAT INFOSYS IS INCURRING HUGE EXPENDITURE TO THE TUNE OF 2.1% OF ITS TOTAL REVENUE ON ITS R&D ACTIVITIES LEADING TO THE C REATION OF SIGNIFICANT INTANGIBLE PROPERTY AND THE FACT THAT INFOSYS IS A IT(TP)A NO.592/COCH/2018 45 BRAND IN ITSELF AND THE FACT THAT IT ASSUMES ENTREPRENEURI AL RISK AND IT ALSO DEALS IN SOFTWARE PRODUCT AND FOLLOWING THE DECISION RENDERED BY HONBLE DELHI HIGH COURT IN CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. (SUPRA), IT CANNOT BE TAKEN AS A VALID COMPARABLE. SO, WE DIRECT THE AO/ TPO TO EXCLUDE INFINITE FROM THE FINAL SET OF COMPARABLES. 14.3 BEING SO, INFOSYS LTD. IS ENGAGED IN PROVIDING BUSINESS CONSULTATION, TECHNOLOGY ENGINEERING AND OUTSOURCING SERVICES AND SEGMENTAL DATA IS NOT AVAILABLE. FURTHER, INFOSYS LTD. HAD SPENT HUGH AMOUNT FO R R&D COUPLED WITH HUGE INTANGIBLE ASSET AND BUILT UP BRAND VALUE. IN SUCH CIRCUMSTANCES, IT CANNOT BE COMPARED WITH ASSESSEES CASE. ACCORDINGLY, WE DIRECT THE AO/TPO TO EXCLUDE THIS COMPANY. THUS , THE GROUND OF APPEAL OF THE ASSESSEE WITH REGARD TO RE JECTION OF COMPARABLES ARE ALLOWED. 15. GROUND NOS . 4, 6 AND 7 WERE NOT PRESSED AND HENCE, THEY ARE DISMISSED AS NOT PRESSED. 1 6 . THE NEXT GROUND, GROUND NO. 5 IS WITH REGARD TO ERRONEOUS DISALLOWANCE OF WORKING CAPITAL ADJUSTMENT. 1 6.1. THE FACTS OF THE CASE ARE THAT THE TPO REJECTED THE ASSESSEES REQUEST FOR WORKING CAPITAL ADJUSTMENT ON THE GROUND THAT THERE WAS NO BASIS FOR THE SAME AS DIFFERENCES IN INTENSITIES OF WORKING CAPITAL BETWEEN THE ASSESSEE AND THE COMPARABLES WAS NOT ESTABLIS HED. RULE 10B OF THE INCOME TAX RULES, 1962 IT(TP)A NO.592/COCH/2018 46 PROVIDES FOR MAKING REASONABLY ACCURATE ADJUSTMENTS TO THE UNCONTROLLED COMPARABLE TRANSACTION TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES ON THE PRICE, COST OR PROFITS. IF THE TAXPAYER IS ABLE TO DEMO NSTRATE THAT DIFFERENCE IN ITS WORKING CAPITAL VIS - - VIS THE COMPARABLE COMPANIES HAD AFFECTED ITS PROFIT MARGIN, ADJUSTMENT IS WARRANTED PROVIDED THAT SUCH ADJUSTMENT COULD BE COMPUTED IN A REASONABLY ACCURATE MANNER. THE TPO RELIED ON THE DECISION OF THE ITAT, CHENNAI IN THE CASE OF M/S. MOBIS INDIA LTD. VS. DCIT (TS - 235 - ITAT - 2013(CHNY) - TP WHEREIN WORKING CAPITAL ADJUSTMENT WAS REJECTED ON THE GROUND THAT THE IMPACT OF THE DIFFERENCE IN WORKING CAPITAL HAS NOT BEEN DEMONSTRATED BY THE TAXPAYER. THE TPO HA D STATED THAT THE ASSESSEE HAD NOT BEEN ABLE TO DEMONSTRATE THAT THE WORKING CAPITAL DIFFERENCES HAD IMPACTED ITS PROFITS. IT HAS NOT BEEN ESTABLISHED WHETHER THE COMPARABLE COMPANIES HAVE FINANCED THEIR WORKING CAPITAL BY OWN FUNDS OR BORROWED FUNDS. IT WAS STATED THAT DIFFERENCE IN WORKING CAPITAL LEVELS ITSELF CANNOT BE ACCURATELY MEASURED AS DATA WITH REGARD TO THE WORKING CAPITAL EMPLOYED BY THE ASSESSEE AND THE COMPARABLE COMPANIES ARE NOT AVAILABLE ON DAILY BASIS. IT WAS STATED THAT AVERAGE WORKIN G CAPITAL WILL NOT SHOW THE ACTUAL WORKING CAPITAL EMPLOYED DURING THIS YEAR. THE TPO STATED THAT THE DIFFERENCES IN THE WORKING CAPITAL LEVELS CANNOT BE MEASURED WITH REASONABLE ACCURACY. THE OPENING AND CLOSING FIGURES OF DEBTORS AND CREDITORS DO NOT SH OW THE MOVEMENTS IN THEIR ACCOUNTS DURING THE YEAR. WORKING CAPITAL REQUIREMENTS ARE NOT UNIFORM DURING THE ENTIRE PERIOD OF THE YEAR AND THEY DIFFER WITH THE CHANGES IN THE WORKING CAPITAL CYCLE AND THE REGULARITY OF SALES AND IT(TP)A NO.592/COCH/2018 47 PURCHASES. THE SALES AND P URCHASES ARE NOT UNIFORM THROUGHOUT THE YEAR. FROM THE OPENING AND CLOSING FIGURES OF DEBTORS AND CREDITORS, THE DIFFERENCE IN WORKING CAPITAL EMPLOYED BY THE TESTED PARTY AND THE COMPARABLES CANNOT BE ASCERTAINED. THE ADJUSTMENT CALCULATED WITH SUCH FIG URES WOULD ONLY SHOW THE DIFFERENCE IN WORKING CAPITAL AS ON A PARTICULAR DATE AND NOT THROUGHOUT THE YEAR. IT WAS STATED THAT SEGMENTAL WORKING CAPITAL WAS NOT DISCLOSED IN THE ANNUAL REPORTS. THE DISCLOSURES OF THE FIGURES OF DEBTORS AND CREDITORS WHICH ARE IMPORTANT FOR COMPARING THE WORKING CAPITAL ADJUSTMENT DOES NOT PROVIDE THE BREAK UP OF TRADE AND NON TRADE NATURE OF SUCH BALANCES. SUNDRY CREDITORS AND DEBTORS WHICH ARE OUT OF NON TRADE TRANSACTIONS ARE ALSO CLUBBED WITH THE BALANCES OUTSTANDING OU T OF TRADE TRANSACTIONS. IT WAS STATED THAT COST OF CAPITAL IS DIFFERENT FOR DIFFERENT COMPANIES. AFTER WORKING OUT THE DIFFERENCE IN THE WORKING CAPITAL EMPLOYED BETWEEN THE TESTED PARTY AND THE COMPARABLE COMPANIES, THE COST OF FINANCING SUCH WORKING CA PITAL IS TO BE ADJUSTED TO ELIMINATE THE IMPACT OF SUCH DIFFERENCE IN WORKING CAPITAL ON THE PROFIT MARGINS THE COST OF WORKING CAPITAL WOULD DEPEND ON THE SOURCE OF FUNDS AND THE CREDIT STANDING OF THE BORROWER. THE COST OF CAPITAL FOR MNCS IS DETERMINED BY THE GLOBAL INTEREST RATES RATHER THAN INDIAN PRIME LENDING RATE. THIS, NO WORKING CAPITAL ADJUSTMENT WAS ALLOWED. 1 6.2 ON APPEAL, DRP OBSERVED THAT RULE 10B PROVIDES FOR MAKING REASONABLY ACCURATE ADJUSTMENT TO THE UNCONTROLLED COMPARABLE TRANSACTION TO ELIMINATE THE IT(TP)A NO.592/COCH/2018 48 MATERIAL EFFECTS OF DIFFERENCES ON THE PRICE, COST OR PROFITS. THE DRP OBSERVED THAT WORKING CAPITAL REQUIREMENTS AND IMPACT DEPENDS ON VARIOUS FACTORS SUCH AS BUSINESS CYCLE, THE NATURE OF BUSINESS ACTIVITY WITH ITS CORRELATION ON THE GENERAL ECONOMIC TRENDS, THE FUND AND CAPITAL POSITION OF THE COMPANY , ITS MARKETING STRATEGIES, ITS MARKET SHARE ETC. ALL OF WHICH CANNO T BE CAPTURED IN THE YEAR END RECEIVABLE OR PAYABLE POSITION. BESIDES, THE PAYABLE AND RECEIVABLE POSITION STATED BY THE IN THE BALANCE SHEET MAY NOT EXACTLY REFLECT AS TO WHETHER IT ARISES FROM TRANSACTION RELATING TO REVENUE ACCOUNT OR CAPITAL ACCOU NT AS THERE IS NO UNIFORMITY IN THE ACCOUNTING OR REPORTING REQUIREMENTS, AND AN INTERMIXING IS GENERALLY POSSIBLE. THE COST ASCRIBABLE TO THE WORKING CAPITAL WOULD BE DIFFERENT IN DIFFERENT ENTERPRISES DEPENDING ON THE COST OF FUND TO THE ENTERPRISE, THE COST OF MONEY IN THE ECONOMY IT OPERATES ETC. IN VIEW OF THESE, A RE ASONABLE ACCURATE ADJUSTMENT IS NOT POSSIBLE, AS THE DIFFERENCES IN WORKING CAPITAL REQUIREMENTS ITSELF IS BASED ON VARIOUS ASSUMPTIONS. BESIDES, WE ALSO NOTE THAT THE ASSESSEE HAD FAILE D TO DEMONSTRATE SUCH DEMONSTRATE SUCH MATERIAL DIFFERENCES SO AS TO WARRANT AN ADJUSTMENT. IN THESE CIRCUMSTANCES, THE DRP UPHELD THE TPOS REASONING AND REJECTED THE ASSESSEES CLAIM FOR WORKING CAPITAL ADJUSTMENT. 1 6.3 . AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. AR RELIED ON THE DECISION OF THIS TRIBUNAL IN THE CASE OF ZAFIN SOFTWARE CENTRE OF EXCELLENCE PVT. LTD. VS. ACIT IN IT (TP) A NO. 331/COCH/2017 FOR THE ASSESSMENT YEAR 2013 - 14 IT(TP)A NO.592/COCH/2018 49 DATED 16/05/2018 WHEREIN THE CLAIM OF WORKING CAP ITAL ADJUSTMENT WAS ALLOWED BY THE TRIBUNAL. 1 6 . 4 THE LD. DR RELIED ON THE ORDER OF THE DRP. 1 6.5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. A SIMILAR ISSUE WAS CONSIDERED BY THIS TRIBUNAL IN THE CASE OF ZAFIN SOFTWARE CENTRE OF EXCELLENCE PVT. LTD. VS. ACIT IN IT(TP)A NO. 331/COCH/2017 FOR THE ASSESSMENT YEAR 2013 - 14 DATED 16/05/2018 WHEREIN IT WAS HELD AS FOLLOWS: 5.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. THE LD. AR RELIED ON THE DEC ISION OF THE ITAT, CHENNAI BENCH IN THE CASE OF FO X TE Q SERVICES INDIA (P) LTD. VS. ACIT IN 74 TAXMAN.COM 216 WHERE IN IT WAS HELD AS UNDER: 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE ASSESSEE OBJECTED TO THE ADJUSTMENT MADE BY THE TRANSFER PRICING OFFICER. WITH REGARD TO WORKING CAPITAL ADJUSTMENT , THE ASSESSEE CLAIMS THAT THE DIFFERENCE IN WORKING CAPITAL BETWEEN THE ASSESSEE AND THE COMPARABLE COMPANIES WOULD MATERIALLY AFFECT THE PROFIT DETERMINED. THEREFORE, CERTAIN ADJUSTMENT NEEDS TO BE MADE TO BRING THEM ON EQUAL FOOTING. THE ASSESSEE ALSO BROUGHT TO THE NOTICE OF THE DRP THAT THE WORKIN G C APITAL ADJUSTMENT , WHICH WAS TO ENSURE THE PROFIT DERIVED BY THE COMPARABLE COMPANIES, CAN BE COMPARED WITH THE PROFIT OF THE ASSESSEE. THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE CAPITAL EMPLOYED BY THE ASSESSEE, INCLUDING THE WORKING CAPITAL, AND THAT OF COMPARABLE COMPANIES NEEDS TO BE TAKEN INTO CONSIDERATION. WITHOUT COMPARING THE WORKING CAPITAL EMPLOYED BY THE COMPARABLE COMPANIES AND THAT OF THE ASSESSEE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THERE CANNOT BE ANY TRANSFER PRICING ADJUSTMENT. IT(TP)A NO.592/COCH/2018 50 5.4 IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, WE ARE INCLINED TO DIRECT THE ASSESSING OFFICER TO CONSIDER THE WORKING CAPITAL ADJUSTMENT AS COMPUTED BY HIM WHILE DETERMINING THE ALP OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AES. HENCE, THIS GROUND OF APPE AL TAKEN BY THE ASSESSEE IS PARTLY ALLOWED. 1 6.6 . IN VIE W OF THE ABOVE ORDER OF TH E TRIBUNAL IN THE CASE O F ZAFIN SOFTWARE CENTRE OF EXCELLENCE PVT. LTD. VS. ACIT CITED SUPRA, WE ARE INCLINED TO DIRECT THE ASSESSING OFFICER TO CONSIDER THE WORKING CAPITAL ADJUSTMENT AS COMPUTED BY HIM WHILE DETERMINING THE ALP OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AES. THUS, THIS GROUND OF APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 1 7 . THE NEXT GROUND, GROUND NO. 8 IS WITH REGARD TO ERRONEOUS IMPUTATION OF INTEREST ON RECOVERY OF EXPENSES. 17.1 THE FACTS OF THE CASE ARE THAT ASSESSEE IS A CAPTIVE SERVICE PROVIDER WHOSE 99.99% OF THE SHARES ARE HELD BY THE AE. IT ALSO INCURRED SUBSTANTIAL INTEREST EXPENSES AND HENCE, EXPENSES INCURRED ON BEHALF OF AND FOR THE BENEFIT OF AES ARE REQUIRED TO BE REIMBURSED AT ARMS LENGTH. SUCH ARMS LEN GTH INTEREST WOULD BE CHARGED BY UNRELATED PARTIES IN SIMILAR CIRCUMSTANCES. THE TPO STATED THAT THE ASSESSEE HAD MADE ADVANCES TO ITS AES IN INDIAN CURRENCY. THE THIRD PARTY INVOICES SUBMITTED BY THE ASSESSEE WERE IN INR ONLY. HENCE, THE APPROPRIATE BEN CHMARK RATE OF INTEREST TO BE APPLIED WOULD BE THE DOMESTIC RATES INSTEAD IF LIBOR. IT WAS STATED THAT THE ASSESSEE DID NOT BORROW IN FOREIGN CURRENCY TO MAKE ADVANCES TO ITS AES. THE MAJORITY OF THE ASSESSEES BORROWINGS WERE IN IT(TP)A NO.592/COCH/2018 51 INDIAN CURRENCY. THUS, THE OPPORTUNITY COST OF THE ASSESSEES FUNDS HAVE TO BE DETERMINED IN RELATION TO ITS INTEREST EARNING CAPACITY IN THE DOMESTIC MARKET. THE DRP - 2, BANGALORE IN ITS PROCEEDINGS DATED 17/12/2015 IN THE CASE OF M/S. IBS SOFTWARE SERVICES PVT. LTD. FOR A.Y. 2 011 - 12 OBSERVED THAT LIBOR CANNOT BE TAKEN AS THE BENCHMARK FOR AN INTERCOMPANY INTERNATIONAL LOAN. THE SUITABILITY OF ADOPTING DOMESTIC RATES FOR INTEREST RATE BENCHMARKING WAS FURTHER CEMENTED BY THE ADOPTION OF THE S BI BASE RATE WITH MARKUP IN THE SAFE HARBOUR RULES NOTIFIED AS PER NOTIFICATION NO. 73/2013 DT. 18/09/2013. THUS , THE TPO CONCLUDED THAT DOMESTIC RATES ARE MORE SUITABLE IN THE INSTANT CASE FOR ARRIVING AT THE ARMS LENGTH INTEREST TO BE IMPUTED ON THE LO ANS/ADVANCES GIVEN BY THE ASSESSEE TO ITS AES IN INDIAN CURRENCY. THE TPO HAD GRANTED THE REQUEST OF THE ASSESSEE TO ADOPT THE DOMESTIC COST OF BORROWINGS AT 11.13% TO IMPUTE ARMS LENGTH INTEREST INSTEAD OF SBI PLR. THE TPO CONSIDERED THE AVERAGE DOMESTIC COST OF BORROWINGS OF THE ASSESSEE AT 11.13% P.A. FOR F.Y. 2013 - 14 FOR THE PURPOSE OF BENCHMARKING THE INTEREST. TO ARRIVE AT THE SPREAD ON THE RATE OF INTEREST THAT THE ASSESSEE OUGHT TO HAVE CHARGED, THE TPO ADOPTED THE SPREAD PRESCRIBED BY THE RBI FOR FACTORING IN THE RISKS AND CREDIT RATING OF THE AE. THE RBI IN ITS GUIDELINES RBI/2010 - 11/8, MASTER CIRCULAR NO. 08/2010 - 11 DATED JULY 1, 2010, PRESCRIBED A SPREAD OF 300 BASE POINTS FOR A TERM OF LESS THAN 5 YEARS. 1 7.2 ON APPEAL, THE DRP OBSERVED T HAT EVEN IF THE ADVANCES WERE MADE FOR BUSINESS EXIGENCIES, THE ADVANCES ARE OUTSTANDING FOR A CONSIDERABLE LONG PERIOD IT(TP)A NO.592/COCH/2018 52 OF TIME. THE ASSESSEE ALSO INCURRED SUBSTANTIAL INTEREST EXPENSES. THE DRP OBSERVED THAT IN VIEW OF THE AMENDMENT INSERTED BY WAY OF E XPLANATION TO SEC. 92B WITH RETROSPECTIVE EFFECT FROM 01/04/2002 , INTERNATIONAL TRANSACTION WOULD SPECIFICALLY INCLUDE WITHIN ITS AMBIT, DEFERRED PAYMENT OR RECEIVABLE OR ANY OTHER DEBT ARISI N G DURING THE COURSE OF BUSINESS AND HENCE, NON CHARGING OR U NDER CHARGING OF INTEREST ON THE EXCESS PERIOD OF CREDIT ALLOWED TO THE AE FOR THE REALIZATION OF INVOICES WOULD AMOUNT TO AN INTERNATIONAL TAXATION. FOR THIS, THE DRP RELIED ON THE DECISION OF THE ITAT, DELHI IN THE CASE OF BECHTEL INDIA PVT. LTD. IN ITA NO.6530/D E L/2016 DATED 16/05/2017. THE DRP ALSO RELIED ON THE DECISION OF THE ITAT DELHI IN THE CASE OF BT E - S ERV (INDIA) PVT. LTD. IN (2017) 87 TAXMANN.COM 251 WHEREIN IT WAS HELD THAT RECEIVABLE OR ANY OTHER DEBT ARISING DURING THE COURSE OF BUSINESS IS INCLUDED IN THE DEFINITION OF CAPITAL FINANCING AS AN INTERNATIONAL TRANSACTION AS PER EXPLANATION 2 TO SECTION 92B W.E.F. 1.4.2002 BY THE FINANCE ACT, 2012 . THE DRP ALSO RELIED ON THE DECISION OF THE ITAT, DELHI IN THE CASE OF TECHBOOKS INTERNATIONAL PVT. LTD.(ITA NO.240/DEL/2015 DATED 06/07/2015 EVEN THE OUTSTANDING RECEIVABLE PARTAKE THE CHARACTER O CAPITAL FINANCING AND CONSEQUENTLY, OVERDUE OUTSTANDING IS AN INTERNATIONAL TRANSACTION . THUS, THE DRP JUSTIFIED THE FINDINGS OF THE TPO ON THIS ISSUE. 1 7.3 REGARDING THE RATE, THE ASSESSEE ARGUED THAT PRIME LENDING RATE IS NOT APPROPRIATE RATE FOR CALCULATING INTEREST ON FOREIGN CURRENCY LOANS/ADVANCES AND THAT LIBOR SHOULD BE ADOPTED. ACCORDING TO THE DRP, ASSESSEE IS AN INDIAN IT(TP)A NO.592/COCH/2018 53 COMPANY LOCATED IN INDIA AND IS THE TESTED PARTY. THE TPO WHILE BENCH MARKING THE LOANS AND ADVANCES TO AES CALCULATED THE OPPORTUNITY COST IN INDIA AND THEREFORE, ADOPTING THE INDI AN MARKET RATES IS APPROPRIATE. THE DRP OBSERVED THAT THE AVERAGE DOMESTIC COST OF BORROWINGS OF THE ASSESSEE AT 11.13% SHOULD BE ADOPTED AS IT IS AN INTERNAL CU P AND THERE IS NO NECESSITY TO MARK UP THE SAME. THE DRP DIRECTED THE TPO TO RE - COMPUTE THE A LP OF THE INTEREST. 17 . 4 AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. AR SUBMITTED THAT THE ASSESSEE HAD ADVANCED AMOUNT TO ITS AES WHICH WERE IN THE NATURE OF RECOVERY OF EXPENSES. IT WAS SUBMITTED THAT THESE EXPENSES PERTAINED TO REC OVERY OF TRAVEL EXPENSES INCURRED BY THE ASSESSEE ON BEHALF OF THE AES ON A COST TO COST BASIS. THESE SHORT TERM ADVANCES WERE OF A TEMPORARY NATURE, GIVEN IN THE ORDINARY COURSE OF BUSINESS OF USTIPL, BASED ON BUSINESS AND COMMERCIAL EXPEDIENCY. IT WAS SU BMITTED THAT TPO HAD ERRONEOUSLY IMPUTED INTEREST ON ADVANCES GIVEN TO SUBSIDIARIES AT AVERAGE INTERNAL BORROWING COST(11.13%) PLUS SPREAD OF 3% INSTEAD OF COMPUTING INTEREST AT LIBOR RATES. THE DRP HELD THAT ADOPTION OF AVERAGE DOMESTIC COST OF BORROWING S OF THE ASSESSEE SHOULD BE ADOPTED SINCE IT IS AN INTERNAL CUP AND THERE WAS NO NECESSITY TO ADD A SPREAD ON THE SAME. THE TPO RECOMPUTED THE ARMS LENGTH PRICE OF THE INTEREST AT 11.13%. THE LD.AR RELIED ON THE FOLLOWING CASE LAWS TO SUPPORT THA T LIBOR /EURIBOR FOR INTERCOMPAN Y LOANS AND ADVANCES GIVEN IN FOREIGN CURRENCY HA S BEEN ADOPTED : IT(TP)A NO.592/COCH/2018 54 1. FOUR SOFT LI M ITED (ITA NO.495/HYD/2010) 2) MAHINDRA & MAHINDRA LTD. VS. ACIT (ITA NO.8597/MUM/2010 AND ITA NO.7999/MUM/2011 3) SIVA INDUSTRIES & HOLDINGS LTD. VS. ACIT (145 TTJ 530) (CHENNAI TRIB.) 4) DCIT VS. TECH MAHINDRA LIMITED (46 SOT 141) (MUM) 5) COTTON NATURALS (INDIA) PVT. LTD. VS. DCIT (2012 - ITAT - 5855 - DEL) 6) TATA AUTOCOMP SYSTEMS LTD. VS. ACIT (2012 - ITAT - 7354 - MUM.) 7) APOLLO TYRES LTD. VS. ACI T (ITA NO. 616/COCH/2011) 8) AURIONPRO SOLUTIONS LTD. VS. ADDL. CIT 9TS - 75 - ITAT - 2013(MUM) - TP) 17 . 5 THE LD. DR RELIED ON THE ORDER OF THE DRP. 17.6 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. A SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN THE CASE OF M/S. ALLIANZ CORNHILL INTERNATIONAL SERVICE PVT. LTD. IN IT A NO.489/COCH/2016 DATED 30/05/2018 WHEREIN IT WAS HELD AS FOLLOWS: WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIA L ON RECORD. IN THE INSTANT CASE, THE ASSESSEE HAD INCURRED EXPENDITURE ON BEHALF OF ITS AES IN INDIAN CURRENCY . THE INVOICES ARE RAISED AGAINST THE AE IN INDIAN CURRENCY ONLY. SINCE THE EXPENDITURE HAS BEEN INCURRED IN INDIAN CURRENCY AND NOT IN DOLLAR S, THE PLEA OF THE ASSESSEE TO ADOPT LIBOR RATES IS REJECTED. HOWEVER, WE FIND THE OPPORTUNITY COST TO THE ASSESSEES FUNDS HAVE TO BE CALCULATED IN RELATION TO THE INTEREST EARNING CAPACITY IN THE DOMESTIC MARKET. THE ASSESSEE HAD PARKED ITS SURPLUS FUN DS IN FDS WITH THE BANKS. IT IS ALSO FOUND BY THE DRP THAT THE ASSESSEE HAS NOT TAKEN ANY INTEREST BEARING FUNDS AND THUS WAS NOT INCURRING ANY INTEREST EXPENDITURE. THEREFORE, THE FIXED INTEREST RATE IS THE MAXIMUM THE ASSESSEE COULD HAVE GOT IF THE RECO VERY OF THE AMOUNTS WERE NOT DELAYED. THEREFORE, THE SBI - PLR RATES ALONE SHOULD BE CALCULATED WITHOUT ANY 3% SPREAD. THE WEIGHTAGE AVERAGE INTEREST OF SBI - PLR ON FDS HAS BEEN WORKED OUT BY THE DRP AT 8.15%. WE ARE OF THE CONSIDERED VIEW THAT ONLY 8.15% SHOULD BE ADOPTED WHILE CALCULATING ALP INTEREST ON THE AMOUNTS OUTSTANDING FROM THE ASSESSEES AES. IT IS ORDERED ACCORDINGLY. IT(TP)A NO.592/COCH/2018 55 17.7 IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, WE DIRECT THE ASSESSING OFFICER TO ADOPT INTEREST AT THE RATE OF 8.15% P.A. WHILE COMPUTING THE ALP. THIS GROUND OF THE ASSESSEE IS PARTLY ALLOWED. 18. THE NEXT GROUND, GROUND NO. 9 IS WITH REGARD TO DISALLOWANCE OF FINANCE LEASE PAYMENTS U/S. 37 OF THE I . T. ACT. 18.1 THE FACTS OF THE CASE ARE THAT THE ASSESSEE HAD DEBITED RS.2,42,78,880/ - AS FINANCIAL LEASE CHARGES IN THE P&L ACCOUNT. ACCORDING TO THE TPO, FINANCIAL LEASES INCIDENTAL TO OWNERSHIP OF THE LEASED ITEMS, WERE CAPITALIZED AT THE LOWER OF THE FAIR VALUE AND PRESENT VALUE OF THE MINIMUM LEASE PAYMENTS AT THE INCEPTION OF THE LEASE TERM AND DISCLOSED AS LEASED ASSETS. THE TPO STATED THAT L EASE PAYMENTS ARE APPORTIONED BETWEEN THE FINANCE CHARGES AND REDUCTION OF THE LEASE LIABILITY BASED ON THE IMPLICIT RATE OF RETURN AND FINANCE CHARGES ARE CHARGED AGAINST INCOME. THE TPO STATED THAT FINANCE LEASE IS ONE WHERE THE LESSEE USES THE ASSET SUBSTANTIALLY THE WHOLE OF ITS USEFUL LIFE AND THE LE ASE PAYMENT ARE CALCULATED TO COVER THE FULL COST TOGETHER WITH INTEREST CHARGED. THEREFORE, THE PAYMENTS MADE TOWARDS THE FINANCE LEASE ARE NOTHING BUT TOWARDS ACQUISITION OF CAPITAL ASSET AND THUS, IS CAPITAL IN NATURE. THEREFORE, THE SAME WAS DISALLOW ED U/S.37 OF THE I.T. AC T AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. IT(TP)A NO.592/COCH/2018 56 18 . 2 ON APPEAL, THE DRP RELIED ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF M/S. ASIA BROWN BOVERI LTD. VS. INDUSTRIAL FINANCES CORPORATION OF INDIA, NO. APPEAL (CIVI L) 3574/1998 DATED27/10/2004 WHEREIN IT WAS STATED AS FOLLOWS: FINANCIAL LEASE HAS BEEN DEFINED BY INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE AS AN LEASE THAT TRANSFERS SUBSTANTIALLY ALL THE RISKS AND REWARDS INCIDENT TO OWNERSHIP OF AN ASSET. TITLE MAY OR MAY NOT EVENTUALLY BE TRANSFERRED . LESSOR IS ONLY A FINANCIER AND IS NOT INTERESTED IN THE ASSETS. THIS IS THE REASON THAT FINANCIAL LEASE IS KNOWN AS FULL PAYOUT LEASE WHERE CONTRACT IS IRREVO CABLE FOR THE PRIMARY LEASE PERIOD AND THE RENTALS PAYABLE DURING WHICH PERIOD ARE SUPPOSED TO BE ADEQUATE TO RECOVER THE TOTAL INVESTMENT IN THE ASSET MADE BY THE LESSOR. 18.3 THE DRP WAS OF THE OPINION THAT PRIMARY PURPOSE OF FINANCIAL LEASE IS THE FINANCING OF THE PURCHASE BY THE FINANCIER. ACCORDING TO THE DRP, THE PURCHASE OF ASSET OR EQUIPMENT OR MACHINERY IS BY THE BORROWER AND FOR ALL PRACTICAL PURPOSES, THE BORROWER BECOMES THE OWNER OF THE PROPERTY IN AS MUCH AS IT IS THE BORROWER WHO CH OOSES THE PROPERTY TO BE PURCHASED, TAKE DELIVERY, ENJOYS THE USE AND OCCUPATION OF THE PROPERTY, BEARS THE WEAR AND TEAR, MAINTAINS AND OPERATES THE MACHINERY/EQUIPMENT, UNDERTAKES INDEMNITY AND AGREES TO BEAR THE RISK OF LOSS AND DAMAGE, IF ANY. ACCORDI NG TO THE DRP, H E IS THE ONE WHO GETS THE PROPERTY INSURED AND HE REMAINS LIABLE FOR PAYMENT OF TAXES AND OTHER CHARGES AND INDEMNITY AND HE CANNOT RECOVER FROM THE LESSOR, ANY OF THE ABOVE EXPENSES. THE PERIOD OF LEASE COVERS THE ENTIRE LIFE OF THE PROPE RTY FOR WHICH IT MAY REMAIN USEFUL FOR EITHER ONE OR TWO TERMS WITH CLAUSE FOR RENEWAL. THUS, THE DRP WAS OF THE VIEW THAT THE EXPENSES ARE NOT TO BE CAPITALIZED. HOWEVER, IT(TP)A NO.592/COCH/2018 57 HE DIRECTED THE ASSESSING OFFICER TO ALLOW DEPRECIATION ON SUCH CAPITALIZED ASSETS AS PER LAW. 19. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US . THE LD. AR SUBMITTED THAT AS PER SECTION 37 OF THE ACT, ANY EXPENDITURE NOT BEING AN EXPENDITURE WHICH IS CAPITAL OR PERSONAL IN NATURE AND IF SUCH EXPENDITURE IS EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS, CAN BE CLAIMED AS DEDUCTION/S. 37 OF THE ACT. THEREFORE, THE ASSESSEE CLAIMED THE EXPENDITURE INCURRED TOWARDS LEASE RENTAL U/S. 37 OF THE ACT. THE LD. AR SUBMITTED THAT THE EXPENDITURE INCURRED BY WAY OF LEAS E RENTALS (INCLUDING PRINCIPAL AND INTEREST) IS REVENUE IN NATURE. ON EXPIRY OF THE LEASE TERM, THE OWNERSHIP OF THE ASSET WILL NOT AUTOMATICALLY TRANSFER TO THE ASSESSEE. HENCE, IT CANNOT BE HELD THAT THE PAYMENT WAS FOR ACQUISITION OF CAPITAL ASSET. TH E LD. AR SUBMITTED THAT THE EXPENDITURE WAS INCURRED DURING THE NORMAL COURSE OF BUSINESS AND THE ASSESSEE HAD INCURRED LEASE RENTAL EXPENSES MAINLY TOWARDS LEASING OF COMPUTERS AND NETWORKING EQUIPMENT WHICH ARE ESSENTIAL FOR THE BUSINESS OF THE ASSESSEE WHICH PROVIDED INFORMATION TECHNOLOGY SERVICES. 19. 1 THE LD. AR RELIED ON THE DECISION OF THE ITAT, DELHI IN THE CASE OF MINDA CORPORATION LTD. VS. DCIT 69 TAXMANN.COM 317 (DEL) WHEREIN IT WAS HELD THAT THE FACT THAT THE ASSESSEE HAD CAPITALIZED THE LE ASED ASSETS IN THE BOOKS AS PRESCRIBED UNDER AS - 19 IS NOT A DETERMINATIVE FACTOR FOR THE PURPOSE OF THE ACT. IT(TP)A NO.592/COCH/2018 58 19.2 IT WAS FURTHER HELD THAT THE FINANCE LEASE CHARGES PAID TO THE LESSOR SHOULD BE ALLOWED AS REVENUE EXPENDITURE AS THE ASSESSEE HAD NOT ACQUI RED ANY OWNERSHIP RIGHTS. THE LD. AR RELIED ON THE FOLLOWING JUDGMENTS : I) SUTLEJ COTTON MILLS LTD. VS. CIT 116 ITR 1 (SC) II) KEDARNATH JUTE MFG. CO. LTD. VS. CIT 82 ITR 363 (SC) III) CIT VS. BANSWARA SYNTHETIC LTD. 15 TAXMANN.COM 247 (RAJ.) IV) BANASHANKARI MEDICAL & ONCOLOGY RESEARCH CENTRE LTD. VS. JT. CIT 316 ITR 407 (KAR.) V) RAJSHREE ROADWAYS VS. UNION OF INDIA 263 ITR 206. THUS, IT WAS SUB MITTED THAT THE ENTRIES IN BOOKS OF ACCOUNTS BY ITSELF, WILL HAVE NO IMPLICATION ON THE ALLOWANC E OF EXPENDITURE UNDER THE PROVISIONS OF THE ACT. THE LD. AR SUBMITTED THAT THERE IS DISTINCTION BETWEEN OPERATING LEASE AND FINANCE LEASE AS PER THE ACT. THE LD. AR PLACED RELIANCE ON THE CBDT CIRCULAR NO. 2/2001 DATED 09/02/2001 WHEREIN IT WAS EXPLICIT LY STATED THAT THE TREATMENT OF LEASE AS PER ACCOUNTING STANDARDS WILL HAVE NO IMPLICATION FOR THE PURPOSES OF THE ACT. T HE RELEVANT PORTION OF THE CIRCULAR READS AS FOLLOWS: IT HAS COME TO THE NOTICE OF THE BOARD THAT THE NEW ACCOUNTING STANDARD ON L EASES ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA REQUIRE CAPITALIZATION OF THE ASSET BY THE LESSEES IN FINANCIAL LEASE TRANSACTION. BY ITSELF, THE ACCOUNTING STANDARD WILL HAVE NO IMPLICATION ON THE ALLOWANCE OF DEPRECIATION ON ASSETS UNDER THE PROVISIONS OF THE INCOME - TAX ACT. 19 . 3 THE LD. AR SUBMITT E D THAT THE LEASE RENTALS PAID DURING THE YEAR WERE ON THE BASIS OF THE LEASE AGREEMENTS ENTERED BY THE ASSESSEE IN EARLIER YEARS. FURTHER, IT WAS SUBMITTED THAT LEASE PAYMENTS MADE IN EARLIER YEARS WERE ALSO CLAIMED AS DEDUCTIONS DURING THE PRIOR YEARS AND WERE ALLOWED AS DEDUCTION BY IT(TP)A NO.592/COCH/2018 59 THE DEPARTMENT . THE LD. AR SUBMITTED THAT IN THE EVENT THAT THE LEASE RENT CAPITALIZED IS TREATED AS A CAPI TAL ASSET, THE ASSESSEE OUGHT TO BE GRANTED DEPRECIATION ON SUCH ASSETS CAPITALIZED . HE RELIED ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF I.C.D.S. LTD. VS. CI T 29 TAXMANN.COM 129 WHEREIN IT WAS HELD THAT THE LESSOR WAS ENTITLED TO CLAIM DEPRECIATION IN RESPECT OF ASSETS LEASED OUT SINCE IT HAS SATISFIED BOTH THE REQUIREMENTS OF SECTION 32, NAMELY OWNERSHIP OF THE ASSET AND ITS USAGE IN THE COURSE OF BUSINESS. THE DRP WHILE DISALLOWING THE CLAIM OF LEASE RENTALS DUR ING THE CURRENT YEAR, HAD DIRECTED TO GRANT DEPRECIATION ON THE UNDERLYING ASSETS. HOWEVER, THE ASSESSING OFFICER HAD NOT GRANTED DEPRECIATION. AS THE ASSESSEE HAD BEEN CLAIMING LEASE RENTALS CONSISTENTLY FOR THE PAST YEARS, IT WOULD BE DIFFICULT TO ASCER TAIN THE OPENING WDV OF THE UNDERLYING ASSETS AND COMPUTE THE ELIGIBLE DEPRECIATION FOR THE CURRENT YEAR ON THE ASSETS TAKEN ON LEASE IN THE PRECEDING YEARS. AS PER AS - 116 W.E.F. F.Y. 2019 - 20, EVERY LEASE WOULD BE TREATED AS FINANCE LEASE IN THE BOOKS OF LESSEE AND LESSEE WOULD BE ELIGIBLE FOR DEPRECIATION AND INTEREST ON LEASE AS EXPENDITURE GOING FORWARD. DETAILS OF LEASE RENTALS PAID DURING THE YEAR IS AS FOLLOWS: NATURE OF ASSETS TAKEN ON LEASE TOTAL LEASE RENTALS PAID DURING THE YEAR LEASE RENTALS PERTAINING TO ASSETS ACQUIRED DURING PRIOR YEARS LEASE RENTALS PERTAINING TO ASSETS ACQUIRED DURING CURRENT YEAR COMPUTERS AND LEASEHOLD IMPROVEMENTS 2,42,78,880/ - 2,42,78,880/ - IT(TP)A NO.592/COCH/2018 60 2 0 . THE LD. DR RELIED ON THE ORDER OF THE DRP. 2 1 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE CONTENTION OF THE LD. AR IS THAT LEASE PAYMENTS SHALL BE ALLOWABLE AS REVENUE EXPENDITURE IN THE HANDS OF THE ASSESSEE AND FOR THAT PURPOSE HE RELIED ON THE ON THE DECISION OF THE IT AT, DELHI IN THE CASE OF MINDA CORPORATION LTD. VS. DCIT 69 TAXMANN.COM 317. HOWEVER, WE FIND THAT THE ASSESSEE IS ENTITLED FOR FINANCIAL LEASE CHARGES AS REVENUE EXPENDITURE ONLY IF IT HAS NOT CLAIMED DEPRECIATION ON THE LEASED ASSET. THE ASSESSEE HAD NOT EXPLAINED WHETHER IT CLAIMED DEPRECIATION ON THE LEASED ASSET OR NOT. IN OTHER WORDS, THE ASSESSEE IS ENTITLED TO FINANCIAL LEASE CHARGES ONLY IN THE EVENT IF IT DOES NOT CLAIM DEPRECIATION ON SUCH LEASED ASSET SINCE DEPRECIATION ON SUCH LEASED ASSET IS TO BE CLAIMED BY THE LESSOR ONLY. THE ASSESSEE IS NOT THE OWNER OF THE LEASED ASSETS. ONCE THE ASSESSEE PROVES THAT IT HAS NOT CLAIMED DEPRECIATION ON THE ASSETS TAKEN ON LEASE, THE ASSESSEE IS ENTITLED FOR LEASE RENTALS PAID BY THE ASSESSEE AS A REV ENUE EXPENDITURE. WITH THIS OBSERVATION, WE REMIT THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE ASSESSEES PROFIT AND LOSS ACCOUNT AND BALANCE SHEET WITH REFERENCE TO THE AGREEMENTS ENTERED INTO BY THE ASSESSEE WITH THE LESSOR. THIS GRO UND OF APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. IT(TP)A NO.592/COCH/2018 61 2 2. THE LD. AR HAS RAISED FOLLOWING ADDITIONAL GROUND WHICH IS INDEPENDENT GROUND FOR M ODIFICATION AND EXTENSION OF GROUND NO. 9, TO ENABLE GROUND NO. 9.6 BE CONSIDERED AS ADDITIONAL GROUND TO GROUND NO 9.1 : THE LEARNED AO HAS ERRED IN NOT ALLOWING THE INTEREST PORTION AMOUNTING TO INR 5,210,574 FORMING PART OF THE FINANCE LEASE PAYMENTS (OF INR 2,42.78,880) AS DEDUCTION. ALL THE FACTS ARE ALREADY ON RECORD AND NO FRESH INF ORMATION IS REQUIRED FOR THE ADMISSION OF THE ABOVE GROUND AS ADDITIONAL GROUND. 2 2 . 1 IN RESPECT OF ABOVE ADDITIONAL GROUND, LD. AR HAS FILED PETITION FOR ADMISSION OF ADDITIONAL GROUND STATING THAT THE ASSESSEE WAS RAISING THE ADDITIONAL GROUNDS WITH BO NA FIDE INTENTION AND ALSO IN ACCORDANCE WITH LAW. IT WAS SUBMITTED THAT THE ADDITIONAL GROUND IS MODIFICATION AND EXTENSION OF GROUND NO. 9 AND MAY BE TREATED AS PART OF THE GROUNDS IN THE APPEA L. IT WAS SUBMITTED THAT THE ADDITIONAL GROUNDS RAISED ARE ONLY IN RELATION TO QUESTION OF LAW VIS - - VIS FACTS ALREADY RAISED IN THE APPEAL FILED. IT WAS SUBMITTED THAT IN THE INTEREST OF JUSTICE, IT WAS ONLY JUST AND PROPER THAT THE ADDITIONAL GROUND RAISED BE ADMITTED ON RECORD AND ACCEPTED AS PART OF GROUNDS OF APPEAL AND ADJUDICATED UPON BY THE TRIBUNAL. 2 2.2 WE FIND BONA FIDE REASONS IN THE ACT OF THE ASSESSEE IN NOT RAISING THE ADDITIONAL GROUND ON EARLIER OCCASION BY PLACING RELIANCE ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF NATIONAL THERMAL POWER CORPORATION LTD. VS. CIT (229 ITR 383) WHEREIN IT WAS HELD THAT TRIBUNAL HAS THE DISCRETION TO ALLOW OR NOT IT(TP)A NO.592/COCH/2018 62 TO ALLOW ADDITIONAL GROUND TO BE RAISED FOR THE FIRST TIME BEFORE THE TRIBUNAL. ACCORDINGLY, WE ADMIT THE OTHER ADDITIONAL GROUND . HOWEVER, THIS GROUND OF APPEAL OF THE ASSESSEE DOES NOT REQUIRE ANY FURTHER ADJUDICATION IN VIEW OF OUR FINDINGS IN T HE MAIN GROUND NO. 9. HENCE, HE ADDITIONAL GROUND RAISED BY THE ASSESSEE IS DISMISSED. 23 . THE NEXT GROUND , GROUND NO. 10 IS WITH REGARD TO DISALLOWANCE OF INTEREST EXPENSES ON ACCOUNT OF INTEREST FREE LOANS ADVANCED TO RELATED PARTIES. 23.1. THE FACTS OF THE CASE ARE THAT THE ASSESSING OFFICER REJECTED THE CLAIM OF THE ASSESSEE THAT THE INTEREST F REE FUNDS WERE NOT USED FOR BORROWING SIN CE THE ACCOUNTS WERE MAINTAINED IN CONSOLIDATED MANNER . 23.2 ON APPEAL, THE DRP WAS OF THE VIEW THAT IF THE COMPANY HAD NOT GRANTED LOAN TO ITS SISTER CONCERNS, THE COMPANY WOULD HAVE NOT REQUIRED TO MAKE BORROWING TO THE EXTENT IT HAS DONE NOW. 23.3 AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. AR SUBMITTED THAT THE ASSESSEE HAD SUFFICIENT O WN FUNDS IN THE FORM OF RESERVES, WHICH ARE ADEQUATE TO COVER THE AFORESAID LOAN, DETAILS OF WHICH ARE AS FOLLOWS: AY LOAN GRANTED TO USTGPL LOAN GRANTED TO USTSPL LOAN GRANTED TO FINCUROFO TOTAL LOAN GRANTED RESERVES IT(TP)A NO.592/COCH/2018 63 OPENING BALANCE CLOSING BALANCE 2009 - 10 1,618,441 - - 1,618,441 717,455,603 951,397,562 2010 - 11 38,391,944 - - 38,391,944 951,397,562 1,499,315,279 2011 - 12 95,319,973 14,861,141 - 110,181,114 1,499,315,279 2,105,104,183 2012 - 13 102,312,883 143,394,962 - 245,707,845 2,105,104,183 2,534,606,602 2013 - 14 296,930,414 84,852,701 22,258,389 404,041,504 2,534,606,602 3,114,462,010 2014 - 15 715,783,881 284,875,181 6,998,261 1,007,657,323 3,114,462,010 3,551,807,586 TOTAL 1,250,357,536 527,983,985 29,256,650 1,807,598,171 23.4 . IT WAS SUBMITTED THAT THE COMPANY HAD SUFFICIENT OWN FUNDS IN THE FORM OF RESERVES WHICH WERE ADEQUATE TO COVER THE AGGREGATE INTEREST FREE LOANS/ADVANCES GRANTED. IT WAS SUBMITTED THAT FROM THE CASH FLOW STATEMENT OF THE COMPANY FOR THE SUBJECT YEAR , IT WAS EVIDENT THAT THE NET CASH FLOW FROM OPERATING ACTIVITIES (1NR 1,342,173.143 ) WAS SUFFICIENT FOR COVERING THE INTEREST FREE LOANS (INR 1,007,657,323). ALSO, IT WAS SUBMITTED THAT THE NET CASH FLOW FROM THE FINANCING ACTIVITIES WAS NEGATIVE DURING THE YEAR, I.E. THE LOAN REPAYMENTS BY THE ASSESSEE TO THE BANKS/FINANCIAL INSTITUTION W E RE MORE COMPARED TO THE LOANS AVAILED BY THE ASSESSEE FROM BANKS/FINANCIAL INSTITUTIONS DURING THE YEAR. HENCE, IT COULD BE INFERRED THAT COMPANY HA D U TILIZED OWN FUNDS FOR THE PURPOSE OF GRANTING LOAN TO RELATED PARTIES. 23.5 THE LD. AR RELIED ON THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2008 - 09 WHEREIN IT WAS HELD THAT INTEREST PAID IN RESPECT OF CAPITAL BORROWED IS OUGHT TO BE ALLOW ED AS EXPENDITURE AS THE COMPANY HAD SUFFICIENT OWN FUNDS MORE THAN THE LOANS/ADVANCES GRANTED TO RELATED PARTIES . THE LD. AR RELIED ON THE JUDGMENT OF THE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES IT(TP)A NO.592/COCH/2018 64 AND POWER LTD. 3132 ITR 340 WHEREIN IT WAS HELD THAT WHERE A N ASSESSEE POSSESSED SUFFICIENT INTEREST FREE FUNDS OF ITS OWN, APART FROM SUBSTANTIAL SHAREHOLDERS' FUNDS, PRESUMPTION STANDS ESTABLISHED THAT THE INVESTMENTS IN SISTER CONCERNS WERE MADE BY THE ASSESSEE OUT OF INTEREST FREE FUNDS AND , THEREFORE, NO PART OF INTEREST ON BORROWINGS CAN BE DISALLOWED ON THE BASIS THAT THE INVESTMENTS WERE MADE OUT OF INTEREST BEARING FUNDS. IF THERE ARE INTEREST FREE FUNDS AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET ITS INVESTMENT AND AT THE SAME TIME TH E ASSESSEE HAD RAISED A LOAN, IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTEREST FREE FUNDS AVAILABLE. THIS PRINCIPLE WAS AFFIRMED BY THE SUPREME COURT RECENTLY IN THE CASE OF CIT VS. RELIANCE INDUSTRIES 410 ITR 436 . THE ABOVE PRINCIPLE WAS ALS O UPHELD IN THE FOLLOWING JUDICIAL PRECEDENTS: A ) CIT & ANR VS. MICROLABS (2016) 383 ITR 490 (KAR) (B) CIT VS. HDFC BANK L T D. (2014) 49 TAXMANN.COM 335 (BOM) (C) GODREJ & BOYCE MANUFACTURING COMPANY L T D VS. DCIT (2017) 39 4 ITR 499 23.6 . IT WAS SUBMITTED THAT SPECIFIC PURPOSE LOAN CANNOT BE SAID TO BE DIVERTED TO SISTER CONCERNS. DETAILS OF LOANS TAKEN BY USTIPL IN A .Y. 2014 - 15 IS AS FOLLOWS: NAME OF LENDER PURPOSE OF LOAN OPENING BALANCE AMOUNT OF LOAN TAKEN REPAYMENT DURING THE YEAR CLOSING BALANCE INTEREST PAID RATE OF INTEREST CISCO SYSTEMS CAPITAL (INDIA) PVT. LTD. PURCHASE OF FIXED ASSETS - 16,489,440 5,248,420 11,241,020 1,011,225 12% IBM INDIA(P) LIMITED - DO - 301,009,145 - 111,909,068 32,943,900 32,943,900 11.85% - 12% IT(TP)A NO.592/COCH/2018 65 HP FINANCIAL SERVICES (INDIA) PVT. LTD. - DO - 60,704,319 - 39,064,911 21,639,408 4,010,230 11.45% - 11.85% SREI EQUIPMENT FINANCE PVT. LTD. - DO - 41,648,651 - 37,616,232 4,032,419 3,050,523 11.95% - 12.13% ICICI BANK LIMITED EXPORT PACKING CREDIT 313,928,259 120,300,590 - 434,228,849 39,900,349 B+0.75% (10.75%) ICICI BANK LIMITED CASH CREDIT 16,450,893 - 16,450,893 - B+2.25% (12.25%) TOTAL 733,741,267 136,790,030 210,289,524 660,241,773 80,916,236 IT WAS SUBMITTED THAT OUT OF THE TOTAL BORROWINGS MADE BY THE COMPANY, CERTAIN AMOUNT WAS TOWARDS THE PURCHASE OF FIXED ASSETS. IT WAS SUBMITTED THAT IN THE FINANCING ARRANGEMENT FOR THE PURCHASE OF ASSETS, THE LOAN AMOUNT WAS NOT ROUTED THROUGH THE A SSESS EE, INSTEAD THE SAME WAS PAID DIRECTLY BY THE LENDER TO THE VENDOR OF ASSETS. HENCE, THE INTEREST PERTAINING TO SUCH SPECIFIC PURPOSE BORROWING SHOULD NOT BE CONSIDERED FOR THE COMPUTATION OF DISALLOWANCE. IT WAS SUBMITTED THAT THE AO OUGHT TO HAVE CONSIDE RED THE BORROWINGS AVAILED/GRANTED DURING THE YEAR FOR THE PURPOSE OF COMPUTATION OF DISALLOWANCE WITHOUT CONSIDERING THE OPENING BALANCE. IT WAS SUBMITTED THAT THE ASSESSEE HAD AV AILED 2 TYPES OF LOAN, ONE WAS TOWARDS ACQUISITION OF CAPITAL ASSETS AND THE OTHER WAS TOWARDS THE WORKING CAPITAL. IT WAS SUBMITTED IN CONNECTION WITH LOANS FOR FIXED ASSETS, THE REPAYMENT DURING THE CURRENT YEAR WAS EXCEEDING THE AMOUNT AVAILED DURING THE YEAR. REGARDING THE WORKING CAPITAL LOAN, THERE WAS A NET INCREASE OF IN R 10.38 CRORES DURING THE YEAR. IT WAS SUBMITTED THAT THERE WAS A NET INCREASE OF 1NR 73.63 CRORES OF LOANS GRANTED TO ASSOCIATE ENTITIES. HENCE, IT WAS SUBMITTED THAT THE AO OU GHT TO HAVE TAKEN INTO CONSIDERATION THE FACT THAT THE ASSESSEE HAD THE OPTION OF UTILIZING THE BORROWED FUNDS TO THE EXTENT OF ONLY IT(TP)A NO.592/COCH/2018 66 10.38 CRORES TOWARDS GRANTING ADVANCES (INR 73.63 CRORES) TO THE RELATED PARTIES. BASED ON THE SAME, THE AO SHOULD HAVE CONSIDERED THE INCREMENTAL LOAN AMOUNTING TO INR 10.38 CRORES FOR DISALLOWANCE COMPU TATION. 23.7 IT WAS SUBMITTED THAT THE COMPANY HAD GRANTED INTEREST FREE LOANS TO ITS SUBSIDIARY COMPANIES AND ASSOCIATE COMPANIES DURING THE NORMAL COURSE OF BUSINESS. THE COMPANY HA D GRANTED ADVANCE TO USTGPL FOR THE PURPOSE OF FIXED ASSET PURCHASE A ND WORKING CAPITAL REQUIREMENTS. IT WAS SUBMITTED THAT THE GROUP COMPANY USTGPL WAS ENGAGED IN T HE BUSINESS OF CONSTRUCTION OF INFRASTRUCTURE DEVELOPMENT FACILITIES, AND THE SPACE IN SUCH FACILITY DEVELOPED WAS RENTED OUT TO THE ASSESSEE AND TH E LOANS GR ANTED BY THE COMPANY TO ITS SUBSIDIARIES, FINCURO AND USTSPL WERE FOR WORKING CAPITAL PURPOSE. BOTH THE SUBSIDIARY COMPANIES PROVIDES IT/ITES SERVICES, WHICH IS SIMILAR BUSINESS LINE OF UST S PL. HOWEVER, AO HELD THAT THE LOANS AND ADVANCES WERE NOT MADE IN THE ORDINARY COURSE OF BUSINESS. 23.8 . THE LD. AR RELIED ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE SA BUILDERS LTD. VS. CIT 289 ITR 26 WHEREIN IT WAS HE LD THAT THE ASSESSEE IS ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOANS, IF THE LOANS GRANTED TO ITS SUBSIDIARY IS UTILIZED FOR THEIR BUSINESS PURPOSE. THE LD. AR RELIED ON THE FOLLOWING JUDICIAL PRECEDENTS WHICH HAVE UPHELD THE VIEW THAT INTEREST EXPENDITURE IS ALLO WABLE SUBJECT TO THE FACTOR OF COMMERCIAL EXPEDIENCY : IT(TP)A NO.592/COCH/2018 67 (A) AMBIENCE PROPERTIES VS. DCIT (ITA NO . 58/HYCL/20I2) : THE ITAT, HYDERABAD HELD THAT IN VIEW OF THE COMMERCIAL EXPEDIENCY OF INVESTMENTS MADE IN ASSOCIATE COMPANY, NO DISALLOWANCE COULD BE MADE UNDER SECTION 36( 1 )(III) OF THE ACT FOR THE PROPORTIONATE INTEREST. (B)SREE R A YAL A SEEMA GREEN ENERGY V DCIT (ITA 485/HYD / 2012): THE ITA, HYDERABAD HELD THAT INTEREST SHALL BE ALLOWED AS DEDUCTION UNDER SECTION 36( 1 )(III) OF THE ACT SUBJECT TO THE FACT THA T INVESTMENTS WERE MADE OUT OF COMMERCIAL EXPEDIENCY. (C) HERO CYCLES (P) LTD. V CIT (CIVIL APPEAL NO. 514 OF 2008): THE APEX COURT IN T H E SUBJECT CASE UPHELD THE VIEW OF DELHI HIGH COURT IN THE CASE OF CIT V S. DALMIA C EMENT LTD (2002) 254 ITR 377 WHEREIN IT WAS HELD THAT ONCE NEXUS IS ESTABLISHED BETWEEN THE EXPENDITURE AND THE PURPOSE OF BUSINESS (WHICH NEED NOT BE NECESSARILY THE BUSINESS OF ASSESSEE ITSELF), THEN THE REVENUE NEED NOT STEP INTO THE SHOES OF BUSINESSMAN TO CHECK THE REASONABLENESS OF THE EXPENDITURE. 23.9 FURTHER, THE APEX COURT IN THE SUBJECT CASE TAKING NOTE OF THE FACT THAT ADVANCES GRANTED TO SISTER CONCERN PROVIDED ADDITIONAL MARGIN TO MEET THE WORKING CAPITAL REQUIREMENTS HELD THAT THE INTEREST SHOULD NOT BE DISALLOWED UNDER SECTION 36 (1 )(III)OF THE ACT : (D) CIT V S. H.B. STOCK HOLDINGS LIMITED (ITA NO. 328/2008) : THE DELHI HIGH COURT HELD THERE SHOULD BE NO DISALLOWANCE UNDER SECTION 36( 1 )(III) ON ACCOUNT OF THE FOLLOWING: THE ASSESSEE WAS HAVING SUFFICIENT FUNDS IN THE FORM OF RESERVES FOR GRANTING LOANS TO ITS SISTER CONCERNS. THE HIGH COURT BY PLACING RELIANCE ON THE APEX COURT DECISION IN THE CASE OF S.A. BUILDERS VS. CIT 2 88 ITR I (SC) UPHELD THE VIEW THAT A COMPANY IS FULLY ENTITLED TO GIVE A LOAN TO ITS SUBSIDIARY COMPANY AND WHICH CAN BE DONE FOR BUSINESS EXPEDIENCY. IT(TP)A NO.592/COCH/2018 68 (E) GULF O IL CORPORATION LTD . VS. ACIT (ITA NO.649/HYD/20 10 ): THE ITAT, HY DERABAD B Y PLACING RELIANCE ON THE APEX COURT RULING IN THE CASE OF S.A. BUILDERS VS. CIT, 288 ITR I (SC) HELD THAT ADVANCES MADE BY THE ASSESSEE TO ITS SISTER CONCERNS IS INCIDENTAL TO CARRYING ON THE BUSINESS BY ASSESSEE ITSELF AND CONSEQUENTLY, THE BORROWED MONEY SHOULD BE CONSIDERED AS HAVING BEEN UTILIZED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. 23.9 .1 FURTHER, IT WAS SUBMITTED THAT THE F OLLOWING JUDICIAL PRECEDENTS HA D UPHELD THE VIEW THAT REVENUE NEED NOT STEP INTO THE SHOES OF BUSINESSMAN FOR CHECKING THE REASONABLENESS OF EXPENDITURE : (A) HERO CYCLES (P) LTD V CIT (CIVIL APPEAL NO. 514 O F 2008) (B) GULF OIL CORPORATION LID V/S ACIT (ITA NO.649/HYD/2010) 24 . THE LD. DR RELIED ON THE ORDER OF THE DRP. 2 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. A SIMILAR ISSUE WAS CONSIDERED BY THE TRIBUNAL IN ASSE SSEES OWN CASE IN IT(TP)A NO.02/COCH/2013 DATED 23/08/2018, WHEREIN IT WAS HELD AS FOLLOWS: 6. WE HAVE HEARD THE RIVAL CONTENTION AND CAREFULLY PERUSED THE RECORD. FROM THE ASSESSMENT ORDER, WE NOTICE THAT THE AO HAS DISALLOWED A PART OF INTEREST EXPENDITURE CLAIM ON THE REASONING THAT (A) THAT ASSESSEE HAS GIVEN INTEREST FREE ADVANCES TO SISTER CONCERNS AS PER THE BALANCE SHEET AS AT 31 . 3.2008 AND (B) THE DECISION RENDERED BY J URISDICTIONAL HON'BLE KERALA HIGH COURT IN THE CASE OF V.I. BABY (SUP RA) SUPPORTS DISALLOWANCE OF INTEREST ATTRIBUTABLE TO THE FUNDS DIVERTED. IN THE WRITTEN SUBMISSIONS, THE ASSESSEE HAS TABULATED THE YEAR WISE DETAILS OF FUNDS GIVEN TO THE SISTER CONCERNS AS WELL AS THE RESERVES AND SURPLUS FUNDS AVAILABLE WITH IT IN THOS E YEARS. FOR THE SAKE OF CONVENIENCE, WE EXTRACT BELOW THE SAID DETAILS: IT(TP)A NO.592/COCH/2018 69 FINANCIAL YEAR AMT DISBURSED TO TEN AMT DISBURSED TO TOONZ TOTAL ADVANCES RESERVES AND SURPLUS 2002 - 03 2,551,812 - 2,551,812 51,459,144 2003 - 04 5,959,312 - 5,959,312 93,539,478 2004 - 05 961,388 - 961,388 139,593,897 2005 - 06 325,049 - 325,049 209,274,643 2006 - 07 - 700,000 700,000 467,452,244 2007 - 08 - - - 717,455,603 TOTAL 9,797,561 700,000 10,497,561 THUS, IT IS SEEN THAT THE ASSESSEE HAS ADVANCED THE AMOUNTS TO ITS SISTER CONCERNS IN THE EARLIER YEARS AND NOT DURING THE YEAR UNDER CONSIDERATION, AS PRESUMED BY THE ASSESSING OFFICER. THUS, THE PRESUMPTION ENTERTAINED BY THE AO IS AGAINST THE FACTS AVAI LABLE ON RECORD. 7. FURTHER, THE AO HAS PLACED RELIANCE ON THE DECISION RENDERED BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF V.I. BABY AND CO., REFERRED SUPRA. THE LD D.R ALSO PLACED HEAVY RELIANCE ON THE ABOVE SAID DECISION RENDERED BY THE HO N'BLE JURISDICTIONAL HIGH COURT. WE HAVE CAREFULLY GONE THROUGH THE SAID DECISION AND NOTICE THAT THE ASSESSEE THEREIN WAS A PARTNERSHIP FIRM AND THE WITHDRAWALS MADE BY ITS PARTNERS RESULTED IN CONVERTING THE CAPITAL BALANCES INTO 'DEBIT BALANCES'. THERE SHOULD NOT BE ANY DOUBT THAT THE DEBIT BALANCE IN THE CAPITAL ACCOUNT INDICATES DRAWING OF FUNDS FROM OUT OF LOAN AND OTHER CREDITORS ACCOUNT. UNDER THAT SET OF FACTS, T HE WITHDRAWALS MADE BY THE PARTNERS OF THE FIRM WERE CONSIDERED AS DIVERSION OF FUNDS I N THE CASE OF V. I . BABY (SUPRA). HOWEVER, IN THE INSTANT CASE, THE ASSESSEE HAS SHOWN THAT IT WAS HAVING 'RESERVES AND SURPLUS', MORE THAN THE AMOUNT ADVANCED TO THE SISTER CONCERNS. ACCORDINGLY, IN OUR VIEW, THE FACTS PREVAILING IN THE CASE OF V.I BABY & CO (SUPRA) IS TOTALLY DIFFERENT FROM THE FACTS PREVAILING IN THE INSTANT CASE AND ACCORDINGLY, IN OUR VIEW, THE DECISION RENDERED IN THE CASE OF V.I. BABY (REFERRED SUPRA) BY THE JURISDICTIONAL HIGH COURT SHALL NOT APPLY TO THE FACTS OF THE INSTANT CASE. 8. THUS, BOTH THE GROUNDS ON WHICH THE IMPUGNED DISALLOWANCE WAS MADE THE ASSESSING OFFICER FAILS AND CONSEQUENTLY, IN OUR VIEW, THE IMPUGNED DISALLOWANCE OF RS.8,24,600/ - IS LIABLE TO BE DELETED. WE ORDER ACCORDINGLY. IT(TP)A NO.592/COCH/2018 70 9. IN THE RESULT, THE APPEAL FIL ED BY THE ASSESSEE IS PARTLY ALLOWED. 24.1 IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED SINCE THE ASSESSEE WAS HAVING SUFFICIENT FUNDS IN THE FORM OF RESERVES FOR GRANTING LOANS TO ITS SISTER CONCERNS. 25. THE NEXT GROUND, GROUND NO. 11 IS WITH REGARD TO DISALLOWANCE OF ADDITIONAL EXPENDITURE INCURRED OWING TO THE MISCONDUCT OF THE EMPLOYEES U/S. 37 OF THE ACT. 25 . 1 THE FACTS OF THE CASE ARE THAT THE ASSESSEE HAD ENTERED INTO AN AGREEMENT WITH A VEND OR FOR RECRUITING CONTRACT BASED EMPLOYEES TO THE COMPANY DURING THE YEAR. THE EMPLOYEES OF THE COMPANY WHO WAS IN CHARGE OF ENTERING INTO SUCH CONTRACT HAD COLLUDED WITH THE VENDOR, OWING TO WHICH THE ASSESSEE HAD TO ACTUALLY PAY MORE THAN THE AMOUNT THAT IDEALLY SHOULD BE PAID TO SUCH CONTRACTED EMPLOYEES. THE EXPENSE OF FRAUD WAS NOT DISCLOSED AS A SEPARATE LINE ITEM IN THE STATEMENT OF PROFIT AND LOSS BUT FORMED PART OF THE EXPENSE PAID IN CONNECTION WITH CONTRACT FOR RECRUITING EMPLOYEES. THE FRAUD C OMMITTED BY THE EMPLOYEES RESULTED IN THE ASSESSEE PAYING THE VENDOR MORE THAN WHAT WAS ACTUALLY REQUIRED. THE INCREMENTAL COST OF INR 45 LAKHS WAS ACTUALLY PAID TO THE VENDORS FOR THE SERVICES RENDERED. ON SUCH AN ARRANGEMENT COMING TO THE NOTICE OF THE ASSESSEE, THE EMPLOYEE WAS TERMINATED FROM THE COMPANY. THE IT(TP)A NO.592/COCH/2018 71 TPO REJECTED THE CLAIM OF THE ASSESSEE SINCE IT COULD NOT BRING ON RECORD ANY DOCUMENTS TO SUBSTANTIATE THE NATURE OF EXPENDITURE. 25 . 2 ON APPEAL, THE DRP OBSERVED THAT THE ASSESSING OFFICER HAD SPECIFICALLY MENTIONED THAT THE SAID EXPENDITURE IS ALLOWABLE ON PRODUCTION OF DOCUMENTS SUBSTANTIATING THE SAME AND THAT THE AR WAS FURTHER REQUIRED TO PROVE THE GENUINENESS OF THE SAME. THE DRP OBSERVED THAT THE ASSESSEE HAS NEITH ER PRODUCED ANY DOCUMENTS BEFORE THE ASSESSING OFFICER NOR PRODUCED BEFORE THE DRP. THE NATURE OF THE EXPENDITURE HAS NOT BEEN SUBSTANTIATED BY THE ASSESSEE. ACCORDING TO THE DRP , THE ASSESSEE COULD HAVE PRODUCED FACTS AND DETAILS TO SUBSTANTIATE THEIR CLA IM INSTEAD OF TRYING TO MAKE MERE LEGAL ARGUMENTS. THE DRP HELD THAT ONLY O N COMPLETE EXAMINATION OF FACTS AS TO WHAT WAS THE NATURE OF CONTRACT, HOW WAS THE CONTRACT PREJUDICED, HOW WAS THE QUANTIFICATION OF THE LOSS DONE ETC. CAN A PROPER ASSESSMENT OF THE ALLOWABILITY OF THE SAME BE MADE. THUS, THE DRP REJECTED THE CLAIM OF THE ASSESSEE ON THIS ISSUE. 2 5.3 AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. AR SUBMITTED THAT THE EXPENDITURE INCURRED BY THE COMPANY WAS WITH RESPECT TO THE CON TRACT ENTERED FOR RECRUITING EMPLOYEES ON CONTRACT BASIS FOR PROVIDING SOFTWARE DEVELOPMENT SERVICES, WHICH WAS THE MAIN OPERATING ACTIVITY OF THE COMPANY. THEREFORE, IT WAS SUBMITTED THAT SUCH EXPENDITURE WAS REVENUE IN NATURE WHICH IS ALLOWABLE AS DEDUC TION. IT WAS SUBMITTED THAT SUCH EXPENDITURE WAS INCURRED IN THE NORMAL COURSE OF BUSINESS AND SUCH EXPENDITURE WAS INCURRED IN CARRYING IT(TP)A NO.592/COCH/2018 72 ON THE BUSINESS. THE LD. A R RELIED ON THE DECISION OF THE ITAT, JAIPUR IN THE CASE OF PAWAN SPECIALITIES (P) LTD. VS. ACIT IN ITA NO. 809/JP/2016 WHEREIN IT WAS HELD THAT THE LOSSES ARISING DUE TO EMBEZZLEMENT OF EMPLOYEES OR DUE TO NEGLIGENCE OF EMPLOYEES SHOULD BE ALLOWED IF THE LOSS TOOK PLACE IN THE NORMAL COURSE OF BUSINESS. IN VIEW OF THIS, THE ASSESSEE WAS ELIGIBL E TO CLAIM THE ENTIRE ADDITIONAL EXPENSE OWING TO MISCONDUCT OF THE EMPLOYEES. THE LD. AR RELIED ON THE CBDT CIRCULAR NO. 35D(XL VII20) (F. N O.10/48/65IT(AI) DATED 24/11/1965 HAS CLARIFIED THAT THE LOSSES ARISING DUE TO EMBEZZLEMENT OF EMPLOYEES OR DUE TO NEGLIGENCE OF EMPLOYEES SHOULD BE ALLOWED IF THE LOSS TOOK PLACE IN THE NORMAL COURSE OF BUSINESS. IT WAS SUBMITTED THAT SINCE THE COMPANY W A S FOLLOWING COST PLUS BILLING MODEL, THE SUBJECT ADDITIONAL EXPENDITURE HAD RESULTED IN ADDITIONAL PROFITS BASED ON WHICH TAXES WERE PAID. 25.4 THE LD. DR RELIED ON THE ORDER OF THE DRP. 25 . 5 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATER IAL ON RECORD. T HE ASSESSEE HAS NEITHER PRODUCED ANY DOCUMENTS BEFORE THE ASSESSING OFFICER NOR PRODUCED BEFORE THE DRP NOR EVEN BEFORE US. THE NATURE OF THE EXPENDITURE HAS NOT BEEN SUBSTANTIATED BY THE ASSESSEE. HENCE, W E DO NOT FIND ANY INFIRMITY IN TH E ORDER OF THE CIT(A) AND CONFIRM THE GROUND. THUS, THIS GROUND OF APPEAL OF THE ASSESSEE IS DISMISSED. IT(TP)A NO.592/COCH/2018 73 26 . THE NEXT GROUND, GROUND NO. 12 IS WITH REGARD TO NON CONSIDERATION OF INADVERTENT DISALLOWANCE OF THE SAME EXPENSE TWICE. 26.1 THE FACTS OF T HE CASE ARE THAT THE COMPANY HAD INADVERTENTLY DISALLOWED THE SAME EXPENSE TWICE U/S. 40(A)(IA) OF THE ACT AMOUNTING TO RS.4,175,973/ - WHILE FILING THE RETURN OF INCOME. THE LINE ITEMS AS PER THE COMPUTATION OF TOTAL INCOME OF THE COMPANY IS AS FOLLOWS: RELEVANT LINE ITEM IN THE COMPUTATION AMOUNT (IN INR) AMOUNT (IN INR) DISALLOWANCE U/S. 40(A)(IA) FOR NON DEDUCTION OF TDS 4,175,973 4,175,973 DISALLOWANCE U/S. 40(A)(IA) FOR NON - DEDUCTION OF TDS ON PROVISION FOR EXPENSES 194J 37,67,407 4,175,973 DISALLOWANCE U/S. 40(A)(IA) FOR NON - DEDUCTION OF TDS ON PROVISION FOR EXPENSES 194C 4,08,506 TOTAL DISALLOWANCE U/S. 40(A)(IA) BY THE COMPANY 8,351,946 8,351,946 THE AMOUNT DISALLOWED IN THE RETURN OF INCOME U/S. 40(A)(IA ) OF THE ACT WAS INR 83,51,946/ - . THE SUM OF EXPENSES ON WHICH TAX HAD NOT BEEN DEDUCTED AT SOURCE AS DISCLOSED IN CLAUSE 21(B) OF THE TAX AUDIT REPORT AMOUNTS TO INR 4,175,973/ - . THE ASSESSING OFFICER DID NOT CONSIDER THE REQUEST OF THE ASSESSEE. 26 . 2 ON APPEAL, THE DRP OBSERVED THAT AS PER SECTION 144C(1) OF THE I.T. ACT, IF THE ASSESSING OFFICER PROPOSES VARIATIONS TO THE INCOME/LOSS RETURNED WHICH IS PREJUDICIAL TO THE INTERESTS OF THE ASSESSEE, HE FORWARDS THE DRAFT ORDER TO THE ASSESSEE. AS PER SECTION 144C(8) OF THE I.T. ACT, THE DRP MAY CONFIRM, REDUCE OR ENHANCE THE VARIATIONS PROPOSED IN THE DRAFT ASSESSMENT ORDER PASSED BY THE IT(TP)A NO.592/COCH/2018 74 ASSESSING OFFICER. THEREFORE, THE DRP HELD THAT SINCE THE ISSUE WAS NOT RELATED TO THE VARIATIONS TO INCOME PROPOS ED BY THE ASSESSING OFFICER IN THE DRAFT ASSESSMENT ORDER, THE SAME WAS OUTSIDE THE JURISDICTION OF DRP. 26. 3 AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. THE LD. AR SUBMITTED THAT FROM THE TAX AUDIT REPORT FOR THE RELEVANT A.Y., IT WAS EVIDENT THAT THE TOTAL AMOUNT OUGHT TO BE DISALLOWED U/S. 40(A)(IA) WAS INR 4,175,973/ - . THE LD. AR RELIED ON THE CBDT CIRCULAR NO. 14(XL - 35) DATED 11 - 04 - 1955 WHICH REITERATED THAT THE TAX OFFICERS SHOULD NOT TAKE ADVANTAGE OF AN ASSESSEES IGNORANCE TO COLLECT M ORE TAX OUT OF HIM THAN IS LEGITIMATELY DUE FROM HIM. 26. 4 THE LD. DR RELIED ON THE ORDER OF THE DRP. 2 6.5 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THIS ISSUE IS REMITTED TO THE FILE OF THE ASSESSING OFFICER TO ASCERTAI N THE CORRECT POSITION OF THE DISALLOWANCE. THUS, THIS GROUND OF APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. IT(TP)A NO.592/COCH/2018 75 27. IN THE RESULT , THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 11 TH DECEMBER , 2019. SD/ - SD/ - ( GEORGE GEORGE K. ) ( CHANDRA POOJARI ) JUDICIAL MEMBE R ACCOUNTANT MEMBER PLACE: KOCHI DATED: 11 TH DECEMBER , 2019 GJ COPY TO: 1 . US TECHNOLOGY INTERNATIONAL PVT. LTD., 721 NILA, TECHNOPARK CAMPUS, KARYAVATTOM P.O., TRIVANDRUM - 695 581. 2. THE ASSISTANT COMMISSIONER OF INCOME - TAX, CIRCLE - 1(1), TRIVANDRUM. 3. THE DISPUTE RESOLUTION PANEL - 2, BANGALORE, 7 TH FLOOR, BMTC BUILDING, 80 FEET ROAD, KORAMANGALA, BANGALORE. 4 . D. R., I.T.A.T., COCHIN BENCH, COCHIN. 5 . GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T., COCHIN