I- Many Software Pvt. Ltd.,, Ahmedabad v. The ACIT, Gandhinagar Circle,, Gandhinagar

ITA 222/AHD/2015 | 2010-2011
Pronouncement Date: 27-10-2016 | Result: Partly Allowed

Appeal Details

RSA Number 22220514 RSA 2015
Assessee PAN AABCI6392P
Bench Ahmedabad
Appeal Number ITA 222/AHD/2015
Duration Of Justice 1 year(s) 8 month(s) 30 day(s)
Appellant I- Many Software Pvt. Ltd.,, Ahmedabad
Respondent The ACIT, Gandhinagar Circle,, Gandhinagar
Appeal Type Income Tax Appeal
Pronouncement Date 27-10-2016
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted I
Tribunal Order Date 27-10-2016
Date Of Final Hearing 06-09-2016
Next Hearing Date 06-09-2016
Assessment Year 2010-2011
Appeal Filed On 28-01-2015
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD I BENCH AHMEDABAD BEFORE SHRI S. S. GODARA JM & SHRI MANISH BORAD AM. ITA(TP) NO.222/AHD/2015 ASST. YEAR: 2010-11 I-MANY SOFTWARE PVT. LTD. 51/52 5 TH FLOOR TITANIUM BUILDING CORPORATE ROAD OPP. PRAHLAD NAGAR GARDEN SATELLITE AHMEDABAD. VS. ACIT GANDHINAGAR CIRCLE GANDHINAGAR. APPELLANT RESPONDENT PAN AABCI6392P APPELLANT BY SHRI PRAKASH KOTADIA AR RESPONDENT BY SHRI B.K.S. PANDYA CIT DR DATE OF HEARING: 6/9/2016 DATE OF PRONOUNCEMENT: 27/10/2016 O R D E R PER MANISH BORAD ACCOUNTANT MEMBER . THIS APPEAL FOR ASST. YEAR 2010-11 ARISING FROM TH E ORDER PASSED BY ACIT GANDHINAGAR CIRCLE GANDHINAGAR DAT ED 12.12.2014 FRAMED U/S 143(3) R.W.S. 144(C) OF THE IT ACT 1961 (IN SHORT THE ACT) IN PURSUANCE TO DIRECTIONS OF DISPUTE RESOLUTION PA NEL VIDE ORDER DATED 29/10/2014. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE AS SESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT EVOLUTION AND PRODUCTION OF CO MPUTER SOFTWARE. ITA (TP) NO. 222/AHD/2015 ASST. YEAR 2010-11 2 THE ASSESSEE HAS CLAIMED EXEMPTION U/S 10B OF THE A CT OF RS.1 19 57 630/-. THE CASE OF THE ASSESSEE WAS REFE RRED TO THE TRANSFER PRICING OFFICER (TPO). THE LD. TPO MADE UP WARD ADJUSTMENT OF RS.43 19 987/- ALONG WITH DENIAL OF EXEMPTION U/ S 10(A) OF THE ACT. 3. AGGRIEVED ASSESSEE FILED OBJECTION BEFORE THE D ISPUTE RESOLUTION PANEL (DRP). THE LD. DRP VIDE ITS ORDER REJECTED ALL THE COMPARABLES SELECTED BY THE ASSESSEE. FURTHER THE L D. DRP ADJUDICATED THE OBJECTIONS RAISED BY THE ASSESSEE A GAINST FOLLOWING COMPARABLES TAKEN BY THE TPO :- 1. SPRY RESOURCES INDIA PVT. LTD. 2. KULIZA TECHNOLOGIES PVT. LTD. 3. E-INFOCHIPS BANGALORE LTD. 4. THIRDWARE SOLUTIONS LIMITED. 5. THINKSOFT GLOBAL SERVICES LTD. LD. DRP REJECTED MOST OF THE OBJECTIONS RAISED BY T HE ASSESSEE WITH THE DIRECTIONS IN THE CASE OF KULIZA TECHNOLOGIES P VT. LTD. TO TREAT THE CLAIM OF BAD DEBTS AS REGULAR BUSINESS EXPENDITURE EXCLUDING E- INFOCHIPS BANGALORE LTD. BEING FUNCTIONALLY NOT COM PARABLES TO THE ASSESSEE. LD. DRP FURTHER HELD IN FAVOUR OF ASSESSE E BY OBSERVING THAT DISALLOWANCE U/S 10A OF THE ACT IS TO BE RESTR ICTED ONLY TO THE AMOUNT BY WAY OF ADJUSTMENT AT RS.43 19 987/- AND T HE BALANCE CLAIM SHOULD BE ALLOWED AS PER THE LAW. ITA (TP) NO. 222/AHD/2015 ASST. YEAR 2010-11 3 4. AGGRIEVED ASSESSEE IS NOW IN APPEAL BEFORE THE T RIBUNAL AGAINST THE DIRECTIONS OF LD. DRP U/S 144C OF THE A CT AND AGAINST THE ORDER U/S 143(3) R.W.S. 144C OF THE ACT. 5. FIRST WE TAKE GROUND NO.1 WHICH READS AS BELOW : - (A) AGAINST THE ORDER U/S 144C 1. THE LD. DRP ERRED IN LAW AS WELL AS ON FACTS IN REJECTING THE TRANSFER PRICING COMPARABLES OF THE APPELLANT AND ALSO APPRO VING SELECTION OF T.P. COMPARABLES OF TPO ESPECIALLY OF THIRDWARE SOLUTION S DESPITE IT IS FUNCTIONALLY DIFFERENT AND ACTUALLY A TRADER IN SOF TWARE. 6. THROUGH THIS GROUND ASSESSEES SOLITARY GRIEVANC E IS WITH REGARD TO THE ORDER OF LD. DRP APPROVING SELECTION OF TPO OF THIRDWARE SOLUTIONS INSPITE OF THE FACT THAT IT IS FUNCTIONALLY DIFFERENT AND ACTUALLY A TRADER IN SOFTWARE. LD. DRP REJECTED ASSESSEES OBJECTION FOR SELECTION OF THIRDWARE SOLUTIONS AS C OMPARABLE BY TPO BY OBSERVING AS BELOW :- 9. AS REGARDS THIRDWARE SOLUTION THE TPO CONSIDERED ASSESSEES OBJECTIONS IN DETAIL AS UNDER :- VI.1 THE ASSESSEE SUBMITTED THAT THE COMPANY IS ENG AGED IN TRADING OF SOFTWARE AND DEVELOPMENT OF SOFTWARE. IN ORDER TO EXAMINE TH E CONTENTION THE RELEVANT PORTION OF THE PROFIT AND LOSS ACCOUNT IS EXAMINED AS BELOW : SCHEDULE 12 : SALES EXPORT FROM SEZ UNITS 475 540 447 478 572 420 EXPORT FROM STPI UNIT 112 090 633 162 900 630 REVENUE FROM SUBSCRIPTION 15 313 736 16 433 714 SALE OF LICENCE 15 138 618 23 237 588 SOFTWARE SERVICES 57 223 072 80 177 023 675 606 505 710 321 375 FROM PERUSAL OF THE ABOVE IT IS SEEN THAT THE ASSES SEE HAS ERRONEOUSLY CONSIDERED ALL OTHER REVENUES EXCEPT THE REVENUE FROM SOFTWARE SERVICES TO BE TRADING IN NATURE. ITA (TP) NO. 222/AHD/2015 ASST. YEAR 2010-11 4 FROM THE ABOVE EXTRACT IT CAN BE CLEARLY SEEN THAT THE MAJORITY OF THE REVENUE IS ON ACCOUNT OF EXPORT FROM SEZ AND STPI UNITS ON WHICH THE ASSESSEE IS CLAIMING EXEMPTION UNDER SECTION 10A AND 10AA OF THE INCOME- TAX ACT 1961. THE RELEVANT PORTION OF THE ANNUAL REPORT EVIDENCING THE SAME IS AS REPRODUCED BELOW :- CURRENT TAX EXPENSES IS CONSIDERED AFTER COMPUTING THE BENEFIT UNDER SECTION 10A & 10AA OF THE INCOME-TAX ACT 1961. COM PANY HAS MAINTAINED SEPARATE BOOKS OF ACCOUNTS FOR ITS BELOW MENTIONED UNITS. 1 STP! UNIT THIRTFWARE BUSINESS SOLUTIONS 2 SEZ UNIT TTWDWARE TECHNOLOGY SOLUTIONS AND SAME IS CONSIDERED FOR CALCULATION OF CURRENT INCOME TAX PROVISION FROM THE ABOVE EXTRACT IT BECOMES VERY CLEAR THAT THE ASSESSEE IS ACTUALLY ENGAGED IN THE PROVISION OF SOFTWARE DEVELOPMENT SE RVICES AS NO TRADING CAN BE CARRIED OUT OF TAX EXEMPT UNITS. THIS GETS FURTHER FORTIFIED FROM THE FOLLOWING EXTRACT OF THE ANNUAL REPORT WHICH DESCRIBES THE RE VENUE RECOGNITION POLICY OF THE ASSESSEE. D) REVENUE RECOGNITION REVENUE FROM SOFTWARE DEVELOPMENT AND IMPLEMENTATIO N ON TIME AND MATERIAL CONTRACTS IS RECOGNISED AND ARE BILLABLE TO CLIENTS AS PER TH E TERMS OF SPECIFIC CONTRACTS. ON FIXED - PRICE CONTRACTS REVENUE IS RECOGNISED AND BILLABLE BASED ON MILESTONES ACHIEVED AND AFTER RECEIVING THE SIGN-OFF CERTIFICATES FROM THE CUSTOMERS FOR THE SPECIFIC MILESTONES AS SPECIFIED IN THE CONTRACTS REVENUE FROM SUBSCRIPTIO N CONTRACT IS RECOGNISED ON ACCEPTANCE OR RENEWAL OF THE CONTRACT AND TS ACCRUED OVER THE PENCE OF THE CONTRACT. REVENUE FROM SALE O F USER LICENSES FOR SOFTWARE APPLICATIONS IS RECOGNISED ON PHYSICAL DELIVERY OF THE SOFTWARE AND TRANSFER OF THE TITLE IN THE USER LICENSE TO THE CUSTOMER. REVENUE FROM SALE OF INVESTMENT IS RECOGNISED ON TR ANSFER OF TITLE FROM THE COMPANY AND DIVIDEND INCOME IS RECOGNISED WHEN THE COMPANY'S RIGHT TO RECEIVE DIVIDEND IS ESTABLISHED. INTEREST IS RECOGNISED USING THE TIME-PROPORTION ME THOD BASED ON RATES IMPLICIT IN THE TRANSACTION. ON THE BASIS OF THE ABOVE IT CAN BE CLEARLY SEEN T HAT THE ENTITY IS ACTUALLY ENGAGED IN PROVISIONS OF SOFTWARE DEVELOPMENT SERVICES AND NOT TRADING AS CLAIMED BY THE ASSESSEE. CONSEQUENTLY THE OBJECTION RAISED BY THE ASSESSEE IS REJECTED. 9.2 IT CAN BE SEEN THAT THE TPO HAD CONSIDERED ALL THE RELEVANT ASPECTS AND THE TPOS CONCLUSION IS BASED ON THE FACTS. HENCE WE RE JECT ASSESSEES OBJECTION ON THIS ACCOUNT. 7. IN SUPPORT OF THE GROUND LD. AR SUBMITTED AS BEL OW :- ITA (TP) NO. 222/AHD/2015 ASST. YEAR 2010-11 5 THE CONTENTIONS OF THE APPELLANT TO PROVE THAT THIR DWARE SOLUTIONS LTD ('THIRDWARE SOLUTIONS') IS FUNCTIONALLY NOT COMPARA BLE TO THE APPELLANT ARE AS FOLLOWS: 1.0 THIRDWARE SOLUTIONS HAS OUTSOURCED SUBSTANTIAL PORTION OF WORK TO THIRD PARTY AND THUS IT OPERATES IN A DIFFERENT BUSINESS MODEL AS COMPARED TO THE APPELLANT. 1.1. ON PERUSAL OF THE FINANCIAL OF THIRDWARE SOLUT IONS FOR FY 2009-10 (ENCLOSED HEREWITH MARKED AS ANNEXURE-B) (PAGE NO 8 TO 67 OF THE PAPER BOOK) IT CAN BE OBSERVED THAT THIRDWARE SOLUTIONS HAS INCURRED EXPENSE OF RS. 11.42 CRORES TOWARDS OUTSOURCING CHARGES WH ICH IS APPROX 27% OF ITS TOTAL DIRECT COST FOR FY 2009-10 AS TABULATED B ELOW: PARTICULARS AMOUNT (RS) OUTSOURCING CHARGES (SOFTWARE SERVICE CHARGES) 11 42 03 224 PURCHASES & COMMISSION (EXCLUDING SOFTWARE SERVICE CHARGES) 2 48 20 625 EMPLOYEE BENEFIT EXPENSES 28 17 37 624 TOTAL DIRECT COST (OUTSOURCING CHARGES + PURCHASES + EMPLOYEE BENEFIT EXPENSES) 42 07 61 473 RATIO OF OUTSOURCING CHARGES TO TOTAL DIRECT COST 27.14% 1.2 HOWEVER THE APPELLANT HAS NOT OUTSOURCED ITS B USINESS ACTIVITIES TO THIRD PARTY WHICH IS EVIDENT FROM THE PROFIT AND LOSS AC COUNT OF THE APPELLANT FOR FY 20009-10 WHICH IS ENCLOSED HEREWITH MARKED AS ANNEXURE-C (PAGE NO 68- TO 82 OF THE PAPER BOOK). 1.3. THE APPELLANT WOULD ALSO LIKE TO PLACE RELIANC E ON THE DECISION OF HON'BLE DELHI TRIBUNAL IN THE CASE OF /ON TRADING INDIA PRIVATE LTD. VS /TO [ITA NO.1035/DEL./2015] FOR THE SAME YEAR VIZ. AY 2010-1 1 WHEREIN THE HON'BLE DELHI TRIBUNAL HELD THAT THIRDWARE SOLUTION S IS NOT A GOOD COMPARABLE FOR SOFTWARE DEVELOPMENT SERVICE PROVIDE R ASSESSEE. THE HON'BLE DELHI TRIBUNAL NOTED THAT THIS COMPANY HAD ALSO INCURRED EXPENSES TOWARDS IMPORT OF SOFTWARE SERVICES EVIDE NCING OUTSOURCING OF SOFTWARE SERVICES UNLIKE THE ASSESSEE. ACCORDINGLY THE HON'BLE DELHI TRIBUNAL EXCLUDED THIS COMPANY FROM THE LIST OF SOF TWARE DEVELOPMENT COMPARABLES. ITA (TP) NO. 222/AHD/2015 ASST. YEAR 2010-11 6 THE RELEVANT EXTRACT OF THE DECISION IS REPRODUCED BELOW FOR YOUR HONOURS' READY REFERENCE: (PAGE NO. 42 TO 44 - PARA 55 AND 5 6) '56. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS ON RECORD THAT THE FUNCTIONS OF THIRDWARE ARE IN CONTRAST WIT H THE ASSESSEE WHICH ONLY PROVIDES SOFTWARE DEVELOPMENT IN THE FINANCE D OMAIN AS PER THE INSTRUCTION OF ITS AE. ALSO THIRDWARE HAS INCURRED EXPENSES TOWARDS IMPORT OF SOFTWARE SERVICES EVIDENCING OUTSOURCING OF SOFTWARE SERVICES UNLIKE THE ASSESSEE. SINCE IT IS ALSO ENGAGED IN OU TSOURCING ITS ACTIVITIES AS IT HAS INCURRED EXPENSES TOWARDS IMPORTS OF SOFT WARE SERVICES EVIDENCING OUTSOURCING OF SOFTWARE SERVICES UNLIKE THE APPELLANT COMPANY. HENCE IT IS FUNCTIONALLY NOT COMPARABLE AND CANNOT BE TREATED AS A COMPARABLE TO ASSESSEE. WE ORDER ACCORDINGLY.' A COPY OF THE ORDER IS ENCLOSED HEREWITH MARKED AS ANNEXURE-D(I) (PAGE NO 83 TO 139 OF THE PAPER BOOK). 1.4. YOUR HONOURS WOULD APPRECIATE THAT THE ABOVE D ECISION OF THE HON'BLE DELHI TRIBUNAL FOR AY 2010-11 FOR SOFTWARE DEVELOPM ENT SERVICE PROVIDER ASSESSEE WOULD BE SQUARELY APPLICABLE TO THE FACTS OF THE PRESENT CASE. THUS THIRDWARE SOLUTIONS SHOULD BE REJECTED FROM T HE COMPARABLES WHICH IS OUTSOURCING ITS SUBSTANTIAL ACTIVITIES TO THIRD PARTIES AND THUS OPERATES IN A DIFFERENT BUSINESS MODEL AS COMPARED TO THE APPELLANT. 2.0 OTHER LEGAL DECISIONS RELIED ON BY THE APPELLAN T WHICH HAVE UPHELD EXCLUSION OF THIRDWARE SOLUTIONS FROM THE LIST OF S OFTWARE DEVELOPMENT COMPARABLES: THE APPELLANT WOULD ALSO LIKE TO RELY ON THE FOLLOW ING JUDICIAL DECISIONS WHICH HAVE HELD THAT THIRDWARE SOLUTIONS IS NOT A G OOD COMPARABLE FOR SOFTWARE DEVELOPMENT SERVICE PROVIDER ASSESSEE. 8. LD. AR REFERRED AND RELIED ON THE DECISIONS OF T HE CO-ORDINATE BENCH IN THE FOLLOWING CASES :- 1. SUN LIFE INDIA SERVICE CENTRE PVT. LTD. VS. DCIT (ITA NO.5799(DEL)2012) FOR ASST. YEAR 2008-09 2. SUN LIFE INDIA SERVICE CENTRE PVT. LTD. VS. DCIT (ITA NO.1489/DEL/2014) FOR AY 2009-10 3. AVAYA INDIA (P) LTD. VS. ADDL.CIT IN ITA NO.5528 /DEL/2011 4. DCIT VS. APPROVA SYSTEMS PVT. LTD. IN ITA NO.178 8/PN/2013 ITA (TP) NO. 222/AHD/2015 ASST. YEAR 2010-11 7 WHEREIN IT HAS BEEN HELD THAT THIRDWARE SOLUTION LT D. IS NOT A GOOD COMPARABLE FOR ASSESSEES ARE ENGAGED IN THE BUSINES S OF DEVELOPMENT SERVICES PROVIDERS. 9. ON THE OTHER HAND LD. DR SUPPORTED THE ORDERS O F LOWER AUTHORITIES. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. SOLITARY GRIEVANCE OF THE ASSESSEE THROU GH THIS GROUND IS AGAINST THE ORDER OF LD. DRP FOR APPROVING THE SELE CTION OF COMPARABLE NAMELY THIRDWARE SOLUTION LTD. BY TPO. W E OBSERVE THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVIDING SO FTWARE DEVELOPMENT EVOLUTION AND PRODUCTION OF COMPUTER SO FTWARE. ASSESSEE ALSO HAS NOT OUTSOURCED ITS BUSINESS ACTIV ITIES TO THIRD PARTY AND OPERATES ON THE INSTRUCTIONS OF ITS ASSOCIATE E NTERPRISE. WE FURTHER OBSERVE THAT ASSESSEE HAS REFERRED AND RELI ED ON VARIOUS DECISIONS OF CO-ORDINATE BENCH WHEREIN IT HAS BEEN HELD THAT THIRDWARE SOLUTION IS NOT A GOOD COMPARABLE FOR THE PURPOSE OF T.P. ADJUSTMENT WITH REGARD TO THE ASSESSEE ENGAGED IN T HE BUSINESS OF SOFTWARE DEVELOPMENT. WE OBSERVE THAT CO-ORDINATE B ENCH DELHIN IN THE CASE OF ION TRADING INDIA PRIVATE LTD. VS. ITO IN ITA NO.1035/DEL/2015 FOR ASST. YEAR 2010-11 HAS HELD AS UNDER :- '56. WE HOVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDE RED THE MATERIAL ON RECORD. IT IS SEEN FROM THE DETAILS ON RECORD THAT THE FUNCTIONS OF THIRDWARE ARE IN CONTRAST WITH THE ASSESSEE WHICH O NLY PROVIDES SOFTWARE DEVELOPMENT IN THE FINANCE DOMAIN AS PER THE INSTRU CTION OF ITS AE. ALSO THIRDWARE HAS INCURRED EXPENSES TOWARDS IMPORT OF S OFTWARE SERVICES EVIDENCING OUTSOURCING OF SOFTWARE SERVICES UNLIKE THE ASSESSEE. SINCE IT IS ALSO ITA (TP) NO. 222/AHD/2015 ASST. YEAR 2010-11 8 ENGAGED IN OUTSOURCING ITS ACTIVITIES AS IT HAS INC URRED EXPENSES TOWARDS IMPORTS OF SOFTWARE SERVICES EVIDENCING OUTSOURCING OF SOF TWARE SERVICES UNLIKE THE APPELLANT COMPANY. HENCE IT IS FUNCTIONALLY NOT CO MPARABLE AND CANNOT BE TREATED AS A COMPARABLE TO ASSESSEE. WE ORDER ACCOR DINGLY.' 11. WE FURTHER OBSERVE THAT THE CO-ORDINATE BENCH DELI IN THE CASE OF SUN LIFE INDIA SERVICE CENTRE PVT. LTD. VS. DCIT (ITA NO.5799/DEL/2012 FOR AY 2008-09 HAS HELD AS UNDER : - '21. WE HOVE PERUSED THE ANNUAL REPORT OF THIS COMPANY WHICH IS AVAILABLE ON PAGES 100 ONWARDS OF THE PAPER BOOK. THE PROFIT & LOSS ACCOUNT OF THIS COMPANY IS AT PAGE 107 WHICH SHOWS 'SALES & OTHER INCOME'. BIFURCATION OF 'SALES ' IS AVAILABLE AS PER SCHEDULE 12 WHICH COMPRISES OF 'S ALE OF LICENCE' AMOUNTING TO RS.39.16 LAC 'SOFTWARE SERVICES' AMOUNTING TO RS.7.67 CRORE 'EXPORT FROM SEZ UNIT' AMOUNTING TO RS.26 39 CRORE 'EXPORT FROM STPI UNIT' AMOUNTING TO RS.16.88 CRORE AND 'REVENUE FROM SUBSCRIPTION' AMOUNTING TO RS.92.93 LAC. THESE FIGURES INDICATE THAT APART FRO M THE REVENUE FROM 'SOFTWARE SERVICES' WHICH IS ONLY TO THE TUNE OF RS.7.67 CRORE THIS COMPANY EARNED TOTAL GROSS REVENUE FROM 'SALES' TO THE TUNE OF RS.52 27 CRORE INCLUDING FROM EXPORT FROM SEZ/STPI UNITS. WHEN WE CONSIDER THE FIGURES O F THIS COMPANY ON AN ENTITY LEVEL AS HAVE BEEN ADOPTED BY THE TPO FOR COMPARISON IT BECOMES VIVID THAT IT CEASES TO BE COMPARABLE WITH THE ASSESSEE'S 'SOFTWA RE DEVELOPMENT AND MAINTENANCE SUPPORT SERVICES' SEGMENT. THE REASON HARDLY NEEDS ANY HIGHLIGHTING BEING THE INCOME OF THIS COMPANY ALSO LARGELY INCLUDING REVENUES FROM EXPORTS FROM SEZ/STPI UNITS APART FROM SALE OF LICENCE. THESE DISTINGUISHING FEATURES MAKE THIS COMPANY AS NON CO MPARABLE. WE THEREFORE ORDER FOR THE REMOVAL OF THIS COMPANY FROM THE LIST OF COMPARABLES.' (EMPHASIS SUPPLIED BY US) 12. FURTHER THE CO-ORDINATE BENCH DELHI IN THE CASE OF AVAYA INDIA (P) LTD VS. ADDL.CIT (ITA NO. 5528/DEL./2011) HAS O BSERVED THAT THIRDWARE SOLUTIONS HAS MADE INCOME FROM SALE OF LI CENCE TO THE TUNE OF MORE THAN RS.1 CRORE WHICH MEANS THE COMPA NY IS INTO PRODUCTION OF SOFTWARE PRODUCTS AND THEREFORE FUNC TIONALLY DIFFERENT FROM CONTRACT SOFTWARE DEVELOPER ASSESSEE. THE RELE VANT EXTRACT OF THE DECISION IS REPRODUCED BELOW :- ITA (TP) NO. 222/AHD/2015 ASST. YEAR 2010-11 9 '12.1 ... (XXV) ... WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. A PERUSAL OF THE ANNUAL REPORT OF THIRDWARE SOLUTIONS LTD. REVEALS THAT THE SAID COMPANY HAS MADE INCOME FROM SALE OF LICENCE TO THE TUNE OF MORE THAN RS. 1 CRORE WHICH MEANS THE COMPANY I S INTO PRODUCTION OF SOFTWARE PRODUCTS WHICH APPARENTLY CANNOT BE A COMP ARABLE TO ASSESSEE DEALING WITH CONTRACT SOFTWARE DEVELOPMENT AND NOT INTO SAL E OF ANY PRODUCT. THEREFORE WE DIRECT TPO/AO TO EXCLUDE THIS COMPANY FROM THE L IST OF COMPARABLES.' (EMPHASIS SUPPLIED BY US) 13. RESPECTFULLY FOLLOWING THE DECISION OF THE CO-O RDINATE BENCH REFERRED ABOVE IN PARA 10 11 & 12 WE FIND THAT TH E SAME ARE SQUARELY APPLICABLE TO THE FACTS OF THE ASSESSEE TO THE EXTENT THAT ASSESSEE IS ALSO ENGAGED IN SOFTWARE DEVELOPMENT V ALUATION OF PRODUCTION WORKS OF COMPUTER SOFTWARE AND OPERATES MAINLY ON THE INSTRUCTIONS OF ITS ASSOCIATE ENTERPRISES WHEREAS T HE IMPUGNED COMPARABLE THIRDWARE SOLUTION IS ADDITIONALLY ALSO IN THE BUSINESS OF TRADING OF SOFTWARE OUTSOURCES IT ACTIVITIES. WE AR E THEREFORE OF THE VIEW THAT THIRDWARE SOLUTION IS NOT A FIT COMPARABL E IN THE CASE OF ASSESSEE FOR THE PURPOSE OF MAKING T.P. ADJUSTMENT. WE ALLOW THIS GROUND OF ASSESSEE. 14. NOW WE TAKE GROUND NO.2 OF ASSESSEES APPEAL WH ICH READS AS UNDER :- (B) AGAINST THE ORDER OF 143(3) RWS 144C 2. THE LD. AO ERRED IN LAW AS WELL AS ON FACTS IN M AKING ADJUSTMENT U/S 144C OF THE ACT INSPITE OF THE FACT THAT DRP HAS NO T DIRECTED TO MAKE ANY ADJUSTMENT TO THE INCOME. LD. AO FURTHER ERRED IN N OT HOLDING THAT THERE IS NO ADJUSTMENTS U/S 144COF THE ACT. 15. LD. AR SUBMITTED AS FOLLOWS :- THE LEARNED AO HAS MADE THE FOLLOWING APPARENT ERRO RS WHILE GIVING EFFECT OF THE ORDER OF THE HON'BLE DRP. ITA (TP) NO. 222/AHD/2015 ASST. YEAR 2010-11 10 1. EXCLUSION OF E-LNFOCHIPS BANGALORE LIMITED: THE APPELLANT WOULD LIKE TO DRAW YOUR HONOURS ATTEN TION TO PARA NO. 7.2 OF THE ORDER OF THE HON'BLE DRP ORDER(PAGE NO 323 TO 341 OF THE PAPER BOOK) WHEREIN THE HON'BLE DRP HAS DIR ECTED TO EXCLUDE E-LNFOCHIPS BANGALORE LIMITED SINCE IT IS F UNCTIONALLY NOT COMPARABLE TO THE APPELLANT. THE RELEVANT EXTRACT OF THE DRP ORDER IS REPRODUCED BELOW FOR YOUR HONOURS' READY REFERENCE: 7.2 WE HAVE CONSIDERED THE TACTS OF THE CASE H IS AN ADMITTED FACT THAT THIS COMPANY IS ENGAGED IN CHIP DESIGNING - AN ACTIVITY WHICH IS ENTIRELY DIFFERENT FROM ASSESEE'S IN WHOSE CASE TH E PRODUCT CONCEPTUALIZATION AND DESIGN FUNCTIONS ARE CARRIED OUT BY THE AE - (PARA 7.2.1 OF THE TP STUDY) FT IS ALSO SEEN THAT MANY OF THE ASSESEE'S CORNPARABIES WERE REJECTED BY THE TPO AS BEING FUNCTIONALLY DIFFERENT IN SIMILAR FACTS SUCH AS CRE SCENDA PRANEEL CORPORATE ROYAL SOFT ETC HENCE THE TPO IS DIRECTE D TO DELETE THIS COMPARABLE THE ORDER OF THE HON'BLE DRP IS ENCLOSED HEREWITH M ARKED AS ANNEXURE-E (PAGE NO 323 TO 341 OF THE PAPER BOOK). HOWEVER THE LEARNED AO HAS ERRONEOUSLY INCLUDED E -LNFOCHIPS BANGALORE LIMITED AND THUS ERRED IN DETERMINING ALP BY INCLUDING E-LNFOCHIPS BANGALORE LIMITED AS COMPARABLE. IN VIEW OF THE ABOVE THE APPELLANT HUMBLY REQUESTS YOUR HONOURS TO DIRECT THE LEARNED AO/TPO TO EXCLUDE E-LNFOCHIPS BANGALORE LIMITED FROM COMPARABLES TO GIVE EFFECT OF THE ORDE R OF HON'BLE DRP. 2. COMPUTATION OF CORRECT OPERATING PROFIT MARGIN O F KUTIZA TECHNOLOGIES PRIVATE LIMITED: THE APPELLANT WOULD LIKE TO DRAW YOUR HONOURS' ATTE NTION TO PARA NO. 6.1 OF THE DRP ORDER (PAGE NO 323 TO 341 OF THE PAPER BOOK) WHEREIN FOR THE COMPUTATION OF OPERATING PROFIT MAR GIN OF KULIZA TECHNOLOGIES PRIVATE LIMITED THE HON'BLE DRP HAS D IRECTED TO CONSIDER BAD DEBTS AS AN OPERATING EXPENSE CONSIDE R FOREIGN EXCHANGE LOSS AS A NON-OPERATING EXPENSE AND OTHER INCOME AS NON-OPERATING INCOME AFTER VERIFICATION. ITA (TP) NO. 222/AHD/2015 ASST. YEAR 2010-11 11 THE RELEVANT EXTRACT OF THE HON'BLE DRP ORDER IS RE PRODUCED BELOW FOR YOUR HONOURS' READY REFERENCE: 6 1 HAVING CONSIDERED THE FACTS OF THE CASE DISALL OWANCE OF FOREX LOSS IS UPHELD BUT THE TPO IS DIRECTED TO TREAT THE CLAIM OF BAD DEBTS AS REGULAR BUSINESS EXPENDITURE BECAUSE THE CORRESPONDING RECEIPTS HAVE BEERS CONSIDERED AS PART OF THE REVEN UE. THE OTHER INCOME SHOULD BE EXCLUDED FROM OPERATING REVENUE IF IT IS NOT OF OPERATING NATURE HOWEVER THE LEARNED AO HAS NOT GIVEN EFFECT OF THE ABOVE DIRECTIONS OF THE HON'BLE DRP TO CORRECT THE OPERAT ING PROFIT MARGIN OF KULIZA TECHNOLOGIES AND THUS WRONGLY CONSIDERED OPERATING PROFIT MARGIN OF KULIZA TECHNOLOGIES WHILE DETERMIN ING ALP. IN VIEW OF THE ABOVE THE APPELLANT HUMBLY REQUESTS YOUR HONOURS TO DIRECT THE LEARNED AO/TPO TO CORRECTLY COMPUTE T HE OPERATING PROFIT MARGIN OF KULIZA TECHNOLOGIES BY CONSIDERING BAD DEBTS AS AN OPERATING EXPENSE AND OTHER INCOME (CONSISTING O F INTEREST AMOUNT WRITTEN BACK AND MISCELLANEOUS INCOME) AS NO N-OPERATING INCOME AS PER THE DIRECTIONS OF THE HON'BLE DRP. THE CALCULATION OF THE CORRECT OPERATING PROFIT MAR GIN OF KULIZA TECHNOLOGIES AFTER GIVING EFFECT OF HON'BLE DRP ORD ER IS ENCLOSED HEREWITH MARKED AS ANNEXURE-F (PAGE NO 342 OF THE P APER BOOK). 16. ON THE OTHER HAND LD. DR SUPPORTED THE ORDERS OF LOWER AUTHORITIES. 17. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THROUGH THIS GROUND ASSESSEE HAS CHALLEN GED THE ORDER OF ASSESSING OFFICER U/S 143(3) R.W.S 144(C) OF THE AC T BEING ERRONEOUS AS ADJUSTMENTS AS PER DIRECTIONS BY LD. DRP WERE NO T GIVEN EFFECT THERETO. 18. WE OBSERVE FROM GOING THROUGH THE ORDER OF LD. DRP AND SUBMISSIONS OF LD. AR THAT M/S E-INFOCHIPS BANGALOR E LTD. WHICH WAS COMPARABLE TAKEN BY TPO WAS DIRECTED TO BE DELETED BY LD. DRP. ITA (TP) NO. 222/AHD/2015 ASST. YEAR 2010-11 12 ALSO IN THE CASE OF KULIZA TECHNOLOGIES THE COMPARA BLE SELECTED BY TPO LD.DRP OBSERVED THAT THE OPERATING PROFIT MARG IN OF KULIZA TECHNOLOGIES NEEDS TO BE GIVEN EFFECT AFTER TREATIN G THE CLAIM OF BAD DEBTS AS REGULAR BUSINESS EXPENDITURE AND TO EXCLUD E OTHER INCOME INCLUDING INTEREST AMOUNT WRITTEN OFF AND MISCELLA NEOUS INCOME BEING NON-OPERATIVE INCOME SO AS TO ARRIVE AT THE CORRECT OPERATING PROFIT. 19. FROM GOING THROUGH THE ORDER OF LD. ASSESSING O FFICER U/S 143(3) R.W.S. 144(C) OF THE ACT WE OBSERVE THAT NO SUCH EFFECT HAS BEEN TO THE ABOVE SAID OBSERVATIONS OF LD. DRP. FUR THER IN LIEU OF OUR DECISION FOR NOT CONSIDERING THIRDWARE SOLUTION LTD . AS A COMPARABLE TO ARRIVE AT THE ARMS LENGTH PRICE OF THE INTERNATI ONAL TRANSACTION ENTERED INTO BY THE ASSESSEE. WE ARE THEREFORE OF THE VIEW THAT THE ORDER U/S 143(3) R.W.S. 144(C) OF THE ACT NEEDS TO BE SET ASIDE AND WE DIRECT LD. ASSESSING OFFICER TO FRAME A FRESH OR DER U/S 143(3) R.W.S. 144(C) OF THE ACT AFTER GIVING DUE EFFECT TO OUR OB SERVATIONS MADE BY US IN THE PRECEDING PARAGRAPHS. NEEDLESS TO MENTION THAT PROPER OPPORTUNITY OF BEING HEARD SHOULD BE GIVEN TO THE A SSESSEE. ACCORDINGLY THIS GROUND OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 20. GROUND NO.3 READS AS UNDER :- 3. THE LD. AO ERRED IN LAW AS WELL AS ON FACTS IN D ISALLOWING CLAIM OF APPELLANT U/S 10B OF THE ACT OF RS.43 19 987 OUT OF TOTAL CLAIM OF RS. 1 19 57 630V-. LD. AO FAILED TO CONSIDER THAT WHEN THERE IS NO ADJUSTMENTS U/S 92C(4) OF THE ACT THERE CANNOT BE ANY DISALLOWANCE U/S 10B OF THE ACT. THIS GROUND IS NOT PRESSED HENCE DISMISSED AS NOT PRESSED. ITA (TP) NO. 222/AHD/2015 ASST. YEAR 2010-11 13 21. GROUND NO.4 IS GENERAL IN NATURE WHICH NEED NO ADJUDICATION. 22. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH OCTOBER 2016 SD/- SD/- (S. S. GODARA) JUDICIAL MEMBER (MANISH BORAD) ACCOUNTANT MEMBER DATED 27/10/2016 MAHATA/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR ITAT AHMEDABAD 6. GUARD FILE BY ORDER ASST. REGISTRAR ITAT AHMEDABAD 1. DATE OF DICTATION: 26/10/2016 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: 26/10/2016 OTHER MEMBER: 3. DATE ON WHICH APPROVED DRAFT COMES TO THE SR. P. S./P.S.: 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: __________ 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S./P.S.: 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK:2 8/10/16 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK: 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER: 9. DATE OF DESPATCH OF THE ORDER: