TMI Blog2013 (1) TMI 672X X X X Extracts X X X X X X X X Extracts X X X X ..... his company was double the industry average. Comparable company has made unusually high profit during the financial year 06-07. The operating revenues increased 63.03% which indicates that it was an extraordinary year for this company. The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. In favour of assessee TPO has observed that "market conditions" are different for on-site and offshore work – Held that:- TPO fails to substantiated how market conditions differ. The fact is that in onsite development of computer software, the Assessee does not employ assets nor does the Assessee assume many risks which the offshore software developer assumes. Even the Assessee accepts that the per hour rate will be different in the case of offshore software development and onsite software development. R & D expense – Revenue or capital expenditure – Expenditure on website development – Assessee contended that these expenses were for exploring the possibility of domestic market through pilot projects – Held that:- Unless the nature of the expenses is examined it is not possible to decide as to whether the same were revenue in nature and that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principles of natural justice; 3. making a reference to Transfer Pricing Officer for determining arms' length price; 4. passing the order without demonstrating that appellant had motive of tax evasion; 5. ignoring the fact that the members of Dispute Resolution Panel also being jurisdictional Commissioner/Directors of Income Tax of the appellant, the constitution of the Dispute Resolution Panel is bad in law; 6. not appreciating that the charging or computation provision relating to income under the head "Profits Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore addition under Chapter X is bad in law; 7. adopting a flawed process of issuing notices u/s 133(6) and relying on the same without providing complete information and an opportunity to cross examine the companies concerned; 8. rejecting the comparables selected by the appellant and rejecting transfer pricing analysis of the appellant; 9. performing fresh transfer pricing analysis and adopting inappropriate filters in doing fresh transfer pricing analysis; 10. selecting inappropriate comparables; 11. rejecting additional c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrived at is detailed in the Annexure to the report in Form 3EB. The PLI of the assessee as arrived at in the said report is annexed as Annexure-II to this order. It can be seen from Annexure-I that the arithmetic mean of comparables was computed at 14.53%. The PLI of the assessee (as per Annexure-II) was computed at 9.98%. It was the claim of the assessee that exercising the option of determining the ALP between +/- 5% of the arithmetic mean of the comparable prices, the range of operating margin would be between 8.80% 20.25% on operating costs. Since the assessee's operating margin on operating cost was within the arms' length range, the assessee claimed that its international transaction was at arms' length. 5. The filters or criteria adopted by the tax payer in its TP study and the remarks of the Transfer Pricing Officer ("TPO") to whom the AO referred determining of ALP on such approach were as follows:- "Filters or criteria adopted by the taxpayer in its TP study: Sl. No. Particulars Remark of the TPO 1 Companies for which sufficient financial data is not available to undertake analysis This is an appro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies who have more than 25% related party transactions (income as well as expenditure combined) of the operating revenues were excluded Companies who have less than 25% of the operating revenues as export sales were excluded Companies who have diminishing revenues/persistent losses for the period under consideration were excluded Companies having different financial year ending (i.e. not March 31, 2006) or data of the company does not fall within 12 month period i.e. 01-04-2005 to 31-03-2006, were rejected Companies whose employee cost to operating revenues is less than 25% of the revenues were excluded Companies whose onsite revenue is more than 75% of the export revenues were excluded." 7. The TPO rejected 20 out of 28 comparables given by the assessee in its TP report (Annexure I to this order). The assessee before the TPO had also given some other additional comparables which was also rejected by the TPO. The TPO on his own, on a search carried on in Prowess Database arrived at a set of 18 comparables over and above the 8 comparables relied upon by the assessee in its TP study, which the TPO accepted were comparable. Thus, the TPO ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 6,20,48,644/- is treated as transfer pricing adjustment u/s 92CA." 9. Against the said adjustment proposed by the TPO which was incorporated in the draft assessment order by the AO, the assessee filed objections before the DRP. The DRP rejected those objections and confirmed the transfer pricing adjustment suggested by the TPO. The adjustment confirmed by the DRP was added to the total income of the assessee by the AO in the fair order of assessment. Against the said order of the Assessing Officer, the assessee has preferred the present appeal before the Tribunal. 10. The ld. counsel for the assessee as well as the ld. DR made rival submissions on various aspects of the adjustment made by the TPO. These objections will be dealt with under different heads. (1) Turnover Filter 11. The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of Rs. 1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that under rule 10B(3) to the Income-tax Rules, it was necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns are the size of the two companies and the relative economies of scale under which they operate." 13. It was further submitted that the TPO's range (Rs. 1 crore to infinity) has resulted in selection of companies like Infosys which is 277 times bigger than the Assessee (turnover of Rs. 13,149 crores as compared to Rs. 47.47 crores of Assessee). It was submitted that an appropriate turnover range should be applied in selecting comparable uncontrolled companies. 14. Reference was made to the decision of the ITAT Bangalore Bench in the case of Genisys Integrating Systems (India) (P.) Ltd. v. Dy. CIT [2012] 53 SOT 159, wherein relying on Dun and Bradstreet's analysis, the turnover of Rs. 1 crore to Rs. 200 crores was held to be proper. The following relevant observations were brought to our notice:- "9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that any income arising from an international transaction shall be computed having regard to the arm's length price. Sec.92-B provides that "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. Sec.92-A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its AE was an international transaction attracting the provisions of Sec.92 of the Act. Sec.92C provides the manner of computation of Arm's length price in an international transaction and it provides:- (1) that the arm's leng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bes rules for Determination of arm's length price under section 92C:- "10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) to (d)** ** ** (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence on the determination of transfer prices in relation to the transactions being compared." 19. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are with regard to the comparability of the comparable relied upon by the TPO. 20. In this regard we find that the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee's turnover is Rs. 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genisys Integrating Systems (India) (P.) Ltd. (supra). Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. In the final analysis, it was submitted that the information obtain u/s. 133(6) in so far as it is contrary to the information available in the public domain should be rejected. 22. The ld. DR however submitted that the power u/s. 133(6) of the Act is absolute and cannot be questioned by the assessee, unless the assessee is able to establish that the same is incorrect. 23. We will deal with this aspect after considering the other submissions made by the assessee on the transfer pricing adjustments, if necessary and required. If on other parameters on which the ALP has to be determined, it is found that the price charged by the Assessee is at Arm's Length, we need not decide this aspect in this case. (3) Improper selection of comparables (a) Megasoft Ltd. : 24. This company was chosen as a comparable by the TPO. The objection of the assessee is that there are two segments in this company viz., (i) software development segment, and (ii) software product segment. The Assessee is a pure software services provider and not a software product developer. According to the Assessee there is no break up of revenue between software products and software services business on a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould vitiate the comparability (submissions on page 381 to 383 of the PB-I). It was further submitted that Megasoft Limited has provided segmental break-up between the software services segment and software product segment (page 68 of PB-II), which was also adopted by the TPO in his show cause notice (Page 84 of PB-I). The segmental results i.e., results pertaining to software services segment of this company was: Segmental Operating Revenues Rs. 63,71,32,544 Segmental Operating Expenses Rs. 51,75,13,211 Operating Profit Rs. 11,96,19,333 OP/TC (PLI) 23.11% 26. It was reiterated that in the given circumstances only PLI of software service segment viz., 23.11% ought to have been selected for comparison. 27. It was further submitted that the learned TPO in case of other comparable, similarly placed, had adopted the margins of only the software service segment for comparability purposes. Consistent with such stand, it was submitted that the margins of the software segment only should be adopted in the case of Megasoft also, in contrast to the entity level margins. 28. The margins at entity level and segment level ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave considered the rival submissions. First we will consider the submission of the Assessee that companies with abnormal margins should not be regarded as comparable. In the case of Quark Systems (P.) Ltd. (supra), the Special Bench had to deal with cases where the results were abnormal. The special Bench observed as follows: "Even if the taxpayer or its counsel had taken Datamatics as comparable in its T.P. audit, the taxpayer is entitled to point out to the Tribunal that above enterprise has wrongly been taken as comparable. In fact there are vast differences between tested party and the Datamatics. The case of Datamatics is like that of "Imercius Technologies" representing extreme positions. If Imercius Technologies has suffered heavy losses and, therefore, it is not treated as comparable by the tax authorities, they also have to consider that the Datamatics has earned extraordinary profit and has a huge turnover, besides differences in assets and other characteristics referred to by Shri Aggarwal." The above observations of the special Bench is a pointer to the fact that where there are extraordinary profits and those companies are considered by the TPO for comparability bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. 35. There is therefore no bar to considering companies with either abnormal profits or abnormal losses as comparable to the tested party, as long as they are functionally comparable. The OECD guidelines and in US TP regulations, this question may not arise at all because those regulations advocate the quartile method for determining ALP. Indian regulations specifically deviate from OECD guidelines and provide Arithmetic Mean method for determining ALP. In the quartile method, companies that fall in the extreme quartiles get excluded and only those that fall in the middle quartiles are reckoned for comparability. Hence, cases of either abnormal profits or losses (which are referred to as outliners) get automatically excluded. In the arithmetic mean method, all companies that are in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to software development) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held that less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO's filter of more than 75% of revenues from software development services. Having drawn the above conclusion, the TPO did not bother to quantify the revenues which can be attributed to software product development and software development service but adopted the margin of this company at the entity level. In terms of Rule 10B(3)(b) of the Rules, an uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis." It was also highlighted that the margin of this company at 52.59% which represents abnormal circumstances and profits. The following figures were placed before us:- Particulars FYs 05-06 06-07 07-08 08-09 Operating Revenue 21761611 35477523 29342809 28039851 Operating Expns. 16417661 23249646 23359186 31108949 Operating Profit 5343950 12227877 5983623 (3069098) Operating Margin 32.55% 52.59% 25.62% - 9.87% 40. It was submitted that this company has made unusually high profit during the financial year 06-07. The operating revenues increased 63.03% which indicates that it was an extraordinary year for this company. Even the growth of software industry for the previous year as per NASSCOM was 32%. The growth rate of this company was double the industry average. In view of the above, it was argued that this company ought to have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epartment of Science and Technology New Delhi) based on our insilico expertise (applying bio-informatics tools). The Company has developed a molecule to treat Leucoderma and multiple cancer and protected the IPR by filing the patent. The patent details have been discussed with Patent officials and the response is very favorable. The cloning and purification under wet lab procedures are under progress with our collaborative Institute, Department of Microbiology, Osmania University, Hyderabad. In the industrial biotechnology area, the company has signed the Technology transfer agreement with IMTECH CHANDIGARH (a very reputed CSIR organization) to manufacture and market initially two Enzymes, Alpha Amylase and Alkaline Protease in India and overseas. The company is planning to set up a biotechnology facility to manufacture industrial enzymes. This facility would also include the research laboratories for carrying out further R D activities to develop new candidates' drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh.' According to the learned D.R. celestial la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e this company should not be treated as comparable. Besides the above, the Assessee has point out to several references in the annual report for 31.3.2007 highlighting the fact that this company was develops biotechnology products and provides related software development services. The TPO called for segmental data at the entity level from this company. The TPO also called for description of software development process. In response to the request of the TPO this company in its reply dated 29.3.2010 has given details of employees working in software development but it is not clear as to whether any segmental data was given or not. Besides the above there is no other detail in the TPO's order as to the nature of software development services performed by the Assessee. Celestial labs had come out with a public issue of shares and in that connection issued Draft Red Herring Prospectus (DRHP) in which the business of this company was explained as to clinical research. The TPO wanted to know as to whether the primary business of this company is software development services as indicated in the annual report for FY 06-07 or clinical research and manufacture of bio products and other prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. (e) Accel Transmatic Ltd. 48. Wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eveloper. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables. Assessee's comparables 51. It is the grievance of the Assessee that the lower authorities have rejected certain comparables selected and proposed by the assessee on the ground that they have predominant onsite revenues and are functionally different. The justification for retaining the comparables selected by the assessee are available on pages 318 to 331 and pages 394 to 402 of PB-I. The comparables that have been rejected by the TPO, but do not deserve to be so rejected, according to the Assessee are: Sl. No Name of the Company Operating Revenues Operating Margin on Cost 1 Indium Software (India) Limited 6,49,14,480 2.03% 2 E2E Infotech Limited 21,548,500 10.81% 3 Goldstone Technologies Limited 410,348,370 22.94% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of functions performed and absence of dissimilarities in margins should lead to the acceptance of onsite work and its data for comparison purposes. Accordingly, the assessee submits that this reason of the TPO is without basis. 54. On the reasoning of the TPO that the pricing structure is different in onsite work, it is the submission of the assessee this aspect was irrelevant. The method selected is TNNM. What is tested is margin and not price. If pricing structure were to be considered as criteria, then it will have to be seen as to what is the pricing structure of all the comparable for various projects. The pricing would differ from project to project, domain to domain and on various other parameters. Such exercise has not been done. Further as admitted by the TPO, once functional similarity is accepted, companies can be compared. The attempt to separate onsite activity for comparison purposes is thus without basis. 55. On the reasoning of the TPO that the assets are negligible in the onsite companies, it is the stand of the Assessee that while discussing turnover filter, the learned TPO has stated that software companies do not require much infrastructure. The TPO in ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re companies when net margins are being compared, price/rate differential should not be criteria for acceptance or rejection of a company as a comparable. It was pointed out that though it is true that a professional sent on onsite projects are paid higher salaries, however the billing rates are also higher. It is on the basis of the cost structure that revenues are agreed upon. In case of onsite operations both income and cost would go up. There cannot be a presumption that margins have been sacrificed to secure revenues. Such an indication of the learned TPO is without any basis. 59. The learned TPO has further stated that companies whose revenues are generated mainly from onsite work mimic a company which is a resident in that country. This again is a conclusion without basis. It is again a conclusion whose relevance to the case on hand has not been established. The same is therefore to be ignored. Further, the TP Regulations or OECD Guidelines do not prescribe application of onsite filter. Therefore, onsite revenue filter should not be used. Accordingly the assessee submits that onsite revenue filter should not be adopted in judging whether a company is to be retained as a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erprises follow hybrid model with revenue mix both from onsite and offshore. It is true that in terms of the functions performed both in the case of offshore service provider and onsite service provider, it is development of computer software. But having regard to Rule 10B(2)(b) it is necessary to have regard to the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions. 63. The first objection of the Assessee is that the TPO has observed that "market conditions" are different for on-site and offshore work, but he has not substantiated how market conditions differ. We fail to see any substance in such objection. The fact is that in onsite development of computer software, the Assessee does not employ assets nor does the Assessee assume many risks which the offshore software developer assumes. Even the Assessee accepts that the per hour rate will be different in the case of offshore software development and onsite software development. 64. The next objection of the Assessee is that when the most appropriate method selected for determining ALP is the TNMM there is no reason as to why one shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate with the economic conditions in those countries. Thus assets and risk profile, pricing as well as prevailing market conditions are different in predominantly onsite companies from predominantly offshore companies like the taxpayer. Since, the entire operations of the tax payer are taking place offshore i.e. in India; it is but natural that it should be compared with companies with major operations offshore, due to the reason that the economics and profitability of onsite operations are different from that of offshore business model. As already stated the Assessee has limited its analysis only to functions but not to the assets, risks as well as prevailing market conditions in which both the buyer and seller of services located. Hence, the companies in which more than 75% of their export revenues come from onsite operations are to be excluded from the comparability study as they are not functioning in similar economic circumstances to that of the tax payer. Hence, it is held that this filter is appropriately applied by the TPO. 68. Admittedly the onsite revenue in the case of the following comparable companies identified by the Assessee was more than 75% of its export revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The question therefore would be as to whether software testing services 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. 72. With regard to Goldstone Technology Ltd., the same was rejected as a comparable by the TPO for the reason that it was engaged in I.T. enabled services. It is the claim of the Assessee that in the company's annual report, flow of revenue in this company is from software development both, onsite and offshore operations. On the above, we find that this company has clarified in response to notice of the AO u/s.133(6) of the Act that it is not in the business of software development but in ITES. The alternative plea of the Assessee is that it should be allowed opportunity to cross examine this company on its reply to the notice of TPO u/s.133(6) of the Act. We have seen the objections of the Assessee which is based only on a reading of the Annual report and the claim of the Assessee is not on sound basis and is purely on surmises. We are of the view that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 - Turnover Range 1 To 200 Crores and After Considering Comparables Selected By The Assessee Sl. No. Name of the Company Operating Revenues Operating Margin on Cost Adjusted Margin on Cost 1. Datamatics Ltd. 545,088,027 1.38% 0.58% 2. E-Zest Solutions Ltd. 62,594,544 36.12% 37.23% 3. Geometic Ltd. (seg) 1,583,797,773 10.71% 10.81% 4. Helios Matheson Information Technology Ltd. 1,786,380,304 36.63% 35.62% 5. Ishir Infotech Ltd. 74,209,887 30.12% 31.60% 6. LGS Global Ltd. (Lanco Global Solutions Ltd.) 453,893,898 15.75% 16.36% 7. Lucid Software Ltd. 16,992,078 19.37% 18.24% 8. Mediasoft Solutions Pvt. Ltd. 18,508,785 3.66% 2.77% 9. Megasoft Ltd (Seg.) 637,132,545 23.11% 17.85% 10. Quintegra Solutions Ltd. 627,216,924 12.56% 10.42% 11. R S Software (India) Ltd. 1,010,449,441 13.47% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to operating revenue. Following the same, the AO is directed to accept the claim of the Assessee in this regard. As far as provision for bad debts are concerned, the TPO has accepted that the same would be part of operating expenses provided the same is incurred every year for at least three years and the manner in which provision is made is consistent. The Assessee in reply to the query of the TPO on the above aspect has not furnished any details. We are of the view that the Assessee should be afforded opportunity to explain its position on the above and the AO is directed to consider the same in accordance with law. As far as Fringe Benefit Tax (FBT) is concerned, the same was not considered by the TPO as part of operating cost in the case of comparables and therefore the same should also not be considered as part of operating cost of the Assessee. We hold accordingly and direct the AO to compute the operating cost of the Assessee. (C) Not making proper adjustment for enterprise level and transactional level differences between the Assessee and comparable companies. (D) Adjustment for differential in risk to be given. As far as point (C) and (D) are concerned, the argumen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses in nature. The plea of the Assessee was that it was in the business of rendering software development services and as a continuous process to develop and improvise new products in domestic market, it has to indulge in research and development. The expenses were for exploring the possibility of domestic market through pilot projects. The expenses were wholly and exclusively for the purpose of existing business carried on by the Assessee. The expenses were revenue in nature and did not result in any advantage/benefit of enduring nature to the Assessee. It was the plea of the Assessee that the information technology industry is fast changing and there is a great degree of obsolescence and therefore expenses of this nature cannot be said to result in any enduring benefit to the Assessee. Among other decisions the Assessee relied on the decision of the Hon'ble Supreme Court in the case of Alembic Chemicals Works Co. Ltd. v. CIT [1989] 177 ITR 377. 84. In the assessment order, the learned AO has disallowed a sum of Rs. 1,76,98,160/- being research and development expenses under section 37 of the Act stating that the said expenditure is not revenue in nature. The Assessee plead ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised by the Assessee reads as follows: "19. disallowing a sum of Rs. 12,50,000 being provision for building registration charges without appreciating that same has been written back in the later assessment year and therefore is deductible expenditure; and 20. disallowing a sum of Rs. 28,25,890 being provision towards foreign travel expenses on the ground that these are liabilities on provisional basis." 88. During the previous year, the assessee had made provision of Rs.12,50,000/- towards building registration charges. The AO has disallowed the same on the ground that it is a provision. The assessee submitted that the provision has been reversed and offered to tax during the AY 2009-10 and therefore same should not be taxed in the year under consideration. The limited plea of the Assessee before us is that if the sum is disallowed in this year the same should not be taxed in AY 09-10. We are of the view that it would be appropriate to direct the AO not to tax the same sum in AY 09-10 as the sum has already suffered tax by disallowance in the present AY. With the above directions, Gr.No.19 is dismissed. 89. As far as Gr.No.20 is concerned, the facts are that the AO disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontingent liability. The following principles were laid down by the Hon'ble Supreme Court:- 'If a business liability has definitely arisen in accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible if these requirements are satisfied the liability is not as contingent one. The liability is in present though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain'. 92. In the present case, we find from the details of expenses which were claimed as a provision, the Assessee has the system of reversing expenses wherever the same was not incurred by the Assessee, in the succeeding Assessment years. We are of the view that the AO should be directed to examine the issue afresh in the light of the decision of the Hon'ble Supreme Court referred to above and ascertain as to the reasonableness of the basis on which the provision is made ..... X X X X Extracts X X X X X X X X Extracts X X X X
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