M/S. EXTENTIA INFORMATION TECHNOLOGY PVT.LTD,,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 1(2),, PUNE

PER R.S.SYAL, VP :

This appeal by the assessee is directed against the final assessment order dated 28-08-2017 passed by the Assessing Officer (AO) u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation to the assessment year 2013-14.

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grounds involve pure question of law and do not require any fresh

examination of facts, we admit them in the hue of the judgment of

Hon’ble Supreme Court in National Thermal Power Company Ltd.

Vs. CIT (1998) 229 ITR 383 (SC).

ground no.1 and additional ground no.7 is that the reference made

by the AO to the Transfer Pricing Officer (TPO) for determining

the ALP of a `specified domestic transaction’ and, in turn,

determination of Arm’s Length Price (ALP) by the TPO of the

`international transaction’ is invalid and violative of the provisions

of section 92CA of the Act.

issue, are that the assessee filed its return declaring total income at

Rs.1,99,54,082/-. Certain international transactions were reported

in Form No.3CEB. The AO made a reference to the TPO for

determining the ALP of the reported `Specified Domestic

Transaction’ (SDT) amounting to Rs.7,07,45,549/- after obtaining

due approval from the Pr. CIT. The TPO recommended transfer

pricing adjustment of Rs.1,11,28,742/- to the value of the

3 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

`International transaction’. A draft order was passed accordingly.

The Dispute Resolution Panel (DRP) gave certain directions which

had the effect of reducing the amount of transfer pricing

adjustment from Rs.1.11 crore and odd to Rs.79,81,424/- in the

final assessment order. Aggrieved thereby, the assessee is in appeal

before the Tribunal.

referred additional and modified grounds is that the TPO erred in

determining the ALP of the `international transaction’ when the

reference made by the AO was only for the `specified domestic

transaction’. The ld. AR invited our attention towards the letter

dated 08-09-2015 written by the AO to the Pr. CIT seeking

permission for making a reference to the TPO for determining the

ALP of the `specified domestic transaction’ amounting to

Rs.7,07,45,549/- and the `international transaction’ of Rs. Nil. A

copy of this letter has been placed at page 186 of the paper book.

The Pr. CIT accorded such permission vide his letter dated 21-09-

2015. Thereafter, the AO made a reference to the TPO for

determining the ALP of the `specified domestic transaction’ of

Rs.7.07 crore and the `international transaction’ of Rs. Nil through

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his letter dated 13-10-2015, a copy of which is available at page

188 of the paper book. The TPO determined the ALP of the

`international transaction’ with book value of Rs.7.07 crore by

proposing transfer pricing adjustment of Rs.1.11 crore. The case

of the assessee is that the TPO was incompetent to determine the

ALP of the `international transaction’ when the reference made to

him by the AO was only for the `specified domestic transaction’ of

equal value. The ld. DR strenuously opposed the contention.

relevant material on record, it is observed from the Form

No.3CEB, a copy of which has been placed at page 25 onwards of

the paper book, that on the front page under Part A of the Form,

the assessee reported value of Rs.2,60,04,296/- against column No.

8: “Aggregate value of international transactions as per book of

accounts”. Against the Column No. 9: “Aggregate value of

Specified Domestic Transactions as per books of accounts”, the

assessee reported value of Rs.7,07,45,549/-. As per the relevant

Instructions at the material time, the AO was admittedly bound to

make a reference to the TPO in case the value of the reported

international transactions/specified domestic transactions

5 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

exceeding Rs.15/5 crore. Acting upon the report of the assessee in

Form No.3CEB wherein the aggregate value of the `specified

domestic transactions’ was shown at Rs.7.07 crore, the AO sought

approval from the Pr. CIT and made a reference to the TPO for

determining the ALP of the `specified domestic transactions’ of

Rs.7.07 crore. The TPO during the course of proceedings before

him observed that the value of Rs.7.07 crore was in relation to

‘international transactions’ and not the ‘specified domestic

transactions’. He accordingly determined the ALP of the

international transaction of Rs.7.07 crore.

does not permit the TPO to determine the ALP of a transaction not

referred to him by the AO. The ld. AR argued that since it was the

‘specified domestic transaction’ which was referred to him by the

AO, he ought not to have proceeded with the determination of the

ALP of the `international transaction’.

of the assessee in the facts and circumstances of the present case.

Sub-section (1) of section 92CA provides that where an assessee

has entered into an international transaction or specified domestic

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transaction and the AO considers it necessary, he may with the

previous approval of the Pr. CIT refer the computation of the ALP

in relation to the said international transaction or SDT to the TPO.

Sub-section (2) provides that where a reference is made under sub-

section (1), the TPO shall serve a notice on the assessee to produce

relevant evidence for its computation of the ALP in relation to the

international transaction or the SDT. Sub-section (2A) of section

92CA provides that where “any other international transaction”,

other than an international transaction referred to in sub-section (1)

comes to the notice of the TPO during the course of proceedings

before him, the provisions of this Chapter shall apply as if such

other international transaction is an international transaction

referred to him under sub-section (1). The point to be noted here is

that whereas sub-sections (1) and (2) of section 92CA talk of both

the `international transactions’ as well as the `SDTs’, sub-section

(2A) refers only to the ‘other international transaction’ and not the

“other SDT”. Similar is the prescription of sub-section (2B) of

section 92CA which provides that where the assessee has not

reported an “international transaction” in Form no. 3CEB, and

such international transaction comes to the notice of the TPO, the

7 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

provisions of this Chapter shall apply as if such transaction is an

international transaction referred to him under sub-section (1). On

going through the language of sub-sections (2A) and (2B) in

juxtaposition to sub-sections (1) and (2) of section 92CA, it

becomes explicitly manifest that when the AO makes a reference

to the TPO for determining the ALP of an international transaction

or SDT, the TPO is supposed to determine the ALP of such

transactions. If, however, during the course of proceedings, another

international transaction, whether reported or unreported, comes to

the notice of the TPO, then he is competent to directly proceed

with the determination of its ALP without going through the

process of the AO first seeking approval from the Pr. CIT or

making a reference to him. The caveat is that the power of the TPO

under sub-sections (2A) and (2B) extends only to the `international

transactions’ and not the `SDT’. In other words, if a SDT comes to

the notice of the TPO during the course of proceedings before him,

for which either no reference was made by the AO or was not

reported, then he is not entitled to determine the ALP of such a

SDT directly.

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made a reference for determination of the ALP of `specified

domestic transaction’, whereas the TPO determined ALP of the

`international transaction.’ The contention advanced on behalf of

the assessee is that such a determination by the TPO is invalid.

There is no doubt that the reference by the AO to the TPO was

made for the SDT amounting to Rs.7.07 crore on the basis of the

report by the assessee in Form No.3CEB which states the value of

SDT as per books of accounts at Rs.7.07 crore. Since the stated

value of the SDT was more than Rs.5.00 crore, it was obligatory

on the part of AO to make a reference to the TPO for determining

its ALP. It was on the basis of the report furnished by the assessee

itself that the AO first sought approval from the Pr. CIT and then

made a reference to the TPO for determining the ALP of the

reported SDT with value of Rs.7.07 crore. The ld. AR fairly

confessed that it was, in fact, a mistake on the part of the assessee

in reporting wrong values in Column Nos. 8 and 9 of Form No.

3CEB in as much as the correct value of the international

transaction was Rs.7.07 crore and that of SDT was Rs.2.60 crore.

Once the assessee misreported the figures of SDT and international

9 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

transaction, it cannot be allowed to turn around later and seek

benefit of its own mistake by contending that the proceedings be

set aside as violative of the provisions of section 92CA. The

objection would have merited consideration if the assessee had

correctly reported but the AO would have made a wrong reference.

The initiation of the entire exercise by the AO in making a

reference to the Pr. CIT for seeking approval and then to the TPO

for determining the ALP is wholly founded on the reporting by the

assessee itself. Now, the assessee cannot be allowed to raise a

claim before the Tribunal that even though it committed a mistake

in reporting the figures of the international transactions and the

SDTs correctly, still the authorities should have acted on the basis

of correct figures.

assessee intimated this mistake to the AO as well as the TPO vide

its letter dated 22-03-2016 served on the TPO on 27-03-2016. It

was submitted that when the mistake was brought to the notice of

the authorities, it became necessary for them to discard the earlier

reference and make a fresh reference for determination of ALP of

the international transaction instead of the SDT.

10 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

assessee allegedly rectified its mistake and intimated the correct

figures to the AO/TPO. On going through the letter, a copy of

which has been placed at page 166 of the paper book, it can be

seen that the assessee simply stated that “the amount of SDT is

below the prescribed limit” and “the amount of international

transaction is Rs.7,07,45,549/-”. Fully aware of the earlier wrong

reporting, the assessee still did not open the cards by correctly

stating that there was a mistake in the earlier report in Form No.

3CEB, which it was seeking to rectify. With the correct figures of

the value of international transactions and the SDTs below the

prescribed limit for making a reference to the TPO, the time

available with the AO for completing the assessment had squeezed

to 31-3-2016, giving him a period of less than a week to take up

and complete the entire assessment. We cannot accord our

imprimatur to such type of practices.

reported transaction is Rs.7.07 crore, for which a reference was

made by the AO to the TPO for determining the ALP. The TPO

eventually determined ALP of the transaction with a value of

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Rs.7.07 crore. In other words, the TPO correctly determined the

ALP of the reported transaction of Rs.7.07 crore for which a

reference was made to him, albeit with the nomenclature of

`specified domestic transaction’ instead of `international

transaction’. The substance of the matter is that the TPO

determined the ALP of transaction of Rs.7.07 crore, which was

referred to him by the AO after seeking due permission from the

Pr. CIT.

Broadcasting Company Ltd. Vs. UOI (2019) 103 taxmann.com 388

(Bom) is misconceived as the facts of that case are alien to the facts

of the instant case. That case is an authority for the proposition that

the TPO cannot assume jurisdiction to determine ALP of a SDT

not referred to him. Au Contraire, the position which subsists

before us is that the TPO determined the ALP of the transaction of

Rs.7.07 crore, being the same transaction which was referred to

him though as a `SDT’ instead of `international transaction’, and

that too on the wrong reporting made by the assessee only. In the

context of jurisdiction of the TPO to determine the ALP, we find

that there is no distinction between referred international

12 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

transactions por una parte and specified domestic transactions por

otra parte u/s 92CA(1) of the Act. Once a reference is made to the

TPO for determining the ALP of a transaction (international or

SDT), he is bound to do so. Such a distinction between the two

becomes significant only when the TPO assumes jurisdiction in

terms of sub-sections (2A) and (2B) of section 92CA in the sense

that he can proceed only with an international transaction and not

with a SDT under the later two sub-sections.

assessee inadvertently reported wrong figures in column nos. 8 &

9, but the further details in other columns of Form No. 3CEB

indicated the correct position and the AO accordingly ought to

have acted with diligence by examining the report in entirety

before making a reference. He accentuated on the language of sub-

section (1) of section 92CA which is couched with the words: `and

the Assessing Officer considers it necessary or expedient so to do,

he may, with the previous approval….’. He emphasized that the

AO was supposed to act conscientiously before seeking approval

from the Pr. CIT for making a reference to the TPO in terms of this

provision.

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value of international transactions as per book of accounts” and

“Aggregate value of Specified Domestic Transactions as per books

of accounts”. Subsequent columns contain break-up of the Column

nos. 8 & 9 as to the nature of transactions. At this stage, it is

pertinent to note that the AO has an option to either suo motu

determine the ALP u/s 92C or make a reference to the TPO for

doing it u/s 92CA. We have uncontrovertedly noted above, that

the AO is bound to make a reference to the TPO in case the

aggregate value of the reported international transactions exceed

Rs.15 crore and/or that of the reported specified domestic

transactions exceed Rs.5 crore. The requirement on the part of the

AO to consider it `necessary or expedient’ is to be seen only in the

context of the cases where the aggregate value of the reported

international transactions does not exceed Rs.15 crore and still the

AO feels it necessary or expedient to get the ALP determined from

the TPO. However, once the aggregate figures as given in Column

nos. 8 & 9 exceeds Rs.15/5 crore respectively, it immediately

becomes incumbent upon the AO to make a reference to the TPO

after taking approval from the Pr. CIT. There is no choice. There

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is no question of considering it necessary or expedient. Reference

has to be invariably made in such situation. Reverting to the facts

and circumstances of the extant case, we find that the AO on

finding the figure in column no. 9 reported at Rs.7.07 crore, being

the aggregate value of specified domestic transactions as per books

of accounts at more than Rs.5.00 crore, had no option but to make

a reference to the TPO without going into any further details. The

position would have been different if the reported value of the

international transaction had been less than the Rs.15 crore and the

AO had been contemplating to make a reference to the TPO. In

that case, the requirement of considering `necessary or expedient’

would have triggered. This contention of the assessee is also ergo

jettisoned.

were introduced by the Finance Act, 2001 w.e.f. 1.4.2002 requiring

determination of the ALP only of the international transactions.

The Finance Act, 2012, w.e.f. 1.4.2013 extended the application of

such provisions to the specified domestic transactions. The term

SDT has been defined in section 92BA to mean any of the

transactions of the nature as enumerated therein, not being an

15 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

international transaction, `where the aggregate of such transactions

entered into by the assessee in the previous year exceeds a sum

of five crore rupees.’ Thus as per the definition, transaction(s)

otherwise fitting into the nature of transactions stipulated under

section 92BA, become `specified domestic transaction’ only when

their aggregate exceeds Rs.5 crore. In other words, such

transactions are not characterized as SDT unless their aggregate

value exceeds Rs.5 crore. If the transactions of the nature given in

the section are entered into by the assessee, but their aggregate

falls short of Rs.5 crore, there is no need for their benchmarking.

Neither there is any obligation on the part of the assessee to report

it, nor is it required by the AO to determine its ALP, either himself

or through TPO.

correct value of the SDT to be reported in Column no. 9 of Form

No. 3CEB was Rs.2,60,04,296/-, which was wrongly reported in

Column no. 8 and vice versa. We do not understand any raison

d’etre for the assessee in reporting, at all, the correct value of the

transactions of the nature prescribed in section 92BA in the first

instance, when it did not cross the threshold of Rs.5.00 crore, so as

16 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

to become SDT. The fact that such transactions did not become

SDT and required no reporting in Form No. 3CEB coupled with

the fact that the assessee still reported it and that too, in a wrong

column, gives some strength to the view point canvassed by the ld.

DR that the assessee wanted to mislead the Revenue by resorting

to the tactic with the ulterior motive.

found in the TPO’s action in determining the ALP of the

`international transaction’ of Rs.7.07 crore.

assessee has challenged the transfer pricing addition of

Rs.79,81,424/- made by the AO in the final assessment order.

company which was incorporated in the year 1988. It is engaged

in providing support services related to software design and

development of custom and packaged application, testing and

communication thereof. The assessee has been providing software

development and support services in the areas of embedded

multimedia and multimedia applications and communication

17 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

systems. The assessee reported two international transactions of

“Provision of software development and support services” with

transacted value of Rs.69,37,222/- and Rs.6,38,08,327/- with its

two Associated Enterprises (AEs) respectively. The assessee

applied Transactional Net Marginal Method (TNMM) as the most

appropriate method for demonstrating these transactions to be at

ALP. For this purpose, it made geographical segments with

different profit margins. The TPO aggregated the same and

computed the assessee’s PLI at 4.20%. As against certain

comparables noted by the assessee, the TPO shortlisted ten

companies as comparable with their mean margin of OP/OC at

19.00%. On the basis of such margin, the TPO computed transfer

pricing adjustment of Rs. 1,11,28,742/-. The DRP ordered the

exclusion of two companies, namely, e-Zest Solutions Ltd. and

Priya Softweb Solutions Pvt. Ltd. from the list of comparables,

which had the effect of reducing the amount of transfer pricing

addition to Rs.79.81 lakh. At this stage, it is relevant to mention

that the ld. AR did not raise any objection to the aggregation done

by the TPO discarding the assessee’s geographical segments. The

assessee is aggrieved by the treatment of foreign exchange

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fluctuation as non-operating both for the assessee as well as the

Revenue; inclusion of three companies in the list of comparables;

and treatment of provision of bad and doubtful debts in respect of

certain comparables as an item of non-operating expenses.

treatment of foreign exchange (forex) gain/loss given by the

authorities as an item of non-operating nature in the computation

of the ALP of the assessee as well as comparables. The ld. AR

contended that the forex gain of the assessee ought to have been

considered as operating revenue. We find merit in the contention

about the inclusion of foreign exchange gain/loss in the operating

revenue/costs of the assessee as well as that of the comparables,

but only in respect of transactions in the revenue field and not the

capital field. The Special Bench of the Tribunal in ACIT Vs

Prakash I. Shah (2008) 115 ITD 167 (Mum)(SB) has held that the

gain due to fluctuations in the foreign exchange rate emanating

from exports is its integral part and cannot be differentiated from

the export proceeds simply on the ground that the foreign currency

rate has increased subsequent to sale but prior to realization. It

went on to add that when goods are exported and invoice is raised

19 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

in currency of the country where such goods are sold and

subsequently when the amount is realized in that foreign currency

and then converted into Indian rupees, the entire amount is

relatable to the exports. In fact, it is only the translation of invoice

value from the foreign currency to the Indian rupees. The Special

bench held that the exchange rate gain or loss cannot have a

different character from the transaction to which it pertains. The

Bench found fallacy in the submission made on behalf of the

Revenue that the exchange rate difference should be detached from

the exports and be considered as an independent transaction.

Eventually, the Special Bench held that such exchange rate

fluctuation gain/loss arising from exports cannot be viewed

differently from sale proceeds. What is true for exports is also true

for other items of expenses/income of revenue nature.

Tribunal in SAP Labs India Pvt. Ltd. Vs ACIT (2011) 44 SOT 156

(Bangalore) has held that foreign exchange fluctuation gain is part

of operating profit of the company and should be included in the

operating revenue. Similar view has been taken in several

20 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

decisions including Trilogy E Business Software India (P) Ltd. Vs

DCIT (2011) 47 SOT 45 (URO) (Bangalore).

that foreign exchange gain or loss be taken as non-operating, is not

sustainable. There is no doubt that in such rules, forex gain/loss

has been treated as non-operating. However it is relevant to note

that such rules are not applicable to the assessment year under

consideration. The Hon’ble Delhi High Court in Pr. CIT VS.

Cashedge India Pvt. Ltd., vide its judgment dated 4.5.2016 in ITA

279/2016, has held that : `So far as the question of fluctuation of

foreign exchange was concerned, the ITAT ruled that the relevant

provision, i.e. `Safe Harbour Rules’ had not been notified for the

concerned assessment year and were, therefore, inapplicable’. Thus

the Hon’ble High Court did not disturb the operating nature of

forex gain/loss as held by the tribunal.

assessee for the year under consideration that one of the

transactions involving fluctuation in foreign currency is in the

capital field, which is, `Purchase of capital goods worth

Rs.13,85,590/-.’ Forex gain/loss in respect of such a transaction

21 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

cannot be considered as a part of operating expense/income. The

ld. AR candidly admitted that the TPO considered forex gain/loss

as non-operating not only for the assessee but also for the

comparables. In view of the foregoing discussion, we are of the

considered opinion that the amount of foreign exchange gain/loss

arising out of revenue transactions is required to be considered as

an item of operating revenue/cost, both for the assessee as well as

the comparables. We hold accordingly.

challenged by the assessee. In order to appreciate the comparability

or otherwise of the companies under challenge, it is sine qua non

to first understand the functional profile of the assessee. The TPO

has briefly referred to the functions carried out by the assessee as

that of providing Software Development and Support services in

the areas of embedded multimedia, multimedia applications and

communication systems as per the requirements of its AEs. There

is some further elaboration in the show cause notice dated 19-08-

2016 issued by TPO capturing the nature of assessee’s services as

implementing end-to-end business processes on force.com

platform to help companies run effectively. The nature of services

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has been noted as existing business process review;

implementation of solutions using sales force best practices on the

saleforce1 platform; existing application and data migration/import

services; integration with third party systems; user interact

customization and work flows; implantation of sales force

communities for external users of the origination; development of

custom reports and dashboards; analytics and business intelligence

and development of App Exchange solutions etc. For having more

clarity on the nature of services rendered by the assessee, we have

also gone through the Agreements entered into by the assessee

with its two AEs. These Agreements also provide that the assessee

“agrees to provide Software Development services to the CLIENT

(i.e. the A.E.) as described in Work Orders issued by CLIENT

from time to time during the period of the Agreement. The term

“Work Products” has been defined to consist of work including but

not limited to reports, specifications, data, databases, software and

documentation that has been developed and delivered by the

assessee pursuant to the Work Orders. To sum up, the nature of

services provided by the assessee to its AEs is that of software

development in the field of multimedia. With the above

23 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

understanding of the functional profile of the assessee, we now

proceed to examine as to whether the companies under challenge

are comparable or not.

rejecting the assessee’s contention of the same being functionally

different and its turnover being five times more. No relief was

allowed by the DRP, which has brought the assessee before the

Tribunal.

material on record. A copy of the Annual report of the company

has been placed at 212 onwards of the paper book. Page 304 of the

paper book is a copy of this company’s Profit and loss account

which records Revenue from sale of services at Rs.142.25 crore.

The authorities have canvassed a view that this company is

engaged only in rendering of software services by rejecting the

assessee’s plea that it was into software products. Page 72 of the

Annual report of this company has note on Revenue Recognition

under the head “Income from Services”. It has been reported that

24 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

the: `Revenue from software development and implementation on

time and material contracts is recognized and are billable to clients

as per the terms of specific contracts. …. Revenue from sale of

user licenses for software applications is recognized on e-delivery

of Software License Key to end user’. Though under the head

“Revenue from sale of products”, this company has shown NIL

figure but when we correlate it with other figures from the Profit

and loss account, it transpires that this company is also into sale of

software products. Under the head “Expenses” at page 304 of the

Paper book, this company has recorded a figure of Rs.24.82 crore

as “Purchase of stock in trade”. Obviously, there can be no

purchase of stock in trade if only services are to be rendered.

Under the main head of “Disclosure of principal product or

services”, this company has reported against the sub-head of

“Description of product or services” as “Acquisition/purchase of

IT Hardware and Software including software as a service

(SAAS)”. The above discussion amply proves that this company is

not exclusively engaged in rendering software services as is the

assessee. We, therefore, order to exclude this company from the

list of comparables.

25 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

objected to by the assessee contending that the business model of

the company was different. Not convinced, the TPO included it in

the list of comparables which was countenanced by the DRP.

material on record, we find that the findings recorded by the lower

authorities on this issue are correct. Annual report of this company

is available at page 336 of the paper book. Page 348 is a copy of

its Profit and loss account with the figure of `Revenue from

operations’ standing at Rs.21.30 crore. Break-up of the Revenue is

given in Note No.17 with the remarks “Sale of software”. The ld.

AR contended that it was clear from the Note No.17 that this

company had only sale of software and not that of sale of software

development services. We do not approve such a contention for

the reason that the company used a generalized term of “Sale of

software” to represent the amount realized from sale rendering of

software development services. This fact is divulged from the

Auditor’s report on page 344 of the paper book. Under the head:

`In respect of its Inventories’, the Auditor has reported that “The

26 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

company is Service Company, primarily engaged in Software

Development. Accordingly, it does not hold any physical

inventory.’ Note No.26 forming part of financial statements

categorically records that the figure of Revenue of Rs.21.65 crore

is from “Services rendered”. The DRP has correctly recorded that

this company apart from involved in software development

services is also engaged in providing software product

development services and no distinction can be drawn between the

activities of software development and software product

development services. In our considered opinion, there is a

difference in rendering software development services as a

Contractor and rendering software development services to and for

self. When a contract/job is received for developing a particular

software product for and on behalf of a customer, the company

developing such software product does not become a software

product company, but remains only as a software development

service provider. On the other hand, when a company develops its

own software product, which is then commercially exploited by

giving licenses to the users, then a company is said to be a software

product company to that extent. Expenses incurred on development

27 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

of such software products are capitalized at the time of incurring

and then written off over a period, whereas in case of software

development service provider all the expenses are claimed as

deduction simultaneous with the revenue received from the

rendering of such software development services. It is only when a

company develops its software product for self which is licensed

to customers that we can say that the company is engaged into

software products and not software development services. If on

the other hand, a company renders software product development

services on contract basis, the company is said to be involved in

providing software development services only. Apart from the

auditor clearly mentioning InfoBans Systems India Private Limited

to be earning all the revenues only from rendering of software

services, we find that, unlike a software product company, there is

no capitalization of any expenditure on development of software

for self in its balance sheet. This shows that this company, like the

assessee, is engaged only in providing software development

services to its customers.

28 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

Tribunal in M/s. Emerson Electric Company (India) Pvt. Ltd. Vs.

ACIT, decision dated 14-06-2019 for treating this company as

comparable is not of any assistance as the relevant discussion has

been made while dealing with the assessment year 2014-15 and not

the A.Y. 2013-14 as is the year under consideration. The ld. AR

also admitted this fact, which is substantiated from the Mumbai

Tribunal order noticing the margin of this company at 48.97%,

whereas such a margin has been noticed in the case of the assessee

at 33.73%. Further there is difference in the figures of revenue. As

against Rs.32.96 crore considered by the Mumbai Tribunal, the

figure of revenue as considered in the case of the assessee is

Rs.21.30 crore. This shows that the Mumbai Tribunal, while

holding such company to be not comparable, was dealing with it

for the A.Y. 2014-15 and not the A.Y. 2013-14 under

consideration. Nature of work and business model of a company

can undergo change from one year to another. It goes without

saying that one needs to examine the comparability position on

year to year basis independently. For one year, a company may be

comparable and for the next year, it may cease to be so for a

29 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

variety of reasons. We, therefore, hold that the authorities below

were justified in including this company in the list of comparables.

without making much discussion in his order. The assessee

approached the DRP which discussed, at para 8 of its direction, the

deployment by the TPO of turnover filter of more than Rs.1.00

crore and less than Rs.5.00 crore. After discussing certain

decisions, the DRP held that upper turnover filter should be fixed at ten times and lower turnover filter at 1/10th of the turnover of the

tested party (the assessee). It, therefore, fixed the upper turnover

filter of Rs.250 crore and lower turnover filter of Rs.2.50 crore

against the assessee’s turnover at Rs.25.17 crore. The AO, while

finalizing the assessment and giving effect to the direction of the

DRP included R.S. Software (India) Ltd. in the list of comparables.

The contention of the assessee is that this company does not pass

the turnover filter as stipulated by the DRP.

material on record, we find from the Annual report of this

company, copy placed at page 469 of the paper book, that its

30 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

“Revenue from operations” stands at Rs.293.22 crore. This shows

that the turnover of this company standing at Rs.293.22 crore does

not pass the upper turnover filter approved by the DRP at ten times

the assessee’s turnover. This has been specifically spelt out by the

DRP that: “Therefore, the upper turnover filter is fixed at Rs.250

crores and lower turnover filter is fixed at Rs.2.50 crore”. It is thus

evident that the upper turnover filter, as applied by the DRP, does

not permit the inclusion of R.S. Software (India) Ltd. in the list of

comparables, whose turnover exceeds Rs.250 crore. As the

turnover of this company stood at Rs.293.22 crore, it is obviously

more than that approved by the DRP.

approved by the DRP is not enshrined in the statute and hence, the

same was rightly tinkered with by the AO/TPO at the time of

giving effect to its directions. We fully agree with the first part of

the contention of the ld. DR that the statute has not provided any

upper or lower turnover filter, but the fact of the matter is that in so

far as this case is concerned, once the DRP directed to apply a

particular filter that became sacrosanct for the TPO. Sub-section

(13) of section 144C provides that : `Upon receipt of the directions

31 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

issued under sub-section (5), the Assessing Officer shall, in

conformity with the directions, complete ..….. the assessment

without providing any further opportunity of being heard to the

assessee …’. It means what is required to be done by the AO at

the stage of completing the assessment under sub-section (13) is to

first pick up the income determination under the draft order; then

ascertain the directions given by the DRP; and thereafter

religiously give effect to the same by modifying the income

computation as per the draft order strictly in accordance with the

direction of the DRP. This manifests that once the matter travels to

the DRP, the AO/TPO become bound to give effect to the

directions of the DRP vis-à-vis the income computation under the

draft order. Such directions are mandatory and not directory on the

AO. The AO has no option to accept or reject the same in as much

he is bound to follow the same, whether or not he agrees with the

same. As R. S. Software (supra) does not pass the turnover filter

approved by the DRP, we order to exclude this company from the

list of comparables.

32 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

referred three companies in the list of comparables, now we

proceed to determine the correctness of the profit margin of two

comparables, namely, CG-VAK Software and Exports Ltd. and

Exilant Technologies Ltd.

two companies in the list of comparables. The only quarrel is on

the computation of their OP/OC. To be precise, the question is

about the treatment given by the authorities below to the Provision

for bad and doubtful debts as non-operating. The TPO while

calculating the profit margin of CG VAK Software and Exports

Ltd., reduced the amount of Provision for bad debts at

Rs.39,97,218/- from total expenses for working out the OP/OC at

18.40%. The view point of the assessee is that the Provision for

bad and doubtful debts ought not have been reduced from

operating expenses.

whose copy has been provided on behalf of the assessee. It can be

seen from the `Expenditure’ under the head “Operating and other

expenses” at Rs.1.87 crore that there is an item of “Provision for

33 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

doubtful debts” at Rs.39,97,218/- included in it. The provision for

doubtful debts has a direct relation with the sales made by a

company. In the same way in which the amount of sales is an item

of operating revenue, the amount of provision for doubtful debts,

having direct link with the sales, is also an item of operating

expense. In our considered opinion, Provision for doubtful debts

cannot be treated as a non-operating expense. We, therefore, direct

to include the amount of Provision for doubtful debts in the

expense side of this company for calculating the profit margin.

Similar is the position regarding Exilant Technologies. Provision

for bad and doubtful debts of this company stands at

Rs.81,91,798/- which can be found in the detail of Other expenses.

The TPO while calculating the profit margin of this company

reduced such an amount. Following the reasoning given

hereinabove, we direct to include Reserve for doubtful debts as an

item of operating expenses in calculating the operating profit

margin of this company.

disallowance of Rs.5.00 lakh made by the AO on page 8 of the

assessment order. The AO observed that the assessee furnished

34 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

details of expenses claimed under the head “Office expenses” at

Rs.2,43,38,458/-. These expenses included Administrative

expense, Finance and legal charges, Office maintenance, Other

expenses and Repairs and maintenance expenses. The assessee

furnished only ledger extract of these expenses. The claim was not

found to be fully verifiable. An addition of Rs.5.00 lakh was,

therefore, made out of such expenses. The assessee did not raise

any objection before the DRP on this addition. Accordingly, the

AO made the addition in the final assessment order.

AO notified the disallowance of Rs.5.00 lakh in the draft order.

Having not challenged such disallowance before the DRP, the

assessee impliedly accepted such disallowance, which proposition

has not been refuted by the ld. AR. His argument was that such a

disallowance of Rs.5.00 lakh having been made out of Operating

expenses should be excluded while calculating the PLI of the

assessee. We agree with this contention for the obvious reason that

once a particular expenditure itself is disallowed, there can be no

question of including it in the Operating expenses for calculating

the profit margin in the process of determination of the ALP.

35 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

While upholding the disallowance, we direct to exclude Rs.5.00

lakh from the Operating expenses of the assessee for the purpose

of calculation of its ALP.

matter to the file of AO/TPO for a fresh determination of the ALP

in terms of the discussion made supra. Needless to say, the

assessee will be allowed a reasonable opportunity of hearing in

such fresh determination.

purposes.

Order pronounced in the Open Court on 04th March, 2020.

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT

पुणे Pune; �दनांक Dated : 04th March, 2020 सतीश

36 ITA No.2331/PUN/2017 M/s. Extentia Information Technology Pvt. Ltd.

आदेश क� क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: अ�ेिषत आदेश आदेश आदेश अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. 3. The CIT(A)-13, Pune 4. The Pr. CIT -5, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे 5. “सी” / DR ‘C’, ITAT, Pune गाड� फाईल / Guard file 6. आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

Date 1. Draft dictated on 02-03-2020 Sr.PS 2. Draft placed before author 03-03-2020 Sr.PS 3. Draft proposed & placed JM before the second member 4. Draft discussed/approved JM by Second Member. 5. Approved Draft comes to Sr.PS the Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *