Income Tax Appellate Tribunal - Mumbai
Dcit-13(1)(1), Mumbai vs M/S Oracle Financial Services Software ... on 30 March, 2026
IN THE INCOME TAX APPELLATE TRIBUNAL
"J" BENCH, MUMBAI
BEFORE SMT. BEENA PILLAI (JUDICIAL MEMBER)
&
SHRI BIJAYANANDA PRUSETH (ACCOUNTANT MEMBER)
I.T.A. No. 4795, 4796, 3430/Mum/2019
(Assessment Year: 2011-12, 2012-13 & 2013-14)
Oracle Financial Services Vs. Assistant Commissioner of Income
Software Limited Tax Range 13(1)(1), Mumbai
Oracle Park
Off Western Express Highway
Goregaon (East)
Mumbai - 400063
[PAN: AAACC1448B]
(Appellant) (Respondent)
I.T.A. No. 5378, 5376 & 3997/Mum/2019
(Assessment Year: 2011-12, 2012-13 & 2013-14)
Deputy Commissioner of Income Vs. Oracle Financial Services
Tax Range 13(1)(1), Mumbai Software Limited
Oracle Park
Off Western Express Highway
Goregaon (East)
Mumbai - 400063.
[PAN: AAACC1448B]
(Appellant) (Respondent)
Assessee by Shri G.C. Srivastava (virtually present)
&
Shri Sukhsagar Syal, A/Rs
Revenue by Shri Pankaj Kumar, CIT, DR
Date of Hearing 26.03.2026
Date of Pronouncement 30.03.2026
ORDER
Per Bench:
These are cross appeals filed by the assessee as well as the
revenue arises out of separate orders passed by the Ld.CIT(A)-57,
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Mumbai for A.Ys. 2011-12, 2012-13 and 2013-14 arising out of date
following orders, details of which are as under:
Details of CIT(A) order like date for relevant A.Y. in table
Assessment Year Order of Ld. CIT(A) Dated
2011-12 07/05/2019
2012-13 07/05/2019
2013-14 18/03/2019
2. Since common issues are involved in these appeals, they were
heard together and are being disposed of by way of this consolidated
order for the sake of convenience and brevity.
2.1. The Ld.AR submitted that, vide application dated 17/08/2023,
the assessee raised additional ground challenging the validity of
assessment order passed based on the decision of Hon'ble Bombay
High Court in case of Shelf Drilling Ron Tappmeyer Ltd. vs. ACIT in
WP no. 2340 of 2021.
He submitted that the assessee do not wish to press this issue at this
stage.
Considering the submission, the application dated 17/08/2023
challenging validity of the assessment order is not admitted.
3. At the outset, the Ld. AR submitted that on merits the issues
involved in the present appeals are identical to those already
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adjudicated by this Tribunal in the assessee's own case for A.Y. 2008-
09 in ITA No. 3432/Mum/2019 & ITA No. 3995/Mum/2019, order
dated 19/02/2026. He submitted that the facts and circumstances
for the years under consideration remain identical and no fresh
material has been brought on record by the Revenue to warrant a
different view. The Ld.AR therefore contended that, in the interest of
judicial consistency, the decision of the Tribunal for A.Y. 2008-09
may be followed and the issues raised in the present appeals be
decided accordingly. The assessee was accordingly directed to file
issue-wise charts for each assessment year highlighting the grounds
raised by both the assessee and the Revenue and the corresponding
issues involved.
3.1. The Ld. DR fairly conceded that the issues arising in the present
appeals are identical to those adjudicated by this Tribunal in A.Y.
2008-09 (supra), and submitted that the appeals may be decided in
accordance with the said decision.
We have heard the submissions advanced by both sides in light of
the material placed on record.
4. At the time of hearing, both the Ld. AR and the Ld. DR fairly
submitted that the issues arising in the present cross appeals are
identical to those considered by this Tribunal in assessee's own case
for A.Y. 2008-09 (supra), and that the decision rendered therein
would apply mutatis mutandis to the years under consideration.
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5. We find that this Tribunal, vide order dated 19/02/2026 in
assessee's own case for A.Y. 2008-09, examined identical issues in
considerable detail. After taking into account the submissions of both
sides, the findings of fact recorded and conclusions drawn therein,
we see no reason to take a different view in the absence of any
distinguishing facts. For the sake of brevity and to avoid repetition,
we do not consider it necessary to reproduce the entire discussion on
each issue. We shall instead refer to the relevant paragraphs of the
order dated 19/02/2026, wherein all the common issues arising in
the present appeals have been examined and adjudicated. A copy of
the said order is annexed to the present order and marked as
"Annexure - A" for ready reference.
Accordingly, following charts summarising the Grounds issue wise
raised by the assesse as well as revenue for each Assessment Years
under consideration are filed which is reproduced as under:-
A.Y. 2011-12
ITA No. 4795/Mum/2019 (Assessee's Appeal)
Ground No. Issue
1 General ground - Order bad in law
Retention of revenue by overseas subsidiaries in Singapore,
2 Netherlands and USA
(also in Department appeal ground no.3.1 to 3.17)
3 Benefit of +/-5% variation computed on Arm's length Price
Allowability of additional claim of Employee compensation cost
4
(ESOP)
5 (Additional Additional ground - Reliance placed on Shelf Drilling Ron
ground) Tapmeyer Ltd. vs ACIT (2023) (WP 2340/21) - Withdrawn
ITA No. 5378/Mum/2019 (Department Appeal)
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Ground
Issue
No.
1 Deduction of training income while computing deduction u/s 10A
Telecommunication expenses ought to be reduced from export turnover
2
while computing deduction u/s 10A
Retention of revenue by overseas subsidiaries in Singapore,
3.1 to 3.17
Netherlands and USA
4.1 to 4.4 Notional interest receivable on delayed receivable
5.1 to 5.5 Interest undercharged in respect of loan to AEs
6.1 to 6.5 Interest charged on Capital Contribution made in AE treated as loan
7&8 General ground
A.Y. 2012-13
ITA No. 4796/Mum/2019 (Appellant Appeal)
Ground No. Issue
1 General ground - Order bad in law
Retention of revenue by overseas subsidiaries in Singapore,
2 Netherlands and USA
(also in Department appeal ground no.1.1 to 1.17)
3 Benefit of +/-5% variation computed on Arm's length Price
Allowability of additional claim of Employee compensation cost
4
(ESOP)
5 Additional claim for foreign Taxes paid in Japan
6 (Additional Additional ground - Reliance placed on Shelf Drilling Ron
ground) Tapmeyer Ltd. vs ACIT (2023) (WP 2340/21) - Withdrawn
ITA No. 5376/Mum/2019 (Department Appeal)
Ground
Issue
No.
Retention of revenue by overseas subsidiaries in Singapore,
1.1 to 1.7
Netherlands and USA
2.1 to 2.4 Notional interest receivable on delayed receivable
3.1 to 3.5 Interest undercharged in respect of loan to AEs
4.1 to 4.5 Interest charged on Capital Contribution made in AE treated as loan
5&6 General ground
A.Y. 2013-14
ITA No. 3430/Mum/2019 (Appellant Appeal)
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Ground No. Issue
1 General ground - Order bad in law
Retention of revenue by overseas subsidiaries in Singapore,
2 Netherlands and USA
(also in Department appeal ground no.5)
3 Benefit of +/-5% variation computed on Arm's length Price
4 (Additional Additional ground - Reliance placed on Shelf Drilling Ron
ground) Tapmeyer Ltd. vs ACIT (2023) (WP 2340/21) - Withdrawn
ITA No. 3997/MUM/2020 (Department appeal)
Ground
Issue
No.
Non reconciliation of receipts as per Individual Transaction Statement
1
(ITS) (AIR statement)
2 Additional claim of Employee compensation cost (ESOP)
Retention of revenue by overseas subsidiaries in Singapore,
3.1 to 3.17
Netherlands and USA
4.1 to 4.4 Notional interest receivable on delayed receivable
5.1 to 5.7 Interest undercharged in respect of loan to AEs
6.1 to 6.5 Interest charged on Capital Contribution made in AE treated as loan
7&8 General
5.1. The relevant paragraph mapping issues raised by both sides in
present appeals with the order of this Tribunal in assessee's own case
for A.Y. 2008-09 (supra) is as under:
Factual Discussion Conclusion in
S.
Issues in AY 2008-09 AY 2008-
No.
(Paras) 09(Paras)
Deduction u/s 10A - Training
1 10.1 to 11.3 11.4
income
Deduction u/s 10A -
2 11.5 11.5
Telecommunication expenses
Computation of deduction u/s 10A
3 11.6 11.6
(Export vs Total Turnover parity)
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Factual Discussion Conclusion in
S.
Issues in AY 2008-09 AY 2008-
No.
(Paras) 09(Paras)
Retention of revenue by overseas
4 8.1 to 8.8 9.4
subsidiaries
Selection of tested party & TP
5 9.2 to 9.4 9.4
benchmarking approach
Benefit of ±5% tolerance range u/s
6 9.5 9.6
92C(2)
Notional interest on delayed
7 12.1 to 14.5 15 to 15.1
receivables
Interest on loan to Associated
8 16 to 18.2 19 to 19.4
Enterprises
Interest on capital contribution
9 20 to 21.12 22 to 22.4
treated as loan
10 General grounds 6 & 27 6 & 27
6.1. It is observed that the facts, functional profile of the assessee,
nature of international transactions and the issues arising in the
present appeals remain identical to those considered by this Tribunal
in A.Y. 2008-09. The assessee is engaged in similar line of business,
the nature of international transactions remains unchanged and the
transfer pricing methodology adopted is also consistent with earlier
years. No distinguishing feature has been brought on record by either
side so as to persuade us to take a different view.
6.2. In such circumstances, in accordance with the principle of
judicial consistency and in absence of any contrary material, the
findings and conclusions recorded by this Tribunal in A.Y. 2008-09
(supra) are respectfully followed and applied mutatis mutandis to the
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grounds raised by both the assessee as well as the Revenue
tabulated hereinabove for the years under consideration.
7. Accordingly, in the absence of any distinguishing facts having been
brought on record by either side, the findings of fact and the
conclusions recorded by the Coordinate Bench in A.Y. 2008-09
(supra) are respectfully followed and applied mutatis mutandis to the
grounds raised by both the assessee and the Revenue on the common
issues for the years under consideration.
10. It is noted that revenue raised ground relating to allowability of
employee compensation cost by the Ld. CIT(A) for 2013-14. Further
the assessee has raised additional ground regarding allowability of
ESOP assessment to 2011-12 and 2012-13 vide application dated
16/03/2026.
10.1. This issue was not there while assessment year 2011-12 and
2012-13 during assessment proceeding. The assessee has therefore
filed application seeking admission of additional grounds reproduced
as under:
Additional Ground for A.Y. 2011-12:
"The Appellant prays your Honor that the Learned AO be directed to allow
additional claim of ESOP expenses of Rs. 8,846,774 pertaining to AY 2011-
12 pursuant to revised Indian Accounting Standard Rules 2015 (Ind. AS)
issued by Ministry of Corporate Affair, which are mandatory to be complied
with retrospective effect from the date the option were granted.
That although this ESOP expense was not claimed in the return or during
assessment (since Ind AS was not applicable at that time), however, it is an
allowable expenditure under Section 37 of the Act in view of reliance placed
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on the judgement of the Karnataka High Court in the case Biocon Limited v
DCIT [IT APPEAL NO. 653 OF 2013]."
Additional Ground for A.Y. 2012-13:
"The Appellant prays your Honor that the Learned AO be directed to allow
additional claim of ESOP expenses of Rs. 29,513,346 pertaining to AY 2012-
13 pursuant to revised Indian Accounting Standard Rules 2015 (Ind. AS)
issued by Ministry of Corporate Affair, which are mandatory to be complied
with retrospective effect from the date the option were granted.
That although this ESOP expense was not claimed in the return or during
assessment (since Ind AS was not applicable at that time), however, it is an
allowable expenditure under Section 37 of the Act in view of reliance placed
on the judgement of the Karnataka High Court in the case Biocon Limited v
DCIT [IT APPEAL NO. 653 OF 2013].
The Appellant prays your Honor that the Learned AO be direct to allow the
additional FTC claim of Rs. 11,518,296 as per the provisions of section 90
read with India-Japan Double Tax Avoidance Agreement, towards taxes
paid by the Appellant in Japan, in respect of income doubly taxed, in India
and Japan."
10.2. In respect of 2011-12 and 2012-13 in the assessee's appeal it
is submitted that additional claim is raised before this Tribunal could
not be raised due to non-availability of relevant judicial precedents
at the time when the appeal was pending before the assessing officer.
It is submitted that this issue thus has been raised before this
Tribunal for the first time necessary consideration in accordance with
law.
10.3. As this is a legal issue raised by the assessee and is necessary
to be considered for computing the correct taxable income in the
hands of the assessee, respectfully following the view taken by
Hon'ble Supreme Court in case of NTPC vs CIT reported in (1998) 229
ITR 382 and decision in case of Jute Corporation of India Ltd vs CIT
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reported in (1991) 187 ITR 688 we admit additional grounds raised
by the assessee before this Tribunal.
Accordingly, the applications seeking admission of additional
grounds filed by the assessee for assessment year 2011-12 and
2012-13 stands admitted.
The Ld.AR filed brief facts that leads to the additional claim for the
years under consideration which is as under:
11. It is submitted that we are the had followed a policy to award
stock options to its employees under various employee stock option
scheme (see note 24 (b) of notes to financial statements), as a means
of employee compensation/reward scheme. The cost of such stock
option benefit to employees was measured by using intrinsic value
method (noted page 68 of the paper book volume 1 for a suspected
with our 13-14). Such valuation was done as per SEBI guidelines
read with Guidance note issued by ICIAI on "Accounting for
Employees Share-Based Payments". It is submitted that the
application of such method did not result in recording of any
expenditure in the financial statements were generally prepared till
assessment year 2016-17.
11.1. Ld.AR submitted that subsequently the Indian accounting
standards were notified by the Ministry of corporate affairs by way of
Companies (Indian accounting standards) Rules, 2015. It is
submitted that as per clause (ii) of rule 4, the assessee being a listed
company was mandated really required to prepare its financial
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statements as per Ind AS from financial year 2016-17. It was
submitted that as per Ind AS 101, the accounting policies under
previous generally accepted accounting principles, deferred from
those under Ind AS for the same period and any adjustments arising
from such differences relating to transactions prior to the transition
date were required to be recognised directly in retained earnings
(opening reserves and surplus) as on 01/04/2015.
11.2. The Ld.AR further submitted that as per Ind AS 102 on
"Accounting and disclosures related to share-based payment", the
assessee had to value stock options as per the fair market value on
the date of grant and charge the same to the P&L account over the
vesting period. It was submitted that such charged in relation to
vested options as on 31/03/2015 pertaining to each of such a earlier
years (prior to transition to Ind AS), the assessee was required to
make adjustment in its opening balance sheet (the opening reserve
and surplus) as per Ind AS 101. It is a submitted that the financial
statements for the financial year 2016-17 was adopted in the AGM
held on 20/09/2017 and the said financial statements recorded an
adjustment to the retained earnings to the extent of ₹ 72, 39, 94, 907
being the total amount of employee stock options outstanding. The
breakup of this has been provided by the assessee as under:
Financial Year Amount in Rs.
FY 2010-11 (A.Y. 2011-12) 88,46,774
FY 2011-12 (A.Y. 2012-13) 2,95,13,346
FY 2012-13 (A.Y. 2013-14) 7,25,25,190
FY 2013-14 (A.Y. 2014-15) 24,22,77,090
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FY 2014-15 (A.Y. 2015-16) 31,34,97,583
Subsidiaries charge 5,73,34,114
Total 72,39,94,097
11.3. As a consequence of the above change, the reserves and of the
assessee stood depleted/reduced by the amount of additional
compensation charge due to retrospect application of the Ind AS. The
Ld.AO disregarded the submissions made by the assessee and
rejected the claim for assessment 2013-14 by observing as under:
That the accounting standards have no bearing as far as
application of Income Tax provisions are concerned.
AS amended in A.Y. 2017-18 have no retrospective effect and
even if so, on the basis of same, no claim can be entertained
under the Act for want of provisions in the Act.
The claim made without valid revised return u/s 139(5) cannot
be entertained by the Assessing Officer (Supreme Court decision
in case of Goetze (India) Ltd v. CIT (157 Taxman 1 (SC)).
12. On an appeal before the Ld.CIT(A), the Ld.CIT(A) agreed with
assessee's contention that profits and gains of the previous year are
required to be computed in accordance with the rebel relevant
accounting standards. The Ld.CIT(A) pleased reliance on decision of
Hon'ble Special Bench of Bangalore Tribunal in case of Biocon Ltd vs
DCIT reported in (2013) 144 ITD 21 which was subsequently affirmed
by Hon'ble Karnataka High Court in case of CIT vs Biocon Ltd reported
in (2020) 121 taxman.com 351.
12.1. The Ld.CIT(A) also agreed with the contention of Jesse that it
was unable to clean the said expenditure at the time of filing of the
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original return of income as the change in accounting standards to
Ind AS was in fact introduce subsequently.
Aggrieved by the observation of Ld.CIT(A), revenue is an appeal for
assessment in 2013-14.
13. The Ld.DR strongly objected for the issue to be considered by this
Tribunal by way of additional ground. The Ld.DR referred to the
aforestated decisions of Hon'ble Supreme Court regarding powers of
this Tribunal to consider legal issues under section 254 of the act,
and submitted that, none of these decisions talk of allowing a
deduction which was not claimed in the return of income/revised
return of income/application under section 119 (2) (b) of the act.
13.1. By referring to the decision by Hon'ble Supreme Court in case
of NTPC (supra), he submitted that, it was a case of non-taxable items
being taxed or a possible deduction denied that emanated from the
return of income. Referring to the decision of Jute Corporation of
India(supra), the Ld.DR submitted that, the issue therein was raised
for the first time before the appellate authorities.
13.2. The Ld.DR submitted that the underlying principle remains at
the ground should come from the order in appeal. He submitted that
issue outside the return of income or assessment order cannot form
part of additional ground for the appellate authorities. It is the
contention of Ld.DR that, only recourse available to the assessee
where a deduction was not claim in the return of income, is by way
of an application under section 119 (2) (b) of the act before the
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competent authority. He thus submitted that the issue before this
Tribunal is not an additional ground of appeal being raised for the
first time either before the Ld.CIT(A) or before this Tribunal, but a new
deduction being claimed for the first time before the appellate
authorities.
13.3. The Ld.DR vehemently submitted that, a deduction can be
claimed by filing the return of income or revised return of income or
if the time for revised return is over then by making an application
before the competent authority under section 119(2)(b) of the act. He
submitted that the judgements nowhere say that a deduction which
should have been claimed in the return of income or revised return
of income or by way of application under section 119(2)(b) of the act
can be claimed before this Tribunal, bypassing established
procedures prescribed in the act.
13.4. He also brought the notice of this Tribunal that an
interpretation of the decisions by Hon'ble Supreme Court referred to
herein above has allowed making claims of deduction before this
Tribunal for the first time created distinction between class of
assessee who is in appeal and vis-a-via those who is not in appeal.
He submitted that conferring greater rights on an assessee who are
in appeal on any issue vis-à-vis those not in appeal cannot be the
intention of the legislature or Hon'ble Supreme Court. He also
submitted that when the Income tax Act itself prescribes a path by
way of an application under section119 (2) (b) of the act, such
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additional claims that does not emanate from the return of Income
should not be entertained by this Tribunal.
13.5. On the contrary, the Ld.AR countered the arguments of the
Ld.DR and submitted as under:
2. The Appellant submits that applying the ratio of Biocon (supra), deduction
for ESOP expenditure is to be granted over the vesting period. In the present
case, even though the Appellant was entitled to claim such deduction at the
time of filing its ITR, it could not do so, as the quantification of the claim was
not available at the relevant time as fair value method [as approved in
Biocon (supra)] was applied only subsequently at the time of preparation of
the financial statements for FY 2016-17 in September, 2017. By then, the
assessment proceedings stood concluded with the passing of the
assessment order dated February 27, 2017
3. The Id. DR, in his submission dated 20th March, 2026 urged that the said
ground could not have been entertained by the CIT(A) and cannot be
entertained by the ITAT for the following reasons-
1) Goetze (supra) does not conclude that a fresh claim can be made
for the first time before the ITAT:
ii) A new claim of deduction cannot be made for the first time before
CIT(A) or the ITAT if it does not emanate from the return of income:
iii) If at all a new claim for deduction is to be made, it can only be
made by way of an application u/s 119(2)(b) of the Act,
iv) Allowing such a claim by the Tribunal would create a distinction
between an assessee in appeal and assessee who is not in appeal-
which could not have been the intention of the legislature.
4. The assessee's submissions qua each of the four arguments of the id. DR
is as follows. As regards argument 1) regarding the relevance of Goetze
(supra), it is submitted that the judgement itself makes it explicit that it only
deals with the powers of an Assessing Officer in entertaining a fresh claim
by way of a letter, and nothing in the judgement has any bearing on the
powers of the ITAT in entertaining fresh claims. In this regard, para 4 of the
judgement is reproduced hereunder-
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"However, we make it clear that the issue in this case is limited to the
power of the assessing authority and does not impinge on the power
of the Income-tax Appellate Tribunal under section 254 of the Income-
tax Act, 1961
5. The aforesaid observation in Goctze (supra) makes it vivid that the ratio
of the judgement has no relevance in construing the width of the ITAT's
powers in entertaining additional claims of deductions.
6. As regards argument in) of the Id. DR that only those claims can be
entertained which emanate from the return of income, it is submitted that
such argument is in the teeth of several judgements of the Hon'ble Supreme
Court and the High Courts. A few judgements dealing with this very aspect
are adverted to hereunder.
7. In the case of Pruthvi Brokers (supra), the assessee sought to make a
fresh claim for deduction u/s. 43B otherwise than by filing a revised return
of income. The question before the High Court was "Whether, on the facts
and circumstances of the case, the Hon'ble Income Tax Appellare Tribunal,
in law, was right in holding that a claim of deduction not made in the original
return and not supported by a revised return, is admissible? The High Court
authoritatively concluded that "A long line of authorities establish clearly
that an assessee is entitled to raise additional grounds not merely in terms
of legal submissions, but also additional claims not made in the return filed
by it The Court further went on to hold that the appellate authorities have
jurisdiction to deal not merely with additional grounds which became
available on account of change or circumstances or law, but with additional
ground which were available when the return was filed
In the case of CIT vs. Central Provinces Manganese Ore Co. Ltd. (1978) (112
ITR 734) (Bom) an additional claim of deduction of export duty paid was
made for the first time before the appellate authorities. The Department
challenged the admissibility of such claim. Such contention was rejected
and it was held by the Hon'ble High Court -"The mere fact that suck a
deduction was not claimed before the Income-tax Officer is in our opinion,
not of amuch importance. If the liability arises then a claim can be made
bona fide at any stage before the higher authority, who it competent to grant
relief In the present case, such a claim was made before the Appellate
Assistant Commissioner but was negatived by him. If the liability is arising
pursuant to a demand made by a department of the Central Government, it
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would be improper on the part of the taxing authority to reagitate the same
matter and contend that since no claim for deduction was made before the
Income-tax Officer, it cannot be made later on before either the Appellate
Assistant Commissioner or the Tribunal when the matter is under
investigation by these authorities in assessment proceedings. Thus, in our
opinion, the Tribunal was right in taking the view that the assessee was
entitled to a deduction."
9. In the case of NTPC (supra), the assessee sought exclusion of certain
interest income on deposits which was erroneously offered to tax. The said
claim was made for the first time before the ITAT by way of a letter. The
Tribunal declined to entertain the additional ground as it was not raised
before the lower authorities. Reversing the Tribunal's decision, it was held
that powers of the Tribunal under section 254 of the Act are expressed in
the widest possible terms and that if, while the appeal is pending, it is found
that non-taxable item is taxed or a permissible deduction is denied, there is
no reason why the parties should be prevented from raising the question for
the first time before the Tribunal
10. In the case of Jai Parabolic (Del), the assessee, by way of an additional
ground filed before the CIT(A) claimed a deduction of expenditure classified
as deferred revenue expenditure in the Balance Sheet and which was not
claimed in the return. The said claim was allowed. On the Department's
appeal challenging the admissibility of such claim, it was held by the High
Court that the appellate authorities are entitled to entertain new claims and
that Goetze (supra) does not denude such power in any manner
11. In the case of Jute Corporation of India Ltd. vs. CIT (1991) (187 ITR 688)
(SC), the assessee raised a claim for deduction of purchase tax by way of
an additional ground before the AAC for the first time, without making such
claim in the return of income. Upholding the admissibility of such clam, the
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Hon'ble Supreme Court held as under "for raising an additional ground
before the Appellate Assistant Commissioner if the ground so raised could
not have been raised at that particular stage when the return was filed or
when the assessment order was made, or that the ground became available
on account of change of circonstances or law. There may be several factors
justifying raising of such new plea in appeal, and each case has to be
considered on its own facts. If the Appellate Assistant Commissioner is
satisfied he would be acting within his jurisdiction in considering the
question so raised in all its
12. The aforesaid judgement was followed by the Hon'ble Bombay High
Court, yet again, in the case of Ultratech Cement Ltd. vs. ACIT (2018) (408
ITR 500)
13. In the humble submission of the assessee, the aforesaid judgements
make it clear that an additional deduction can be claimed before the
appellate authorities even though it was not claimed in the return of income
provided the said claim is made bona fide and for good reasons. The Id. DR,
while arguing to the contrary, has not cited any judgement in support of his
assertion that the additional ground can only pertain to deductions already
claimed in the return of income. In fact, this very argument has been
negatived in the judgements referred to hereinabove.
14. The third argument of the Id. DR that an additional claim for deduction
can be raised only before the Board by way of an application u/s. 119(2)(b)
is equally misconceived. Firstly such an argument militates against the ratio
of the aforesaid judgements which hold that such a claim can be raned
before the appellate authorities. Be that as it may, the argument overlooks
the fact that section 119(2)(b) only deals with the powers and duties of the
Board in dealing with applications which seek redressal of genuine
hardship. There is no reference either to the CIT(A) or the Tribunal in the
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said provision Besides, in the facts of the present case, the assessment
already stood concluded under section 143(3) of the Act. Therefore, there
could be no question of approaching the Board for seeking its permission to
file a revised return of income. Assuming for the sake of argument that the
assessee could approach the Board in the present set of facts u/s 119(2)(b),
the same can still not lead one to conclude that an assessee cannot also
approach the CIT(A) or the ITAT if its appeal is pending before such
authorities. The other redressal mechanism u/s 250 or 254. Reliance in this
regard is also placed on the decision of this Hon'ble Tribunal in the case of
Getinge Medical India Pvt. Ltd. vs. DCIT (2026) (ITA 4872/Mum/24) wherein
it has been held that section 119(2)(b) does not operate as a fetter on the
appellate jurisdiction of the Tribunal which exercises its powers in terms of
section 254 of the Act.
15. The fourth argument of the Id. DR that permitting an assessee to raise
an additional ground before the ITAT would create two unequal classes of
assessees is equally misplaced. Different assessees may be differently
placed and may have different modes of redressal available under the Act.
The right to raise additional grounds is a remedy available to an assessee,
in whose case an appeal is pending before an appellate authority. On the
other hand, in the case of an assessee where no addition is made and,
therefore, no appellate proceedings are pending, the Act provides for an
alternative mechanism under section 119(2)(b) to seek condonation of delay
and appropriate relief from the CBDT Thus, both categories of assessees are
provided distinct but adequate remedies under the Act, depending on their
respective set of facts. The difference in remedies does not amount to
discrimination.
We have perused the submissions advanced by both sides in light of
records placed before us.
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14. The primary objection of the Ld. DR is that the assessee's claim
for deduction, not having been made in the return of income or by
way of a revised return, cannot be entertained at the appellate stage
and that the only recourse available is under section 119(2)(b) of the
Act. We are unable to accept the aforesaid contention.
14.1. At the outset, the reliance placed by the Ld.DR on the decision
in Goetze (India) Ltd. is misplaced. Hon'ble Supreme Court itself has
clarified that the said decision is confined to the powers of the Ld.AO
and does not impinge upon the powers of this Tribunal, under section
254 of the Act. Thus, the said decision cannot be read as a restriction
on the jurisdiction of this Tribunal to entertain a fresh claim. The
relevant observation of Hon'ble Supreme Court is reproduced as
under:
"4. The decision in question is that the power of the Tribunal under section
254 of the Income Tax Act, 1961, is to entertain for the first time a point of
law provided the fact on the basis of which the issue of law can be raised
before the Tribunal. The decision does not in any way relate to the power
of the assessing officer to entertain a claim for deduction otherwise than
by filing a revised return. In the circumstances of the case, we dismiss the
civil appeal. However, we make it clear that the issue in this case is
limited to the power of the assessing authority and does not impinge on
the power of the Income Tax Appellate Tribunal under section 254 of the
Income Tax Act, 1961. There shall be no order as to costs."
14.2. It is now well settled by catena of judicial precedents, including
the decisions of the Hon'ble Supreme Court in NTPC Ltd.(supra) and
Jute Corporation of India Ltd.(supra), as well as decision of Hon'ble
Bombay High Court in Pruthvi Brokers & Shareholders Pvt. Ltd.(supra)
and decision of Hon'ble Delhi High Court in Jai Parabolic Springs
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Ltd.(supra) that the this Tribunal is vested with wide powers to
entertain not only additional grounds but also fresh claims, even if
such claims were not made in the return of income, so long as the
relevant facts are available on record.
14.3. The underlying principle is that the purpose of assessment
proceedings is to correctly determine the taxable income in
accordance with law, and there can be no estoppel against statute.
This Tribunal in the case of Getinge Medical India Pvt. Ltd.(supra),
relied upon by the Ld.AR, also supports the proposition that section
119(2)(b) does not operate as a fetter on the appellate jurisdiction of
this Tribunal.
14.4. We find no merit in the contention of the Ld.DR that an
additional claim must necessarily emanate from the return of income
or the assessment order. Such a proposition stands directly negated
by the aforesaid binding precedents, which clearly recognize the right
of the assessee to raise a new claim before the appellate authorities,
even if the same was available at the time of filing the return but was
not so claimed. In fact, Hon'ble Courts have consistently held that a
legitimate claim cannot be shut out on mere technicalities,
particularly when all necessary facts are already on record.
14.5. The argument of the Ld.DR that section 119(2)(b) provides the
sole remedy is equally untenable. The said provision operates in an
altogether different field and merely empowers the CBDT to condone
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delay in certain cases of genuine hardship. It does not curtail or
override the statutory appellate jurisdiction vested in the Tribunal
under 254 of the Act. The existence of an alternative remedy cannot
be construed as a bar on the exercise of appellate powers.
14.6. On the contrary, we find merit in the submission of Ld.AR that
the choice of remedy, where multiple statutory avenues are available,
lies with the assessee. The contention of the Ld.DR that the assessee
ought to have necessarily invoked the provisions of section 119(2)(b)
of the Act cannot be accepted as a mandate in law. It is a settled
principle that where the statute provides alternative remedies, it is
open to the assessee to opt for the remedy best suited to its facts,
and the existence of one remedy does not operate as a bar against
the exercise of another, particularly when the appellate jurisdiction
is already validly invoked.
14.7. We also take note of the argument advanced by the Ld.DR that
in proceedings under section 119(2)(b), the assessee may not be
entitled to interest on refund arising out of such claim, whereas if the
claim is entertained by this Tribunal, the assessee may become
entitled to such interest. In our considered view, this distinction
cannot be a ground to curtail the statutory powers of this Tribunal or
to deny the assessee a lawful remedy. If a claim is otherwise
admissible in law and is allowed in appellate proceedings, the
consequential relief, including interest on refund, must follow in
accordance with the provisions of the Act. The possibility of a differing
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consequence under an alternative remedy does not justify restricting
the assessee's right to raise a legitimate claim before the appellate
forum.
14.8. As regards the plea of the Ld.DR that entertaining such a claim
would create an impermissible distinction between assessees in
appeal and those not in appeal, we find the same to be devoid of
merit. The Act itself contemplates different remedies in different
situations. An assessee in appeal is entitled to avail the statutory
appellate remedies, including raising additional grounds, whereas an
assessee not in appeal may seek recourse under section 119(2)(b).
The availability of distinct remedies based on the factual matrix does
not amount to discrimination.
14.9. In the facts of the present case, it is not in dispute that the
claim for deduction could not be made at the stage of filing of the
return of income on account of non-availability of the requisite
quantification, which arose only subsequently due to the change in
accounting policy pursuant to the introduction of Ind AS and the
consequent adoption of the fair value method. For Assessment Year
2013-14, it is an admitted position that the assessment proceedings
were still pending before the Ld. AO at the relevant time, and the
assessee had, in fact, raised the claim during the course of
assessment proceedings. However, the same came to be rejected by
the Ld. AO placing reliance on the decision in Goetze (India) Ltd.
Thus, the assessee was prevented from having its claim adjudicated
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on merits at the assessment stage, thereby justifying the action of
the Ld.CIT(A) in entertaining and adjudicating the same.
14.10. In such circumstances, the assessee had no occasion to raise
the claim before the Ld.AO, and therefore, the only efficacious remedy
available was to raise the same before the appellate authorities. The
claim is thus bona fide, arises from the material on record, and its
consideration is necessary to determine the correct taxable income
in accordance with law. Denying such a claim on a mere technicality
would result in taxation contrary to law.
14.11. In view of the aforesaid discussion and respectfully following
the binding judicial precedents, we hold that the assessee is entitled
to raise the impugned claim before this Tribunal. The objection raised
by the Revenue is, therefore, rejected.
14.12. Accordingly, in the interest of justice, we deem it appropriate
to restore the issue to the file of the Ld.AO for the limited purpose of
necessary verification and adjudication of the assessee's claim on
merits. The Ld.AO is directed to examine the claim of deduction in
the light of the material placed on record and in accordance with law,
keeping in view the ratio laid down in the decision of Biocon Ltd.
(supra), as well as the principles enunciated by the Hon'ble Delhi High
Court in PVR Ltd. vs CIT reported in (2022) 145 taxmann.com 331 and
PCIT vs New Delhi Television Ltd. reported in (2017) 398 ITR 57, along
with other applicable judicial precedents. The assessee shall be
afforded adequate opportunity of being heard and is also directed to
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furnish all requisite details in support of its claim. The Ld.AO shall
thereafter decide the issue in accordance with law.
Accordingly, additional ground no.1 raised by the assessee for
assessment year 2011-12 and 2012-13 stands allowed for
statistical purposes.
14.4. Regarding the revenue's Ground no.2 for assessment year
2013-14, we do not find any infirmity in the view taken by the
Ld.CIT(A) and the same is upheld.
15. It is noted that the assessee has raised another additional
ground for Assessment Year 2012-13 with regard to the claim of
Foreign Tax Credit (FTC) in respect of taxes paid in Japan in
accordance with the provisions of the Double Taxation Avoidance
Agreement between India and Japan.
We find that the said issue requires proper examination and
verification in order to determine the correct tax liability of the
assessee in India. Accordingly, in the interest of justice, we deem it
appropriate to restore this issue to the file of the Ld. Assessing Officer
for necessary verification. The Ld.AO is directed to examine the
assessee's claim of FTC in accordance with law and the applicable
provisions of the DTAA, after affording the assessee a reasonable
opportunity of being heard. The assessee is also directed to furnish
requisite details and supporting evidences in support of its claim.
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Accordingly, the additional ground raised by the assessee for
assessment year 2012-13 stands allowed for statistical purposes.
In the result, the appeals filed by the assessee are partly allowed
and the appeals filed by the Revenue stands dismissed.
Order pronounced in the open court on 30/03/2026
Sd/- Sd/-
(BIJAYANANDA PRUSETH) (BEENA PILLAI)
Accountant Member Judicial Member
Mumbai
Dated: 30/03/2026
SC Sr. P.S.
Copy of the order forwarded to:
(1)The Appellant
(2) The Respondent
(3) The CIT
(4) The CIT (Appeals)
(5) The DR, I.T.A.T.
True Copy
By order
(Asstt. Registrar)
ITAT, Mumbai
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ANNEXURE 'A'
IN THE INCOME TAX APPELLATE TRIBUNAL
"J" BENCH, MUMBAI
BEFORE SMT. BEENA PILLAI (JUDICIAL MEMBER)
&
SHRI GIRISH AGRAWAL, (ACCOUNTANT MEMBER)
I.T.A. No. 3432/Mum/2019
Assessment Year: 2008-09
Oracle Financial Services Vs. Assistant Commissioner of
Software Limited Income Tax, Range 13(1)(1),
Oracle Park, Off Western Mumbai
Express Highway
Goregaon(East)
Mumbai - 400063
[PAN: AAACC1448B]
(Appellant) (Respondent)
I.T.A. No. 3995/Mum/2019
Assessment Year: 2008-09
Assistant Commissioner of Vs. Oracle Financial Services
Income Tax, Range 13(1)(1), Software Limited
Mumbai Oracle Park, Off Western Express
Highway
Goregaon(East)
Mumbai - 400063
[PAN: AAACC1448B]
(Appellant) (Respondent)
Assessee by Shri G.C. Srivastava/Shri Sukhsagar Syal, A/Rs
Revenue by Shri Pankaj Kumar, CIT D/R
Date of Hearing 27.01.2026
Date of Pronouncement 19.02.2026
ORDER
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Per Smt. Beena Pillai, JM:
The present cross-appeals arise out of the order dated 01/03/2019 passed by the Ld. CIT(A)-57 (hereinafter referred to as the "Ld. CIT(A")] for A.Y. 2008-09 on the following grounds of appeal:-
2. The assessee has raised the following grounds of appeal:-
"GROUNDS OF APPEAL The grounds of appeals (including sub-grounds) set below are distinct, separate and without prejudice to each other:
Ground No. 1 - Order bad in law 1.1 The impugned order passed by learned CIT(A) is bad in law to the extent the CIT(A) has affirmed the addition made in the assessment order.
Ground No. 2 - Disallowance under section 14A of the Act 2.1 On the facts and circumstances of the case and in law, the CIT(A) erred in upholding disallowance of Rs. 165,615 under section 14A of the Act read with Rule 8D of the Income Tax Rules ("the Rules") by treating the said amount as attributable to earning of exempt interest income without appreciating the fact that no expenditure was actually incurred to earn interest income claimed exempt while computing total income.
Ground No. 3 - Retention of revenues by overseas subsidiaries in Singapore and Netherlands 3.1 The learned CIT(A) erred in rejecting the value of international transaction as recorded in the books of accounts and determining a new arm's length price in substitution of the arm's length price determined by the Appellant.
3.2 On facts of the case and in law, the CIT(A) erred and violated the principle of natural justice by not giving due cognizance to the detailed analysis of comparable companies submitted by the Appellant in its TP Study report.30
I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited 3.3 The learned CIT(A) erred in considering Net Profit Margin (NPM) of 23.40% as against NPM of 22.31% earned by the Appellant as per the TP study report, resulting in upholding of TP adjustment to the extent of Rs. 255,428,000.
3.4 After accepting the Appellant as the tested party, the learned CIT(A) ought to have relied upon benchmarking carried out by the appellant in the Transfer Pricing Study. However, the CIT(A) erred in rejecting some of the companies, which were selected by the Appellant and considering some additional companies as comparable to the Appellant without providing any cogent reasons in the Order.
3.5 The CIT(A) considered five additional companies as comparable to the Appellant out of 11 companies which were considered as comparable in the CIT(A) order in the case of the Appellant for AY 2006-07 and AY 2007-08. The rest of the 6 companies considered as comparable by the CIT(A) in order in case of the Appellant for AY 2006-07 and AY 2007-08 were rejected for the reason of data insufficiency. The additional five companies considered as comparable by the CIT(A) are listed below:
1. Helios and Matheson Information Technologies Limited
2. ICSA Limited
3. KALS Information Systems Limited
4. Saksoft Limited
5. Megasoft Limited 3.6 The CIT(A) has erred in not providing methodology followed or benchmarking analysis performed for searching the additional five comparable companies. The CIT(A) has erred in considering five additional companies as comparable to the Appellant without clarifying how the Functions, Assets and Risks of these companies was comparable to the Functions, Assets and Risks of the Appellant.
3.7 The CIT(A) erred in rejecting certain companies from the final set of comparable companies as per TP Study Report prepared by the Appellant on an ad-hoc and unscientific basis.
3.8 The CIT(A) erred in using single year NPM for arriving at the appropriate Arm's Length Margin and thereby rejecting 2 functionally comparable companies out of 16 comparables used by the Appellant in its TP Study report stating that the sufficient data relating to companies was not available. The said 2 comparables are as listed below:
1. Akshay Software Technologies Limited 31 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited
2. R Systems International Limited 3.9 The CIT(A) erred in rejecting 9 comparable companies concluding that the said comparables are consistent loss making or are earning returns not comparable to the appellant. The said 9 comparables are as listed below:
1. B2B Software Technologies Ltd
2. Birla Technologies Ltd
3. Compulink Systems Ltd
4. Exensys Software Solutions Limited
5. Kale Consultants Ltd
6. Maars Software International Ltd
7. PS I Data Systems Ltd
8. Sasken Communication Technologies Ltd
9. Tata Elxsi Ltd 3.10 The CIT(A) erred in cherry picking comparables to reach pre-conceived conclusions, with the sole object of rejecting comparables selected by the Appellant and arriving at skewed results.
3.11 The CIT(A) erred in arbitrarily selecting certain companies which are earning super normal profits and not functionally comparable to the appellant and adding those in the final set of comparables on an ad hoc basis.
Ground No. 4 - The benefit of +/- 5% variation computed on Arm's length Price 4.1 Without prejudice to the above, the learned CIT(A) failed to provide the benefit of variation / reduction of 5 percent from the arithmetic mean as provided in proviso to Section 92C(2) of the Act while determining Arm's Length Price for the adjustment made to the international transaction of the Appellant.
The appellant craves leave to add, to amend, alter, vary, omit, or substitute the aforesaid grounds of appeal or add a new ground or grounds of appeal at any time before or at the time of hearing of the appeal."
2.1. The revenue has raised the following grounds of appeal:-
1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO to consider training income of Rs.
27,99,71,864/- for computing deduction u/s 10A of the I.T. Act without 32 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited considering the fact that the training was not on account of export of software but the training was after the delivery of software and it was in the nature of additional service not eligible for Section 10A computation.
2. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO not to exclude telecommunication expenses of Rs. 1,83,31,155/- from the export turnover, without considering the specific provision of the Act given in Clause (iv) of Explanation 2 to Section 10A that the Export Turnover is taken after reducing the amount of telecommunication expenses relating to the various 10A units. The assessee has incurred the above telecommunication expenses in foreign currency in connection with the development & export of its software and just because no separate invoice is raised on the customers towards these expenses, the assessee cannot include it in export turnover.
3.1 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in directing to restrict the TP adjustment on account of retention of excess revenue by the foreign AEs of the assessee of Rs. 25,54,58,000/- as against Rs. 62,25,55,098/- charged by the TPO without appreciating the facts and circumstances of the case and analyzing the same on the basis of FAR analysis?
3.2 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in not upholding the decision of the TPO in adopting AEs as tested party disregarding the finding of the TPO that the functions performed by the assessee are more complex as compared to the functions performed by the AEs?
3.3 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in not appreciating the facts that the assessee performs complex functions being a provider of comprehensive information technology solutions to the global financial services industry through a comprehensive range of products and customized service offerings, whereas the AEs perform very simple function of marketing support services abroad for the products and services of the assessee and that comparability, if assessee performing complex functions is taken as tested party, would lead to skewed and suboptimal results compared to that for AEs performing simple functions and hence, in such circumstances, it is always advisable to choose the AEs as tested party which would lead to easier and near-optimal comparability results?
3.4 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in not appreciating the facts that the Assessee is transacting 33 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited with its AEs who are merely marketing entities and all the complex functions are being carried out by the Assessee?
3.5 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in not appreciating the facts that the assessee incurs substantial expenditure for the purpose of recruitment of employees and such recruited employees have been deputed to the rolls of AEs without being appropriately compensated for such cost of recruitment incurred by the Assessee?
3.6 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in not appreciating the facts that during the year the assessee has reimbursed huge amounts to its AEs on account of reimbursement of cost of salary paid by the AEs to assessee's employees which indicates that the Assessee routinely sends its employees for onsite work to various countries, where the AEs actually conclude the deal on behalf of the Assessee, which clearly gives a picture that the salary of the employees paid by the AEs are reimbursed by the Assessee, which shows that the AEs are merely conduit companies without carrying out any substantial activities?
3.7 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in not appreciating the facts that the invoices raised by the AEs to their customers have been raised back to back as and when the same have been raised by the Assessee on AEs, which itself discloses that there is no actual value addition done by these AEs and they are merely acting as conduit between the Assesse and the end customers?
3.8 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in not appreciating the facts that there were differences in the retention percentages within the AEs which is not uniform and the said retention percentage is not decided on scientific basis and the same is arbitrary?
3.9 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in not appreciating the facts that the revenue earned by the assessee during the year is majorly coming from existing customers and thus evinced that the AEs are involved in very few fresh license deals and thereby the remuneration taken by them do not commensurate with the FAR activities carried out by them?
3.10 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in ignoring the principle enunciated by the OECD in its guidelines 2010 at paragraph No.7.36 that in what is essentially an agency 34 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited function, the pass-through cost should be excluded and the agency functions are to be compensated only on cost plus basis?
3.11 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in holding that 'there are several challenges in accessing reliable and readily available data in case of the AEs despite they being lesser complex entities', though the assessee is duty-bound to produce the financials of the AEs under Rule 10D(3)(d) which the assessee has duly produced and that there is no difficulty in accessing the reliable data pertaining to AEs?
3.12 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in not upholding the adoption of AEs as tested party in view of the facts and circumstances in the above grounds and as the AEs have simply performed marketing agent function for the assessee and it is ideal to remunerate them on simple cost plus method being the most appropriate method under the facts and circumstances, instead of taking assessee performing complex functions as tested party and using the least appropriate method of TNMM under the given facts and circumstances?
3.13 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in holding that the 'TPO imposed secret comparables without confronting them to the assessee and without providing an opportunity to the assessee to examine in a gross travesty of natural justice', despite the fact that the TPO listed the comparables very well in his order and without prejudice, if felt adequate opportunity has not been provided to assessee, nothing prevented the CIT(A) to herself giving the opportunity, powers being coterminous with that of the TPO or calling for a remand report from TPO u/s 250(4) r.w.r. 46A with a direction to give opportunity to the assessee?
3.14 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in not appreciating the facts that the retention percentage allowed to the Oracle entities by the TPO was more than fair enough to allow mark up of 10% over cost to the AEs on a consistent basis year-on-year and in view of the above facts, whether the CIT(A) is justified in observing that 'the TPO has randomly considered benchmarking results and arrived at adhoc margin of cost plus 10%'?
3.15 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in choosing the assessee as tested party without giving any cogent reasons?
35I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited 3.16 Whether on the facts and circumstances of the case and in law, without prejudice, after having taken the assessee as the tested party, the Ld. CIT(A) is correct in herself adopting ten comparables, choosing five from assessee's list of sixteen comparables, with her own five comparables, without giving cogent reasons and without giving opportunity to the TPO, thus violating Rule 46A?
3.17 Whether on the facts and circumstances of the case and in law, without prejudice, after having taken the assessee as the tested party and after having chosen five comparables herself under external TNMM for benchmarking the transaction, the Ld. CIT(A) is correct in not furnishing the entire working for arriving at the adjustment of Rs. 25,54,58,000/-?
4.1 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in deleting the adjustment of Rs. 1,97,93,267/- made on account of interest chargeable on receivables from AEs on the pretext that 'Nil interest has been charged by the assessee on the receivables from Non- AEs which could be taken as existing internal CUP and therefore no interest can be charged in the case of AE, without analyzing and comparing the facts of quantum and period of such receivables relating to non-AEs and on what similar grounds they could be taken as internal CUP?
4.2 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in deleting the interest on receivables without appreciating the facts that the AE had already collected the receivables from the end customers and have huge cash balances at bank, earning huge amount of interest on such balances from their bank accounts at the cost of assessee, without paying the amounts due to the assessee in time and without compensating the assessee?
4.3 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in deleting the interest on receivables without appreciating the facts that two of the AEs were remitting the proceeds within normal credit period of 60 days, whereas the third one was causing inordinate delay in making payments without any cogent reason, on which interest has been charged?
4.4 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in deleting the interest on receivables without appreciating the facts that the AE has earned interest on the bank balance which was built up from collections made from the customers on behalf of assessee since the AE just functions as a marketing agent of the assessee without by itself making any value addition?
36I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited 4.5 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in observing that the TPO has come to an erroneous conclusion that the rates of interest charged for both the AEs in Mauritius and USA have to be same', whereas the TPO in his order has worked out the same on the basis of the interest charged by the Assessee from its AEs plus 200 basis points?
5.1 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in deleting the interest Rs. 1,46,58,952/- charged on capital contribution being loan in nature given to the AE - OFSS America, without appreciating the facts and basic tenets of transfer pricing?
5.2 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in not remanding the case u/r 46A when she observed in her order that 'the appellant also submitted a copy of share certificate received by the Appellant from its AE; the AE, who is WOS of the Appellant has confirmed via letter that the capital contribution received by them is in the nature of additional paid-in capital, which forms a part of the stockholder's equity which amounts to admitting new evidence without giving opportunity to the TPO and more so, when the TPO clearly observed in his order that no share certificate was issued to the assessee towards the capital contribution and that the assessee has failed to bring any evidence on record?
5.3 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in observing that the 'TPO erroneously characterized the transaction as a loan transaction without adducing any factual evidence to support same', ignoring the facts provided by the TPO in his order that the authorized share capital of the AE is only $100 and the value of one share issued so far is $1 remained as it is constant from earlier years and even if taken that the capital contribution is towards remaining authorized share capital of $99, there is no way the capital contribution of $119,99,901 ($120,000 - $99) could be taken as capital contribution towards paid-up equity shares as the authorized share capital and so, the remaining capital contribution ($119,99,901) to AE which cannot be towards equity has to be necessarily considered as loan and interest to be charged, otherwise it leads to base erosion to India?
5.4 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in relying on RBI permission to make capital contribution, as it cannot be stamp on ALP determination and erred in not adhering to the decision of Hon'ble Punjab & Haryana High Court in Coca Cola India Inc. v. ACIT (309 ITR 194) wherein it has been held that the Income tax Authorities are not bound by the RBI for determining ALP?
37I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited 5.5 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in relying on the decisions in the cases of S.A. Builders Ltd. CIT (2007) 158 Taxman 82 (SC) and Sony India (P) Ltd. vs DCIT (2008-TIOL- 439-ITAT-DEL) which are distinguishable on facts?
6.1 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in deleting the addition made of Rs. 3,17,08,761/- u/s. 92CA(4) of the I.T. Act, 1961 on account of fees paid to AEs for marketing of customization work of the assessee company without appreciating the facts of the case and the findings made by the Transfer Pricing Officer?
6.2 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in deleting the addition made on account of fees paid to AEs for marketing of customization work of the assessee company without appreciating that the customization assignments do not require any marketing efforts by the AEs as the end customer has already been identified by the AEs for the sale of the product?
6.3 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in deleting the addition made on account of fees paid to AEs for marketing of customization work of the assessee company without appreciating that during the TP proceedings the assessee failed to bring on record any material substantiating the efforts taken by the AEs for marketing the customization assignment?
6.4 Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is correct in deleting the addition made on account of fees paid to AEs for marketing of customization work of the assessee company without appreciating that the assessee has not been remunerating the third party distributors for the marketing customization, nor any material has been brought on record to prove that in case of third party distributors, marketing of customization assignment had been done by the assessee itself?
7. The appellant prays that the order of CIT(A) on the grounds be set aside and that of the Assessing Officer be restored.
8. The appellant craves leave to add, amend or alter all or any of the grounds of appeal which may be necessary."
3. Brief facts of the case are as under:-
38I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited The assessee company is a subsidiary of M/s Oracle Global (Mauritius) Ltd. and is engaged in providing comprehensive information technology solutions to the global financial services industry through a wide range of software products and customized service offerings. The assessee filed its e-return of income on 29/09/2008 declaring total income of ₹41,35,59,943/- under the normal provisions of the Income-tax Act, 1961 and book profit of ₹419,75,16,583/- u/s 115JB of the Act. The return was filed through the e-filing module and was accompanied by the Balance Sheet, Profit & Loss Account and Tax Audit Report u/s 44AB. The return was processed u/s 143(1) on 03/06/2009.
3.1. Subsequently, the case was selected for scrutiny and notice u/s 143(2) was issued on 04/08/2009. Thereafter, notice u/s 142(1) dated 04/07/2011 was issued. In response, the assessee's authorised representatives, attended the proceedings from time to time and furnished the details called for. The case was discussed during the course of assessment proceedings.
3.2. The Ld. AO noted that the assessee had entered into international transactions with its Associate Enterprise [AE] exceeding the threshold limit. Reference was, therefore, made to the Transfer Pricing Officer [TPO] to determine the Arm's Length price [ALP] of the transactions. The Ld. TPO, upon receipt of the reference, called upon the assessee to furnish economic details of the international transactions in Form 3CEB. From the details furnished, 39 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited the Ld. TPO noted that the assessee had entered into the following international transactions:-
Sr. No. Nature of international transactions Amount (Rs. in '000s) Sale / purchase of banking software 1 6,061,927 product licenses IT solutions and consulting services 2 6,167,807 rendered / availed 3 Interest on loan granted to AEs 22,193 4 Reimbursement / recovery of expenses 4,716,709 5 Capital contribution 1,224,129
4. After calling for various details in respect of the services rendered by the assessee, the Ld. TPO proposed adjustment of ₹69,81,44,206/- as under:-
Sr. International Arm's Length
Transaction Adjustment
No. Transaction Value Price
Excess retention of revenues by
1 the Associated Enterprises in Nil 62,25,55,098 62,25,55,098
Singapore & Netherlands
2 Customization fees 27,42,03,387 Nil 3,17,08,761
3 Interest on accounts receivable Nil 1,97,93,267 1,97,93,267
Interest undercharge on loan to
4 2,21,93,373 3,16,21,501 94,28,128
Associated Enterprises
Interest on capital contribution
5 Nil 1,46,58,952 1,46,58,952
treated as loan
4.1. Upon receipt of the order passed u/s 92CA(3), the Ld. AO issued notice to the assessee dated 09/11/2011 seeking an explanation as to why the adjustment proposed by the Ld. TPO should not be made. The assessee filed its detailed submission dated 16/10/2017 in reply to the notice issued by the Ld. AO. The Ld. AO observed that the 40 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited submissions furnished by assessee were the same as those made before the Ld. TPO and, since the Ld. TPO had already taken into consideration the contentions of assessee, the suggested adjustments were held to be in accordance with the provisions of section 92CA(4) of the Act. The Ld. AO thus passed the assessment order making adjustment in the hands of assessee as proposed in the order passed u/s 92CA(3).
Aggrieved, by the order of the Ld. AO, assessee preferred an appeal before the Ld. CIT(A).
5. The Ld. CIT(A), after dealing with the issues raised by assessee and taking into consideration various orders passed in assessee's own case on identical issues, partly allowed the appeal.
Aggrieved by the order of the Ld. CIT(A), both the Revenue as well as assessee are in appeal before the Tribunal.
Assessee's Appeal
6. At the outset, the Ld. AR submitted that, in so far as the appeal filed by assessee is concerned, assessee does not wish to press Ground No. 1 and Ground No. 5.
6.1. It is submitted that Ground No. 1 is general in nature.
41I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited 6.1.1. In respect of Ground No. 5, assessee filed following letter seeking withdrawal of the same, which is scanned and reproduced as under:-
42I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited Accordingly, Ground No. 1 and Additional Ground No. 5 raised by the assessee stand dismissed.43
I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited
7. Ground No. 2 raised by the assessee relates to disallowance u/s 14A in respect of interest expenditure. The Ld. AR submitted that considering the smallness of the amount involved, the assessee does not wish to press this ground for the year under consideration. However, liberty was sought to contest the issue in appropriate circumstances in any other assessment year.
In view of the submission of the Ld. AR, Ground No. 2 is dismissed as not pressed, with liberty as aforesaid.
8. Ground Nos. 3 & 4 relates to the issue of retention of revenue by overseas subsidiaries located in Singapore and Netherlands. The Ld. AR submitted that this issue also arises in Ground Nos. 3.1. to 3.17, raised by the Revenue.
Brief facts leading to the issue are as under:
8.1. It is submitted that, the assessee is engaged in providing information technology solutions to the global financial services industry through a comprehensive range of proprietary software products and customized services. The assessee designs, develops and markets software products and also provides software development services. The Ld. AR submitted that the assessee has subsidiaries in the USA, Netherlands and Singapore, which are engaged in marketing, sales and distribution of software products developed by assessee and customized solutions in their respective jurisdictions. These associated enterprises (AEs) enter into contracts 44 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited with third-party customers in their own names and subsequently outsource the execution of such contracts to the assessee. It is noted that, for rendition of such services, the AEs have entered into Marketing Services Agreements and License Agreements with the assessee governing these transactions.
8.2. Referring to the agreements and the details of the AEs, the Ld. AR submitted that the business model followed by the assessee for the transaction is revenue retention model, wherein the AEs retain 30% to 50% of the total contract value for performing marketing, distribution, administrative and brand management functions in their respective territories, while the balance revenue is remitted to the assessee for execution of software development and related services.
8.3. For benchmarking the international transactions, the assessee adopted the Transactional Net Margin Method (TNMM) as the most appropriate method and reported a net profit margin of 22.31% for the year under consideration. The assessee treated itself to be the tested party and selected 16 comparable companies with an arithmetic mean margin of 12.63% and, accordingly, concluded that the transactions with its AEs to be at arm's length.
8.4. The Ld. AR submitted that the Ld.TPO, however, disregarded the assessee as the tested party and instead considered the AEs located in the overseas jurisdictions as the tested parties, treating 45 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited them as entities performing significant entrepreneurial and distribution functions. The Ld.AR submitted that such an approach adopted by the Ld.TPO is contrary to transfer pricing principles as the functional profile of the AEs involved are not verifiable. The Ld. TPO arrived at the above conclusion on the premise that the AEs directly enter into contracts with third-party customers and are responsible for execution and performance of those contracts.
8.4.1. It is submitted by Ld.AR that, the Ld. TPO also presumed that the AEs were rendering only marketing support services and held that for such functions they should earn only a 10% margin on marketing costs.
8.5. Accordingly, the Ld. TPO concluded that the AEs in the Netherlands and Singapore were earning profit margins of 73.27% and 35.82%, respectively, on apportioned marketing costs. At this juncture, the Ld. TPO ignored the AE based in the USA on the ground that it had incurred losses during the year.
8.6. The Ld. AR submitted that the assessee granted its AEs the right to distribute its products to end customers in their respective jurisdictions under license agreements. It is submitted that, the AEs enter into contracts with end customers and sold the assessee's products. He submitted that the AEs, being marketing and distribution entities, performed value-added functions and were incentivized to generate business and expansion and ensured 46 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited significant market presence. It was further submitted that since the contracts were entered into by the AEs with end customers in their jurisdictions, the entire contract value was received and recorded as revenue in the books of the AEs, thereafter as per the Master Service Agreement, the AEs retained an agreed percentage of revenue towards the functions performed by them and remitted the balance to the assessee as consideration for subcontracted work. In the books of the AEs, the retained portion was accounted for as cost of sales.
8.7. The Ld. AR submitted that the transfer pricing study report categorized the assessee as a full-fledged risk-bearing entity, whereas the AEs were exposed primarily to market risks in their respective jurisdictions. He submitted that the assessee derived and executed the projects, while the AEs coordinated the projects and provided on-
site services through the employees of assessee. It was submitted that, necessary employees of the assessee were deputed to the AEs for on-site services, and the assessee reimbursed the entire cost of such employees.
8.8. The Ld. AR further submitted that an identical issue arose in the assessee's own case for A.Y. 2006-07 in ITA No. 1473/Mum/2018, order dated 23/06/2023, wherein the Tribunal, after considering similar facts, accepted the benchmarking adopted by the assessee by treating assessee to be the tested party. This Tribunal accepted the net profit margin of the assessee on the ground that it fell within the permissible tolerance range vis-à-vis comparables. The Ld.AR 47 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited submitted that though the Revenue preferred an appeal before the Hon'ble Bombay High Court on various issues, this issue was not contested therein and, therefore, the view taken by the Tribunal stands accepted by the Department and has attained finality.
8.9. On the other hand, the Ld. DR relied on the orders of the authorities below.
We have perused the submissions advanced by both sides in light of the material placed before the Tribunal.
9. It is an admitted position that the benchmarking approach adopted by the Ld. TPO for A.Y. 2006-07 has been identically followed for the year under consideration. The Ld. TPO rejected the assessee as the tested party on the premise that the AEs were performing simple marketing and customization functions. It is not in dispute that the revenue model for the year under consideration is identical to that in A.Y. 2006-07. Following the earlier approach, the Ld. TPO treated payments to AEs at cost plus 10% markup as the arm's length price.
9.1. It is further noted that the Ld. TPO did not reject the comparables adopted by the assessee. However, the Ld.CIT(A), while adjudicating the issue, restricted the comparable set to 11 companies (consistent with A.Y. 2016-17). The arithmetic mean margin of these 11 comparables was computed at 23.40% as against the assessee's 48 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited margin of 22.31%. The Ld.CIT(A) accordingly restricted the adjustment to ₹25,54,28,000/-.
9.2. Under the transfer pricing provisions, the "tested party" is the entity to which the transfer pricing method is applied for the purpose of benchmarking an international transaction or a specified domestic transaction. Although the term "tested party" is not expressly defined in the Act, the concept is recognized in Rule 10B and the OECD Transfer Pricing Guidelines and has been consistently followed in Indian jurisprudence. The tested party is ordinarily the entity which is the least complex of the associated enterprises involved in the transaction and for which reliable and comparable uncontrolled data is available. In selecting the tested party, regard must be had to the nature of functions performed, assets employed, and risks assumed (FAR analysis). Generally, the entity with a simpler functional profile, limited risks, and no ownership of unique intangibles is chosen as the tested party, since its margins can be more reliably benchmarked using external comparables. While in most cases the Indian entity is selected as the tested party, there is no legal bar to selecting the foreign associated enterprise as the tested party, provided adequate and reliable data relating to comparables in the relevant foreign jurisdiction is available and the selection leads to a more reliable determination of the arm's length price. The selection of the tested party must, therefore, be guided by the principle of availability of reliable data and the degree of comparability, with the overarching 49 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited objective of arriving at the most appropriate method and the most reliable measure of arm's length results.
9.3. In the present case, the AEs of the assessee are located in the Netherlands and Singapore and are stated to be rendering services in relation to marketing, sales and distribution of software products developed by the assessee, as well as facilitating customised solutions to end users through the employees of the assessee. The Ld. TPO, however, selected the AEs as the tested party. It is an accepted principle that the tested party should ordinarily be the least complex entity for which reliable and comparable uncontrolled data is available. While it is true that the AEs are stated to be performing marketing and distribution support functions in their respective jurisdictions and the assessee is the developer and owner of the software products undertaking significant functions, the selection of the foreign AEs as the tested party would necessarily require the availability of reliable and verifiable comparable data in the respective foreign markets.
9.4. On perusal of the record, it is noted that the Ld. TPO has not brought on record any comparable uncontrolled transactions pertaining to entities operating in the Netherlands or Singapore. On the contrary, the Ld. TPO has proceeded to accept and rely upon the comparables selected by the assesse from the Indian jurisdiction. This approach, in our considered view, is inherently inconsistent with the selection of the foreign AE's as the tested party. Once the AE's 50 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited are chosen as the tested party, the benchmarking exercise ought to have been carried out with reference to comparables operating in similar economic and geographical markets as those of the AE's. In the absence of such an exercise and in the absence of reliable foreign comparables, the selection of the AE's as the tested party does not satisfy the requirement of arriving at the most reliable arm's length result.
Accordingly, we hold that the Ld. TPO erred in selecting the foreign Aes as the tested party in the facts of the present case.
9.5. We find that the Ld. CIT(A), while granting partial relief to the assessee, restricted the transfer pricing adjustment only to the extent of the difference between the margin of the assessee and that of the comparables. However, the Ld. CIT(A) failed to extend the benefit of the tolerance band of ±5% as provided under the proviso to section 92C(2) of the Act. The statutory proviso clearly mandates that where the variation between the arm's length price determined and the price at which the international transaction has actually been undertaken does not exceed the prescribed tolerance range, the transaction price shall be deemed to be at arm's length.
9.6. We note that the margin of the assessee has been computed at 22.31%, whereas the margin of the comparables has been determined at 23.40%. The difference between the two margins thus works out to 1.09%. In terms of the proviso to section 92C(2) of the 51 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited Act, where the variation between the arm's length margin and the margin declared by the assessee does not exceed the prescribed tolerance band of ±5%, the transaction price is required to be accepted as being at arm's length. Since the variation in the present case is well within the permissible range, no transfer pricing adjustment is called for.
The Ld. CIT(A), therefore, was not justified in restricting the addition to the difference in margins without granting the benefit of the tolerance band. We accordingly direct the deletion of the transfer pricing adjustment.
Accordingly, Ground Nos. 3 and 4 raised by the assessee are allowed and Ground Nos. 3.1 to 3.17 raised by the Revenue stand dismissed.
Revenue's Appeal
10. In the Revenue's appeal, Ground Nos. 1 and 2 are directed against the deduction allowed by the Ld. CIT(A) under section 10A of the Act.
10.1. Both sides submitted that the issue is squarely covered by the decision of the co-ordinate Bench of the Tribunal in assessee's own case for A.Ys. 2002-03 to 2005-06. The Ld. AR submitted that relevant orders passed by this Tribunal on this issue are placed in Paper Book, Volume-2. It was further submitted that the Revenue 52 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited had preferred appeal before the Hon'ble Bombay High Court against Tribunal order for A.Y. 2002-03 in ITA No. 2352/2011, and a copy of the order passed by the Hon'ble High Court is placed at page 3 of Paper Book, Volume-2 wherein the Hon'ble High Court dismissed the ground on this issue. The Ld. AR submitted that thereafter the revenue has accepted the position regarding computation of deduction under section 10A of the Act. He placed also reliance on the decision of the Hon'ble Supreme Court in the case of CIT vs. HCL Technologies Ltd. reported in (2018) 404 ITR 719 (SC).
10.2. On the contrary, the Ld. DR relied on the orders of the authorities below.
We have perused the submissions advanced by both sides in the light of the material placed before us.
11. The Ld.AR submitted that, Ld.AO during the draft assessment stage disallowed following while computing deduction u/s 10A of the Act:-
a) Training income received.
b) Telecommunication expenses.
It is submitted that, these were excluded from export turnover for purpose of computing deduction u/s 10A of the Act.
11.1. The Ld.AR submitted that, Ld. AO during the assessment proceedings, held that, training income should be excluded for the 53 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited purposes of computing deduction under section 10A of the Act. The assessee contended that the training income was intrinsically linked to the business of the undertaking and was earned in the course of its eligible business operations. It was explained that training forms an integral part of the software products sold to customers, as effective use of the software requires proper training; without such training, the usability and commercial viability of the products would be adversely affected. It was further submitted before the Ld. AO that there exists a direct nexus between the software products, the profits and gains of the undertaking, and the income derived from training activities. The assessee thus submitted that the training income is eligible for deduction u/s 10A of the Act.
11.2. The submissions of the assessee were not accepted by the Ld. AO, and disallowed the claim in respect of training income while computing the deduction u/s 10A of the Act by excluding the same from the export turnover. The assessee submitted that although such expenses were incurred, they were not recovered separately from customers. It was contended that no adjustment on this account was warranted either in the export turnover or in the total turnover for the purpose of computing deduction u/s 10A of the Act.
11.3. The Ld.AR submitted that, the Ld. AO, while computing the deduction u/s 10A in the hands of the assessee, excluded the amount of telecommunication expenses relating to various 10A units 54 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited from the export turnover, without reducing the same from the total turnover.
11.4. Before the Ld.CIT(A), the assessee's contention was considered in the light of various decisions of the Hon'ble Supreme Court as well as the co-ordinate Bench decision in the case of the assessee for the preceding assessment years. In respect of the income earned by the assessee from training activity, the Tribunal, for A.Y. 2002-03, decided the issue in ITA No. 3699/Mum/2006 and CO No. 366/Mum/2006 vide order dated 31/08/2010, wherein it was held that income derived from training given to customers for use of software developed by the assessee was inextricably connected to the export of software and, therefore, had to form part of both total turnover as well as export turnover for computing deduction u/s 10A of the Act. The said order was upheld by the Hon'ble Bombay High Court vide order dated 24/03/2014 in ITA No. 2352/2011. The Ld. AR emphasized that the assessee was erstwhile known as i-Flex Solutions Ltd., at the time when the Hon'ble High Court passed the aforesaid order.
11.5. In respect of telecommunication expenses forming part of export turnover, the issue is no longer res integra and is covered by the ratio laid down by Hon'ble Supreme Court in the case of CIT vs. HCL Technlogies Ltd. (supra).
55I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited 11.6. In view of the aforesaid observations of the co-ordinate Bench of the Tribunal in the assessee's own case, as well as the decision of the Hon'ble High Court affirming the view taken by the Tribunal on both the issues, we do not find any force in the grounds raised by the Revenue and the view taken by Ld.CIT(A) is upheld. The Ld.AO/TPO is thus directed to compute the deduction under section 10A as per the ratio laid down by Hon'ble Supreme Court in case of CIT vs. HCL Technlogies Ltd. (supra) .
Accordingly, Ground Nos. 1 and 2 raised by the Revenue stand dismissed.
12. Ground Nos. 4.1 to 4.6 raised by the Revenue relate to deletion of :
Notional interest receivable on delayed receivables and, Interest charged in respect of loan to AE.
Notional interest receivable on delayed receivables Brief facts leading to the issue are as under:
12.1. The Ld.TPO noted that in respect of recivables from Netherland and Singapore AE's, the Ld.TPO noted that most of the outstanding amounts were received by the assesse within the credit period of 60 days. However there was delay in remitting the recivables by the US AE. It was submitted that the amounts remained outstanding from the US subsidiary because the subsidiaries had not collected the 56 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited dues from the end customers and, therefore, the same did not represent any advantage conferred upon the overseas subsidiaries.
12.2. It is submitted that the Ld.TPO considered the time lag between the payment received by the AE's from the end customers and the remittance made by the AE's to the assesse. The Ld.TPO rejected internal CUP, since the assesse charged NIL interest to third parties in case of delay in payment by them beyond the payment terms. The adjustment was proposed by the Ld.TPO on the premise that subsidiaries have delayed in remitting the dues after having collected the same from the end customers.
12.3. It is submitted that the adjustment was computed by adding 200 basis points on ad hoc basis to the rate of interest, i.e., 5.18%, charged by the assesse in its own case of loan granted to one of its AE. The Ld.TPO thus considered the average quarterly bank balance of the US AE at the rate of 7.18%. The Ld.TPO thus proposed addition of ₹1,97,93,267/- on account of notional interest receivable from the US AE on the outstanding balances lying with them. The said proposed adjustment was incorporated by the Ld.AO in the draft assessment order as well as the final assessment order.
Aggrieved by the order of the Ld.AO, the assesse preferred appeal before the Ld.CIT(A).
13. The Ld.CIT(A), after considering various submissions of the assesse observed and held as under:
57I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited "I have perused the facts of the case and the TPO's order. It is seen that Nil rate of interest has been charged by the appellant in an uncontrolled transaction involving a third party and so an Internal CUP exists to establish that there is no need to levy interest on outstanding with AEs.
It is also seen that the AEs also did not charge interest to third party customers so as to pay corresponding interest to the appellant. The longer outstanding period is interalia, the result of AEs not having collected the accounts from final end-customers and do not represent any advantage conferred on the AEs. These material facts have escaped the attention of the TPO leading to an erroneous conclusion on his part.
It has also to be accepted that the Appellant operates in a service industry where emphasis is on building long term relationship with the customers and payment terms are not, accorded same level of importance as in other business.
In view of the facts stated, this action of the Learned TPO/ Assistant CIT is not reasonable and as the facts being the same and covered by the order of my predecessor in the office, the adjustment made on notional interest is deleted."
Aggrieved by the order of Ld.CIT(A), the revenue is in appeal before this Tribunal.
14. The Ld. DR submitted that, in certain instances, the AEs remitted amounts to the assessee after considerable delay even though the same had already been realized from the end customers. The Ld. DR, therefore, supported the reasoning of the Ld. TPO and contended that the delay in remittance, despite recovery from end users, justified the adjustment on account of notional interest. The Ld. DR further emphasized that the Ld.CIT(A) did not examine these aspects in detail and, therefore, the view adopted by the Ld.CIT(A) was not based on proper appreciation of the factual matrix.
58I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited 14.1. Ld.AR submitted that the assessee operates in the software development industry, where emphasis is placed on building long- term relationships with customers and payment terms are not accorded the same level of strategic importance as in certain other businesses. The Ld.AR emphasized that no interest was charged by the assessee to third-party customers for any delay in payments and, therefore, the Ld.TPO was not justified in attributing notional interest on outstanding receivables from the subsidiaries. He submitted that the longer outstanding period was, inter alia, the result of the US-AE not having collected amounts from the end customers and did not represent any advantage conferred on the US-AE.
14.2. He further submitted that an identical issue arose in the assessee's own case for A.Y. 2006-07 in ITA No. 1473/Mum/2018 and ITA No. 1579/Mum/2018, wherein the Tribunal, vide order dated 23/06/2023, decided the issue by observing as under:-
"9.3 We heard the rival submissions on this issue and perused the record. In A.Y. 2003-04 the Tribunal has accepted the contention of the assessee that the delay in realization from AEs has occurred for the reason that there was corresponding delay in realization of debts by the AEs from their customers.
However, on a perusal of the details furnished by the assessee in page No. 635 to 865 of the paper book, we noticed that the AEs have remitted money to the assessee with delay ranging from 1 day to a period exceeding 1 year, after realization from their debtors. Hence the reasoning given by the Tribunal, as rightly pointed by Ld D.R, would not apply to the facts of the year under consideration.
9.4 We also noticed that the TPO has computed the interest by taking average quarterly balances. In our view, the same is not correct method of computing interest on delayed receivables. Since the details of realization of 59 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited individual bills are available, it will be possible for the assessee/TPO to compute interest individually after allowing accepted credit period.
9.5 In view of the above said discussions, we are of the view that this issue requires fresh examination at the end of the Assessing Officer/TPO.
Accordingly we set aside the order passed by the learned CIT(A) on this issue and restore the same to this file for examining this issue afresh in the light of discussions made supra."
14.3. The Ld.AR submitted that the Ld.TPO adopted ad hoc rate of interest earned on loan for computing the notional interest instead of considering the interest rates prevailing in the international market. He argued that no notional interest was chargeable in the facts of the case; however, without prejudice to the same, adopting an erroneous approach or methodology for computing the notional interest receivable from the overseas subsidiaries is contrary to established transfer pricing principles.
14.4. He submitted that the methodology adopted by the Ld.TPO is an adhoc arbitrary method and not prescribed under the Act. It is further submitted that, while passing the order, the Ld.TPO computed adjustment considering the rate of interest charged by the assessee in its own case on loan granted to one of its AE which is a controlled transaction and added an ad-hoc 200 basis point to it.
14.5. The Ld.AR submitted that while determining ALP for the said transactions the Ld.TPO has not even examined the applicability of any other method prescribed under Section 92C(1) of the Act. Based on a controlled transaction, the Ld.TPO proceeded to adopt arbitrary 60 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited 5.18% plus adhoc 200 basis points as the arm's length compensation for interest on delayed receipts from AEs.
14.6. The Ld.AR submitted that the use of controlled transactions for the application of the CUP method by the Ld.TPO is flawed that disregards the provisions of the law.
We have perused the submissions advanced by both sides in light of the records placed before us.
15. Considering the rival submissions and the material on record, we note that this issue was examined by the Tribunal in the assessee's own case for A.Y. 2006-07 (supra), wherein the observations made in A.Ys. 2003-04 to 2005-06 were also taken into consideration. This Tribunal has remitted the issue back to the Ld.AO/TPO by observing as under:
9.3. We heard the rival submissions on this issue and perused the record. In A.Y. 2003-04 the Tribunal has accepted the contention of the assessee that the delay in realization from AEs has occurred for the reason that there was corresponding delay in realization of debts by the AEs from their customers. However, on a perusal of the details furnished by the assessee in page No. 635 to 865 of the paper book, we noticed that the AEs have remitted money to the assessee with delay ranging from 1 day to a period exceeding 1 year, after realization from their debtors. Hence the reasoning given by the Tribunal, as rightly pointed by Ld D.R, would not apply to the facts of the year under consideration.
9.4 We also noticed that the TPO has computed the interest by taking average quarterly balances. In our view, the same is not correct method of computing interest on delayed receivables. Since the details of realization of individual bills are available, it will be possible for the 61 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited assessee/TPO to compute interest individually after allowing accepted credit period."
Admittedly, the delay in realization of receivables by the assessee from its US AE was, partially attributable to the AEs not having recovered the amounts from the end customers. However, from the details furnished in the paper book (pages 646 to 1511), it is noticed, on a random verification of invoice dates, that there are instances where the U/S. AE remitted receivables to the assessee with delay even after the dues had been realized by them from the end customers.
15.1. In view of the above factual position, we are of the opinion that the reliance placed by the Ld. AR on the observations of the Tribunal for A.Ys. 2003-04 to 2005-06 cannot be mechanically applied to the year under consideration. The facts for the year under consideration are more akin to those noted by the Tribunal for A.Y. 2006-07, as reproduced in the preceding paragraphs. Accordingly, we direct the Ld. AO/TPO to examine this issue afresh in accordance with law and transfer pricing principles. The Ld. TPO shall compute interest, if any, on the outstanding receivables based on the LIBOR rate. The assessee is directed to furnish details of realization of individual invoices by the US AE and to identify such receivables that was outstanding even after the same being received by the US AE from the end customer. The Ld. TPO shall allow the accepted credit period of 60 days while computing such delay.
62I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited Interest charged in respect of loan to AE Brief Fact leading to this issue is as under:
16. The assesse granted loan to the US AE being Oracle Financial Services Software America Inc.(hereinafter referred to as OFSS), (formerly known as i-flex America Inc.) and ISP Internet Mauritius Company( hereinafter referred to as ISP Mauritius) at different period of time under different terms and condition. The details of the loan advanced by the assesse are as under:
Rate Date of Date of Nature of Name of Quantum of Amount disburseme determinati rate of the AEs of loan interes (in Rs.) nt of loan on of LIBOR interest t 6 month USD As adjusted OFSS 1 January LIBOR Fluctuatin 20,855,27 10,000,00 from time to America 2004 plus 50 g rate 4 0 time** basis points LIBOR 12 prevalent as month ISP 22 of two days USD LIBOR Mauritiu December prior to the Fixed rate 1,338,099 950,000 plus 50 s 2004 date of basis disbursement points of the loan Based on the above terms and conditions, the rate of interest earned during the year under the consideration on the loan provided to OFSS America was 5.18 percent and ISP Mauritius was 3.54 percent.63
I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited 16.1. In the transfer pricing documentation the assessee, stated that the above loans were duly approved by Reserve Bank of India ('RBI'), and served as an appropriate benchmark for determining the arm's length standard and accordingly, the receipt of interest by the assessee on loan granted to its AEs was considered to be compliant with the arm's length principle.
16.2. It was submitted that to determine the arm's length rate of interest in respect of the loans granted, the assessee had obtained an independent letter from HDFC Bank Limited (an independent third party), which quoted an interest rate of LIBOR plus 50 basis points for the USD denominated loans, which was furnished before the Ld.TPO.
16.3. In view of the fact that the interest rate offered by the assessee on the loans given to subsidiaries are in line with interest rate charged by the bank on foreign currency loans, by the assessee, the transaction was held to be at Arm's Length price.
16.4. The Ld.TPO made an adjustment on interest on loan charged to its AE alleging that if the AE goes bankrupt or defaults in making the payment, the assessee would be liable to bear the loss as it may not be in a position to recover that money from the AE. Such a situation warrants a higher rate of interest that the assessee should charge from the AE. To cover this risk, the Ld.TPO applied ad-hoc mark up of 200 basis points on the rate charged by the assessee on 64 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited the loan provided to its AE and thereby arrived at the rate of 7.18%. The Ld.TPO thus made addition of Rs.9,428,128 on account of interest undercharged by the assessee for loan granted to USA and Mauritius.
Based on the order passed by the Ld.TPO under Section 92CA(3) of the Act, the AO proposed addition of Rs.9,428,128 to the total income of the assessee in respect of interest on loan granted to its AEs.
The said proposed adjustment was incorporated by the Ld.AO in the draft assessment order as well as the final assessment order.
Aggrieved by the order of the Ld.AO, the assesse preferred appeal before the Ld.CIT(A).
17. The Ld.CIT(A), after considering various submissions of the assesse observed and held as under:
"I have gone through the order of the Learned TPO/ Additional CIT, the detailed submissions and arguments made by the Appellant's ARs. I do not agree with the stand taken by the Learned TPO/ Additional CIT. Comparison of controlled transaction with other controlled transactions is not permitted under Indian transfer pricing legislation as it distorts the very principle of transfer pricing. Transfer pricing legislation in India is based on sound economic logic. In arriving at such arm's length outcomes, transfer pricing legislation seeks to disregard "Controlled" situations by a process of benchmarking these transactions with "Uncontrolled Transactions" between "Unrelated Parties". The arm's length price has to be established by comparing controlled transactions with uncontrolled transactions and not comparison of controlled transactions with other controlled transactions. The Learned TPO/ Additional CIT have not given due weightage to this fundamental principle which goes at the root of the transfer pricing legislation. Even on merits, parameters such as geographical region amount of loan, currency of loan, underlying security and creditworthiness of the 65 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited borrower are relevant factors in determining interest rate. Even a quotation given by a third party i.e. a banker has only persuasive value, however it does not constitute a CUP since it is a quotation and not an actual uncontrolled "transaction".
In the present case, the geography is very wide as one AE is in Mauritius while another in USA. There is nothing on the record of the TPO to suggest that the amount of loan, security and tenure are identical. The TPO has ignored these crucial factors and hence come to an erroneous conclusion that the rates of interest charged for both the AE's have to be same.
Instead of seeking clarification he jumped to the conclusion that this was the effective rate on which interest should have been charged.
Accordingly, following the order of my predecessor this Ground is disposed as being allowed in favour of the Appellant and the Assistant CIT is directed to delete the transfer pricing adjustment (combined) of INR94,28, 128."
Aggrieved by to order of the Ld.CIT(A), the revenue is in appeal before this Tribunal.
18. The Ld.DR relied on the orders passed by Ld.TPO/Ld.AO.
18.1. On the contrary, the Ld.AR relied on orders passed by Ld.CIT(A). He also place reliance on following decisions of coordinate bench of this Tribunal in assessee's own case foe preceeding years:
Order of this Tribunal for assessment year 2004-05 in ITA no. 5078/Mum/2010 vide order dated 12/10/2021 Order of this Tribunal for assessment year 2005-06 in ITA no. 5079/Mum/2010 vide order dated 16/01/2023 Order of this Tribunal for assessment year 2006-07 in ITA no. 1579/Mum/2018 vide order dated 23/06/2023 66 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited 18.2. The Ld.AR further submitted that the department has accepted the consistent view adopted by this Tribunal as this issue was not challenged by the revenue before Hon'ble Bombay High Court in appeal filed for assessment year 2004-05 and 2005-06.
We have perused the submissions advanced by both sides in light of records placed before us.
19. We have considered the rival submissions and perused the material available on record. It is an undisputed fact that the assessee has charged interest from its AEs located in the USA and Mauritius at different rates, namely 5.10% and 3.54% respectively, and that such rates have been determined by adopting LIBOR plus 50 basis points. The assessee has benchmarked the said international transactions by applying the internal CUP method on the basis of a letter issued by HDFC Bank evidencing the rate of interest charged by the bank on a loan advanced to one of its subsidiaries. The said comparable is internal in nature and represents the rate at which an independent party has extended credit under comparable circumstances. The rate adopted by the assessee is also in conformity with the internationally accepted benchmark for foreign currency denominated inter-company loans.
19.2. It is a settled principle that where a reliable internal CUP is available, the same deserves to be given precedence over external comparables, as it provides a more direct and accurate measure of 67 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited the arm's length price, provided the transactions are comparable in terms of currency, tenure, and risk profile. In the present case, no material has been brought on record by the Ld. TPO to demonstrate any material differences between the bank loan and the loans advanced to the AEs which would have a bearing on the pricing. Nor has the Revenue brought on record any better external comparable.
19.3. The Ld. CIT(A), while adjudicating the issue, has followed the orders of the Tribunal in the assessee's own case for the preceding assessment years wherein, on identical facts, the benchmarking of interest by adopting LIBOR plus an appropriate basis point spread and applying the internal CUP method was accepted. No distinguishing feature in facts or in law has been brought to our notice for the year under consideration. In such circumstances, the principle of consistency also warrants that a similar view be taken.
19.4. In view of the foregoing, and respectfully following the view adopted by this Tribunal in preceding assessment years, we find no infirmity in the action of the Ld. CIT(A) in accepting the interest charged to the AEs as being at arm's length by applying the internal CUP method.
Accordingly, Ground Nos. 4.1 to 4.6 raised by the Revenue are allowed for statistical purposes.
20. Ground Nos. 5.1 to 5.4 relate to the deletion of interest charged on capital contribution made to the AEs.
68I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited Brief facts leading to the issue are as under:
20.1. The assessee has wholly owned subsidiary by the name Oracle Financial Services Software America Inc. (OFSS America Inc., earlier known as I-flex America Inc.) in Delaware, USA during financial year 2004-05. It is submitted that OFSS America Inc. is principally engaged in the business of providing information technology solutions to the financial services industry in the USA. As per its Certificate of Incorporation, OFSS America Inc. was authorized to issue 100 shares with a face value of USD 0.01 per share. Out of these authorized shares, OFSS America Inc. issued one share to the assessee at the time of incorporation, making the assessee its sole shareholder. Accordingly, OFSS America Inc. became a 100% wholly owned subsidiary of the assessee.
20.1.1. It is submitted that, the assessee, being the only shareholder, infused capital into OFSS America Inc. over the years. The assessee contributed capital of USD 61.5 million in the financial year relevant to A.Y. 2007-08 and further capital of USD 12.16 million in the financial year relevant to A.Y. 2008-09. It is a settled position that no additional shares were issued by OFSS America Inc. to the assessee during these years when the capital was infused. The Ld. AR submitted that the assessee continues to be the sole shareholder of OFSS America Inc., holding one share therein.69
I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited 20.2. The Ld. AR further submitted that the capital contributions made during the financial years relevant to A.Ys. 2007-08 and 2008- 09 were infused to facilitate strategic acquisition in the USA of Castek Software Inc., USA, a company specializing in delivery of enterprise software solutions and provision of related services to the insurance industry. He emphasized that details regarding utilization of the funds infused as capital contribution into OFSS America Inc. fort the year under consideration is placed at pages 395 to 396 of the paper book and also formed part of the submissions made before the Ld. CIT(A) on this issue.
20.3. It is submitted that the Ld. TPO treated the capital contribution made during the financial year relevant to A.Y. 2008-09 amounting to USD 12.16 million as an interest-free loan to OFSS America Inc. The Ld. TPO was of the opinion that, since the funds were infused in the form of capital, OFSS America Inc. ought to have issued further shares in lieu thereof, which had not been done in the present case. The Ld.TPO observed that OFSS America Inc. was authorized to issue 100 shares, out of which only one share had been issued to the assessee at the time of incorporation.
20.4. The Ld.TPO also was of the opinion that OFSS America Inc. could have issued, at the most, 99 additional shares at USD 1 each and, therefore, could have received only USD 99 as capital contribution towards share capital. The Ld. TPO thus held that the difference between USD 12 million and USD 99 represented loan on 70 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited which the assessee ought to have earned interest income at the rate of 16% per annum.
Accordingly, the Ld.TPO proposed adjustment of ₹9,76,70,392/- in the hands of the assessee. The said proposed adjustment was incorporated by the Ld.AO in the draft assessment order as well as the final assessment order.
Aggrieved by the order of the Ld.AO, the assesse preferred appeal before the Ld.CIT(A).
21. On appeal before the Ld.CIT(A), the addition was deleted by holding that the Ld.TPO failed to consider the submissions of the assessee that, as per US Treasury Regulations and US Court Rulings, a company incorporated in the USA which is a wholly owned subsidiary of another company need not issue further shares on receipt of additional capital, as issuance of shares in such circumstances would be a 'meaningless gesture'. The Ld.CIT(A) further held that the Ld. TPO failed to bring any evidence on record to support its stand that the capital contribution could be re- characterized as a loan attracting interest. It was also held that the Ld. TPO could not step into the shoes of the assessee to rewrite the transaction entered into between the parties.
Aggrieved by the order of the Ld.CIT(A), the revenue is in appeal before this Tribunal.
71I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited
22. The Ld.DR relied on the written submissions filed on 15/02/2024. The Ld.DR submitted that a company cannot issue shares beyond the number of shares authorized in its articles and, therefore, supported the observations of the Ld.TPO in re- characterizing the transaction of capital contribution as loan advanced to the AE.
22.1. The Ld.AR on the contrary relied on the observation of the Ld.CIT(A). He submitted that the assessee is the sole shareholder of OFSS America Inc., holding only one share, which constitutes 100% of the issued share capital of the company. It is an admitted fact that, over the years, the assessee infused capital into OFSS America Inc., and no further shares were issued at the time of such capital infusions. The Ld. AR emphasized that despite the infusion of capital, the assessee continued to hold the same one share and retained 100% ownership in OFSS America Inc. The Ld.AR vehemently objected to the deletion of the TPO's adjustment on following propositions:-
"i. Department is not entitled to recharacterize the assessee's transaction.
ii. Department cannot call into question the decision of the assessee to invest in equity or debt.
iii. Application of doctrine of meaningless gesture.
iv. OFSS America Inc. has not breached the limit of its authorised shares.
v. Even if further shares were issued, there would be no breach of authorised shares.72
I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited vi. US regulations cited by the ld. DR have no bearing on the facts of the case.
vii. Other instances of doctrine of meaningless gesture available in public domain.
viii. Other evidence showing that USD 12 million is capital contribution.
ix. The assessee could not have had any incentive to shift profits out of India."
21.2. The Ld.AR also placed reliance on following decisions to support its argument that, the Department is not entitled to re- characterise a capital contribution transaction as a loan transaction:-
Hon'ble High Court of Bombay in the case of Aegis Ltd. Vs. PCIT [2019] taxmann.com 495 (Bom.) Decision of the co-ordinate Bench of the Tribunal in ITO vs. Sterling Oil Resources Ltd. reported in (2016) 179 TTJ 298. [This decision has since been confirmed by the Hon'ble Bombay High Court in [2019]108 taxmann.com 645.] 21.3. The Ld.AR submitted that US courts and their Internal Revenue Service (IRS) recognizes the doctrine of a "meaningless gesture," which is founded on the principle that issuance of additional stock to a shareholder who is the sole shareholder of a corporation has no economic significance. He submitted that since all the shares are owned by a single shareholder, any further issue of shares to the same shareholder would be a futile exercise, as the 73 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited shareholder's rights and benefits would remain unchanged even if additional shares were issued. The Ld. AR further placed reliance on US IRS Memorandum No. AM 2020-005 dated 29/05/2020, which recognizes this principle by observing as under:-
"Shareholders transfer to corporation of money (situation 1) or appreciated property (situation 2) on August 1, year 1 (each a subsequent transfer) is also a transfer to which section 351 applies, even though shareholder does not receive any additional stock. Lessinger us. Commissioner, 872 F .2d 519, 522 (2d Cir. 1989), the exchange requirements of section 351 are met where a soul stockholder transfers property to a wholly owned corporation even though no stock or securities are issued therefore. Issuance of new stock in this situation would be a meaningless gesture."
21.4. The Ld.AR submitted that the observation of the Ld.TPO that the assessee could have contributed only USD 99 towards capital, being the balance authorized share capital, and that the remaining contribution should be treated as a loan, is factually incorrect. It was emphasized that the assessee is the sole shareholder of OFSS America Inc., exercises exclusive control rights as shareholder, and enjoys all benefits arising from its ownership. Thus, even though no further shares were issued against the capital contribution infused by the assessee during the year under consideration, the same has no relevance in view of the doctrine of "meaningless gesture." It was also submitted that OFSS America Inc. has not breached the limit of its authorized share capital.
21.5. The Ld.AR, referred to sections 152 and 153 of the Delaware General Corporation Law, which was also relied by the Ld.DR in his written submissions and submitted that, section 152 permits the 74 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited Board of Directors to determine the consideration at which shares are to be issued. Secondly, section 153 provides that shares having a par value have to be issued for a consideration, which should not be less than the par value. Therefore, the regulations require a Delaware company to issue shares at a price, which should not be less than the par value. In the instant case, the par value of each share of OFSS America Inc. was USD o.01 (wrongly noted as USD 1 by the ld. DR) is the minimum price for which the shares can be issued and not the maximum price, as alleged by the ld. DR. He thus submitted that the Ld.DR's assertion that OFSS America Inc. was capable of receiving only USD 99 as capital, and therefore, the rest has to be characterised as a loan, gives a complete go by to the concept of issue of shares at a premium, and is ex facie contrary to sections 152 and 153 of the General Corporation Law.
21.6. He further submitted that, OFSS America Inc. had two options while receiving capital contribution of USD 12 million from the assessee. The first option was to invoke the doctrine of meaningless gesture and not issue any further shares and the second option was to issue any number of shares it wanted, as long as such number did not exceed 99, i.e. the remaining authorised shares and receive the capital contribution of US 12 million. OFSS America Inc. chose the first option. The essence of the Department's case is that had it chosen the second option, it could have received only USD 99 by issuing 99 shares at USD 1 each, which is completely erroneous as section 152 gives the company the right to choose the issue price and 75 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited it places no fetter on the maximum price at which shares can be issued.
21.7. The Ld.AR thus submitted that the Department's contention that par value is the maximum price at which the shares can be issued is wholly flawed. He then submitted that assuming, for the sake of argument, that OFSS America Inc. had chosen the second option, it could have issued any number of shares( say for example 5 shares), and received USD 12 million. In such a case, the par value of such further shares would have been USD 0.05 (i.e., USD 0.01 X
5), and USD 11,999,999.95 would have been the securities premium. Therefore, the whole construct of the Department's argument is contrary to the Delaware General Corporation Law and has no legs to stand on.
21.8. As regards the Ld. DR's reliance on section 161 the Corporation Law and Chapter 6 of Model Business Corporation Act, 2000, the Ld.AR submitted that, there can be no doubt that additional stock cannot be issued beyond the limit of authorised capital. In the case of OFSS America Inc., no such breach has taken place. It is reiterated that OFSS America Inc. was authorised to issue 100 shares, out of which it had issued 1 share to the assessee at the relevant time. It is further submitted that it is not for an Income tax Authority to allege a violation of corporate law, when the regulator under that law has not alleged such a violation. Such an allegation on the part of the Ld.DR is wholly without jurisdiction. In any event, the assessee does 76 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited not doubt the sanctity of section 161 of the Corporation law, but the same has no relevance to the facts of the case.
21.9. The submissions of the Ld. DR placing reliance on Section 158 of the Corporation Law and Clause 6.26 of the Model Business Corporation Act are misconceived and factually inapplicable to the present case. The entire edifice of the Ld. DR's argument proceeds on an erroneous assumption that the assessee has claimed issuance of uncertificated shares in respect of the capital contribution of USD 12 million. This is not the case of the assessee. The assessee has never contended that no shares were issued or that the investment remained unallotted; rather, the capital contribution stands duly recorded and recognized in the books of the assesse as well as of OFSS America Inc..
21.10. The requirement of passing a Board resolution, as referred to by the Ld. DR, would arise only in a situation where a company elects to issue shares in uncertificated form. Since no such case has been made out by the assessee, the question of invoking the said provision does not arise at all. The reliance on the Model Business Corporation Act is, in any event, misplaced, as it is only a model legislation framed by the American Bar Association and has no binding applicability unless specifically adopted by the relevant State law.
21.11. Further, the assessee is the sole and 100% shareholder of OFSS America Inc. In such a wholly owned structure, the question 77 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited of prejudice, dilution, or any third-party shareholder rights does not arise. The objection raised by the Ld. DR is therefore purely academic, divorced from the factual matrix, and does not impinge upon the validity of the capital contribution or its recognition in the books.
21.12. The Ld.AR also placed on record the documents filed by it before the Reserve Bank of India (RBI) in compliance of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004, for making equity capital contribution of USD 12 million in OFSS America Inc. The Ld.AR invited our attention to the following-
The board resolution dated 4/10/2007, wherein the Board had accorded its approval for investing capital of USD 12 million in OSS America Inc. Letter of confirmation from OFSS America Inc. (pg. 1507 of the paperbook) was also filed confirming the fact that USD 12 million was an addition to the equity capital of the assessee.
He submitted that both, the assessee and OFSS America Inc, in their respective financial statements have recorded the investment as an investment towards equity.
21.13. The Ld.AR submitted that the capital infusion was in compliance with the applicable corporate law provisions. He further submitted that the assessee had filed relevant documents evidencing 78 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited compliance with RBI requirements under FEMA Regulations, 2004 for making equity capital contribution of USD 12 million in OFSS America Inc. He submitted that, assessee had furnished:
• In Section A of Form ODI, the assessee has selected the option "proposed investment is in Existing Project (Acquisition of stake in an already existing JV/WOS overseas promoted by an Indian party"
• In Section C of Form ODI, the assessee has selected the purpose of supplementary investment as "Enhancement of Equity in existing JV/WOS overseas"
• Section D of Form ODI shows that investment has been made in equity share capital • The assessee has also filed a compliance confirmation statement as per FEMA regulations with regards to the investment by subscribing USD 12,000,000 to equity shares" in the capital of OFSS America Inc. • In Form A2 (application cum declaration for drawal of foreign exchange), the purpose is mentioned as "Enhancement of Equity in existing WOS"
We have perused the submissions advanced by both sides in light of the material placed before us.79
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22. We have considered the rival submissions and perused the material on record. It is an admitted position that the assessee is the sole shareholder of OFSS America Inc. holding 100% of its equity and that the amount of USD 12 million was infused as capital contribution. No additional shares were issued at the time of such infusion and the assessee continued to hold the same one share representing the entire issued share capital. The Ld.TPO re- characterized the said capital contribution as loan on the premise that the authorised share capital was limited and, therefore, the excess amount partook the character of a loan carrying interest.
22.1. In our considered view, the Ld. CIT(A) was justified in deleting the adjustment. Firstly, the Revenue has not brought any material on record to demonstrate that the transaction was, in substance, in the nature of a loan or that there existed any obligation for repayment or payment of interest. In the absence of any such characteristic, a capital contribution cannot be re-characterized as a loan merely on presumptions. It is well settled that the Ld.TPO cannot step into the shoes of the assessee and re-write the transaction entered into by the parties.
22.2. Secondly, the fact that no further shares were issued to a 100% shareholder does not, by itself, alter the character of the transaction. The doctrine of "meaningless gesture," as recognized in the context of wholly owned subsidiaries, supports the position that issuance of additional shares to the sole shareholder does not have any economic 80 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited significance, as the ownership and control remain unchanged. Further, no material has been brought on record by the Ld.TPO to show that the authorised share capital was breached or that the capital contribution was in violation of the applicable corporate law provisions.
22.3. Thirdly, the decisions relied upon by the assessee, including those of the jurisdictional High Court, support the proposition that capital contributions cannot be re-characterized as loans in the absence of any debt-like features. The Revenue has not brought on record any distinguishing facts for the year under consideration.
22.4. In view of the above, we find no infirmity in the order of the Ld. CIT(A) in holding that the capital infusion of USD 12 million is in the nature of equity and does not give rise to any notional interest adjustment.
Accordingly, Ground Nos. 5.1 to 5.4 raised by the Revenue stand dismissed.
23. Ground Nos. 6.1 to 6.4 relate to the adjustment proposed in respect of customization fees retained by the AEs.
Brief facts relating to this issue are as under:
23.1. The assessee, in relation to Product business, broadly derives license fees, customization fees and annual maintenance contracts from the AEs. It is submitted that Customization is integration of the 81 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited products with customer's IT systems and enhancement to address the specific requirements of the customers. Thus thorough knowledge is therefore required not only of the assessee's products but also of the customers' IT configuration, etc. 23.2. It is submitted that the AEs in USA, Netherlands and Singapore are engaged in distribution of software products and services in respective jurisdictions. It is submitted that the assessee granted AE's right to distribute its products to end-customers in their respective jurisdiction under a license agreement. The AE's thus enter into the contract with the end customers and sell the assessee's products in their respective jurisdiction.
23.3. Since all contracts are primarily entered into by AEs with the end-customers, the AEs receive and book the entire contract value received from the customers as their revenue. Thereafter, the AEs retain certain percentage thereof for their functions and remit the balance amount to the assessee as consideration for subcontracting of the work to the assessee. The amount paid to the assessee by the AEs towards the aforesaid subcontracts is accounted as cost of sales in books of the AEs. The AEs carry on the distribution of products and services on a principal-to-principal basis.
23.3.1. During the year under consideration the AE's retained Rs.27,42,03,387/- out of the total customisation fee received from the end customers towards, marketing and customisation work.82
I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited 23.3.2. It is further, submitted that the assessee also appoints third party distributors for marketing of software products. However, the third party distributors are not assigned the work of sourcing customization work for the assessee.
23.4. The Ld.TPO was of the opinion that no additional marketing function is performed by the AE's to secure the customisation assignment. He noted that once the product is sold to the end customers, and if same requires customisation, the assesse is automatically in a position to customisation services without any significant marketing efforts by the AE's. The Ld.TPO disregarded the TNMM analysis adopted by the assessee for benchmarking the said transactions and instead applied the CUP method by comparing the arrangement of the assessee with third-party distributors.
23.5. It was submitted by the assesse that marketing of customization work requires not only knowledge of the assessee's products but also familiarity with the customer's IT configuration and systems. Accordingly, continuous training is provided to the subsidiaries to equip them to effectively market and support the assessee's products. The assessee submitted that, in the present facts of the case, CUP method cannot be adopted as a similar training is not provided to third-party distributors and their entrusted with a limited responsibility for marketing of the products only. The assessee had submitted the third party distributors only sold the software products developed by assessee and these distributors were 83 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited never assigned to source customisation work for assessee. It was submitted that no commission was paid to the third party distributors as not customisation efforts were undertaken by them.
23.5.1. The Ld.TPO proposed an adjustment of ₹3,17,08,761/- in respect of fees retained by the overseas subsidiaries towards marketing, product distribution, registration and client management services relating to customization work.
The said proposed adjustment was incorporated by the Ld.AO in the draft assessment order as well as the final assessment order.
Aggrieved by the order of the Ld.AO, the assesse preferred appeal before the Ld.CIT(A).
24. The Ld.CIT(A), after considering the submissions of the assesse observed and held as under:
"I have gone through the order of the TPO/AO and the submissions made by the ARs for the Appellant and the orders of my predecessors in office. Further, the Appellant's ARs also drawn my attention to the order of High Court in Appellant's own case (i.e., Order in relation to Income-tax Appeal No.2352 of 2011 dated 24 March 2014 for AY 2002-03).
The submission by the Appellant's ARs has been considered. It is evident that the nature of services rendered by the distributors in general is totally different from that of subsidiaries. The distributors were only selling the software products of the Appellant. These distributors were not assigned to source customization work for the Appellant and therefore no commission was paid to the distributor for any customization efforts undertaken by the Appellant. While the services rendered by the distributors are primarily in respect of the products, the services rendered by the subsidiaries are in respect of the overall, services carried out by the Appellant.84
I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited Consequently, in respect of the sale of products made, commission is paid to the distributors.
The latter are not entitled for commission payment on account of customization works done by the Appellant.
On the other hand, the subsidiaries got paid on the overall consideration that included receipt on account of customization. Therefore, the finding of the TPO / Additional CIT that in respect of customization, the Appellant is not liable to make payment to the subsidiaries is not correct.
Appellant's ARs has vide submission dated 08 March 2018 also placed reliance on various judgments delivered such as Mumbai Tribunal in the case ofSerdia Pharmaceuticals (India) Private Limited Vs. ACIT (ITA Nos:
2469/Mum/06, 3032/Mum/07 and 2531/Mum/08), Gharda. Chemicals Ltd. vs. DCIT (9(1))(ITA No. 2242/Mum/06) and UCB India Private Limited vs. ACIT (2009) (ITA. 428& 429/Mum/2007) supports its contention that high degree of comparability is required for application of CUP method.
In the present case, a valid CUP does not exist as the functions performed by Distributors are not similar to that carried by AE who add further value by way of customization. This was even pointed out in TP documentation. It is observed that the same issue has been adjudicated in the High Court and was decided in Appellant's favour. It is also observed that in earlier years on same facts the appeal was decided in Appellant's favour on this very issue. Thus taking into account all the facts and circumstances this ground is allowed in favour of the Appellant."
Aggrieved by the order of the Ld.CIT(A), the revenue is in appeal before this Tribunal.
25. The Ld. DR relied on the orders of the authorities below.
25.1. AR submitted that this issue is squarely covered by the decision of the co-ordinate Bench of the Tribunal in the assessee's own case for earlier assessment years 2002-03 and 2005-06 in ITA No. 3699/Mum/2006; CO No. 366/Mum/2006 and ITA No.4489/M/2010; ITA No. 4079/Mum/2010, respectively. It was 85 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited submitted that the Department's appeal on this issue before the Hon'ble High Court in ITA No. 2352/2011 has also been dismissed, and a copy of the order is placed at pages 1 to 4 of the paper book.
We have considered the submissions of both sides in light of the material placed before us.
26. It is noted that, the Co-ordinate bench of this Tribunal in similar circumstances had decided the issue for AY 2002-03 which has been followed in the orders passed by this Tribunal for AY 2003-04 and 2004-05 (supra). The relevant findings of the Tribunal are as under:-
27. Having considered rival submissions, we find, identical issue arose in assessee's own case in assessment year 2002-03. While deciding the issue, the Tribunal in ITA No. 3699/Mum/2006 dated 31.08.2010 has held as under:
"17. We have heard the rival submissions of the parties. The Learned D.R. vehemently argued that there is no reason to pay the additional commission to the subsidiaries then the independent local distributors. It is argued that entire customisation work is done by the assessee only and there is no contribution by the subsidiaries in the customization work entrusted by the users of the software manufactured by the assessee company. Per contra, the Learned Counsel argues that in addition to the sale of the software, the additional assignments or jobs for collection of customization work is done by the subsidiaries (A.Es.). Ld. Counsel also referred to the sample copy of the agreement, which is placed in the paper book and submits that so far as the local independent distributors are concerned, Some of them are paid between 15 to 20% only on the selling the products of the assessee. He submitted that though the entire customization work is done by the assessee but all the data collection work is done by the subsidiaries. The Learned Counsel supported the order of Learned CIT (A) deleting the addition.
18. We find force in the argument of Learned Counsel. We have also gone through the reasons given by the Learned CIT (A). Though the 86 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited subsidiaries are not directly involved in the customization work of the software but at the same time they are only authorized to collect the customization work in the market and other independent distributors are not doing said work. It is also seen that some of the independent distributors are paid higher commission then the subsidiaries without doing any job for collection of customization work. Moreover, the Learned D.R. could not controvert the findings of the Learned CIT (A) before us. In our opinion, no interference is called in the order of the Learned CIT (A) on this issue. Accordingly, the same is confirmed. Ground no.3 taken by the revenue is dismissed."
26.1. It is also not in disputed that this view adopted by the Tribunal for AY 2002-03 has been upheld by the Hon'ble High Court in ITA No. 2532/2011 vide order dated 24/03/2014. The Ld.CIT(A), while considering the issue has observed and held as under:-
"I have gone through the order of the TPO/AO and the submissions made by the ARs for the Appellant and the orders of my predecessors in office. Further, the Appellant's ARs also drawn my attention to the order of High Court in Appellant's own case (i.e., Order in relation to Income-tax Appeal No.2352 of 2011 dated 24 March 2014 for AY 2002-03).
The submission by the Appellant's ARs has been considered. It is evident that the nature of services rendered by the distributors in general is totally different from that of subsidiaries. The distributors were only selling the software products of the Appellant. These distributors were not assigned to source customization work for the Appellant and therefore no commission was paid to the distributor for any customization efforts undertaken by the Appellant. While the services rendered by the distributors are primarily in respect of the products, the services rendered by the subsidiaries are in respect of the overall, services carried out by the Appellant.
Consequently, in respect of the sale of products made, commission is paid to the distributors.
The latter are not entitled for commission payment on account of customization works done by the Appellant.
Appellant's ARs has vide submission dated 08 March 2018 also placed reliance on various judgments delivered such as Mumbai Tribunal in the case ofSerdia Pharmaceuticals (India) Private Limited Vs. ACIT (ITA Nos:87
I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited 2469/Mum/06, 3032/Mum/07 and 2531/Mum/08), Gharda. Chemicals Ltd. vs. DCIT (9(1))(ITA No. 2242/Mum/06) and UCB India Private Limited vs. ACIT 2009) (ITA. 428 & 429/Mum/2007) supports its contention that high degree of comparability is required for application of CUP method.
In the present case, a valid CUP does not exist as the functions performed by Distributors are not similar to that carried by AE who add further value by way of customization. This was even pointed out in TP documentation. It is observed that the same issue has been adjudicated in the High Court and was decided in Appellant's favour. It is also observed that in earlier years on same facts the appeal was decided in Appellant's favour on this very issue. Thus taking into account all the facts and circumstances this ground is allowed in favour of the Appellant.
Thus, Ground No. 16 to 18 is allowed."
26.2. It is noted that, the subsidiaries got paid on the overall consideration that included receipt on account of customization. Therefore, the finding of the Ld. TPO that in respect of customization fee, cannot be upheld. Based on the above discussion, we do not find any infirmity in the view adopted by Ld.CIT(A) and the same is upheld. We, therefore do not find any force in these grounds raised by Revenue.
Accordingly, Ground Nos. 6.1. to 6.4. raised by revenue stands dismissed.
27. It is submitted that, Ground Nos. 7 & 8 are general in nature and, therefore, not pressed.
In the result, appeal of the revenue stands partly allowed and appeal of the assessee stands allowed.
Order pronounced in the open court on 19/02/2026 88 I.T.A. No. 4795, 4796, 3430/Mum/2019 I.T.A. No. 5378, 5376 & 3997/Mum/2019 Oracle Financial Services Software Limited Sd/- Sd/-
(GIRISH AGRAWAL) (BEENA PILLAI)
Accountant Member Judicial Member
Mumbai
Dated: 19/02/2026
SC Sr. P.S.
Copy of the order forwarded to:
(1)The Appellant
(2) The Respondent
(3) The CIT
(4) The CIT (Appeals)
(5) The DR, I.T.A.T.
True Copy
By order
(Asstt. Registrar)
ITAT, Mumbai