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2015 (9) TMI 138
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....aw in deleting addition of Rs. 21,16,50,310/- on account of lease hold improvements expenses. 3. The Ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 1,00,55,42,364/- on account of direct selling agent commission expenses. 4. The Ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 5,28,33,372/- on account of loss on sale of repossessed assets. 5. The Ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 3,61,02,215/- on account of depreciation on computer peripherals. 6. The Ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 5,74,05,698/- on account of NCD and Commercial paper issue expense. 7. The Ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 51,34,55,174/- on account of loan acquisition costs. 8. The Ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 1,13,56,639/- on account of adjustment Arm's length price of the international transaction. 9. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any grounds of appeal at any time before or during the hearing of this appeal." 3. Vide Ground No. 1 the grievance of....
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....ade by the AO on account of advertisement and publicity by following the decision of his predecessor in disposing of the appeal for the assessment years 2003-04 to 2005-06 wherein the order dated 18.12.2009 by the ITAT followed the earlier decision in assessee's own case for the assessment years 2001-02 and 2002-03 which had been upheld by the Hon'ble Jurisdictional High Court vide order dated 30.03.2011. 5. We have considered the submissions of both the parties on this issue and are of the view that since the ld. CIT(A) deleted the addition made by the AO by following the judgment of the Hon'ble Delhi High Court and moreover, this issue is also squarely covered vide order dated 20.02.2015 in assessee's own case in ITA No. 4776/Del/2010 for the assessment year 2006-07 passed by this Bench of the Tribunal wherein relevant findings has been given as under: "13. Applying the aforesaid principle to the facts of this case, it clearly emerges that the expenditure on publicity and advertisement is to be treated as revenue in nature allowable fully in the year in which it was incurred. Concededly, there is no advantage which has accrued to the assessee in the capital field. The expen....
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....It was further explained that the capital expenditure was duly bifurcated from the bills and the balance amount of Rs. 6.46 crores was claimed as leasehold improvements. The Assessing Officer treated the entire expenditure being in capital field and allowed depreciation @ 10%. Learned Counsel submitted that this issue is covered by the decision of ITAT dated 18^th December, 2009 for assessment years 2001-02 and 2002-03 contained at page no. 861 of paper book-II(A) and also by the decision of ITAT for assessment years 2003-04 to 2005-06 contained at page no. 1061 of paper book-II(A). Learned Counsel pointed out that the Tribunal's decision for assessment years 2001-02 and 2002-03 was assailed by revenue before Hon'ble High Court. Vide its judgment dated 30.03.2011 Hon'ble High Court dismissed the revenue's appeal observing as under: "20. The argument of Mrs. Bansal was that the nomenclature of times of expenditure namely sanitary, fittings, civil works, brickworks, flowing etc. would clearly show that this expenditure could be capital in nature. Her grievance was that the Commissioner of Income Tax (Appeals) or the Tribunal did not go into this question at all and simply accepted....
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....tails and that the assessee has duly identified the capital portion of the expenditure incurred and the amount of the improvements expenses which were of revenue in nature. We also find that it is a settled law that powers and duties of the Commissioner of Income Tax (Appeals) are coterminus with that the Assessing Officer. Hence, in our considered opinion, there is no need to interfere with the finding of the learned Commissioner of Income Tax (Appeals). Accordingly, we uphold the same." 13. Further in assessment years 2003-04 to 2005-06 Tribunal in para no. 9.2, after taking note of the decision of Hon'ble Delhi High Court for assessment years 2001-02 and 2002-03 (supra), observed as under: "9.2 In the light of aforesaid view taken by the Hon'ble Jurisdictional High Court, especially when the Revenue have not placed before us any material controverting the aforesaid findings of the learned Commission of Income Tax (Appeals) so as to enable us to take a different view in the matter nor brought to our notice any contrary decision, we have no hesitation in upholding the findings of the learned Commissioner of Income Tax (Appeals). Therefore, ground No. 2 in the appeals of the ....
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....ansaction took place as the period of financing was normally more than one year. On this premise, the Assessing Officer took the view that these expenses could not be termed as having the chargeability in which they were incurred. He took average of three years for such agreements and spread the expense over a period of three years thereby allowing 1/3^rd expenditure incurred in that particular year. The matter was taken up in appeal and before the ld. Commissioner of Income Tax (Appeals), the assessee questioned the aforesaid approach of the Assessing Officer by contending that in the course of its business, the assessee enters in the loan agreements of hire purchase which agreements are required to be stamped in accordance with the provisions of Indian Stamps Act. The stamp duty paid by the assessee is debited to agreement stamping fee under the major head of "rates and taxes" and is claimed as revenue expenditure. This entire process of getting stamped the agreements had been outsourced by the assessee to the Contract Processing Associates (CPA) and who are paid remuneration as well. Therefore, the expense towards stamping as well as commission paid to the agents is debited in w....
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....water to the municipality and provided water pipelines, (ii) to supply electricity for street lighting in the municipality and pup up a transmission line therefore, and (iii) to concrete the main road from the factory to the railway station. In return, the respondent was not liable to pay municipal rates and taxes for a period of 15 years. During the previous year relevant to the assessment year 1959-60, the respondent spent a sum of Rs. 2,09,459/- towards installing water pipelines and accessories outside the factory premises which were to belong to and be maintained by the municipality. Since it was not disputed that the entire expenditure concerned installations and accessories which came to the ownership of the municipality, the High Court, on a reference held that the expenditure was revenue in nature" and deductible in computing the profits of the company." The Hon'ble Apex Court upon consideration referred to the decision at the Apex Court in the Empire Jute Co. Ltd. Vs CIT 124 ITR 1 and held that "if this principles is applied to the facts of the case before us, what we find is that the advantage which was secured by the assessee by making the expenditure in question was....
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....essee by observing in para 24 of the impugned order as under: "24. Brief facts apropos this issue are that during the year the assessee had shown loss on sale of repossessed assets to the tune of Rs. 5,92,69,342/-. The assessee explained that this loss had been worked out by calculating the difference between the amount still to be recovered from such customer and the amount received on sale of re-possessed assets. Following the decision of Hon'ble Allahabad High Court in the case of Motor and General Sales (Private) Limited Vs CIT (226 ITR 137), disallowed the assessee's claim observing that the assets did not constitute the assessee's stock in trade. Hence, the loss on repossessed assets could not be held as revenue's loss for the assessee company. Learned counsel pointed out that this issue has already been decided by Tribunal as well as by Hon'ble High Court in earlier years. We find that Tribunal in assessment years 2003-04 to 2005-06 has allowed this ground observing in para 17 page 1072 of paper book as under: "17. We have heard both the parties and gone through the facts of the case. In disputably and as pointed out by the learned Commissioner of Income Tax (Appeals) ....
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....6(1)(vii) of the Act has been amended w. E. F. 01.04.1989. We, therefore, decide this issue also in favour of the assessee." 17.1 Subsequently, Hon'ble High Court in their order 04.03.2011 in ITA No. 451/2011 upheld the aforesaid decision of the ITAT in the light of view taken by the Hon'ble High Court in their decision dated 09.11.2010 in CIT Vs Citicorp Maruti Finance Ltd. in ITA No. S 1712 & 1714/2010, holding that the assessee was entitled to loss on sale of repossessed assets u/s 36(1)(vii) read with section 36(2) of the Act. 17.2 In the light of aforesaid view taken by the Hon'ble Jurisdictional High Court, especially when the revenue have not placed before us any material, controverting the aforesaid findings of the learned Commissioner of Income Tax (Appeals)so as to enable us to take a different view in the matter nor brought to our notice any contrary decision, we have no hesitation in upholding the findings of the learned Commissioner of Income Tax (Appeals). Therefore, ground No. 6 in the appeal of the revenue for the assessment year 2003-04 and ground No. 5 in their appeals for the assessment years 2004-05 and 2005-06 are dismissed." 15. So, respectfully follo....
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....se for the preceding assessment year i. E. 2006-07. The aforesaid contention of the ld. Counsel for the assessee was not controverted by the ld. DR. 20. It is noticed that a similar issue having identical facts has been decided in favour of the assessee in the assessment year 2006-07 vide order dated 20.02.2015 by following the earlier orders of the Tribunal for the assessment years 20003-04 to 2005-06 and the relevant findings have been given in para 39 which read as under: "39. Having heard both the parties, we find that Tribunal in para nos. 25 to 25.7 in assessment years 2003-04 to 2005-06 observed as under: "25. We have heard both the parties and gone through the facts of the case. Indisputably, the aforesaid amount relates to expenditure in connection with the issue of non convertible debentures and commercial paper. The Assessing Officer treated the same as deferred expenditure while the ld. Commissioner of Income Tax (Appeals) allowed the claim in the light of decision of India Cements Ltd. (supra). It is well established that the concept of deferred revenue expenditure is essentially an accounting concept and alien to the Act. The relevant provisions of the Act re....
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....and revenue and the same does not recognize of any concept of deferred revenue expenditure. That is why Assessing Offficer himself allowed the 1/5^th of the amount. In a number of judgments viz. Amar Raja Batteries Ltd. Vs ACIT (2004) 91 ITD 280 (Hyd.), JCIT Vs Modi Olivetti Ltd. (2005) 4 SOT 859 (Del.), ACIT Vs Medicamen Biotech Ltd. (2005) 1 SOT 347 (Del.), Hero Honda Motors Ltd. Vs JCIT (2005) 4 SOT 393 (Mum) and ACIT VS Ashima Syntex Ltd. 117 ITO 1 (Ahd.) (SB) it has been affirmed that where any expenditure is treated as a deferred revenue expenditure, it presupposes that the concerned expenditure, creating benefit is in the revenue filed and is a revenue expenditure, but considering its enduring benefits as well as the fact that it does not result in the creation of any new asset or advantage of enduring nature in the capital field, the same is required to be treated distinctly from capital expenditure. However, where any identifiable capital asset, tangible or intangible comes into existence as a result of the amount expended, the same will have to be treated as a capital expenditure and depreciation allowable thereon as per the prescribed rules and procedures under the Incom....
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.... any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper accountancy principles, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee." 25.5 Likewise, in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs CIT 227 ITR 172 (SC), Hon'ble Supreme Court held that "It is true that this court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not the question has to be decided according to the principle of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act as was pointed out by Lord Russell in the case of B. S. C. Footwear Ltd. (1970) 77 ITR 857, 860 (CA), the Income Tax Law does not march step by step in ....
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....l in assessment years 2003-04 to 2005-06 after considering the findings of learned Commissioner of Income Tax (Appeals) for both the years, observed in paras 29 & 29.1 as under: "29. We have heard both the parties and gone through the facts of the case. Indisputably, the assessee offered loan processing fees (income) for tax and claimed loan acquisition costs as expense in the year of accrual in accordance with, a practice being consistently followed by the assessee over the years and never questioned by the Revenue. However, the Assessing Officer did not accept the submissions of the assessee in the light of decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Limited (supra). On perusal, the learned Commissioner of Income Tax (Appeals) allowed the claim on the ground that the Assessing Officer could not take a different stand relating to income and expenditure on the same issue and the treatment in books of accounts does not govern the tax treatment, which is governed by the provisions of the Act. As already observed by us in paras 25 to 25.7 while adjudicating ground No. 3 in the appeal of the revenue for the assessment year 2003-04....
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.... account of adjustment Arm's length price of the international transaction . 27. Facts related to this issue in brief are that the international transactions in this case were direct selling agent commission payment, original data service charges, interest charges, expenses reimbursement within the group and fees received for software development and sport services. The AO referred the matter to the TPO u/s 92CA of the Act and the TPO held that all the international transaction except software development and sport services were at Arm's length based on TP documentation submitted by the assessee. For the transfer pricing analysis of the above said international transaction, the assessee selected Transactional Net Margin Method (TNMM) as most appropriate method and operating profit as a percentage of total cost as Profit Level Indicator (PLI). The assessee selected 18 comparables and the average PLI of the comparables worked out to 13.43%. The assessee had a return on total cost of 18% during the year ended on 31.03.2007. Accordingly, the fees received by the assessee for software customization and sport services run to its associate enterprises amounting to Rs. 20,97,13,000/- wa....
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....tware Ltd. ICRA Techno Analytics Ltd. Mediasoft Solutions Ltd. Mindtree Consulting Ltd. Megasoft Ltd. Computech International Ltd. (Software segment) Persistent Systems Ltd. Karuturi Networks Ltd. (project sales and software development segment) Quintegra Solutions Ltd. R S Software (India) Ltd. R Systems International Ltd. (Seg.) Sasken Communication Technologies Ltd. (Seg.) Tata Elxsi Ltd. (Seg.) Thirdware Solutions Ltd. Wipro Ltd. (Seg.) SIP Technologies & Exports Ltd. Mindtree Consulting Ltd. 29. The assessee raised several objections to the use of fresh filters which the ld. CIT(A) summarized in para 10.5 of the impugned order which read as under: Filter Assessee's arguments TPO arguments 1) Companies with related party transactions more than 25% of the operating revenues have been rejected AS 18 on related parties does not prescribe any percentage 15% to be considered in place of 25% relying on Sony India ITAT RPT data is not available on public domain Assessee does not have powers like TPO to use 133(6) This fi....
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.... Employee cost is a major cost in this industry and failure to comply with this filter means that the company is outsourcing its major work or is a software products company or a trading company or a company with peculiar economic circumstances Low employees cost means that the co is functionally different 'Revenue earned by a software development company is generally directly proportional to number of employees Power u/s 133(6) was used to where complete info was not available No comparable has been accepted/rejected merely on this ground 4) Companies with Diminishing revenue filter (revenue less than 30% over last 10 years or at least 3 years) rejected Neither the Act nor the OECD provides that the revenue trend is a determinant of comparability Company that has diminishing revenues need not necessarily be a consistent loss maker On one hand companies which demonstrate a positive growth trend in Revenues are being considered and on the other hand companies which have losses are being discarded. This shall result in selecting only high margin companies If a certain software company is under diminishing revenues for 3 years it implies that the company has some peculiar ....
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.... carried outside India on customer site Co's generating more than 75% of export revenues from onsite companies working outside India having their own geographical markets, cost of labour etc. 30. The assessee objected to the rejection of his own comparable by the TPO and explained the functions performed by it in the following words: "The appellant is a non banking finance company primarily engaged in the business of providing finance to customers for auto, sales finance, personal loans and mortgage (i. E. home loan and home equity) loans. The appellant has been using a software called "I-Loan" for its financing business since 2002. I-loan is in house developed software that enables the appellant to evaluate its loan portfolio & process these transactions. The same also provides a platform for management reporting. Since the infrastructure (assets, manpower etc.) which is used to upgrade the software on continuous basis for the purposes of appellant's operations, remains underutilized, it was decided to do similar activities for its Associated Enterprises (AEs) so that the appellant is able to utilize its resources optimally. Hence, the software was implemented in other locat....
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....roduct development and providing specialized application services through its two divisions namely Xius-bcqi division and BlueAlly Division. Please find below the extract of the reply submitted by Megasoft (page no 702 of the paper book): "Xius-bcgi division 1. The Xius-bcgi division is a total telecom division whose main focus would be to invent, market and manage cutting edge telecom products, applications & services. Xius-bcgi division has been inventing and implementing industry transforming technologies for the wireless and convergent telecom industry. Xius helps carriers to maximize the value of their wireless network through its applications, products and technologies platform integration and support. The division performs different levels of activities throughout the process of software development. The details of activities performed with respect to software development are detailed in Annexure-l. 2. Xius-bcgi performs market analysis, technology evolution assessment and then builds a product roll out and or Product Enhancement Road Map Plan. Once the road map plan is defined, development team goes about implementing this roadmap. Products that are resultant of th....
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.... experience working across various platforms and technologies, including integration of multiple technology environments. Application Management Services: Designed to address customers' needs for reliability, high availability, and evolving functionality of their existing business applications. Because an effective and fully utilized enterprise application portfolio is a clear competitive advantage for any business. Concept-to-Market Services: Designed to help customers accelerate their products' time-to-market, through BlueAlly's comprehensive IP-CP3 framework (IP creation, procurement, protection and propagation) and industryleading product partnership models. " Copy of annual report of Megasoft for year ended 31 December 2007 is enclosed as Annexure 2. However as submitted above, the appellant is neither into any product development nor is its software saleable in the market. The appellant only provides limited software service to its AEs. Accordingly, the TPO has erred in holding that Megasoft is functionally comparable to the appellant. Scale of operations: According to the standalone financials of Megasoft for the year ended 31 December 2007, total sales of Meg....
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....rrect computation of PLI - Without prejudice to the above arguments, it is submitted that PLI computed by the TPO is incorrect on account of the following reasons: * As per the TPO's order (page no 705 of the paper book), revenue of both XIUS- bcgi division and BlueALLY division has been taken for computing operating profits. * The TPO has not considered depreciation and miscellaneous expenses as operating expenses" Findings: The above submission of the appellant is carefully considered. There is amalgamation in the company during the financial year. The company has also acquired a US based company. The company is in multiple areas of software technology having different lines of business. Therefore, I hold that this company should not be taken as a comparable. Celestial Labs Ltd. ('Celestial Labs'): Appellant has submitted that this company is engaged in software products, has abnormal profits and having high advertisement spending. These issues were raised before the TPO. From the order of the TPO, I am of the opinion that the TPO has effectively countered all doubts raised by the taxpayers. On the issue of products, the company has categorically stated that it has....
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....ved as follows: "It is no doubt true that loss and competition are normal incident of business and merely on above factors, exclusion may not be justified." Accordingly the appellant prays that the above company should be included in the set of comparables. Please find enclosed the Director's report, Balance Sheet and Profit and Loss Account of OITL for the year ended 31 March 2007 (refer Annexure 3). Upon going through the enclosed information, Your Honours will find that although the Company has incurred a loss of Rs. 3.85 crores in the relevant financial year, net worth of the Company is positive (65.98 crores). Further, losses of the Company have reduced significantly from 18 crores in the previous year ended 31 March 2006 to 3.85 crores in the previous year ended 31 March 2007. This shows that the Company is in the process of recovering from losses contrary to the allegation made by the TPO that the Company is incurring significant losses of the past three years and might be on the verge of closure. Accordingly, it is prayed that the Company be included as a comparable for working out the Arm's length price." 33. The ld. CIT(A) after considering the submissions of ....
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....ny India Pvt. Ltd. Vs DCIT 114 ITD 448 (Del.) 37. In his rival submissions the ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the assessee had entered into international transaction of providing Software Development Services and the financial result with regard to the software scheme showed NCP percentage at 18% by using TNMM method. It was further stated that the assessee compared Profit Level Indicator with 18 comparables, the mean margin of which was 13.43%. It was also stated that the TPO rejected 16 comparables including Orient Information Technology Ltd. without assigning any result. The said comparable i. E. Orient Information Technology Ltd. was to be accepted, in view of the decision in the case of Yum Restaurants India Pvt. Ltd. in ITA No. 5122/Del/2010 decided by the ITAT Delhi Bench. It was further stated that Mega Soft Ltd. was rightly directed by the ld. CIT(A) to be excluded from the comparables because the said company was functionally different. 38. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it....
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....n fee expenses is spread over the period of three years according 1/3^rd of the total loan acquisition fee is allowed in current year rest being is allowable in the next two years. 2. The ld. CIT(A) has erred on facts and in law in deleting the addition of Rs. 9,60,08,845/- on account of NCD & Commercial Paper issue expenses ignoring the fact that the same expenditure has been spread over the period of five years and accordingly 1/5^th is allowed in the current years and rest being will be allowed in the next four years. 3. The ld. CIT(A) has erred on facts and in law in deleting the addition on account of depreciation on computer software are eligible for depreciation and same cannot be extended to computer accessories and peripherals. 4. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any grounds of appeal at any time before or during the hearing of this appeal." 41. As regards to this appeal, it was the common contention of both the parties that the issues raised vide Ground Nos. 1, 2 & 3 of this appeal are similar to the issues raised in Ground Nos. 7, 6 & 5 in ITA No. 2848/Del/2012 for the assessment year 2007-08, which we ....