AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2016 (6) TMI 203
X X X X Extracts X X X X
X X X X Extracts X X X X
....ismissed. 2. During the assessment proceedings, the Assessing Officer(AO)found that assessee had entered into International Transaction(IT) with its Associated Enterprise(AE). He made a reference to the Transfer Pricing Officer (TPO), as per the provisions of section 92 of the Act, to determine the Arm's Length Price (ALP) of the said transaction. The TPO selected following comparables: Comparable companies Operating margins on cost Cinerad Communication Limited 1.47% Cinevistaas Limited 13.63% Creative Eye Limited 5.57% New Delhi Television Ltd. 30.90% Arithmetic mean 12.89% He found that the assessee had calculated the margin of 5.04% on operating costs for the year under appeal. Therefore, the TPO made TP adjustment of Rs. 18, 85, 92, 757/- as under: Particulars Amount (in Rs.) Margin on operating cost as per arms length margin (2402065960*12.89%) 30, 96, 26, 302 Margins earned 121, 03, 35, 45 Adjustment 18, 85, 92, 757 In pursuance of the order of the TPO, the AO made an addition of Rs. 18.85 crores to the total income of the assessee. 4. Aggrieved by the order of the TPO/AO the assessee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....laim, that the relevant transaction of the assessee was not comparable to ordinary exporters, that the TPO was justified in rejecting such comparables used by it in the TP study report, that the assessee had objected inclusion of NDTV and CL, that it had argued that their margins very high and unusual, that NDTV was the content creator and it supplier to the assessee, that simultaneously it could not be treated as content creator, that the argument advanced by the assessee devoid of merit, that the profit margins of the four comparables, identified by the TPO were in a normal progression of 1.47%, 5.57%, 13.63% and 30.9%, that the margins of any one of them could not be excluded, that none of the comparables had shown unusually high or low figure of profit, that the assessee acted as a content creator, that it had not procured all its contents form NDTV, that it was doing inhouse content production activity also, that assessee had not made a claim that 90% of the content was procured from the content creators like NDV, CL, Balaji Telefilms, UTV Software Communication, etc. Finally, the FAA upheld the order of the AO. 5.Before us, the Authorised Representative(AR) stated that ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....osts related to production such as actors, equipments, creator personnel were in the books of the content-producers, that assets such as lights camera studios and sets were not utilised by the assessee except for its in-house production, that financials of the assessee did not include any such costs/ assets for the contents purchased/procured/sourced, that NDTV utilised such assets, that two of the comparable companies selected by the TPO i.e. NDTV, CL were actual content producers for the assessee, that the assessee had bought content from both of these companies during the assessment year 2003-04, that financial statements of NDTV for AY.2003-04 were not available in the public domain at the time or even today, that the assessee had requested the concerned TPO to provide with evidence forming the basis for selecting NDTV as comparable and the manner of computation of margin earned by NDTV for the subject assessment year, that the financial assessments of NDTV available in the public domain are from AY.2004-05 onwards, that NDTV had admitted that it had entered into content reduction agreement with STAR and BBC (Pg.1182 of the PB), that the assessee had furnished the details of pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... us and material placed on record, it is notice that nowhere in the TPO order it is mentioned what selection process has been adapted for including the two comparables by the TPO. What are the criteria, keywords, quantitative and qualitative filters applied for selecting the comparables. If rules provide for selection criterion of comparables, then same has to be adhered to strictly i.e. either parties. If a particular mechanism of such process is to be done scientifically by the assessee then same applies to the TPO also, otherwise it will always create suspicion of cherry picking of the comparables by the parties. There cannot be two different standards under the law one for the assessee and one for the TPO. So far as selection of the comparables by the TPO, nothing has been brought on record before us, that the TPO had adopted any scientific method for selection of his two comparables, i.e. Motilal Oswal Investment Advisory Private Ltd. and Future Capital Holdings Ltd....". If the selection process of comparables adopted by the TPO is examined it becomes clear that he had not adhered to the process as envisaged by the provisions of the Act and the Income tax Rules, 1962(Rules....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hannels........... Business review and operations Our primary business change from reduction of television software for other broad - casters to television new broadcasting through our own channel." Page 1222 of the PB, under the head production expenses, gives details of expenditure such as set construction, helicopter running and maintenance, graphic, music and edits etc. 6.3. Now we would like to take the other comparable i.e. CL. Pages 84 of the PB reads as under: "the improved performance during the year as a result of the company's strong programming on the private satellite channels like Star plus with Sanjeevani, Ssssssh Koi hai and Jai Mata Ki continuing to perform strongly". At page 848 of the PB following description is found- "Your company's studio at Kanjur Marg is being used extensively for the shooting of various television programmes, feature films and ad commercial for both in house and external producer." From the above one thing is clear that the assessee is not content producer like NDTV or CL. We agree with the argument advance by the assessee that quality control is totally different from manufacturing. If a busi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tant fact that during the year under appeal NDTV was a pure content producer. Therefore, selection of NDTV, as a comparable in our opinion was not justified. Similarly, he should not have selected CL as a comparable because it was supplying contents to various entities including the assessee. Thus, there were two basic flaws in the approach of the TPO and the FAA. First to hold that the assessee was a producer of contents and secondly to include NDTV and CL in the list of the comparables. If both these comparables are taken out of the list no TP adjustment will be required. Therefore, reversing the order of the FAA we decide ground no.4 in favour of the assessee. ITA/1370/M/2009: 7. First Ground of appeal, raised by the AO, is about deductibility of license fee.It was brought to our notice that while deciding the appeal for AY.2001-02, the Tribunal had decided the issue in favour of the assessee, that the Hon'ble Bombay HC had dismissed the Revenue's appeal, that the Hon'ble Supreme Court did not admit the SLP filed by the department, that the Tribunal had directed the AO to reconsider the claim of assessee, while deciding appeal for AY.2002-03, that the AO himself allowed th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oval of the Reserve Bank of India and copy Of the approval is placed on record. Reliance was also placed before us upon the judgement of jurisdictional High Court in the case of SG S India (P) Ltd. 208 CTR 263 in which it has been held that if the expenditures are incurred after obtaining the RBI approval, the reopening of the assessment on the ground that the calculations are not at arms length is without any merit. In the instant case the assessee has obtained the approval from the RBI before making the payment of licence fee, as such the nature of payment cannot be out rightly rejected or doubted. It requires proper adjudication in the light of detailed analysis and relevant evidences furnished by the assessee. Whereas the Assessing Officer has disallowed the entire claim of payment of licence fee without looking into the merits of the case and the relevant provisions of the Act. In the impugned assessment year the claim of the assessee should have been examined in the light of the report of the Transfer Pricing Officer and the evidences filed by the assessee but the Assessing Officer as well as the CIT(A) have not adjudicated the issue in accordance with law. We, therefore, are....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... order of learned CIT(A) confirming the disallowance is hereby set aside and consequently, the disallowance confirmed by him is hereby deleted. This would dispose of ground no.3 in the appeals of the assessee as well as Revenue." Respectfully, following the above order second ground of appeal is dismissed. 10. Next ground deals with addition made on account of point of accrual of commission income. The AR stated that the Tribunal had decided the issue in favour of the assessee, while deciding the appeal for AY.s.1997-98 to 99-2000 (103ITD73)& AY.2000-01(22SOT444), that the department did not succeed before the Hon'ble High Court or the Hon'ble Supreme Court, that the Tribunal had decided identical issue in favour of the assessee while adjudicating the appeal for AY.2006-07.The Tribunal had decided the issue as under while deciding the appeal for AY.2000-01 (supra). "65. The next issue arising from the appeal of assessee relates to the addition of Rs. 6, 85, l5, 145/- in respect of commission income (wrongly mentioned as addition of Rs. 23, 64, 41, 347/- in the ground no 2 raised by the assessee). Briefly stated, the facts are that assessee was acting as an agent for ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 28th July, 2006 by holding that income accrued in the year in which the amount was received by the assessee or paid by the advertisers even under the Mercantile system of accounting. Since the lower authorities had relied on their orders for the preceding Assessment Year's, the addition cannot be upheld since the additions made in the earlier years on this account have been deleted by the Tribunal. However, the learned D.R. has submitted before us that there is a change in the terms and conditions of payment of commission and that the same may be considered. In view of the same it would be appropriate to refer the relevant clauses of the agreement for the benefit of this order. The clause (8) of the agreement dated 31st day of May, 1994, which was considered by the Tribunal in the appeals relating to Assessment Years 1997-98 to 1999-2000 read as under : "The agent shall be entitled to retain 15% of the net invoiced amount paid by the assessee as commission......................" 67. XXXXXXXXXXXXX 68. After going through the relevant terms under both the agreements, we do not find any material difference since under both the agreements, the commission is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... such profits are to be deducted from the profits of the business as computed under the head "Profits and gains of business or profession". The expression "included any such profits" would mean only such receipts by way of brokerage, commission, interest, rent, charges or any other receipt which are included in the profits of the business as computed under the head "Profits and gains of business or profession". Therefore, if any quantum of the receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature is allowed as expenses under sections 30 to 44D of the Act and is not included in the profits of business as computed under the head "Profits and gains of business or profession", ninety per cent. of such quantum of receipts cannot be reduced under clause (1) of Explanation (baa) from the profits of the business. In other words, only ninety per cent. of the net amount of any receipt of the nature mentioned in clause (1) which is actually included in the profits of the assessee is to be deducted from the profits of the assessee for determining "profits of the business" of the assessee under Explanation (baa) to section 80HHC . Ex....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ery. He allowed depreciation @25% for those devices. He allowed depreciation of Rs. 38.86 lakhs and reduced the balance from the block, out of the total depreciation of Rs. 93.28 lakhs. 12.1. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA)and made elaborate submission before him. After considering the submission of the assessee and the assessment order, he held that the issue stood covered in favour of the assessee by the order of the Kolkatta Tribunal delivered in the case of Samiran Majumdar (98ITD 119), that the Tribunal had held that the printer and scanner were an integral part of the computer, that the same were to be treated as computer for the purposes of allowing higher rate of depreciation @60%.He directed the AO to treat the computer items as a part of the computer and allow depreciation @60%. 12.2. During the course of hearing before us, the Departmental Representative (DR) stated that the AO had specifically excluded certain items from the list of computers, that those devices were entitled to depreciation @25% only. The AR stated that all the items were necessary to run the computers. He relied upon t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m asst. yr. 2003-04, defines "computer software" to mean any computer programme recorded on any disc, tape, perforated media or other information storage device. No definition of 'computers' has been given in the Appendix, unlike that of computer software. It is nobody's case that the routers or switches are computer software. Thus we shall restrict ourselves in understanding the meaning of the expression 'computers', in the facts and circumstances of the case. 12. Sec. 32, which grants depreciation allowance, does not define the word 'computer'. It is an admitted position that the word 'computer' has not been defined in the IT Act or IT Rules. We find that the term "computer system" has been defined in Explanation below s. 36(1)(xi) as follows : "(a) 'Computer system' means a device or collection of devices including input and output support device and excluding calculators which are not programmable and capable of being used in conjunction with external files, or more of which contain computer programmes, electronic instructions, input data and output data, that performs functions including, but not limited to, logic, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cannot be applied as such (for giving meaning to 'computer') in the context of s. 32. 15. In some of the cases decided by the Tribunal, reliance has been placed on the definition of "computer" given by the Information Technology Act, 2000, s. 2(i), which is as under : "(i) 'Computer' means any electronic, magnetic, optical or other high speed data processing device or system which performs logical, arithmetic and memory functions by manipulations of electronic, magnetic or optical impulses, and includes all input, output, processing, storage, computer software or communication facilities which are connected or related to the computer in a computer system or computer network." 16. Before we go on to apply this definition in the context of s. 32, the scheme of the Information Technology Act, 2000, needs to be examined. Its preamble indicates that it is an Act to provide legal recognition for transactions carried out by means of electronic data interchange and other means of electronic communication, commonly referred to as "electronic commerce", which involves the use of alternatives to paperbased methods of communication and storage of info....
X X X X Extracts X X X X
X X X X Extracts X X X X
....been expressed by the Hon'ble Rajasthan High Court in Arihant Tiles & Marbles (P) Ltd. vs. ITO (2007) 211 CTR (Raj) 169 : (2007) 295 ITR 148 (Raj) holding that the interpretation of any expression used in the context of one statute is not to be automatically imported while interpreting similar expression in another statute. This judgment has been approved by the Hon'ble Supreme Court in ITO vs. Arihant Tiles & Marbles (P) Ltd. (2009) 227 CTR (SC) 513 : (2009) 32 DTR (SC) 161 : (2010) 320 ITR 79 (SC). 18. From the aforestated portion of the statement of objects and reasons and the preamble of the Act, it is evident that the rationale behind the Information Technology Act, 2000 is quite distinct from that of the IT Act, as can be seen from its preamble, which is 'an Act to consolidate and amend the law relating to income-tax and supertax'. Thus it is palpable that both these Acts are not in pari materia. There is significant difference in the scope, purpose and substance of these two statutes. Exconsequenti the definition of 'computer' as given in the Information Technology Act, 2000, cannot be applied in the context of s. 32 of the IT Act. However, t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be understood as per common parlance language. Taking into this account, apparently, the business of the assessee is that of a hotel, which is a trading activity and not that of an industrial undertaking.' Resultantly the benefit of deduction was denied. 21. In Aspinwall & Co. Ltd. vs. CIT (2001) 170 CTR (SC) 68 : (2001) 251 ITR 323 (SC), their Lordships were concerned with the question of granting investment allowance, for which one of the prerequisite conditions as per s. 32A was that the industrial undertaking should be engaged inter alia in the manufacturing. It was noticed that the word "manufacture" was not defined in the IT Act. In such circumstances it was held that "In the absence of a definition, the word 'manufacture' has to be given a meaning as is understood in common parlance. It is to be understood as meaning the production of articles for use from raw or prepared materials by giving such materials new forms, qualities or combinations whether by hand labour or machines. If the change made in the article results in a new and different article then it would amount to manufacturing activity." 22. Similar view has been taken by the Hon'b....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 25. Thus in order to determine whether a particular machine can be classified as a computer or not, the predominant function, usage and common parlance understanding, would have to be taken into account. To analyse further, let us take the case of a television, the principal task of which is to deliver visuals accompanied with audio. The signals are received through the relevant networks such as Dish TV, Tata Sky etc. But TV does not become computer for the reason that its principal function cannot be done only with the aid of 'computer functions' notwithstanding the fact that in the entire process of networking or receiving the output from different channels and making it available to the viewers, some sort of computer functions are necessarily involved. Similarly take the case of mobile phone. Its principal task is to receive and send calls. It is not a standalone apparatus which can operate without the relevant network, such as Airtel, BSNL, Reliance. It, therefore, follows that any machine or equipment cannot be described as computer, if its principal output or function is the result of some sort of 'computer functions' in conjunction with some non-computer....
X X X X Extracts X X X X
X X X X Extracts X X X X
....not share a common network address. The subnets in the router do not necessarily map one-to-one to the physical interfaces of the router. The term "layer 3 switching" is used often interchangeably with the term "routing". The term switching is generally used to refer to data forwarding between two network devices that share a common network address. 29. In simple words, a router means a device that routes data from one computer to another or from one network to another. Routers provide connectivity inside enterprises, between enterprises and the internet, and inside internet providers. From the above discussion it transpires that the function of a router is to receive the data from one computer and make it available to another computer for viewing or further processing. Apart from facilitating the flow of data between two computers, the routers also help in the transfer of data from network to computer. Thus the essential function of the router in a commercial organization is to facilitate the flow of data from one computer to another for its processing or storage. Switches are shorter version of routers, which perform similar functions as that of routers but within a limi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y assessory or in combination with a computer, it cannot be called a 'computer component'. 31.3 Coming to the routers, it is seen that these can also be used with a television and in such use, no computer is required. These are also called TV routers. Similarly, "Internet Service Providers", give connectivity, by installing a router in the premises of the persons/institutions availing the internet connection. In these cases the router is not used along with a computer. In such a situation, it would be a "standalone" equipment. In such cases this cannot be considered a component of a computer or computer hardware. Giving another example, a computer software can be used in many devices including washing machine, television, telephone equipment etc. When such software is used in those device, it integrates with that particular device. The predominant function of the device determines its classification. Only if the computer software, resides in a computer, then it becomes a part and parcel of a computer and, as an long as it is an integral part of a computer, it is classified as a 'computer'. 31.4 In view of the above discussion, we are of the conside....