TaxTMI 
TaxTMI 
TaxTMI 
2017 (5) TMI 1756
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.... Date of No. CIT(A)'s order 1 1065/Ahd/2012 2004-05 21.01.2010 143(3),r.w.s. 147 r.w.s. 92C & 144C of the IT Act, 1961. 27.02.2012 2 1038/Ahd/2012 2004-05 -do- -do- -do- 3 1066/Ahd/2012 2005-06 21.01.2010 -do- 29.02.2012 4 1039/Ahd/2012 2005-06 -do- -do- -do- 5 1067/Ahd/2012 2007-08 28.012011 143(3) r.w.s.92C and r.w.s. 144C 29.02.2012 6 3283/Ahd/2010 2006-07 11.10.2010 143(3) r.w.s. 92C and Date of DRP's 144C of the Act order 15.09.2010 7 459/Ahd/2015 2007-08 28.01.2011 271(1)(c) of the Act 30.12.2014 8 1040/Ahd/2012 2007-08 -do- 143(3) r.w.s. 92C and 144C of the Act 29.02.2012 9 577/Ahd/2015 2007-08 -do- 271(1)(c) of the Act 30.12.2014 10 CO No. -do- 271(1)(c) of the Act -do- 55/Ahd/2015 11 2801/Ahd/2012 2008-09 22.12.2011 143(3) r.w.s. 92C and 14.09.2012 144C of the Act 14.09.2012 12 709/Ahd/2016 2008-09 -do- 271(1)(c) of the Act 1.1.2016 Table no.2 Sr.No. Ay Appellant Appeal No. Nature of issues 1 2004-05 SRTPL Appeal 1065/Ahd/2012 Reopening of assessment transfer pricing issues and purchase of library books 2 Department Appeal 1038/Ahd/2012 3 2005-06 SRTPL Appe....
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.... statute when the reference to the TPO was made by the learned AO. Grounds relating to corporate tax adjustments 3. Without prejudice to Ground No. 1 & 2 above, on facts and in circumstances of the and in law, the learned CIT (A) erred in confirming the action of the learned AO in holding that purchase of library books of Rs. 17,31,114 is a capital expenditure and hence not allowable as a revenue expenditure. Grounds relating to transfer pricing adjustments 4. Without prejudice to Ground No.l & 2 above, the learned CIT (A) erred in confirming the transfer pricing adjustment of Rs. 2,08,61,862 determined by the learned TPO. 4.1 On facts and in circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the learned TPO in invoking transfer pricing provisions even though no single company selected as comparable is engaged in identical business of the Appellant. 4.2 On facts and in circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the learned TPO in treating deferred revenue expenditure of Rs. 70.98 lacs as an ordinary operating expenditure while computing the operating margin of the Appellant. 4.3 ....
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....has erred in rejecting the contention of the Appellant that the assessment was barred by limitation and void ab initio as the notice under section 143(2) of the Act was served beyond the time limit specified under Proviso to Section 143(2)(ii). 1.2 The learned CIT(A) has erred in stating that the Appellant has not filed any return of income in response to notice under section 148 of the Act. 1.3 The learned CIT(A) has erred in holding that the provisions of Section 292BB are applicable to the subject captioned year. 2. Without prejudice to Ground No. 1 above, on the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in confirming the action of the learned AO in relation to calling for information and making an addition to the total income of the Appellant on issues which are not connected with the reasons on the basis of which the reassessment was initiated. It is submitted that: 2.1 The learned Assessing Officer is not permitted to make general inquiries on matters totally unconnected with the issue on which proceedings under Section 147 were originally initiated. 2.2 The learned CIT (A) has erred in relying on the provisions of Explanat....
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....argins of the Appellant. Grounds - 1039/Ahd/2012 - Asst. Year 2005-06- By Revenue 1. The facts and in the circumstances of the case and in law the learned CIT(A) has erred in excluding M/s. Celestial Labs from the list of comparable for determining the arm's length price holding that M/s. Celestial Lab is not involved in research and development work without considering the fact that it was evident from the draft red herring prospectus submitted by M/s. Celestial Labs to SEBI for its 1PO that the company is indeed engaged in research related to development of pharmaceutical product and molecules. 2. On the facts and in the circumstances of the case and in law the learned CIT(A) has erred in allowing standard deduction of 5% as per section 92C(2) of the Act without considering the fact that the provisions of section 92C of the Act clearly states that the +/-5% variation is not to be allowed as standard deduction. 3. On the facts and in the circumstances of the case and in law, the C1T(A) ought to have upheld the order of the Assessing Officer. 4. The appellant craves leave to add, to amend or alter the above grounds as may be deemed necessary Grounds - 3283/Ahd/2010 -....
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....nd consequent to such reduction, ALP so worked out being at arm's length, the addition made be deleted. 6. a. Without prejudice, Ld. TPO as well as Ld. D.R.P. have erred in working A.L.P. without making mandatory F.A.R. adjustment prescribed in the Rules as attributable to the assets employed as well as risk assumed, in the form of adoption of earnings before depreciation and deduction at 6% of A.L.P. towards non assumption of finance risk representing difference between P.L.R. and bank rate. b. Ld. TPO and Ld. D.R.P. ought to have considered Appellant's submission for adoption of profit before depreciation for the purpose of working A.L.P under TNMM. Appellant therefore pleads that post such adjustment A.L.P. works at arm's length and addition made in the A.O. be deleted. 7. a. Ld. TPO and Ld. D.R.P. have erred in not granting deduction of 5% of A.LP. as permissible under proviso to subsection (2) of section 92C as in force. b. Appellant therefore pleads that the said deduction of 5% of A.L.P, as may finally be upheld by the Hon. Tribunal, be granted thereon. 8. Pending rectification petition made u/s 154, Appellant seeks the following relief unless granted subsequen....
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....,11,50,423 determined by the learned TPO. 3.1 On facts and in circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the learned TPO in invoking transfer pricing provisions even though no single company selected as comparable is engaged in identical business of the Appellant. 3.2 On facts and in circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the learned TPO in treating deferred revenue expenditure of Rs. 53.23 lacs as an ordinary operating expenditure while computing the operating margin of the Appellant. 3.3 On facts and in circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the learned TPO / AO in treating Vimta Labs Limited and Alphageo (India) Limited as comparable companies for Financial Year 2006-07. 3.4 On facts and in circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the learned TPO / AO in not adjusting depreciation from the operating costs whilst computing the operating margins of the Appellant and the comparable companies. It is prayed that the learned TPO be directed to make such economic adjustment whi....
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...., to amend or alter the above grounds as may be deemed necessary Grounds - 577/Ahd/2015 - Asst. Year 2007-08- By Revenue 1. On the facts and in the circumstances of the case the learned CIT(A) has erred in facts and in law in directing to delete the penalty u/s.271(1)(c) of the Act of Rs. 54,54,7837- on account of upward adjustment made by the TPO, without appreciating that the assessed income under the normal provisions was Rs. Nil, only due to set off brought forward unabsorbed depreciation. 2. The appellant craves leave to add, to amend or alter the above grounds as may be deemed necessary. Grounds - CO No.55/Ahd/2015 - Asst. Year 2007-08- By assessee On the facts and circumstances of the case and in law, the learned Assistant Commissioner of Income Tax, Circle 2(1)(1), Baroda (hereinafter referred to as the 'learned AO') and the learned Commissioner of Income Tax (Appeals) - 2, Baroda (hereinafter referred to as the 'learned CIT (A)') have erred on the following grounds, which are independent, separate/alternative and without prejudice to one another: 1. On the facts and circumstances of the case and in law, the learned AO and the learned CIT (A) err....
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....ed in not granting risk adjustment and other economic adjustments while calculating the operating margins of the Appellant. It is prayed that the learned TPO be directed to make such adjustments to the Appellant. 6. On facts and in circumstances of the case and in law, the learned CIT (A) erred in confirming the action of the learned TPO / AO in treating the following incomes as non operating incomes while computing the margins of the appellant: Accumulated Depreciation Op. Bal. difference considered as income Rs. 886,005 VAT Refund Rs. 83,759 Income from sale of grass, scrap, etc Rs. 67,367 Total Rs. 1,037,131 The appellant prays that the learned TPO / AO be directed to consider the above incomes as operating incomes and accordingly calculate the revised operating margins of the appellant. Grounds - 709/Ahd/2016 - Asst. Year 2008-09- By assessee On the facts and circumstances of the case and in law, the Commissioner of Incometax (Appeals)-II, Baroda [CIT(A)] erred in confirming penalty on the following grounds, which are independent, separate/alternative and without prejudice to one another: 1. On the facts and circumstances of the case and in law, the l....
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.... profit before depreciation interest and tax(PBDIT) to be used as Profit Level Indicator for computing the operating margins for AY 2004-05 to 2008-09; v) Assessee has challenged the inclusion of Vimta Labs and Alphangeo as comparable, whereas the Department has challenged the order of CIT(A) for not considering the Celestial Lab as comparable; vi) Both Assessee and revenue has challenged the availability/non-availability of benefit of +/- 5% as standard deductions u/s.92C of the IT Act vii) Allowing of basic adjustment and other economic adjustment while computing the operating margin. viii) Both the parties have challenged the sustaining/deleting penalty u/s.271(1)(c) of the IT Act for AY 2007-08 and AY 2008-09, as the case may be . 4. Perusal of the above indicates that the issue at sl. no.(iii) to (vii) i.e. any adjustment is required to be made in the value of the international transaction entered with its associate, is common in all the assessment year in the quantum appeals. Now we take these major disputes in a seriatim. 5. The first issue is involved in Asst. Year 2004-05 and 2005-06. In this segment assessee has challenged the reopening of the assessments by iss....
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.... book profit U/S.115JB. Any gain on account of exchange fluctuation is treated as profit and any loss out of exchange fluctuation is treated as a loss. In this case, the assessee has earned a gain of Rs. 1,10,77,247/- on account of exchange fluctuation. Therefore, this gain should be considered as the assessee's income from the relevant year and should be considered for computing the total income under the normal provisions as well as under MAT. (2) As per col.No.B-6 to the notes to the account, the assessee stated that during the year, the assessee has incurred an expenditure of Rs. 8,93,931/- for the purchase of library books and also Rs. 22,03,538/-on purchases of computer software, for its main activity of carrying out research which has been charged to profit and loss account. It is seen from the above that both the above items library books and computer software were purchased by the assessee for its main business of research. But the same was treated as revenue expenditure, which is not correct. Both the said items purchased by the assessee for its main business of research give enduring of nature of benefit and it should be capitalized." 5.1 The reopening of assessme....
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....ook profit computed for the purpose of alternative tax u/s 115JB . He however, contended that apart from this ground AO has also observed that the amount of fluctuation gain was not considered by the assessee while computing income under the regular provisions. As far as this limb of reason is concerned, he pointed out that the addition made in the regular computation of income on account of alleged exchange fluctuation gain is concerned this addition has been deleted by ld. CIT(A) and the Revenue has not challenged the order of CIT(A). Thus this reasoning is no more available to the AO because no addition has been made on one of the years for which assessment was sought to be reopened. He further contended that as far as the noninclusion of exchange fluctuation gain in the book profit is concerned it is has not materially affected the ultimate demand as assessee has already suffered substantial loss in the book profit, roughly at Rs. 2.16 crores and even if this gain was added in the computation of total book profit then the total loss shown in the book profit would be reduced by Rs. 54,03,649/- but ultimately there will be loss. The assessee cannot carry forward this loss for fut....
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....a firm conclusion. Ld. counsel for the assessee has also not disputed about the legal position that fluctuation gain should be included in the book profit. His argument is that even after inclusion there is no taxable income under MAT also. To our mind this line of argument is to accept that the Assessing Officer to form a firm opinion about ultimately taxability of income which in his prima facie opinion escaped from taxation. Therefore, we are of the view that at that time when Assessing Officer recorded reasons he cannot be expected to anticipate the ultimate taxability of an item. We do not find any force in the contentions of ld. counsel for the assessee on the first fold of submissions. 5.8 In the next fold of submissions ld. counsel for the assessee contended that a notice u/s 148 of the Act was issued /served on 17.4.2007. The assessee has filed a letter dated 19th June, 2007 contending therein that the return filed by assessee on 14.10.2004 u/s 139 of the Act be treated as return filed in response to this letter. Ld. Counsel for the assessee contended that a notice u/s 143(2) was issued on 22nd October, 2008 i.e. after the expiry of time limit provided in the provisions. ....
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....t the contention of the assessee is not acceptable on the following grounds.:- (1) In this case the notice u/s 148 of the Income Tax Act, 1963. was issued to the assessees on 17.04.2007. The assessee did not file its return of income in response to this notice. This fact was also brought to the notice of the assessee vide this office letter no, Cir.,4/AABCS7650L/2008-09 dated 28.05.2008 wherein assessee was further reminded that no compliance was made in response to the notice issued u/s 148 of the Act and therefore, requested to file the return immediately. In response to this fetter, the assessee filed its reply vide letter dated 04.06,2008 Inter alia requesting for adjournment and Supply of reasons for re-opening. Heedless, to mention that assessee has not made any categorical reply regarding non filing return u/s 148 of the Act, though a reference to a purported letter dated 19.06,2007 had been made which has never been this office;. (ii) So far as the assessee submission regarding a letter dated 19.06.2007 addressed to this office is concerned, it is submitted that no such letter was filed In this officer and the assessees is misleading the appellate proceedings by s....
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....this letter has been submitted by the A.O. In this letter, ft has been clearly mentioned that the appellant has not filed any revised return of income in response to the notice u/s 148. Hence, it was requested to file a revised return immediately. In response to this fetter, the appellant should have pointed out the fact of filing a letter asking for treating the original return as the return filed in response to notice u/s 148. But it kept silent and went on to comply with the different notices issued for the purpose of reassessment. In fact, the appellant has failed to produce any evidence to show that any objection was raised by it at any time during the course of reassessment proceedings, to show that notice u/s 143(2) had been served on it beyond the time limit specified under the Act. Thus, it is clear that the appellant has not filed arty return in response to notice u/s 148 and hence, the appellant's claim that notice u/s 143(2) was barred is not acceptable. Without prejudice to this, since no objection has been raised during the course of reassessment proceedings before passing of the order u/s 143(3) r.w.s. 147, hence, the issue Is covered against the appellant by the....
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....h have been treated as capital expenditure by learned Assessing office as against Revenue expenditure claimed by the assessee by observing that the library books and computer software which are used for research purposes provide enduring benefit to the assessee. Learned DRP has also confirmed the view taken by Learned Assessing Officer. Aggrieved assessee is now in appeal before the Tribunal raising this common issue for AY 2004-05 to AY 2007-08 . 7.1 As regards to purchase of library books Learned AR submitted that these library books are the reference materials and books for which are used for conducting research. The research field is a dynamic field which keeps on changing on day to day basis. It may happen that the books that are used for a particular research may not be useful when the research changes or the research conducted is superseded by a research with more advanced technology and means. Due to rapidly changing requirements in research projects, such books do not provide any enduring benefit. Accordingly, reliance in this regard is placed on the principles laid down by the Hon'ble Supreme Court in case of Alembic Chemicals Works Co Ltd v CIT (177 ITR 377) and he....
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....uick changes on account of technology, the assessee needs to update with the latest information. Some books can be of enduring benefit but in most of the cases, such books do not provide any long term benefits. 7.4 Similarly, we also observe that the field of computer software is also vast and the business enterprise has to incur cost of licenses and renewal fees for application level programs like MS office, anti-virus etc.. These programs do not provide services at all perpetuate but it requires regular updation and license fee has to be paid every year. Now the moot question before us is whether such expenditure on purchase of library books and computer software is revenue in nature or capital in nature. Before proceeding ahead, we would like to go through the judgment of Hon'ble Apex Court in the case of Alembic Chemical Works Co. Ltd. vs. CIT, reported in [1989] 43 Taxman 312 (SC), wherein the Hon'ble Court has laid down the principles to identifying certain type of expenditures to be capital in nature or revenue in nature by holding that "The idea of 'once for all' payment and 'enduring benefit' are not to be treated as something akin to statutory conditions;....
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.... of the case in the light of above decision, we observe that the expenditure on library books and computer software are not providing any enduring benefit to the assessee generally and they become obsolete and unusable in a very short span of time which may be less than one year or little more and certainly if an assessee observes that majority of expenditure is having a life span of less than a year, then such expenditure on computer software and library books has been rightly treated as revenue expenditure by the assessee. We are, therefore, of the view that in the given facts and circumstances of the case and the type of business activity the assessee is engaged into, assessee has rightly claimed the expenditure on library books and computer software as revenue expenditure and lower authorities erred in treating them as capital expenditure. We, therefore, allow the related grounds of the assessee for AYs 2004-05 to AY 2007-08. 8. The next common issue in all these appeals is whether on the basis of argumentations of the TPO any adjustment is required to be made in the revenue of international transaction with the associated enterprise of the assessee on the ground that such tra....
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....made reference under sec.92CA to the TPO. On scrutiny of the account it revealed to the TPO that assessee has only one international transaction vide which it has provided research services to its aid. In order to justify arms' length price of international transaction with the associated enterprise assessee has followed Cost Plus Method (CPM). However, ultimately it was agreed by the assessee on the strength of TPS work the arms' length price of international transaction is to be computed on Transaction Net Marginal Method (TNMM). 8.2 It is pertinent to mention that assessee has shown total sales at Rs. 5,42,35,259/-. It has shown total cost at Rs. 6,04,40,339/- thus the operating profit was shown at a loss i.e. the minus figures of Rs. 62,50,080/-. The profit level indicated shown by the assessee by dividing profit by gross was worked out at minus 10.27%. In order to buttress that PLI at minus 10.27% is at an arms' length price, the assessee made reference to few comparable in the beginning and finally before the TPO accepted two comparable namely Biotec Consortium India Ltd (Margin (-)15.09%) and IDC (India) Ltd (Margin 7.24%). Average of these two comparable comes (-) 3.925%. ....
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.... an operating expenditure for the computation of operating margins of SRTPL for the purpose of Transfer Pricing. 8.8 Now in appeal before the Tribunal Learned counsel submitted that that the Appellant had incurred pre-operative expenses of Rs. 3.54 crores during AY 2002-03. These were general overhead expenses which were incurred prior to commencement of the research activities. Accordingly, the same was neither allowed as revenue expenditure nor was allowed to be capitalised and was required to be written off over the period of 5 years as deferred revenue expenditure, as per the Guidance Note issued by the ICAI. These expenses were incurred prior to commencement of the research projects. As per agreement with AE only operating and capital costs in relation to the Research activities for AE can be charged to AE. As these expenses were not incurred for undertaking research projects as they were incurred prior to the commencement of the projects and the same cannot be charged to the Associate Enterprise. Further, the deferred revenue expenditure that has been written off has also been disallowed in the computation of income while filing the return of the income. 8.9 Further, the Ap....
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....g expenditure for the purpose of transfer pricing. 8.14 We have heard the rival contentions and perused the material available on record and gone through the decisions relied on by the ld. Counsel. We notice that the assessee company was incorporated in 1998 as a part of Saudi Basic Industries Corporation (AE SABIC Saudi Arabia). It is engaged in the business of providing contract research and development (R&D) to its AE in petrochemicals and polymers. As per Technology Research Agreement dated 21.10.2001 entered between the assessee and AE, the assessee is reimbursed at 5% markup on the actual cost of research projects incurred by the assessee which includes both operating and capital rerated costs. 8.15 The issue raised by the assessee relates to deferred revenue expenditure of Rs. 70.98 lacs written off in five assessment years which has been considered as a part of operating cost by the Revenue Authorities for the purpose of calculating Arms Length Price, applying the TNMM Method. 8.16 We notice that assessee started its commercial production in January 2002 and had incurred pre-operative expenditure of Rs. 5.29 crores upto 31st December 2001, i.e., prior to its commencement....
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....ion and has also been disallowed by the assessee suo moto in computing the total income. We also find support to this view from the decision of Co-ordinate Bench of in the case of Pole to Win India (P.) Ltd. Vs. DCIT, reported in [2015] 60 taxmann.com 311 (Bangalore - Trib.), wherein it has been held that the expenses which have been disallowed while computing the taxable income are excludable from the computation of operating margin. 8.18 In view of our above discussion and in the given facts and circumstances of the case, we are of the view that the deferred revenue expenditure written off at Rs. 70.98 lacs for all the five years should be excluded from the computation of operating cost in order to calculate Arms Length Price as per TNMM Method. Accordingly, this common ground of the assessee for AY 2004-05 to AY 2008-09 is allowed. 9. Now we take up the issue relating to selection of comparable by the Transfer Pricing Officer. First we take up the comparable Alphageo India Ltd selected by the TPO as comparable which has been challenged by the assessee. The learned AO has held that Alphageo (India) Limited is selected as a comparable by SRTPL itself and hence cannot be rejected....
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....ok Further the contention of the learned AO that once the company has been selected as a comparable by the assessee it cannot be rejected is invalid. SRTPL places reliance on the judgment of the Chandigarh ITAT in the case of DCIT v Quark Systems (P.) Ltd. (4 ITR(T) 606) where the ITAT has held that the assessee can reject a company even though it has been selected as a comparable in its own TP report. This decision has also been upheld by the Hon'ble Punjab & Haryana High Court in the decision at 244 CTR 542. * The learned Departmental Representative in his argument has relied upon the judgment of the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. (56 taxmann.com 417) and has argued that the companies with high turnover should not be rejected as comparable. * SRTPL submits that it has not contended for exclusion ofAlohageo (India) Limited on the basis of high turnover or high profit margins. Alphageo (India) Limited needs to be excluded as a comparable since the same is not functionally comparable to the research and development functions undertaken by SRTPL. SRTPL relies upon the decision of Delhi ITAT in the case of Philip ....
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....uthority. On perusal of the case records, we observe that in the beginning assessee adopted CPM method for AY 2004-05 as a most appropriate method; however, in the transfer pricing study, ld. TPO undertook a fresh search and applied the TNMM method. Assessee has not challenged the application of TNMM method. As per TPO's working, the margin of the asset was computed at (-)3.74% as against the margin of comparable companies at 28.05% and accordingly the upward adjustment of Rs. 2,45,52,597/- was proposed by ld. TPO. This upward adjustment was scaled down to Rs. 2,19,97,133/- by ld. DRP by calculating the average margin of comparable companies at 22.08% as against (-) 3.74% of assessee-company SRTPL. M/s. Alphangeo India Ltd has been included as comparable by both the ld. TPO & DRP. 9.8 During the course of proceedings before us, ld. Departmental Representative has argued that M/s Alphangeo India Ltd is engaged in the provision of Seismic Survey Services which relates to the service of data acquisition research analysis which is nothing but research and development in that field. 9.9 On the other hand, ld. Authorized Representative has submitted that M/s. Alphageo India Ltd is a c....
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....acceptance of a particular comparable if it is realized that the same is not functionally comparable. This view finds support from the decision of Chandigarh Special Bench of the Tribunal in the case of DCIT vs. Quark Systems (P.) Ltd., reported in [2010] 4 ITR(T) 606 (Chandigarh) (SB), where in it has been held that the assessee can reject a company even though it has selected as comparable in its own TP report. This decision has also been upheld by Hon'ble Punjab & Haryana High Court in the judgment of CIT vs. Quark Systems India (P.) Ltd., reported in [2011] 11 taxmann.com 427 (Punjab & Haryana). Similar view has also been taken by Mumbai Tribunal in the case of Syngenta Biosciences Private Limited (supra), observing that "the argument of Ld. Sr. DR that once assessee has chosen Alphageo (India) Ltd. as comparable it cannot back out now without filing multiple year data. We find that the assessee in the case of Alphageo (India) Ltd. has filed the data of three years to show any variability distortions which are having effect on determination of transfer pricing of the international transaction. We are of the view that the comparable which are available in public domain even afte....
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....ot considered Celestial Labs as a comparable company from AY 2007-08 onwards. Reliance in this regard is placed on following judicial precedents: - M/s Tevapharm Pvt. Ltd. v. ACIT (147 TTJ 35) {Mumbai ITAT) - Evonik Degussa India P. Ltd. v. ACIT (151 TTJ 1) (Mumbai ITAT) - Telcordia Technologies P. Ltd. v. ACIT (137 ITD 1) (Mumbai ITAT) - Apotex Research Private Limited v DCIT (ITA No 918/Bang/2011) (Bangalore ITAT) 10.3 Learned counsel further it was been held in various decisions that functional comparability is must to consider Celestial Labs as comparable. 10.4 We have heard the rival contentions and perused the material available on record. Revenue is aggrieved with the exclusion of Celestial Labs Limited as comparable by ld. CIT(A). Revenue has given force to this contention by submitting that Celestial Labs Limited is engaged in the business of software development activity which are in the nature of research and development services and hence are comparable to the assessee. 10.5 We further perused from the record that Celestial Labs Limited is basically engaged in the development of tailor made software packages and software tools and does not involve in t....
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....s not entitled to benefit of 5% of standard deduction. Accordingly, this ground is not pressed. 12.1 We have heard the rival contentions and perused the records placed before us. As the assessee has not pressed this common ground of standard deduction of +/- 5% from the operating margin, we dismiss this ground as not pressed. 13. Next common issue is with regard to use of exclude Depreciation from operating cost for calculating Profit Level Indicator (PLI) for undertaking transfer pricing analysis or alternatively to provide depreciation adjustment to compute operating margin. 13.1 This ground deals with issue contended by the assessee before the lower authorities for calculating operating cost after excluding depreciation however the ld. TPO has taken the Profit Level Indicator of operating profits to operating costs without excluding the depreciation from the said computation. The ld. TPO and DRP has concluded that the depreciation should normally be deducted to compute net margins because depreciation is a cost incurred in generating the revenue and failure to factor in a reasonable allowance for usage of an asset will over inflate the results given by TNMM and inclusion of r....
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.... turnover ratio and the methods of depreciation followed by the comparable, this leads to a situation where the profitability cannot be reliably ascertained due to the difference in methods of depreciation or the rates of depreciation and hence cash profits / PBDIT can be considered as a PLl. * Under Transfer Pricing the most important factor is the comparability of the margins of the tested party with the comparable companies. Hence to bring the comparability under rule 10B in this case the profit level indicator ought to have been taken before depreciation. * The guidance note of ICAI and the OECD also has accepted that if asset turnover ratio is not comparable with the comparable companies, PLI should be taken before depreciation. (refer the extract of OECD regulations provided at Sr. No. 2 Page 4 - 9 of Paperbook 2 -Other Documents and for ICAI guidance note refer Sr No. 4 ofpaperbook 3) * SRTPL relies upon the judgment of Chennai ITAT in the case of ICON Clinical Research India Pvt Ltd (I.T.A.No.1034/Mds/2014) wherein the ITAT has accepted the use of PBDIT as a PLl. Further, usage of PBDIT as a PLl is also upheld by the Ahmedabad ITAT in the case of Siemens Healthcare ....
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....be provided when there is a difference in the method of depreciation charged. * As mentioned earlier, SRTPL follows SLM method of depreciation whereas the comparable follow SLM and WDV method both. The difference in the method of depreciation of SRTPL vis-a-vis the comparable companies affects the amount of depreciation in the books of accounts. Accordingly, a suitable adjustment should be allowed to SRTPL to bring its depreciation in par with the comparable for the comparability purpose. * SRTPL further relies upon the ruling of Pune ITAT in the case of E Gain Communication Private Limited v ITO (118 ITD 243) where the ITAT has allowed depreciation adjustment in case of an entity following cost plus model and having claimed excess depreciation in the books of accounts due to the difference in method of depreciation as compared to the comparable companies. SRTPL also relies on the judicial precedents of various ITATs provided at Sr No. 3 to 9 of Paperbook 1 which also support that depreciation adjustment should be allowed while computing the operating margins of the comparable. The amount of depreciation adjustment that should be allowed is provided at Chart 3 provided during....
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....V * _* -13,88% * * Average Margin of Com parables -10.41% -2.10% -7.53% -2.94% -4.55% SRTPL SLM LA89%H 8.12% 6.78% 4.89% 6.76% SRTPL % of Depreciation to operating cost (used as a depreciation adjustment for computing margins of com parables) 37.03% 29.83% 29.56% 26.94% 30.49% *Denotes that the company was not selected as a comparable in that particular year - Accordingly, inclusion of depreciation in the analysis would distort the comparability. - Reliance in this regard is placed on following judicial precedents: - Siemens Healthcare Diagnostics Ltd v. ACIT (152 ITD 155) (Ahmedabad ITAT) - Pentair Water India Pvt. Ltd. v ACIT (ITA No 2/PNJ/2013 & ITA No 5/PNJ/2013) (Panaji ITAT) - - Schefenacker Motherson Limited (123 TTJ 509) (Delhi ITAT) M/s Qual Core Logic Limited vs Deputy CIT (ITA 893/Hyd/2011) (Hyderabad ITAT) - DCIT vs M/s.Reuters India Private Limited (ITA No 9177/M/2010) (Mum ITAT).This decision has been further affirmed by Bombay HC in case 69 taxmann.com 187. - Reliance also placed on OECD Commentary (please refer Sr no 2 Page 4 to 9 of Paper book 2 for working in this regard) and re....
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....sidered as a PLI. 13.8 The learned Departmental Representative also relied upon the conclusions provided by the DRP in its directions for AY 2006-07 and has contended that PBDIT should not be used as a PLI. However the learned Departmental Representative in his arguments has primarily agreed that a suitable adjustment for the amount of depreciation needs to be provided when there is a difference in the method of depreciation charged. 13.9 We have heard the rival contentions and perused the record placed before us. The assessee's common ground for AY 2004-05 to AY 2008-09 relates to computation of operating margin, wherein it has been contended by assessee that either the operating profit margin needed for undertaking transfer pricing analysis , to be calculated by using operating cost excluding depreciation cost or alternatively depreciation adjustment to be allowed for computing the operating margin for the very reason that different methods of calculating depreciation are adopted by the comparable and the asset base with such comparables vary. 13.10 We observe that the assessee has applied TNMM method for comparing the operating margin earned from its international transaction....
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....ternational transactions against uncontrolled transactions is to compute an ALP to those transactions. This exercise would fail if a factor, which has a material bearing on the value or the profitability. In the given case, the relevant factors were present. On perusal of the comparable and the details, we observe that the assessee-company has adopted SLM method to calculate the depreciation; whereas the comparable like Biotech Consortium India Limited, Research Support International Limited, Spectrum Infotech Limited etc. have calculated the depreciation on WDV. Another important factor which we observe is the asset base held by the assessee SRTPL vis-à-vis comparable. The ld. Counsel has placed on record charts for all the five assessment years depicting asset turnover ratio which we find necessary to reproduce below: Assessment Year 2004-05 - Asset turnover ratio Name of the Company Fixed Assets As on March 2003 (A) Fixed Assets As on March 2004 (B) Average Fixed Assets C = (A+B)/2 Turnover for the year ended 31 March 2004 (D) Asset Turnover Ratio E = D/C8*100 SRTPL 31,99,66,418 31,95,70,730 31,97,68,574 5,42,35,259 17% Bio....
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....e Fixed Assets C = (A+B)/2 Turnover for the year ended 31 March 2008 (D) Asset Turnover Ratio E = D/C8*100 SRTPL 40,81,04,327 41,72,93,420 41,26,98,874 11,83,67,055 29% Biotech 26,58,778 29,48,530 28,03,654 3,67,11,046 1309% IDC (India) Limited 2,42,86,769 2,19,57,864 2,31,22,317 15,68,28,850 678% Vimta 1,08,76,52,359 1,08,27,16,388 1,08,51,84,374 76,69,39,183 71% Research 5,88,15,000 7,49,81,000 6,68,98,000 14,53,85,000 217% 13.15 On perusal of the above chart, we notice that there is a huge difference in asset turnover ratio so much so that assessee's asset turnover ratio is ranging between 17% to 29%; whereas the asset turnover ratio of the comparable is ranging between 71% to 177.8%. It is an admitted fact not disputed by the revenue also that there is a variation in adoption of method of calculating depreciation and also there is a huge difference of asset turnover ratio depicted in the above table. At this level, we agree that the depreciation adjustment has to be provided to calculate the operating profit margin as if evident that there has been substantial under utilization of the assets vis-à-vis comparable companies....
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....d was found to be comparable by Transfer Pricing Officer. As per the Transfer Pricing Officer, the Transaction Net Margin Method of M/s. Span Diagnostics Limited works out to 9.22% whereas the Transaction Net Margin Method of the assessee in respect of aforesaid international transactions comes to 5.75%. Therefore, the Transfer Pricing Officer added Rs. 2,91,87,164/- to the income of the assessee. The assessee claimed before the Transfer Pricing Officer that there is huge difference between the depreciation of the assessee and the depreciation of the comparable case in as much as ratio of depreciation to total cost ratio is almost three times higher in the case of the assessee as compared to M/s. Span Diagnostics Limited, the comparable case. The depreciation in the case of the assessee comes to 8.02% of operating cost whereas the depreciation to the total operating cost comes to 2.63% only in the case of M/s. Span Diagnostics Limited. The assessee also pointed out that the depreciation charged by the assessee in its books of accounts is on Written Down Value (WDV) method whereas the depreciation charged in the case of M/s. Span Diagnostics Limited is on Straight-line method, hence....
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....he context and purpose for which the "net profit" was to be computed. Depreciation, which can have varied basis and is allowed at different rates, is not such an expenditure which must be deducted in all situations. It has no direct connection or bearing on price, cost or profit margin of the international transactions. Object and purpose of the transfer pricing to compare like with the like, and to eliminate differences, if any, by suitable adjustment is to be seen. Therefore, there was justification on the part of the taxpayer in pleading that profits be taken without deduction of depreciation as depreciation was leading to large differences in margins for various reasons. The taxpayer also relied upon para 22.4 of Guidance Note on Transfer Pricing issued by ICAI suggesting cash -profit/sales as one of the ratios to be applied for computing ALP under the TNMM as per Indian Regulations. Contention that depreciation would depend upon type of technology employed, age and nature of machinery used, is quite well-founded. Above, along with size of enterprise and investment in plant/machinery were important factors to be taken into account for comparison and for computing profit. There ....
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....l differences. Without considering obvious material differences, the contention of the taxpayer to take profit without depreciation was rejected. This rejection is not sound in law. ** ** ** The CFT(A) has observed "fresh investment was being made in automobile ancillary industry which was in expansion phase and, therefore, there is no requirement to exclude depreciation in computing PLI". What expansion, when made, the date and year of expansion, its comparability with taxpayer's case? Nothing relevant is ....
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....sfies arm's length requirement on ratio of cash profit to sales if uniformly applied. As the deduction of depreciation is leading to wide differences, the same should be excluded. The only reason given for rejecting taxpayer's analysis and for making adjustment in the two years is that use of ratio of cash profit without depreciation is not permitted under the law. This view in the light of above discussion cannot be accepted as correct and is disapproved." 14. Further, the Panaji Bench of Tribunal in the case of Pentair Water India (P.) Ltd. (supra) has held as under: "The common contention in respect of computation of TNMM i.e. operating profit taken by the Id. AR in respect of the comparable is that while computing the profit ratio, profit prior to depreciation should be computed as it will give true and fair profit ratio without being affected by the depreciation charged by each of the companies. We noted that different companies have adopted different method of depreciation. In fact, for charging depreciation to the Profit & Loss account there are different prevalent recognized methods of depreciation. Some Assessee opt of Straight Line method, some opt for Written....
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.... the assessee and the chosen comparable case and if the methods are different, then to make suitable adjustment for the same as per law. 16. Further, in view of the above two decisions of the Tribunal as quoted above, it is observed that if in case depreciation of the assessee and the comparable case are not on the similar method, then for comparing the results of the two companies the cash margin also can be adopted for comparing the Transaction Net Margin Method of the two companies. The Transfer Pricing Officer is directed to take into consideration the above cited decisions for deciding the issue afresh as per law. Needless to mention that proper opportunity of hearing shall be allowed to the assessee before adjudicating the issue afresh. We order accordingly. Thus, this ground of appeal of the assessee is allowed for statistical purposes. 13.19 We further observe that similar issue has also been adjudicated by Hyderabad Bench of the Tribunal in the case of M/s Qual Core Logic Limited Vs. Deputy CIT in ITA 893/Hyd/2011) (Hyderabad ITAT) while dealing the issue of determination of ALP as to whether profit should be taken without deduction of depreciation. The Coordinate Ben....
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....t difference in computing profits of comparable as depreciation is permitted depending upon nature of plant/machinery and year of use. Obviously there are differences between the machinery employed by the taxpayer and other comparable concerns which is reflected in amount and percentage of depreciation claimed. How this variation and difference could be ignored under TP Regulations is neither shown nor explained. The assessee has debited high amount/ratio of depreciation. Other enterprises have claimed depreciation at much lower amounts. Size of the assets besides the age of the assets of comparable was leading to difference in the profit margins and in mean margin. On the contrary, claim of depreciation is eating up large chunk of profit in the case of the taxpayer. The CIT(A) has not said a word on "asset" employed and "risks" suffered by the tested party and the comparable. Thus, material differences needing suitable adjustment were ignored and a flawed analysis was carried even in appellate proceedings. Without considering obvious material differences, the contention of the assessee to take profit without depreciation was rejected. This rejection is not sound in law. This groun....
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....re find substance in the plea of the assessee of excluding deprecation from operating cost because the ultimate object is to calculate the Arms Length Price with the AE. To arrive at Arms Length Price, comparable are taken as a basis to compute as to whether assessee has charged less revenue as compared to the prevailing market rate or has shown higher cost. Rule 10B states that an uncontrolled transaction shall be comparable to an international transaction if either there are no differences between two or a reasonably accurate adjustment can be made to eliminate the material effects of such differences. When we read sub-clauses (ii) & (iii) of Rule 10B(1)(e) in juxtaposition to sub-rules (2) & (3) of Rule 10B, the position which emerges is that the net operating profit margin of comparable companies calls for adjustment in such a manner so as to bring both the international transaction and comparable cases at the same pedestal. ln other words, if there are no differences in these two, then the average of the net operating profit margin of the comparable companies becomes a benchmark. However, in case there are some differences between the comparable and the assessee, then the effe....
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....,993 87.93% SLM Research Support 4,63,15,000 4,61,53,000 1,62,000 0.35% WDV IDC India 12,18,27,448 10,49,69,869 1,68,57,579 16.06% SLM Spectrum Infotech Pvt Ltd 4,70,00,000 4,21,21,305 48,78,695 11.58% WDV Average (A) 16.51% Sabic Research and Technology Private Limited Assessment Year 2007-08 Margin computation using PBDIT / Operating costs as the PLI Name of the company Operating revenues Op cost excl depn Operating margins Revised PLI = PBDIT /Total operating costs Excluding depreciation Method of Depreciation SRTPL 9,89,47,053 7,43,11,046 2,46,36,007 33.15% SLM Biotech 3,48,64,906 4,03,57,843 (54,92,937) -13.61% WDV IDC (India) Limited 13,38,47,675 11,28,56,820 2,09,90,855 18.60% SLM Vimta 58,68,03,450 35,91,23,790 22,76,79,660 63.40% SLM Average (A) 22.80% Sabic Research and Technology Private Limited Assessment Year 2008-09 Margin computation using PBDIT / Operating costs as the PLI Name of the company Operating revenues Op cost excl depn Operating margins Revised PLI = PBDIT /Total operating costs excluding deprec....
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....on from operating cost for calculating PLI for doing transfer pricing analysis. 14. Now, we take-up the appeals relating to penalty imposed under Section 271(1)(c) of the Act in the cross appeal and cross objection by assessee for AY 2007-08 and assessee's appeal for AY 2008-09. 14.1 First, we take up appeal relating to AY 2007-08. Subsequent to the passing of the order by the ld. CIT(A) in quantum appeal, two additions with respect to transfer pricing adjustment under normal provisions and other with respect to foreign exchange gain under MAT provisions were sustained and confirmed. Subsequently, the ld. AO proceeded with the penalty proceedings under section 271(1)(c) of the Act and levied penalty amounting to Rs. 59,11,496/- in respect to the addition confirmed by the ld. CIT(A). Thereafter, the ld. CIT(A) vide his order dated 30.12.2014 deleted the penalty amounting to Rs. 54,54,783/- in respect of transfer pricing adjustment but confirmed penalty amounting to Rs. 4,56,713/- in respect of foreign exchange gain under MAT provisions. 14.2 As far as Department's appeal ITA No.577/Ahd/2015 is concerned, in lieu of the fact that we have allowed the ground of assessee's for calcul....
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....j) and as reduced by clauses by (i) to (vii). The notional foreign exchange gain does not appear in the said clauses and accordingly, the assessee could not have reduced the same from the book profits. Accordingly, the assessee could not have reduced the same from the book profits. Ld. CIT(A) further held that since the assessee had made a wholly untenable and legally sustainable claim, the same cannot be allowed and the ld. AO had rightly levied the penalty on the said addition. 16.2 Aggrieved, the assessee is now in appeal before the Tribunal. 16.3 Ld. Authorized Representative for the assessee submitted that the assessee had earned the notional foreign exchange gain in respect of the ECB loans availed from the group company for the purpose of acquiring capital assets and the assessee was under a bona fide belief that the same needs to be reduced from the book profits while computing MAT under Section 115JB. Ld. Counsel further referred to the decision of Mumbai ITAT in the case of ITO vs Suraj Jewellery (lndia) Ltd (21 SOT 79), wherein it has been held that where Profit and Loss includes certain receipts which are not of income nature, the same are to be excluded before making....
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.... which was actually not sustainable in law. In these peculiar facts, we observe that judgment of Hon'ble Apex Court in the case of Reliance Petroproducts Pvt. Ltd. (supra) is squarely applicable, wherein it has been held that a mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee and such a claim made in the return cannot amount to furnishing inaccurate particulars. We further observe that the Hon'ble jurisdictional High Court in the case of CIT Vs Wood Papers Ltd, has also relied on the above referred judgment of Hon'ble Apex Court and held that mere making of false claim does not confirm levy of penalty. We are, therefore, of the view that in the given facts and circumstances of the case, and respectfully following the judgments of Hon'ble Apex Court and Hon'ble jurisdictional High Court, we find that the assessee should not have been visited with penalty under Section 271(1)(c) of the Act. We, therefore, delete the penalty of Rs. 4,56,513/- and allow the ground raised by the assessee. 17. Now we take up ITA No.709/Ahd/2016 for AY 2008-09, where in the assessee is aggrieved w....