TaxTMI 
TaxTMI 
2017 (5) TMI 1756
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.... of asst. order Sec. under which order was passed 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 Appel....
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....he 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 Explanation 3 to section 147 of the Act which were not on the 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 ....
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....g Officer. 4. The appellant craves leave to add, to amend or alter the above grounds as may be deemed necessary. Grounds - 1066/Ahd/2012 - Asst. Year 2005-06- By assessee Grounds relating to reopening of assessment 1. 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 Assessing Officer ('AO') in holding that reassessment proceedings under section 147 of the Act are valid in law. 1.1 The learned CIT(A) 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)....
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....nancial Year 2004-05. 5.4 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 while computing the operating margins of the Appellant. 5.5 On facts and in circumstances of the case and in law, the learned CIT(A) erred in not granting risk adjustment and other economic adjustments while calculating the operating margins 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 ....
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....ricing provisions fail and the addition made there under be deleted. 5. a. Without prejudice, Ld. TPO as well as Ld. D.R.P. have also erred in rejecting the Appellant's plea of rejection of comparable on the ground of differences on account size, age, lack of segment results etc. and without passing speaking order thereon on each of the comparable and affirming their inclusion solely on the ground of their engagement in research and development activity. b. Appellant therefore pleads that the said comparable and more particularly M/s. Vimta Labs Ltd and M/s. Alphageo (India) Ltd be rejected on the ground of their size of operations, their age as well as lack of segment report viz-a-viz that of appellant and 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 representin....
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....ition made in respect of software expenditure in earlier assessment years. 2. On facts and in circumstances of the case 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. 3,28,985 is a capital expenditure and hence not allowable as a revenue expenditure. 2.1 Without prejudice to ground no 2 above, on facts and in circumstances of the case and in law, the learned AO be directed to grant depreciation to the Appellant on the opening written down value of addition made in respect of library books in earlier assessment years. Grounds relating to transfer pricing adjustments 3. On facts and in circumstances of the case and in law, the learned CIT (A) erred in confirming the transfer pricing adjustment of Rs. 2,11,50,423 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 ....
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....count should be included while computing the book profits or not is a debatable issue and hence no penalty should be levied in such a scenario. - The Appellant had disclosed all the relevant facts and details in respect of the tax position adopted for offering exchange gain to tax. Accordingly, there is no furnishing of inaccurate particulars of income Grounds - 1040/Ahd/2012 - Asst. Year 2007-08- By Revenue 1. 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. 2. On the facts and in the circumstances of the case and in law, the CIT(A) ought to have upheld the order of the Assessing Officer. 3. The appellant craves leave to add, 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 ....
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....n law, the learned CIT(A) erred in confirming the action of the learned TPO / AO in invoking transfer pricing provisions even though no single company selected as comparable is engaged in identical business of the Appellant. 3. On the facts and circumstances of the case and in law, the learned CIT(A) erred in confirming the action of the learned TPO / AO by rejecting Cost plus method as the most appropriate method selected by the appellant. Without prejudice to Ground No.1 to 3 above 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 while computing the operating margins of the Appellant and the comparable companies. 5. On facts and in circumstances of the case and in law, the learned CIT(A) erred in not granting risk adjustment and other economic adjustments while calculating the operating margins of the Appellant. It is prayed that ....
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....ention to reduce the margins of the comparable without any evidences and based on surmises and conjectures. 3. With the assistance of ld. Representatives, we have gone through the record carefully. It is pertinent to observe that controversy in all these twelve appeals (8 appeals relate to quantum addition and 4 appeals relate to penalty u/s 271(1)(c) of the Act) of assessee and revenue relating to Assessment years 2004-05 to 2008-09 can be compartmentalized into following common issues :- i) Assessee has challenged the reopening of assessment in AY 2004-05 and AY 2005-06; ii) Assessee has challenged the disallowance of expenditure for purchase of library books and computer software for treating them as capital expenditure as against revenue expenditure during AY 2004-05 to AY 2007-08. iii) With regard to Transfer Pricing Adjustment, assessee has challenged the considering of the deferred revenue expenditure as operating expenditure for the computation of operating margins of assessee company (SRTPL) for AY 2004-05 to 2008-09 iv) Calculation of Arm's length Price after giving adjustment of depreciation or profit before depreciation interest an....
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.... 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. 54,03,639/- 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. (4) In view of the above, I am satisfied that the income chargeable to tax has escaped assessment within the meaning of section 147 of the Income tax Act. (5) Issue notice u/s 148 of the Income-tax Act, 1961." A Y 2005-06 (1) In this case, the return of income was filed on 30-8-2005 showing total loss at Rs. 1,71,84,69/-. The tax payable under MAT was also shown at Rs.NIL. (2) The return of income was accompanied by audited accounts. In the profit & loss account, the assessee has shown the following incomes:- Research Fees Rs. 7,34,03,329/- Exchange Fluctuation gain Rs. 1,10,77,247/- Miscellaneous income Rs. 13,54,395/- Rs. 8,58,34,961/- But in the computation of total income, the ....
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....return. Accordingly, Tribunal quashed the reassessment proceedings. This order of the Tribunal was challenged by the Revenue before the Hon. Gujarat High Court the vide Tax Appeal No.210 of 2016. The above conclusion of the Tribunal could not get the approval of the Hon. High Court and accordingly has set aside the order of the Tribunal and restored the issued including the reopening to the file of A.O. The Hon. High Court has observed that assessee can challenge the validity of reopening on all grounds other than the one which have found not sustainable. Copy of the decision dated 20th June, 2016 is placed before us. 5.2 Ld. Counsel for the assessee while impugning the reopening has contended that as far as the issue wherein tangible material came to the possession of Assessing Officer for harboring the plea that income has escaped assessment is concerned that issue has become in fructuous after the decision of Hon. High Court and assessee cannot re-agitate this issue before the Tribunal. However, apart from this issue he has raised two other folds of submissions. 5.3 In the first fold of submissions he contended that the AO has reopened the assessment in AY 2004-05 on the b....
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....t any addition for the purpose of taxability of income of assessee is there. There cannot be any adjustment in the value of international transaction on the ground that such transaction was not at arm's length price. 5.5 On the other hand, ld. DR contended that exchange fluctuation gain was bound to be given effect in the book profit. The assessee has not disputed this legal requirement. There is ultimate result after inclusion of such amount are altogether is a different matter. 5.6 We have duly considered the rival contentions on this issue. We have perused the reasons recorded by the Assessing Officer (extracted supra). A perusal of the reasons would indicate that there was an exchange fluctuation gain. The assessee was bound to give treatment of this gain in the books of account. The assessee has not included this amount in the income computed under the regular provisions as also in the book profit. Since the addition has been deleted out of the computation of regular income, therefore, we deem it necessary to make no discussion on this receipt. 5.7 The set of questions before us is that Assessing Officer has recorded the reasons on 10th October, 2006. At that point of....
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....n the order of ld. CIT(A). He pointed out that the alleged letter dated 19.6.2007 was not submitted by the assessee to the Officer having jurisdiction over the assessee. Jurisdiction over the assessee was with DCIT Circle-4(3) whereas this letter was given to ITO, Ward-4(1). Both these authorities are altogether different. The assessee has not made any challenge before the Assessing Officer but when it took up this issue before ld. CIT(A) a remand report was called for and on the basis of that Remand Report ld. CIT(A) observed that assessee has not filed return in response to notice u/s 148 of the Act. The Assessee has submitted alleged letter altogether with different authorities whose cognizance cannot be taken and, therefore, there is no error relating the action taken by Assessing Officer. 5.11 We have duly considered the rival contentions. We deem it pertinent to take note of the remand report reproduced by ld. CIT(A) and the finding of ld. first appellate authority which read as under :- "4.3 Subsequent to this, the A.O. was asked to comment on the observations made by the appellant In above mentioned letter. The A.O, vide his report dated 30-09-2011 has stated as....
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....ice issued u/s 148 of the Act by this office. Thus, no return had been filed by the assessees in response to the notice u/s 148 of the Act. Therefore, the assessee's claim that the notice u/s 143(2) of the Act was issued after the time limit specified in this section is misplaced and not tenable in law. (iii) Further, it is also pertinent to mention herewith that the assessee has not challenged the validity of notice issued u/s 143(2) of the Act during the course of assessment proceedings, Therefore, the assessee cannot challenge its validity after the assessment proceedings. Legislature has therefore, intentionally inserted section 292BB in the Act to remove such incongruities and the provisions of the same can be reckoned with," 4.3.1 A copy of this report was forwarded to the appellant, who has not made any comment on this, 4.4 I have considered the facts of the case. The appellant claims that he filed a letter on 19.06.2007 with the A.O. asking him to treat the original return filed as the return filed in response to notice u/s 148. But, as already pointed out, the letter had been filed in a wrong office. Moreover, the A.O. has observed in the ass....
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....n this year there was no loss in the computation of book profit. Therefore, this year is not on a sound footing from point of view of Assessing Officer. Ld. Counsel for the assessee has made reference to a large number of decisions in the chart submitted at the time of arguments. We do not deem it necessary to recite and recapitulate all these decisions because he has referred nine decisions for the proposition that if Assessing Officer failed to collect any tangible material independently after filing of return then he cannot reopen the assessment. This proposition has been decided against the assessee by Hon. Jurisdictional High Court. Similarly other decisions are with a view to buttress his argument that 143(2) notice was not served within time limit. While examining in Asst. Year 2004-05 we have observed that the alleged return was not submitted by the assessee to an appropriate authority, therefore, its cognizance cannot be taken for the purpose that returns were filed in response to notice u/s 148 of the Act. The facts are altogether identical as in Asst. Year 2004-05. Therefore, we do not find any merit in these arguments of the ld. counsel for the assessee. The reopening o....
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....s which have held that the expenditure incurred towards procurement of computer software is a revenue expenditure: * ACIT vs Torrent Pharmaceutical Ltd. (Ahd ITAT) (ITA No. 1869 and 1881/And/2009) * FAG Bearing India Ltd. vs DCIT (12 ITR(Trib) 395) (Ahd ITAT) * Amway India Enterprises vs DCIT (301 ITR 1) (Delhi ITAT) (Special Bench) * Chief CIT vs O.K. Play India Ltd. (346 ITR 57) (P&H HC) * CIT vs Southern Roadways Ltd. (304 ITR 84) (Mad HC) * CIT and Anr. vs Toyota Kirloskar Motors (P) Ltd. (349 ITR 65) (Kar HC) * CIT vs Varinder Agro Chemicals Ltd. (309 ITR 272) (P&H HC) * CIT vs Asahi India Safety Glass Ltd. (346 ITR 329) (Del HC) On the hand learned Departmental Representative relied upon the order of lower authorities 7.3 We have heard the rival contentions, perused the material available on record and gone through the decisions relied on by the ld. Counsel. The assessee is aggrieved with the order of ld. CIT(A) confirming the action of the ld. AO of treating the expenditure incurred on library books and computer software as capital expenditure during Assessment year 2004-05 to Assessment Year....
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....r that, all depends of the purpose for which the expenditure has been incurred and its utility to the type of business the assessee is involved into. In the present case, the assessee which is engaged in the business of providing contract research and development services to its associate enterprise is dependent on the latest information, technology developments at the international level and the future projections. To assist in its attainment of object of running the business prudently, it needs to use latest books and software. In the present era, it is well evident that the computer software are changing every now and then and similarly due to overall in-depth knowledge sharing, the assessee needs to update with the help of books. 7.6 We further observe that the Co-ordinate Bench, Ahmedabad in the case of ACIT vs Torrent Pharmaceutical Ltd. (supra), the Tribunal has adjudicated the issue relating the payment of software expenditure to IBM for being treated as revenue or capital. It held in favour of the assessee by following the decision of Delhi Bench of the Tribunal in the case of Escorts Ltd. v ACIT, (2007) 104 ITD 427 (Del), wherein it has been held that software becomes ....
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....mical process and products. According to clause -3 of Article-1 of the agreement it was agreed that - 3. Results of Research Projects: SABIC will be the exclusive owner of all results of Research Projects, including discoveries, inventions, know-how processes and technologies generated by the Research Projects, whether patentable or not, undertaken by SRTPL under this Agreement and are designated as the "Research Results". SRTPL assigns to SABIC all rights, title and interest in all patents, trademarks, copyrights, trade secrets, confidential information or any other proprietary rights from the Research Projects SRTPL shall retain no right, title or ownership in the Research Results or Research Projects performed under this Agreement Should SABIC or any of its agents or representatives seek to obtain patents, trademarks or copyrights in any country in the world on all or part of the Research Results, SRTPL agrees to cooperate fully in providing information, completing forms, performing actions and obtaining necessary signatures and/or assignments required to obtain such patents, trademarks or copyrights. However, the patents, trademarks, copyrights will be in the ....
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....ost of the assessing company as they have not been reimbursed by the AE, SABIC Saudi Arabia. He further denied the benefit of +5% range proviso to section 92C(2) of the Act as the assessee's international transaction do not fall in this range. 8.4 Subsequently during the course of assessment proceedings u/s.143(3) rws 147 rws 92C & 144C of the Act assessee made objections to the show cause notice issued by learned Assessing officer by submitting that the TPO has considered net margins of the four companies and gross margin of the fifth company M/s. Alphangeo (India) Ltd instead of net margin due to which apparently uncomparable have been compared which has resulted in higher markup. It was further submitted that in the matters of deployment of asset, they are not comparable to assessee. 8.5 However Learned Assessing officer was not convinced with the reply of assessee and made addition of upward transfer pricing adjustment of Rs. 20861862/- which was arrived at after calculating total cost of the assessee after including deferred revenue expenditure. 8.6 Dissatisfied with the order of Assessing Officer, assessee went in appeal before CIT(A) and partly succeeded. 8.7 Now....
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....been recovered in the year AY 2002-03 when the expense was incurred. Mere accounting treatment of deferment of the expenditure should not impact the nature of the expenditure which was in no way connected to the research and development activities undertaken by SRTPL in each year. * SRTPL also places reliance on the judgment of Bangalore ITAT in the case of Pole to Win India Pvt. Ltd. v DCIT (60 taxmann.com 311) where the ITAT has held that the expenses which have been disallowed while computation of the taxable are also excludible from the computation of operating margin. (Refer Sr no 8 Page 130 to 158 of paper book 3) * In the present case, as mentioned earlier, SRTPL has disallowed the deferred revenue expenditure in the computation of income and hence the deferred revenue expenditure should be excluded from the computation of operating costs. 8.12 Learned Departmental representative submitted that the The expenditure incurred by SRTPL are general and routine in nature which are required to be spent for running day-to-day business. The same should have been reimbursed by the AE at cost +5% markup based on the Technology Research Agreement entered by SRTPL wi....
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....ses and included the same as a part of operating cost for computing the operating market of the assessee by taking a view that his expenditure was incurred in connection with the research and development activities to be undertaken by the assessee in future. This issue of ld. AO was upheld by the lower appellate authority. It is pertinent to note that the impugned expenditure of Rs. 70.98 lacs which is 1/5th of the non-operating expenditure of Rs. 3.56 crores has been incurred much before the commencement of commercial operation in January 2002 and it was not towards any specific research and development project and has also not been recovered from the AE. It is also relevant to note that as per the agreement entered into by the assessee with AE, it is only entitled to recover the operating cost connected with the research project. The relevant extract of the agreement is reproduced below:- "4. Compensation for Research Projects SABIC will reimburse SRTPL for the actual costs of each Research Project according to the following criteria:- (a)Reimbursable Operating Costs: SABIC will reimburse SRTPL for all operating costs incurred and r....
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....k 2 he submitted that this company is not functionally comparable to the companies providing Research and Development services. 9.3 Alphageo is one of the largest private sector provider of seismic survey services in India. It provides seismic survey services to rapidly growing oil exploration and production sector. It provides entire spectrum of seismic and related services like acquisition and processing of data. The services provided by Alphageo are: - 2D and 3D seismic services - Designing and preplanning of 2D and 3D surveys - Seismic data processing and interpretation - Reservoir data acquisition and analysis, etc Accordingly the company is not into research and development. Rather the company is engaged into provision of data into organized form. It collates data, organizes them and provides it to its customers. Reliance is also placed on the annual report of the company outlining its activity (refer Sr No 8 Page 80 to 173 of factual paper book) 9.4 Further reliance is also placed on the ruling of Mumbai ITAT in the case of Syngenta Biosciences Private Limited v DCIT (ITA 1083/Mum/2015) wherein Alphageo was rejected as....
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....scapital Investment Advisors (India) (P.) Ltd. (supra) and ruling of Delhi ITAT in the case of Philip Morris Services India SA (India Branch) (supra) and submits that to consider a company as a comparable, the functional comparability is must. Accordingly irrespective of the loss, Biotech Consortium India Limited should be considered as a comparable. Further comparability of Biotech Consortium has never been an issue raised before any of the Appellate authorities. This company has been accepted as a comparable by both, the Department and SRTPL. * On the other hand learned departmental representative submitted that Alphageo (India) Limited is engaged in the provision of seismic survey which is related to the services of data acquisition research analysis and hence it should be considered as a comparable. 9.6 Further, exclusion of Aiphageo (India) Limited cannot be only because the company earns higher margins. The learned DR has also submitted that Biotech Consortium, a loss making company, has been accepted as a comparable by both, the Department and SRTPL. Since a loss making company has been accepted as a comparable, the company with higher margins should also be acce....
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....bunal in the case of Philip Morris Services India SA (supra), which squarely covers the facts dealt in this appeal, wherein it has been held that functional comparability is must to consider M/s. Alphangeo India Ltd as comparable. 9.11 We further observe that the issue of comparability of M/s. Alphangeo India Ltd as a comparable to R&D sector is directly covered by the decision of Bombay Bench of the Tribunal in the case of Syngenta Biosciences Private Limited v DCIT, reported in 180 TTJ 61, wherein comparable M/s. Alphangeo India Ltd was rejected as a functional comparable since it was engaged in the provision of Seismic Survey Services and not in the field of research and development. The relevant extract of the decision is reproduced below:- "We find that the assessee's activity in R&T includes undertaking certain samples preparation and chemical analysis activities for the agro chemical business. It supplies to its AEs the necessary formula, information and expertise to enable it to provide R&T activities. Whereas on the other hand, Alphageo (India) Ltd. is in the business of exploration and production of oil. We are of the view that these two companies i.e. the....
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....TL is into the field of research and development, whereas, Alphageo (India) Ltd is not into research and development but only engaged in provision of data into organized forms. It cannot be taken as a comparable for calculating Arms Length Price with Associate Enterprise by applying TNMM Method. We, therefore, respectfully following the decisions referred above, direct the ld. TPO to exclude M/s. Alphageo (India) Ltd from the list of comparable companies for AY 2004-05 to AY 2008-09. In the result this ground of the assessee is allowed. 10. Another issue of comparable raised by the Revenue against the order of Learned CIT(A) is for excluding the Celestial Labs Limited from the list of comparable for determining the Arm's Length Price with AE 10.1 Learned Departmental Representative submitted that Celestial Limited is engaged in the business of software development activities. These activities are in the nature of Research & Development services and hence it is comparable to SRTPL. 10.2 Learned counsel for the assessee submitted that Celestial Labs Limited is engaged in developing tailor made software packages and software tools and is not involved in the research and devel....
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....gth Price with AE from Assessment year 2007-08 onwards. This fact is not disputed by the Revenue Authorities. We are, therefore, of the view that in the given facts and circumstances of the case and the decisions referred above and also non-inclusion of the said comparable Celestial Labs Limited by ld. TPO from AY 2007-08 onwards, the comparable Celestial Labs Limited is not a fit comparable for calculating the Arms Length Price in the case of assessee. We, therefore find no reason to interfere with the order of Learned CIT(A) and uphold his decision of excluding the Celestial Labs Limited from the list of comparable for AY 2004-05 , AY 2005-06 and AY 2006-07. 11. Next issue relates to ground taken by the assessee is against the order of ld. CIT(A) confirming the inclusion of Vimta Labs Limited as a comparable. 11.1 At the outset ld. Authorized Representative has requested for not pressing this ground of inclusion of Vimta Labs Limited as comparable for calculating Arm's length price with AE. 11.2 We accordingly treat the grounds challenging the inclusion of Vimta Labs Ltd in the list of comparable as not pressed and dismiss the same and direct the ld. TPO to retain Vimta ....
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....rom its international transactions with the comparable companies. While computing the operating margins of SRTPL and the comparable companies, the profit level indicator of operating profits to operating costs is taken. However, the learned TPO has failed to exclude depreciation from the said computation. The depreciation ought to be excluded on account of the difference in the capital employed and the difference in the method of depreciation followed by the comparable. * As per Rule 10B(1)(e), in case of TNMM, the net profit margin arising in comparable uncontrolled transactions is to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market. * In the present case, SRTPL follows a different method of charging depreciation in the books of accounts as compared to the comparable. SRTPL follows SLM method of depreciation whereas the comparable follow SLM and WDV method both. The difference in the method of depreciation affects the amount of depre....
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....Limited (30 ITR(T) 367) and has submitted that PBDIT cannot be used as a PLl. However. SRTPL submits that the Delhi ITAT in its judgment at Para 5.4, Question I, Point v has mentioned that the depreciation plays a pivotal role in the case of the manufacturing entities and hence PBDIT cannot be considered as a PLl. However, in the present case, SRTPL is an entity engaged in service sector providing research and development services and hence the above ruling of Delhi ITAT cannot be applied in the case of SRTPL. * The learned DR's reliance on Chennai ITAT judgment of Lason India P. Ltd. is also misplaced as the ITAT had not considered the comparability factor under Transfer Pricing. Further, the ITAT has also not considered the other rulings of the other benches. Further, the subsequent judgments after this decision have consistently held that PLl could be taken before depreciation. * The learned Departmental Representative has also relied upon the conclusions provided by ^ the DRP in its directions for AY 200607 and has contended that PBDIT should not be used as a PLI. The detailed reply to the DRP's conclusions is provided as Annexure 2. (b) Depre....
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.... 2008-09 Biotech Consortium India Limited 1025% 1124% 459% 401% 1309% IDC (India) Limited 571% 554% 734% 448% 678% Vimta Labs Limited 240% 256% 211% 89% 71% Research Support International Limited _* 444% 161% * 217% Spectrum Infotech Limited * * 1778% * * SRTPL 17% 22% 22% 20% 29% "Denotes that the company was not selected as a comparable in that particular year Note: The above data is after excluding Alphageo (India) Limited as a comparable. For the data of asset turnover ratio including Alphageo (India) Limited, refer Sr no. 9,19,27 and 34 of Paperbook 2 b. Comparison of Operating Margins using PBDIT as a PL! (Chart 2 provided during the hearing) Comparable Method of depreciation^ AY 2004-05 AY 2005-06 AY 2006-07 AY 200708 AY 2008-09 Biotech Consortium India Limited WDV -32,97% -14.49% -16.84% -13.61% 13.64% IDC (India) Limited SLM 14.02% 14.35% 16.06%_ 18.60% 18.27% Vimta Labs Limited SLM 87.24% 106.64% 87.93% 63.40% 44.40% Research Support Internation....
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....please refer Sr no 3 Page 10 of Paper book 2 for working in this regard) 13.5 Learned Counsel for the assessee further submitted that aalternatively, an improvement to the comparability standards should be considered. In other words, to improve comparability standards, the depreciation of the comparable companies should be adjusted to account for the Assessee's and the comparable companies' different business maturity. 13.6 Reliance is also placed on Rule 10B(3) whereby an uncontrolled transaction shall be comparable to an international transaction if reasonably accurate adjustments can be made to eliminate the material effects of such differences (please refer Sr No 1 Page 1 to 3 of Paper book 2 for extract of Rule 10B). - The comparable companies operating costs should be recalculated by also considering a depreciation rate of 37.03 percent of other operating costs, excluding depreciation (which would be in line with the depreciation provided by the Appellant) (please refer Sr no 30 Page 61 of Paper book 2 for working in this regard) Reliance in this regard is placed on following judicial precedents: - Mentor Graphics Private Limited....
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....rnational transactions with the comparable companies and in order to arrive at the results took the profit level indicator of operating profits to operating cost by excluding depreciation ; whereas the ld.TPO did not exclude the depreciation from the said computation even when there was a difference in capital employed as well as the method of calculating depreciation, i.e., SLM or WDV method. 13.11 The brief argument put forward by the assessee is that whether it should be granted the depreciation adjustment or profit before depreciation or PBDIT should be used as a PLI while computing operating margin on account of difference in asset base and method of depreciation followed by the comparable companies and the assessee. 13.12 First, we deal with the issue whether the depreciation adjustment could be granted to the assessee or not. In this regard, reference is drawn to the guidance provided under Rule 10B(1)(e) of the Rules which specifically mention that the net profit margin needs to be adjusted to take into account the differences between the international transactions and the comparable uncontrolled transactions which could materially affect the net profit margin. Furthe....
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....418 31,95,70,730 31,97,68,574 5,42,35,259 17% Biotech 26,57,073 21,13,815 23,85,444 2,44,54,906 1025% IDC (India) Limited 62,14,594 1,50,50,560 1,06,32,577 6,06,62,389 571% Vimta Labs Limited 12,43,19,078 16,83,04,012 14,63,11,545 35,11,37,120 240% Assessment Year 2005-06 - Asset turnover ratio Name of the Company Fixed Assets As on March 2004 (A) Fixed Assets As on March 2005 (B) Average Fixed Assets C = (A+B)/2 Turnover for the year ended 31 March 2005 (D) Asset Turnover Ratio E = D/C8*100 SRTPL 31,95,70,730 34,85,21,393 33,40,46,062 7,34,03,319 22% Biotech 21,13,815 25,45,616 23,29,716 2,61,91,345 1124% IDC (India) Limited 1,50,50,560 1,49,22,320 1,49,86,440 8,30,09,290 554% Vimta Labs Limited 12,43,19,078 16,83,04,012 14,63,11,545 35,11,37,120 240% Research Support NA 16,93,000 16,93,000 75,20,697 444% Vimta Labs Ltd 16,83,04,012 23,99,15,313 20,41,09,662 52,19,51,962 256% Assessment Year 2006-07 - Asset turnover ratio Name of the Compa....
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.... 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 resulting in high depreciation cost to the assessee as compared to its revenues and various depreciation methods followed by the assessee and the comparable companies. We therefore, hold that in the absence of any depreciation adjustment, being granted to the assessee, it would not be possible to make a fair comparability with the comparable and there is a need for reasonable examination/ adjustment whereby the operating margin earned by the assessee would be comparable to the operating margin earned by the comparable companies after providing deprecation adjustment. 13.16 Now we focus our discussion to the plea raised by the ld. Counsel as to whether for calculating operating margin, depreciation is to be excluded from the operating cost or a depreciatio....
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.... 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 for comparing Transaction Net Margin Method of the two companies, adjustment in respect of depreciation is must. However, the Transfer Pricing Officer had given no finding on the variation in the amount of depreciation as well as effect of variation in two different methods of providing depreciation employed in the two cases. In the opinion of the Transfer Pricing Officer, depreciation is must for arriving at net margin and therefore depreciation cannot be excluded. 12. On appeal before the Dispute Resolution Panel, the assessee reiterated its submissions made before the Transfer Pricing Officer. 13. The Dispute Resolution Panel has also not recorded any finding in respect of the claim of the assessee about the difference in th....
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.... 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 is considerable support for the contention raised on behalf of the taxpayer in the OECD Guidelines on Transfer Pricing. The claim of depreciation can lead to great difference in computing profits of comparable as depreciation is permitted depending upon nature of plant/machinery and year of use. In 5th or 6th year of commencement, depreciation can be 25 to 30 per cent of amount allowed in first year to an enterprise. In these appeals, the TPO had excluded certain comparable after noting differences in their year of start of operations. Thus, age of plant/machinery and other related information is available on record and, therefore, contention of the taxpayer on differences in claim of depreciation is fully established on reco....
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....bsp; ** 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 stated in the impugned orders. One does not know how differences on account of depreciation could be ignored on the facts stated above merely on general observations that automobile ancillary industry is in the expansion phase. Taxpayer is seeking adjustment of differences on account of depreciation and no plausible reason has been given for not accepting this claim. There is no finding that there are no differences in claim of depreciation and, therefore, it should have been excluded in computing "operating profit" as warranted by rules. On the other hand, the differences as per the chart are accepted. The finding that cash profit cannot be considered is not legally correct. The taxpayer in order to get adjus....
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....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 Down method and some opt for Sum of Digit method or even Replacement Cost method. Selection of each method will affect the rate and quantum of depreciation even if the nature of the asset is the same and ultimately, the net profit derived by the company will vary. For determining the fair and true profit, in our opinion, it is appropriate that the effect of the depreciation must be excluded out of the operating profit for determining the operating profit ratio. Therefore, the best way of computing the operating profit, in our opinion, will be to compute the profit before depreciation in respect of each of the company. This will take out the inconformity or the variation in the profit level of th....
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....r 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 Bench observed as follows:- 57. We have heard both the parties on this and perused the material on record. In the present appeal, ALP of transactions carried was to be determined by comparing net profit of the taxpayer (tested party) with mean net profit of comparable. Only receipts and expenditure, having connection with international transactions, were required to be taken into account. Any receipt or expenditure having no bearing on price or margin of profit could not be taken into consideration. It is evident from statutory provisions that it is nowhere provided that deduction of depreciation is a must. Depreciation can be tak....
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....fit 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 ground is allowed. Accordingly, we direct the Assessing Officer to recompute the ALP. 13.20 Similar view has also taken by the Co-ordinate Bench, Mumbai in the case of DCIT vs M/s. Reuters India Private Limited in ITA No 9177/M/2010) (Mum ITAT) following the Special Bench decision of Chandigarh Bench in the case of DCIT v Quark Systems (P.) Ltd. (4 ITR (T) 606), by observing as under:- 4. We have heard the rival submissions and perused the relevant material on record. Insofar as the question of taking up Cash profit to Total cost as PLI for the first time before the learned CIT(A) is concerned, we find no embargo in it. It is ob....
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....lauses (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 effect of such differences should be ironed out by making suitable adjustment to the operating profit margin of comparable. That is the way for bringing both the transactions, namely, the international transaction and the comparable uncontrolled transactions, on the same platform for making a meaningful and effective comparison. The above analysis transpires that the law provides for adjusting the profit margin of comparable on account of the material differences between the international transaction of the assessee and comparable uncontrolled transactions. The ld. Counsel has also placed on record chart for all the five years....
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....c 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 depreciation Method of Depreciation SRTPL 11,84,34,422 8,50,17,113 3,34,17,309 39.31% SLM Biotech 3,79,00,000 3,33,51,4....
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....culating 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 calculating operating profit m....
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....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 any calculati....
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.... 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 with the ....