Income Tax Appellate Tribunal - Ahmedabad
Sabic Research & Technologies Ltd.,, ... vs Income Tax Officer,Ward-4(2),, Baroda on 1 May, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD '' I " BENCH - AHMEDABAD
Before Shri Rajpal Yadav, JM, & Shri Manish Borad, AM.
SN ITA No. Asst. Year Appellant Respondent
1 1065/Ahd/2012 2004-05 Sabic Research and ITO, Ward 4(2),
Technology Pvt. Ltd., Baroda.
Plot no.5 & 6 Savli,
GIDC Estate
Manjusar, Baroda.
2 1038/Ahd/2012 -do- ACIT, Circle-4, Sabic Research and
Baroda. Technology Pvt. Ltd.
3 1066/Ahd/2012 2005-06 Sabic Research and ITO, Wd-4(2), Baroda
Technology Pvt. Ltd.
4 1039/Ahd/2012 -do- ACIT, Cir.4, Baroda Sabic Research and
Technology Pvt. Ltd.
5 1067/Ahd/2012 2007-08 Sabic Research & ACIT, Cir.4, Baroda.0
Technology Pvt. Ltd.
6 3283/Ahd/2010 2006-07 Sabic Research & ITO, Wd-4(4),
Technology Pvt. Ltd. Baroda.
7 459/Ahd/2015 2007-08 Sabic Research and ACIT, Cir.2(1)(1).
Technology Pvt. Ltd. Baroda.
8 1040/Ahd/2012 -do- ACIT, Cir.4, Baroda Sabic Research and
Technology Pvt. Ltd.
9 577/Ahd/2015 2007-08 ACIT, Circle-2(1)(1), Sabic Research and
Baroda Technology Pvt. Ltd.
10 CO -do- Sabic Research and ACIT Circle-2(1)(1)
No.55/A/2015 Technology Pvt. Ltd. Baroda
11 2801/Ahd/2012 2008-09 Sabic Research and DCIT, Circle-4,
Technology Pvt. Ltd. Baroda.
12 709/Ahd/2016 -do- -do- ACIT, Cir-4, Now
Cir.2(1)(1), Baroda.
Appellant by Shri Dhinal Shah, AR
Respondent by Shri Mahesh Shah, CIT, DR &
Uma Shankar Prasad, Sr.DR.
Date of hearing : 09/02/2017
Date of pronouncement : 01/05/2017
ORDER
ITA No. 1065 & 11 others
Asst. Year 2004-05 to 2008-09
PER MANISH BORAD, ACCOUNTANT MEMBER:
This present bunch of 11 appeals and one Cross Objection are directed at the instance of assessee as well as Revenue for Asst. Years 2004-05 to 2008-09. In order to appreciate the facts in more scientific manner exhibiting the date of assessment order, section under which order was passed, the date of CIT(A)'s order, we would like to put these details in following two tables which read as under :-
Table no.1 Sl. ITA No. AY Date of asst. Sec. under which Date of No. order order was passed, CIT(A)'s order 1 1065/Ahd/2012 2004-05 21.01.2010 143(3),r.w.s. 147 r.w.s. 27.02.2012 92C & 144C of the IT Act, 1961.
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 29.02.2012
r.w.s. 144C
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 29.02.2012
144C of the Act
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
12 709/Ahd/2016 2008-09 -do- 271(1)(c) of the Act 1.1.2016
2
ITA No. 1065 & 11 others
Asst. Year 2004-05 to 2008-09
Table no.2
Sr.No. AY Appellant Appeal No. Nature of issues
1 SRTPL Appeal 1065/Ahd/2012 Reopening of
2 2004-05 Department 1038/Ahd/2012 assessment transfer
Appeal pricing issues and
purchase of library
books
3 SRTPL Appeal 1066/Ahd/2012 Reopening of
4 2005-06 Department 1039/Ahd/2012 assessment transfer
Appeal pricing issues and
purchase of library
books and purchase of
computer software
5 2006-07 SRTPL Appeal 3283/Ahd/2010 Transfer pricing issues,
6 SRTPL Appeal 1067/Ahd/2012 purchase of library
7 2007-08 Department 1040/Ahd/2012 books and purchase of
Appeal computer software
8 SRTPL Appeal 2801/Ahd/2012 Transfer pricing issues
9 459/Ahd/2015
10 2008-09 Department 577/Ahd/2015
appeal Penalty
11 Cross Objection CO
filed by SRTPL 55/Ahd/2015
12 2008-09 SRTPL appeal 209/Ahd/2016
2. Grounds of appeal raised by Assessee and Revenue in all these 11 appeals and one cross objection read as under:-
Grounds - 1065/Ahd/2012 - Asst. Year 2004-05- Assessee's appeal 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).3
ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 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 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.
4ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 4.3 On facts and in circumstances of the case and in law, the learned CIT(A) erred in the action of the learned TPO / AO in treating Vimta Labs Limited and Alphageo (India) Limited as comparable companies for Financial Year 2003-
04. 4.4 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.
4.5 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 - 1038/Ahd/2012 - Asst. Year 2004-05- Revenue's appeal 1 On 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 arms'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 IPO 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 CIT(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 - 1066/Ahd/2012 - Asst. Year 2005-06- By assessee Grounds relating to reopening of assessment 5 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09
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) 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 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 case and in law, the learned CIT (A) erred in confirming the action of the learned AO in holding that computer software expenses of Rs. 22,03,538 is a capital expenditure and hence not allowable as a revenue expenditure.
4. Without prejudice to Ground No. 1 & 2 above, 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. 8,93,931 is a capital expenditure and hence not allowable as a revenue expenditure.
Grounds relating to transfer pricing adjustments 6 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09
5. Without prejudice to Ground No.l & 2 above, the learned CIT (A) erred in confirming the transfer pricing adjustment of Rs 1,95,08,213/-_determined by the learned TPO.
5.1 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.
5.2 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.
5.3 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 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 to development of pharmaceutical product and molecules.
7ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09
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 - Asst. Year 2006-07- By assessee
1. a. Ld. A.O. & Ld. D.R.P. have erred both on facts and in law in disallowing the expenditure on library books of Rs.3,63,604/- by treating the same as capital expenditure.
b. Appellant therefore pleads that the said expenditure be allowed as revenue expense and thereby delete the net addition of Rs.1,45,442/- made on this account by Ld. A.O.
2. a. Ld. A.O. & Ld. D.R.P. have erred on facts and in law by disallowing expenditure on computer software of Rs.9,66,2277- by treating the same as capital expenditure.
b. Appellant therefore pleads that the said expenditure be allowed as revenue expense and net addition of Rs,3,86,491/- made on this account by Ld. A.O. be deleted.
3. a. Ld. TPO and Ld. D.R.P. have erred in subjecting write off of deferred revenue expenses of Rs.70.98 lacs as cost and thereby added the average margin based on comparable, thereon and subjecting aggregate amount of Rs. 86,65,238/- as transfer pricing addition. Write off refers to the idle cost incurred prior to setting up of the business and hence not includable as a normal business cost and that too attributable for the year.
b. Appellant therefore pleads that this write-off be deleted as operating cost for the purpose of working A.L.P. thereof and thereby set aside addition of Rs.86,65,238/- made on this count in the A.O. based on the margin of 22.08%.
4. a. Ld. TPO and Ld. D.R.P. have erred in invoking transfer pricing provisions even though no single company selected as comparable is engaged in the identical business of the Appellant.
8ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 b. Appellant therefore pleads that in absence of such identical business, the transfer pricing 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 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 subsequently by Ld. A.O.
i) Ld. D.R.P. as per the direction have directed Ld. A.O. to add margin of 5% on D.R.E. and thereby determine ALP of Rs 74,52,900/- on this count. Against this Ld. A.O. has added a general markup of 22.08% thereon and has worked ALP at Rs.86,65,238/-. Thus in the Appellant's case excess addition of Rs.12,12,338/- has been made on this ground which may be deleted.
9ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09
ii) Ld. A.O. has not considered Ld. D.R.P/s directions to exclude the expenditure of subscription, periodicals and web access charges of Rs.32,98,838/- for the purpose of disallowance as capital expenditure and thereby has made net addition of Rs.13,19,535/- after allowing depreciation. As per Ld. D.R.P's directions only net addition of Rs. 1,45,441/- on library books is warranted. Appellant also requests Hon. Tribunal to direct inclusion of this addition in event of its confirmation, to the computation of assesseed income as the same has not been considered by the Ld. A.O. in the Order.
Grounds - 1067/Ahd/2012 - Asst. Year 2007-08- By assessee Grounds relating to corporate tax adjustments
1. 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 computer software expenses of Rs. 1,41,232 paid to Avaya Global Connect Ltd is a capital expenditure and hence not allowable as a revenue expenditure.
1.1 Without prejudice to ground no I 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 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.
10ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 while computing the operating margins of the Appellant.
3.5 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 - 459/Ahd/2015 - Asst. Year 2007-08- By assessee On the facts and circumstances of the case and in law, the Commissioner of Income- tax (Appeals)-II, Baroda [CIT(A)J 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 CIT(A) erred in confirming the action of the Assistant Commissioner of Income-tax, Circle 4, Baroda in levying penalty of Rs 4,56,713 on the notional foreign exchange fluctuation gain added to the . book profit computed under section 115JB of the Act.
1.1 On the facts and circumstances of the case and in law, the CIT(A) erred in holding that the Appellant had furnished inaccurate particulars of income and the claim of the Appellant is wholly untenable and legally unsustainable.
1.2 On the facts and circumstances of the case and in law, the CIT(A) erred in not considering the fact that :11
ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09
- The Appellant has disclosed, by way of notes, in its return of income as to why the notional foreign exchange gain has been reduced while computing the book profits under section 115JB of the Act.
- Whether such foreign exchange gain on capital account 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 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 12 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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) erred in:
(i) Not considering that the respondent had undertaken transfer pricing study and had furnished comparable companies for justifying the Arm's Length Price.
(ii) Not considering that the respondent had not furnished inaccurate particulars of income as the company had made full disclosure regarding its international transactions in its return of income and proper documentation as required by Section 92D read with Rule 10D were maintained and all details and facts relevant to the same were also duly furnished to the learned TPO.
(iii) Not considering that the respondent has determined the arm's length price in accordance with provisions of Section 92C of the Act in good faith (i.e. bona-fide belief) and with due diligence.
Grounds - 2801/Ahd/2012 - Asst. Year 2008-09- By assessee On the facts and circumstances of the case and in law, the Commissioner of Income- tax (Appeals) -III, Baroda ['CIT(A)'] has erred on the following grounds, which are independent, separate/alternative and without prejudice to one another:
1. On facts and in circumstances of the case and in law, the learned CIT (A) erred in confirming the transfer pricing adjustment of Rs 13,402,270 determined by the learned TPO / AO, by carrying out a fresh search and rejecting the submissions made by the Appellant.
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 / 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 13 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 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 Rs 886,005 considered as income 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 Income- tax (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 learned CIT(A) erred in confirming the action of the Assistant Commissioner of Income-tax, Circle 4, Baroda in levying penalty of Rs 45,55,500 on the upward transfer pricing adjustment.
1.1 On the facts and circumstances of the case and in law, the learned CIT(A) erred in holding that the Appellant had furnished inaccurate particulars of income and upholding the penalty levied on the transfer pricing adjustment.14
ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 1.2 On the facts and circumstances of the case and in law, the learned CIT(A) erred in not considering that the Appellant had made full disclosure regarding its international transactions in its return of income and proper documentation as required by Section 92D read with Rule 10D were maintained and all details and facts relevant to the same were also duly furnished to the learned TPO.
1.3 On the facts and circumstances of the case and in law, the learned CIT(A) erred in not considering the fact that the Appellant has determined the arm's length price in accordance with provisions of Section 92C of the Act in good faith (i.e. bona-fide belief) and with due diligence.
1.4 On the facts and circumstances of the case and in law, the learned CIT(A) erred in holding that the Appellant had misrepresented the facts with a clear cut intention 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 15 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 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.
16ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09
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 issuance of notice u/s 148 of the Act though the facts on all the five points are common in both the assessment years. Therefore, for the facilitation we are taking Asst. Year 2004-05. Brief facts are that the assessee company has filed its returns of income on 14.10.2004 declaring total loss of Rs.2,36,14,400/-. The return was processed u/s 143(3) of the Act on 27.3.2006. Thereafter ld. AO has recorded reasons and issued notice u/s 148 of the Act. The reasons recorded by the AO in Asst. Year 2004-05 and 2005-06 read as under :-
AY 2004-05 "(1) In this case, the return of income was filed on 14-10-2004 showing total loss at Rs.2,36,14,400/-. 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.5,42,35,259/-
Exchange Fluctuation gain Rs. 54,03,639/-
Miscellaneous income Rs. 6.390,344/-
Rs.6,02,69,242/-
But in the computation of total income, the assessee has excluded the exchange fluctuation gain from the total income as well as from the 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.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."
17ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 assessee has excluded the exchange fluctuation gain from the total income as well as from the 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 assessments was challenged before the first appellate authority but the appeal to Learned CIT(A) did not bring any relief to the assessee. Ultimately the dispute travelled to the Tribunal and the Tribunal vide its order dated 24th July, 2015 has accepted the contentions of the assessee. On the strength of Hon. Delhi High Court 18 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 decision in the case reported at (2013) 29 taxmann.com 292 (Delhi) in the case of CIT vs. Orient Craft Ltd. Tribunal was of the opinion that even in the case intimation u/s 143(i) has been issued by the AO assessment cannot be reopened by the AO merely on reanalyzing the material available to him on the basis of which he could have issued notice u/s 143(2) and scrutinized the return. In other words the Tribunal was of the view that there should be some tangible material came to the possession of AO authorizing him to initiate reassessment proceedings. According to the Tribunal there was no tangible material collected by the Assessing Officer after the filing of return by the assessee and the AO merely reanalyzing the material submitted by the assessee along with the return. Accordingly, Tribunal quashed the re- assessment 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 19 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 basis that exchange fluctuation gain amounting to Rs.54,03,649/- was not included by the assessee in the book 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 non- inclusion 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 20 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 carry forward this loss for future adjustment and therefore, this item is neither here nor there for the taxability for the income for AY 2004-05 is concerned. Both these reasons therefore, fail.
5.4 For buttressing his proposition he made a reference to the decision of Gujarat High Court in the case of CIT vs. Mohd. Junded Dadani (2013) 30 taxman page 1. He contended that in this decision Hon. Gujarat High Court has considered the judgment of Hon. Bombay High Court in the case of Star India P. Ltd. vs. Addl. CIT - 311 ITR (ST) 235 (Mumbai) and that of Hon. Delhi High Court in the case of Ranbaxy Laboratories Ltd. v. CIT : 336 ITR 136. Unanimous opinion of all the three high courts is that the expression "also has been employed under section 147 which contemplates that any income unearth by the AO during the re-assessment proceedings can never be added if there is some addition qua the points raised on which assessment was set to be opened. If there are no additions on those points then no other addition can be made. Ld. Counsel for the assessee emphasized that since in AY 2004-05 there cannot be said that 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 21 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 time he was required to form his opinion prima facie. It was not incumbent on the Assessing Officer to arrive at 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 22 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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. According to him this notice should have been issued and served upon the assessee on or before 18th June, 2008 i.e. within the time period of 12 months.
5.9 He further contended that though section 292BB has been brought on the statute book by Finance Act 2008 contemplating therein that if assessee has participated in the proceedings then he will be precluded to raise any objection about service of notice etc. This provision has been considered by Hon. Gujarat High Court in the case of CIT vs. K. M. Ravji in Tax Appeal No.771 of 2010. He placed on record a copy of the decision dated 18th July, 2011. He pointed out that Hon. Gujarat High Court has held that this section recapitulate the defect in the service of notice. It does not recapitulate the validity of proceedings in the case of non-issue of notice. No notice has been issued, thus assessee has not been precluded to challenge the assessment proceedings on this 23 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 ground. In this way ld. counsel for the assessee has prayed that re- assessment order deserves to be quashed.
5.10 On the other hand, ld. DR relied upon 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 follows;
"2. After going through the contents of letter submitted by the assessee in your office on 23.09.2011 it is found that 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 24 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 stating that there Is no separate counter for acceptance of letter address to Dy.CIT, Circle-4, Baroda. In fact, there is a receipt register managed by separate staff for each ward and circle. Every Setter submitted by the assessees in this office have been acknowledged with the stamp of the concerned A.O.'s office. The same can also be verified by the other submissions furnished by the assessees to this office. The copy of fetter dated 19.06.2007 submitted now by the assessees In your office bears the stamp of ITO, Ward ~ 4(1), Baroda and has never been received in this office as verified from the receipt register, The Inward Register of ITO, Ward-4(l)t Baroda has also been verified but no entry of such Setter dated 19.06.2007 as claimed has been found entered in the register, The copies of the relevant pages are also enclosed herewith for ready reference. For the sake of argument, even if assessee's contention is accepted as correct, the same has been submitted in the wrong office hence, cannot be treated as compliance to notice 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 assessment order that a letter no.25
ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 Cir 4/AABCS/7650L/2008-09 dated 25.05,2008 was issued and served upon the appellant fixing the hearing in the case on 04.06.208. A copy of 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 provisions of section 29288 also. Accordingly, this ground of appeal is dismissed."
5.12 As far as the legal proposition by the ld. counsel for the assessee is concerned, we do not have any dispute with regard to the proposition and we do not want to indulge into any investigation of the alleged legal proposition because there is no foundation of facts to apply the legal position. Assessee has not submitted the letter to the right official alleging therein that the return filed on 14th October, 2004 u/s 139(1) is to be treated as filed in response to the notice u/s 148 of the Act. Therefore, we do not find any merit in this contention of the ld. counsel for the assessee. We do not find any infirmity in the order of ld. CIT(A) for upholding the reassessment for Asst. Year 2004-05.
6. As far as Asst. Year 2005-06 is concerned, again we find that Assessing Officer has adopted the same reasoning for reopening of the assessment that failure of the assessee to include exchange fluctuation in the book profit and in this year there was no loss in the computation 26 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 of assessment in this year is upheld.
7. The next common issue relates to expenditure for purchase of library books and computer software during AY 2004-05 to AY 2007-08, which 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.
27ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 hence the expenditure incurred towards the purchase of library books should be treated as a revenue expenditure.
7.2 As regards computer software purchase Learned AR submitted that These software includes cost of licenses for application level programs like MS Office, Antiviruses etc. These programs are not those kinds of programs which will continue to provide services till perpetuity by incurring one time expenditure. Every year these programs keep on updating and the license fees for these application programs needs to be paid afresh. The application software which is relevant for the research and development in the current year will not 28 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 be relevant in future years due to the constant updation and changes in the application software's. Accordingly, this computer software do not provide any enduring benefit to SRTPL. It was further submitted that for AY 2004-05 and AY 2005-06 Learned CIT(A) has deleted part of the additions made for computer software purchase. Reliance placed on the following decisions 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 29 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 on library books and computer software as capital expenditure during Assessment year 2004-05 to Assessment Year 2007-08. We notice that the assessee is engaged in the business of research and development which is a dynamic field and keeps on changing on day to day basis. Library books are the reference material for conducting research. In this era of quick 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; nor are the notions of 'capital' or 'revenue' adjudicial fetisn. What 30 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 is capital expenditure and what is revenue are not eternal varieties but must needs be flexible so as to respond to the changing economic realities of business. The expression 'asset or advantage of an enduring nature' was evolved to emphasise the element of a sufficient degree of durability appropriate to the context........ There is also no single definite criterion which by itself, is determinative whether a particular outlay is capital or revenue. The 'once for all' payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common-sense way having regard to the business realities. In a given case, the test of 'enduring benefit' might break down".
7.5 From going through the above principles laid down by the Hon'ble Apex Court which makes things very clear 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.
31ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 obsolete with technological innovation and advancement within a short span of time and it can be said that where the life of the computer software is shorter (say less than 2 years), it may be treated as revenue expenditure.
7.7 Examining the facts 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.
32ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09
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 transaction was not done by assessee at arms' length price. The facts are identical in all the years. Therefore, for the facilitation of reference we are taking all the facts mainly from Asst. Year 2004-05 in case of any variation wanting specific mentioned those facts. Brief facts of the case are that assessee is the part of South Basic Indus. Corporation (SABIC). Out of the aggregate paid capital of SABIC 70% is held by Government and balance 30% by a private individual and parties. Assessee was incorporated under the Companies Act, 1956 having got its registration on 17.2.1988 at plot no.5 & 6 Savli, GIDC, Baroda hereinafter referred to SRTPL. It entered into technological agreement on 16th March, 2001 with SABIC. The assessee had to operate a research center in Baroda, Gujarat which is dedicated principally in conducting long range research in chemical products, catalysts and technology for developing "leads" to new and improved chemical 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 33 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 name of SRTPL, but will remain in the property of SABIC.
8.1 Thus it was found by the AO that assessee is engaged in research in computer and lead services and earned Rs.5,42,35,259/- in Asst. Year 2004-05. Realizing involvement of international transaction ld. AO 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 34 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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%. In view of the negative margin so worked out , assessee submitted that no adjustments are called for in the case of M/s. SRTPL as it has made the billing cost plus 5% as per the research agreement.
8.3 The TPO was not satisfied with the comparable of the assessee. He accordingly made a fresh search and thereafter included the following three comparable to the two comparable accepted by the assessee after observing in detail as to why these comparable are having similar business activities to that of the assessee :-
Celestial 29.97%
Vimta 35.52%
Alphangeo 63.62%
Accordingly learned TPO worked out average profit margin of the five comparable at 24.25% and calculated the value of International Transaction Arm's Length Price at Rs.7,50,97,121/- and proposed a Transfer pricing adjustment at Rs.2,08,61,862/-.Learned TPO also included deferred revenue expenditure as part of operating cost 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.
35ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 we will take up the issue of Deferred Revenue expenditure The learned AO as well as the learned CIT(A) are of the view that since deferred revenue expenditure was incurred in connection with the Research and Development activities to be undertaken by SRTPL in future, it is to be considered as an operating expenditure for the computation of operating margins of SRTPL for the purpose of Transfer Pricing.
36ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 Appellant entered into an exclusive agreement as per which the Appellant is not restricted from undertaking research activities on behalf of other third parties. Accordingly, it could not be said that expenses incurred prior to commencement were incurred in relation to research projects for AE.
37ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 8.10 Since the said expenses were non-operating and pre-operative in nature, the same were not claimed as a revenue expenditure while computing the income for AY 2002-03 or any subsequent years. Further, as the same represents pre-operative expenses, the same should also be treated as non-operating extraordinary expenses in nature for the purpose of computing margins of the Appellant. The said write off of Rs. is not in the nature of operating cost as it has no nexus with sales.
8.11 Alternatively, even if the deferred revenue expenditure was to be recovered from the AE, the same should have 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.
38ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 with the AEs.
8.13 Further, the learned Departmental Representative has argued that no interest was charged on the loan extended to SRTPL by the Associated Enterprises and hence the transaction of loan is not at arm's length. Accordingly, based on above the deferred revenue expenditure is to be treated as an operating 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.
39ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 of commercial operations. Out of total sum of Rs.5.29 crores, an expenditure of Rs.3.54 crores, being non-operating in nature, was accounted as deferred revenue expenditure and as per the recommendation of the Institute of Chartered Accountants of India. It has been written off over a period of five years in equal installment of Rs.70.98 lacs. Since the said expenditure was non-operating in nature and related to the period prior to the commencement of commercial operations, the same has been disallowed suo moto by the assessee while computing the total income and the same has also not been considered by the assessee in the operating costs while recovering mark-up of 5% from the AE. However, ld. TPO, while computing the operating margin in the transfer pricing proceedings, applying TNMM Method, considered the deferred revenue expenditure as operating expenses 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 40 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 reasonably allocate to each Research Project, in accordance with the following:"
8.17 From above condition referred in the agreement we notice that it is only the operating cost which the assessee can get reimbursed; whereas the impugned expenditure is undisputedly non-operating in nature relating to a period prior to the commencement of commercial operation 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.) 41 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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. The learned CIT(A) has held that this company is involved in research and development services and hence considered as a comparable.
9.1 During the course of hearing before the Tribunal Learned Counsel submitted that Alphageo (India) Limited is a company engaged in provision of seismic survey services in India. It provides seismic survey services to the rapidly growing oil exploration and 42 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 production sector. It provides entire spectrum of seismic and related services like acquisition and processing of data.
9.2 Further The company is not into research and development rather it is engaged into provision of data into organized form. It collects data, organizes them and provides it to its customers. Reliance is placed on the annual report of the company outlining its activity. Referring to page 14,24,33 and 40 of Paperbook 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.43
ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 a comparable.
(Please refer Sr No 9, Page 159 to 177 of Paper book 3) 9.5 It further relied on the ruling of Mumbai ITAT in the case of Syngenta Biosciences Private Limited v DCIT(180 TTJ 61) wherein Alphageo was rejected as a functionally comparable since it was engaged in the provision of seismic surveys and not in the field of research and development. (Please refer Sr No 9, Page 159 to 177 of Paperbook 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 44 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 Morris Services India SA (India Branch) (73 taxmann.com 264) which has followed the decision of the Hon'ble Delhi High Court in the case Chryscapital Investment Advisors (India) (P.) Ltd. (supra) and has held that to select a company as a comparable, functional comparability is must.
• Accordingly, the extent to which the learned Departmental Representative has relied upon the ruling of Chryscapital Investment Advisors (India) (P.) Ltd. (supra) for exclusion of the Alphageo (India) Limited on the basis of high turnover or high profit is invalid. The copies of these rulings have been provided to the Hon'ble Bench members during the course of the hearing.
• SRTPL relies upon the rulings of the Hon'ble Delhi High Court in the case of Chryscapital 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 45 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 accepted as a comparable. Also the comparable has been accepted by SRTPL as comparable in its own Transfer "7 Pricing analysis and hence the same cannot be rejected as a comparable now.
9.7 We have heard the rival contentions and perused the material available on record. The issue raised through this ground by assessee is challenging the inclusion of Alphageo India Ltd as comparable by the TPO which has been further upheld by the lower appellate authority.
46ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 company engaged in the provision of Seismic Survey Services to the rapidly growing oil exploration and production sector and it provides entire spectrum of Seismic and related services like acquisition and processing of data, but certainly not into research and development work.
47ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 9.10 It was further submitted that M/s. Alphageo India Ltd is engaged in the provision of data into organized form by way of collecting data and organizing them for its customers. This company is not functional comparable to the companies providing research and development services. Ld. Counsel has also referred and relied on the judgment of Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. (supra) and decision of Tribunal 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 48 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 exploration and production of oil. We are of the view that these two companies i.e. the assessee and Alphageo (India) Ltd. are functionally not comparable and cannot be taken into consideration.
98.12 Further we also notice that ld. DR has contended that the comparable M/s. Alphangeo India Ltd has been accepted by the assessee as comparable in its own transfer pricing analysis and hence the same cannot be rejected as a comparable now. We, however, disagree with the contention of the ld. DR, because there is no bar for the assessee to withdraw its 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 after the conduction of the studies by assessee 49 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 can be taken as comparable and considered for benchmarking. The assessee filed complete multiple year data in the case of Alphageo (India) Ltd......"
9.13 Summarizing the discussions, relating to Alphageo (India) Ltd, we observe that the services provided by Alphageo (India) Ltd includes 2D and 3d surveys, Seismic data acquisition in 2D and 3D, Seismic data processing/reprocessing/special processing, Seismic data interpretation and Reservoir data acquisition and analysis. It shows that Alphageo (India) Ltd is not into research and development but is only engaged in the provision of data into organized forms.
9.14 We are, therefore, of the view that the assessee-company SRPTL 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 50 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 development activities. As per Director's report for the year ending 31 March 2004, Celestial Labs could cater to a variety of users and was instrumental in developing tailor made Software packages for the end users. Accordingly, Celestial Labs is not a good comparable for Research and development company. Further, reliance placed by the AO on draft prospectus is also misplaced as the same relates to future expansion plans and was also filed in 2006.Also the learned TPO has not 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) 51 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 the research and development activities. The fact that Celestial Labs Limited is not a good comparable to a company involved in research and development activity has been considered in a series of judgments mentioned below:-
1. M/s Tevapharm Pvt. Ltd. v. ACIT (147 TTJ 35) (Mumbai ITAT)
2. Evonik Degussa India P. Ltd. v. ACIT (151 TTJ 1) (Mumbai ITAT)
3. Telcordia Technologies P. Ltd. v. ACIT (137 ITD 1) (Mumbai ITAT)
4. Apotex Research Private Limited v DCIT (ITA No 918/Bang/2011) (Bangalore ITAT) 52 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 10.6 We further notice that ld. TPO has himself not considered Celestial Labs Limited as comparable in assessee's case for calculating Arm's length 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 Labs Limited in the final list of comparable companies for calculating the Arm's length 53 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 price of International transaction entered by SRTPL with Associate Enterprise SABIC. In the result this ground of the assessee is dismissed.
12. Another common ground raised by the assessee is against the order of ld. TPO and DRP for not granting deduction of +/- 5% of ALP as permissible under proviso to Section 92C(2) as in force. At the outset, ld. Counsel for the assessee conceded to fact that post amendment under Section 92C(2) of the Act, the assessee is 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 54 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 rent/lease charges in the cost base for computing net margin under TNMM would also call for inclusion of depreciation expenses incurred for parity of reasoning.
13.2 Aggrieved, the assessee is now in appeal before the Tribunal.
13.3 Learned Counsel for the assessee with regard to his contentions of using operating cost excluding depreciation cost for calculating Profit level indicator and or in the alternative for providing depreciation cost adjustment for calculating operating margin submitted as under:-
(a) Using PBDiT as a PLI • SRTPL has applied TNMM method for comparing the operating margins earned from 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 55 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 depreciation in the books of accounts.
• The difference in the method of depreciation has resulted into the lower Asset Turnover ratio of SRTPL as compared to the comparable companies. The different Asset-Turnover ratio highlights the diverse maturity stages of SRTPL and of the comparable companies business and also the substantial capital expenditure undertaken by SRTPL.
56ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 (please refer chart number 1 provided during the hearing which shows comparison asset turnover ratio of SRTPL vis-a-vis the comparable in various years) • Further there is a substantial difference in the asset 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) 57 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 • 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 Diagnostics Limited v ACIT (152 ITD 155).
SRTPL also places reliance on the rulings of the various ITAT and High Court placed at Sr No. 1 and 2 of paperbook 1 and Sr No. 1 to 7 of paperbook 3 which support the contention of SRTPL that PBDIT can be used as a PLl in case where there are difference in the methods of depreciation or difference in the rates of depreciation.
• The learned Departmental Representative during his arguments has placed reliance on the judgment of Delhi ITAT in the case DCIT v Sumi Motherson Innovative Engineering 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 58 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 2006- 07 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) Depreciation adjustment to be allowed while computing the operating margins • The comparable companies operating costs should be recalculated by considering the ratio of depreciation to operating costs adopted by SRTPL to bring the depreciation charged by SRTPL at par with the comparable.
• Since there has been a substantial difference in the asset turnover ratio and the methods of depreciation followed by the comparable, a suitable adjustment should be allowed to 59 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 SRTPL to bring its depreciation in par with the comparable for the comparability purpose. Further the learned DR 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.
• 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 60 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 amount of depreciation adjustment that should be allowed is provided at Chart 3 provided during the course of the hearing and is reproduced as 'Chart c' of this summary.
13.4 Learned Counsel for the assessee referred to the tables below showing asset turnover / asset intensity ratio, summary of margins using PBDIT as a PLI and summary of margins of depreciation adjustment of SRTPL vis-a-vis comparable a. Asset Turnover / Asset Intensity Ratio (Chart 1 provided during the hearing) Comparable AY 2004-05 AY 2005-06 AY 2006-07 AY2007-Q8 AY 2008-09 Biotech Consortium 1025% 1124% 459% 401% 1309% India Limited IDC (India) Limited 571% 554% 734% 448% 678% Vimta Labs Limited 240% 256% 211% 89% 71% Research Support _* 444% 161% * 217% International Limited Spectrum Infotech * * 1778% * * Limited 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 AY 2004-05 AY 2005-06 AY 2006-07 AY 2007- AY depreciation^ 08 2008-09 Biotech Consortium WDV -32,97% -14.49% -16.84% -13.61% 13.64% India Limited IDC (India) Limited SLM 14.02% 14.35% 16.06%_ 18.60% 18.27% 61 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 Vimta Labs Limited SLM 87.24% 106.64% 87.93% 63.40% 44.40% Research Support WDV * 1.90% 0.35% * 21.92% International Limited •jr Spectrum Infotech WDV _* 11.58% * * Limited Average Margin of 22.76% 27.10% 16.51% 22.80% 24.56% Com parables SRTPL SLM 45.11% 40.38% 38.34% 33.15% J59.31%J 'Denotes that the company was not selected as a comparable in that particular year c. Comparison of Operating Margins after considering depreciation adjustment (Chart 3 provided during the hearing) Comparable Method of AY AY 2005- AY 2006- AY 2007- AY 2008-
Depreciation 2004-05 06 07 08 09
Biotech Consortium WDV -51.09% -34.14% -35.82% -30.96% -12.91%
India Limited
IDC (India) Limited SLM -16.79% u^LL?2% -10.42% -6.57% -9.36%
_
Vimta Labs Limited SLM 36.64% 59.16% 45.04% 28.72% 10.66%
Research Support WDV * -21.52% -22.55% * -6.57%
International
Limited
Spectrum Infotech WDV * _* -13,88% * *
Limited
Average Margin of -10.41% -2.10% -7.53% -2.94% -4.55%
Com parables
SRTPL SLM LA89%H 8.12% 6.78% 4.89% 6.76%
SRTPL % of 37.03% 29.83% 29.56% 26.94% 30.49%
Depreciation to
operating cost
(used as a
depreciation
adjustment for
computing margins
of com parables)
62
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Asst. Year 2004-05 to 2008-09
*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 regulation 1.482-1 (d)(2) of the US regulation (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 63 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 v DCIT (112 TTJ 408) (Delhi ITAT)
- E Gain Communication Private Limited v ITO (118 ITD 243) (Pune ITAT)
- Amdocs Business Services Pvt. Ltd vs DCIT (ITA1412/PN/11) (Pune ITAT)
- Market Tools Research Pvt. Ltd vs ACIT (ITA no 2066/HYD/2011) (Hyd ITAT)
- M/s Honeywell Technology Solutions Lab P. Ltd. v. DCIT (I.T.(TP) A.No. 1344/Bang/2011) (Bang ITAT)
- M/s Kuehne and Nagel Pvt. Ltd. v. ACIT (ITA No. 5648/Dei/2010) (Delhi ITAT) 64 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 13.7 On the other hand learned Departmental representative submitted that it is not possible to consider item by item comparability for the purpose of computation of the PLI. If depreciation cost is more in the initial years, the repairs cost would be less and vice versa. Hence the depreciation should not affect the PLI. He further placed reliance on the judgment of Delhi ITAT in the case DCIT v Sumi Motherson Innovative Engineering Limited (30 ITR(T) 367) and has submitted that PBDIT cannot be used as a PLI. 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 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 65 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 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 66 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 transactions and the comparable uncontrolled transactions which could materially affect the net profit margin. Further Rule 10B(3) of the Rules provide that an uncontrolled transaction shall be comparable to international transaction if (1) none of the differences between the transactions being compared or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in or the profit arising from such transactions in the open market, or (2) reasonably accurate adjustments can be made to eliminate the material effects of such differences.
13.13 Further, guidance note on report under Section 92E of the Act provided at page 61 of the paper-book No.3 provides that "there may be difference in assets employed and the method of providing depreciation. In order that such differences does not impact the net profit, the operating margin on operating cost before depreciation is taken as profit level indicator." Accordingly, relying upon the guidance provided in Rule 10B(1)(e)(iii) and Rule 10B(3), it can be concluded that adjustment for the depreciation can be granted to bring the depreciation in par with the comparable in appropriate circumstances.
13.14 We further observe that the factors mentioned in Rule 10B are not exhaustive. The principal object of benchmarking international 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 67 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 Fixed Assets Fixed Assets Average Turnover for Asset
Company As on March As on March Fixed Assets the year Turnover
2003 2004 (B) C = (A+B)/2 ended 31 Ratio E =
(A) March 2004 D/C8*100
(D)
SRTPL 31,99,66,418 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 Fixed Assets Fixed Assets Average Turnover for Asset
Company As on March As on March Fixed Assets the year Turnover
2004 2005 (B) C = (A+B)/2 ended 31 Ratio E =
(A) March 2005 D/C8*100
(D)
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%
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Assessment Year 2006-07 - Asset turnover ratio
Name of the Fixed Assets Fixed Assets Average Turnover for Asset
Company As on March As on March Fixed Assets the year Turnover
2005 2006 (B) C = (A+B)/2 ended 31 Ratio E =
(A) March 2006 D/C8*100
(D)
SRTPL 34,85,21,394 38,54,95,274 36,70,08,334 8,19,93,269 22%
Biotech 25,45,616 30,71,279 28,08,448 1,29,02,848 459%
IDC (India) Limited 1,49,22,320 1,82,48,747 1,65,85,534 12,17,24.905 734%
Research 16,93,000 5,57,44,000 2,87,18,500 4,62,80,000 161%
Spectrum 30,49,498 22,00,218 26,24,858 4,66,64,231 1778%
Vimta Labs Limited 23,99,15,313 25,68,96,095 54,20,15,546 211%
27,38,76,876
Assessment Year 2007-08 - Asset turnover ratio
Name of the Fixed Assets Fixed Assets Average Turnover for Asset
Company As on March As on March Fixed Assets the year Turnover
2006 2007 (B) C = (A+B)/2 ended 31 Ratio E =
(A) March 2007 D/C8*100
(D)
SRTPL 46,62,91,924 51,11,87,406 48,87,39,665 9,89,47,053 20%
Biotech 1,04,00,000 1,08,00,00 1,06,00,000 4,25,00,000 401%
IDC (India) 3,45,00,000 2,98,50,000 13,38,00,000 448%
Limited 2,52,00,000
Vimta Labs 27,38,76,876 1,08,76,52,359 68,07,64,618 60,24,92,570 89%
Limited
Assessment Year 2008-09 - Asset turnover ratio
Name of the Fixed Assets Fixed Assets Average Fixed Turnover for Asset
Company As on March As on March Assets C = the year Turnover
2007 2008 (B) (A+B)/2 ended 31 Ratio E =
(A) March 2008 D/C8*100
(D)
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%
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IDC (India) 2,42,86,769 2,19,57,864 2,31,22,317 15,68,28,850 678%
Limited
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 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 70 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 to be excluded from the operating cost or a depreciation adjustment to be allowed by applying the percentage of depreciation to the total cost (excluding depreciation) of the assessee to be applied to other comparable companies.
13.17 As regards, the first plea of excluding the depreciation cost from the total operating cost, we have come across various judicial decisions, of which we would like to note of few of them which has a direct resemblance to the facts of the assessee.
13.18 We observe that the Co-ordinate Bench of Tribunal in the case of Siemens Healthcare Diagnostics Ltd v. ACIT (supra) has adjudicated similar issue and have held that the depreciation cost to be excluded from the operating cost for calculating operating profit margin by relying on the decision of the Schefenacker Motherson Ltd. v ITO/DCIT, reported in 123 TTJ 509, by observing as under :-
11. We have heard the rival submissions and perused the orders of lower authorities and material available on record. In the instant case, the assessee is engaged in the business of trading of diagnostic instruments and consumables manufactured by its associated enterprises. The assessee entered into international transactions representing purchase of goods from the associated enterprises. The conclusion arrived by the assessee in respect of arm's length nature of the transaction was not found to be acceptable by the Transfer Pricing Officer. It is not in dispute that the arm's length price of the aforesaid international transaction is to be benchmarked on Transaction Net Margin Method (TNMM). To compute Transaction Net Margin Method of the assessee, data of M/s. Span Diagnostics Limited 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 71 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 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 the amount of depreciation as well as in respect of difference in the method of providing depreciation employed in the case of the assessee vis-a-vis the method employed in the case of M/s. Span Diagnostics Limited. The Dispute Resolution Panel without recording any finding on this issue confirmed the action of the Transfer Pricing Officer. We find that the Delhi Bench of the Tribunal in the case of Schefenacker Motherson Ltd. (supra) has held as under:
"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 taken into account or disregarded in computing profit depending upon the 72 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 context and purpose for which profit is to be computed. There is no formula which would be applicable universally and in all circumstances. "Net profit"
used in r. 1 OB can be taken to mean commercial profit as held by the TPO and confirmed on appeal by the CIT(A). But depreciation in such profit on commercial principles has to be the "actual" amount by which the assets of business got depleted between the two dates separated by a year. It cannot be depreciation under tax or companies rules or as per policy of the company. In the case in hand, Revenue authorities went wrong in disregarding the 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 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 record. 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 taxpayer has debited high amount/ratio of depreciation as per rules as it was first or second year of commencement of its business. Other enterprises nave claimed depreciation at much lower amounts.
73ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 It is more than 5 and 15 times of the taxpayer. 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. How above differences were not considered in applying FAR analysis? The CFT(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. The AO, after looking into details of financial results of comparable enterprises, excluded all companies except the three, although two of companies selected, namely CCML and RPL percentage of depreciation to total cost had differences of more than 2 per cent which is quite substantial. The CIT(A) is right in holding that working of mean profit of the TPO on the basis of three selected companies was not correct. But then the CIT(A) also failed to give due regard to the nature, type and age of the machinery employed by comparable or size of the companies leading to material 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 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 adjustment of difference in depreciation furnished arm's length working after excluding depreciation and by taking all other expenses into consideration and showed that such profit of the taxpayer was quite comparable to the mean margin of comparable similarly computed. This demonstratively showed that deduction of depreciations was making huge difference and required suitable adjustment. This claim has not been challenged. It is clear that the best way to adjust difference on account of depreciation was to ignore depreciation both in case of the party and the 74 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 comparable. After all TP adjustments are to be made of differences in price charged or for international transactions and not of difference in the claim of depreciation as has been done in this Such adjustments also matched the requirement of the context (TP principles). The basic issue was whether the cost paid or charged for international transactions was at arm's length or not. The factors which go to influence price, cost or profit are/were relevant for computing profit and not depreciation having no direct connection with price or profit but responsible for wide differences. The case of the Revenue is not clear. If depreciation is not leading to any difference, its exclusion is immaterial. If it is leading to differences, then differences are required to be adjusted, as required by provisions of IT Regulations. There is no way to dislodge the claim of the taxpayer. The context and purpose of legislation and facts of case overwhelmingly approve adoption of cash profit only. The taxpayer in both the assessment years showed before the Revenue authorities that profit shown by the taxpayer satisfies 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 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 75 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 level of the comparable arising due to adoption of different method of charging depreciation. We have gone through the order of the Bombay Bench of this Tribunal in the case of Reuters India (P.) Ltd. as has been relied on by the Id. AR. We noted that the Tribunal in this case has adopted the cash profit/operating cost as the correct profit level indicator under the TNMM method. If the net operating profit ratio is computed in respect of the CDR unit before depreciation, it will be as under:
Particulars:- Total Revenue from CDR Operations 109,449,682 Notional Revenue 1,629,003 Total 111,078,685 Total Operating Cost 97,289,193 Less: Adjustment for Excess 13,565,825 Depreciation provided Adjusted Operating Cost 83,723,368 Operating Profits 27,355,317 Net Operating Profit/ Operating Cost 32.67%''
15. In the above facts and circumstances, in our considered view, it shall be fair and in the interest of justice to restore the matter back to the file of the Transfer Pricing Officer for proper verification of the claim of the assessee regarding huge difference in the amount of depreciation between the assessee company and the chosen comparable case and also the difference in the method of providing of depreciation in the two companies. In our considered view, if the methods of depreciation adopted by the two companies are different, then the net margins arrived at are not strictly comparable unless suitable adjustment is made in the amount of depreciation so as to adopt depreciation under the same method in the two cases. Therefore, the Transfer Pricing Officer is directed to take into consideration the difference in the method of providing depreciation in the case of 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.
76ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 Co- ordinate 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 taken into account or disregarded in computing profit depending upon the context and purpose for which profit is to be computed. There is no formula which would be applicable universally and in all circumstances. "Net profit"
used in Rule 10B can be taken to mean commercial profit. But depreciation in such profit on commercial principles has to be the "actual" amount by which the assets of business got depleted between the two dates separated by a year. It cannot be depreciation under tax or companies rules or as per policy of the company. In the case in hand, Revenue authorities went wrong in disregarding the 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 assessee in pleading that profits be taken without deduction of depreciation as depreciation was leading to large differences in margins for various reasons.77
ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 assessee 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. 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 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 obvious that the assessee demonstrated through its TP study that the price charged or paid to its AEs was at the ALP. The TPO made certain exclusions from the list of comparable which led to the making of TP adjustment. Since the TP adjustment was eventually made by the AO, it was naturally possible for the assessee to take up its matter 78 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 before the learned CIT(A) for the first time. It is further important to note that the claim of having higher rate of depreciation in assessee's case did not come to be considered for the first time. The assessee had reported this fact in Notes to its Financial Statement that the depreciation on equipments was charged on straight- line basis on the original cost in accordance with the policy of charging depreciation taking useful life of 2 to 5 years. Such Note is available on page 11 of the paper book. In view of the fact that all the relevant details in this regard were already available on record and the assessee simply required the examination of its claim before the CIT(A), respectfully following the Special Bench order in the case of DCIT v. Quark Systems (P) Ltd. [(2010) 132 TTJ (CM.) (SB) 1], we find no infirmity in the order of the Id. CIT(A) in entertaining this claim for adjudication on merits.
13.21 Further Delhi Tribunal in the case of Mentor Graphics Private Limited v DCIT (112 TTJ 408) (Delhi ITAT) recognized the need for adjustment as per Rule 10B(a)(e) after considering all the differences in the functions performed, risk issued and asset involved. From going through the aforesaid decisions, wherein it has been consistently held that for calculating profit level indicator, operating cost excluding deprecation can be taken as the basis for calculating operating margin.
13.22 We therefore 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 79 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 calculating revised PLI using Profit Before Depreciation, Interest and Tax.
Assessment Year 2004-05 Margin computation using PBDIT / Operating costs as the PLI Name of the Operating Op cost excl Operating Revised PLI = Method of company revenues margins PBDIT /Total Depreciation depn operating costs excluding depreciation SRTPL 5,42,35,259 3,73,75,828 1,68,59,431 45.11% SLM Biotech 1,41,94,442 2,11,76,808 (69,82,366) -32.97% WDV 80 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 Vimta Labs 35,13,91,295 18,76,65,486 16,37,25,809 87.24% SLM IDC India 6,09,40,369 5,34,47,972 74,92,397 14.02% SLM Average (A) 22.76% Assessment Year 2005-06 Margin computation using PBDIT / Operating costs as the PLI Name of the Operating Op cost excl Operating Revised PLI = Method of company revenues depn margins PBDIT /Total Depreciation operating costs excluding depreciation SRTPL 7,34,03,319 5,22,89,618 2,11,13,701 40.38% SLM Biotech 2,05,93,626 2,40,82,442 (34,88,816) -14.49% WDV Vimta Labs 52,22,13,269 25,27,12,716 26,95,00,553 106.64% SLM Research 75,21,000 73,81,000 1,40,000 1.90% WDV Support IDC India 8,30,99,654 7,26,71,595 1,04,28,059 14.35% SLM Average (A) 27.10% Assessment Year 2006-07 Margin computation using PBDIT / Operating costs as the PLI Name of Operating Op cost excl depn Operating margins Revised PLI = Method of the revenues PBDIT / Total Depreciation company operating costs excluding depreciation SRTPL 8,19,93,209 5,92,67,547 2,27,25,662 38.34% SLM Biotech 1,90,60,689 2,29,21,870 (38,61,181) -16.84% WDV Vimta 54,45,59,498 28,97,74,505 25,47,84,993 87.93% SLM Labs Research 4,63,15,000 4,61,53,000 1,62,000 0.35% WDV Support IDC India 12,18,27,448 10,49,69,869 1,68,57,579 16.06% SLM 81 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 Spectrum 4,70,00,000 4,21,21,305 48,78,695 11.58% WDV Infotech Pvt Ltd Average 16.51% (A) Sabic Research and Technology Private Limited Assessment Year 2007-08 Margin computation using PBDIT / Operating costs as the PLI Name of the Operating Op cost excl Operating Revised PLI = Method of company revenues depn margins PBDIT /Total Depreciation operating costs Excluding 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) 13,38,47,675 11,28,56,820 2,09,90,855 18.60% SLM Limited 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 Operating Op cost excl Operating Revised PLI = Method of company revenues depn margins PBDIT /Total Depreciation operating costs excluding depreciation SRTPL 11,84,34,422 8,50,17,113 3,34,17,309 39.31% SLM Biotech 3,79,00,000 3,33,51,461 45,48,539 13.64% WDV IDC (India) 15,68,00,000 13,25,79,071 2,42,20,929 18.27% SLM Limited Vimta 81,76,00,000 56,62,14,854 25,13,85,146 44.40% SLM 82 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 Research 14,54,00,000 11,92,59,000 2,61,41,000 21.92% WDV Support Average (A) 24.56% 13.23 If we summarize the above five charts for AY 2004-05 to AY 2008-09 the revised Profit level Indicator after excluding depreciation from operating cost then the revised PLI shall be as follows:-
AY 2004-05 2005-06 2006-07 2007-08 2008-09 SRTPL 45.11 40.38 38.34 33.15 39.31 Average of 22.65 27.10 16.51 22.80 24.56 Comparable
From going through above chart, we observe that the assessee's revised PLI is much better than the average of the comparable .In the given facts of the case, where the asset turnover ratio of the assessee- company i.e. SRTPL is too low as compared to the asset turnover ratio of the comparable and also due to difference in the method of calculating depreciation and respectfully following the decisions referred above relating to this issue, we are of the view that depreciation should be excluded from the operating cost for the purpose of calculating profit level indicator for doing the transfer pricing analysis of the arm's length price of the international transaction entered with Associate Enterprise. We therefore allow the common ground raised by the assessee. However as the chart showing revised PLI calculated after excluding depreciation cost from the 83 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 operating cost has been filed before us , we direct the learned Transfer Pricing Officer to verify the calculation shown in the above chart wherein operating cost has been taken after excluding depreciation. Needless to mention that the Assessing Officer will allow adequate opportunity of being heard to the assessee for furnishing necessary details. In the result, we allow the assessee's ground of appeal for calculating the Profit level Indicator of assessee and comparable after excluding depreciation from the operating cost. As regards the alternative plea or providing adjustment of depreciation for computing the operating margin, it becomes academic to deal with this issue as we have already allowed the assessee's main plea of excluding depreciation 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 84 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 margin after excluding depreciation from the operating cost and we have also directed the ld. AO to exclude Alphageo lndia Limited and Celestial Labs from the list of comparable and retain Vimta Labs Limited as comparable and have given direction to calculate the Arms Length Price of International transaction with AE after giving effect to our above said decisions. In these circumstances, penalty imposed at Rs.54,54,783/- by ld. Assessing Officer needs to be deleted. In the result, Department's appeal is dismissed.
15. In view of our decision referred dismissing revenue's appeal for AY 2007-08 above, the cross-objection filed by the assessee vide CO No.55/Ahd/2015 is also dismissed as not maintainable.
16. Now we take-up the appeal by the assessee vide ITA No.459/Ahd/2015 filed against the levy of penalty amounting to Rs.4,56,713/- in respect of addition of foreign exchange gain under MAT provisions for AY 2007-08.
85ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 16.1 Briefly stated facts relating to this ground are that during the year the assessee earned the notional foreign exchange gain amounting to Rs.53,59,000/- in respect of the ECB loans availed from the group company for the purpose of acquiring capital assets. The same being capital receipt, the assessee was under a bonafide belief that the same needs to be reduced from the book profits while computing MAT under Section 115JB of the Act and accordingly, the said foreign exchange gain was not offered to tax under the MAT provisions. However, during the assessment proceedings, while computing the book profits under provisions of section 115JB of the Act, the ld. AO found that the assessee has not included notional exchange gains in the books profit and he accordingly added the same in the book profits for calculating MAT. This action of the ld. AO was confirmed by ld. CIT(A) and the assessee had not filed any further appeal against the said addition. Subsequently, penalty proceedings were initiated imposing penalty of Rs.4,56,513/- by observing that the assessee had willfully, knowingly and without reasonable cause furnished inaccurate particulars of book profit. Further, the ld. CIT(A) has also confirmed the penalty levied by the ld. AO on the ground that as per provisions of the Explanation to section 115JB, "book profit" means the net profit as shown in the Profit and Loss account as increased by clauses to (a) to (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 86 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 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 calculation in this regard. Ld. Counsel further referred to the decision of Mumbai ITAT in the case of Oriental Containers Limited vs JCIT (19 SOT 30) (Mum ITAT) wherein it has been held that MAT is not to be levied on artificial income. It was further contended that there was no error found in the calculation of foreign exchange and the particulars furnished were correct. It was only a bonafide claim which was not allowable and the issue raised in this appeal is squarely covered by the decision of Hon'ble Apex Court in the case of CIT vs. Reliance Petroproducts Pvt. Ltd., reported in [2010] 322 ITR 158.
87ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 16.4 On the other hand, ld. DR vehemently argued supporting the order of the lower authorities.
16.5 We have heard the rival contentions and gone through the decisions relied on by the assessee. The short question is whether the assessee is liable to pay penalty under Section 271(1)(c) of the Act for not including the notional exchange gains in the books profit while computing MAT under Section 115JB of the Act. In the year under appeal, the assessee while calculating book profit for the purpose of MAT, reduced the notional foreign exchange gain in respect of ECB loans availed for the purpose of acquiring capital assets. The amount of notional foreign exchange gain is not under dispute by the Revenue and therefore, the calculation of notional foreign exchange gain submitted by assessee in its financial statement and income tax returns is free from any error. This is also a fact that the assessee is a private limited company and is a part of Saudi Basic Industries Corporation and is engaged in the business of providing contract research and development. As on 31.03.2005, the assessee was having a asset base of Rs.34.85 crores and is regularly furnishing income tax return; books of accounts are audited and no major defect has been pointed out by the Revenue Authorities. We further observe that assessee has given plausible reasons for reducing the book profit by the amount of notional foreign exchange gain and has also referred to various judgments. For imposing a penalty under Section 271(1)(c) of the Act, the assessee should have either concealed the particulars of income or 88 ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 furnished inaccurate particulars of income. In the given facts, we observe that the assessee has furnished accurate particulars of income and in a bonafide belief has made a claim 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 with the order of ld. CIT(A) in confirming the penalty of Rs.45,55,500/- in respect of transfer pricing adjustment.
89ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09 17.1 Briefly stated facts are that subsequent to passing of order by ld. CIT(A), wherein the additions with respect to transfer pricing adjustment under normal provision were sustained and confirmed. Subsequently, ld. AO proceeded with penalty proceedings under Section 271(1)(c) of the Act levying penalty of Rs.45,55,500 in respect of transfer pricing adjustment. This penalty has been confirmed by ld. CIT(A) vide order dated 01.07.2016. Now, aggrieved, the assessee is in appeal before the Tribunal.
17.2 We observe that we have dealt with the quantum addition for AY 2008-09 relating to transfer pricing adjustment and other related issues. We have allowed the grounds of the assessee for excluding Alphageo from list of comparable, excluding depreciation and deferred revenue expenditure from operating cost of assessee and comparable for calculating operating profit margin, retaining Vimta Lab as comparable. Further we have dismissed revenue's appeal of including Celestial Lab as comparable. We have accordingly directed the learned Transfer Pricing officer to perform Transfer pricing analysis of International transaction with Associate Enterprise in light of our decision on quantum issue. We are, therefore, of the view that as the ld. AO will re-compute the ALP as per our discussions above, there remains no basis for confirming penalty under Section 271(1)(c) of the Act imposed at Rs.45,55,500/- at this juncture. In the result, this appeal of the assessee is allowed.
90ITA No. 1065 & 11 others Asst. Year 2004-05 to 2008-09
18. All other remaining grounds are general in nature and do not require separate adjudication.
19. In the result, the appeal of the assessee bearing ITA Nos. 1065 to 1067/Ahd/2012, 3283/Ahd/2010 are partly allowed for statistical purposes, whereas CO No.55/Ahd/2015 is allowed for statistical purposes. Assessee's appeal bearing ITA Nos. 459/Ahd/2015, 2801/Ahd/2012 & 709/Ahd/2016 are allowed. Revenue's appeal bearing ITA Nos. 1040/Ahd/2012 is allowed and ITA Nos. 1038 & 1039/Ahd/2012 are partly allowed, whereas ITA No.577/Ahd/2015 is dismissed.
Order pronounced in the open Court on 1st May 2017 Sd/- Sd/-
(Rajpal Yadav) (Manish Borad)
Judicial Member Accountant Member
Dated 01/05/2017
*mh/bt
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
TRUE COPY
Asst. Registrar, ITAT, Ahmedabad
91