Income Tax Appellate Tribunal - Mumbai
Hapag-Lloyd India P.Ltd, Mumbai vs Assessee on 14 January, 2015
आयकर अपीलीय अिधकरण,
अिधकरण मुंबई ᭠यायपीठ 'के ' मुब
ं ई।
IN THE INCOME TAX APPELLATE TRIBUNAL " K " BENCH, MUMBAI
᮰ी िवजय पाल राव, ᭠याियक सद᭭य, एवं ᮰ी एन. के . िबलै᭦या, लेखा सद᭭य. के समᭃ ।
BEFORE SHRI VIJAY PAL RAO , JM AND SHRI N.K. BILLAIYA, AM
आयकर अपील सं./I.T.A. No. 7771/Mum/2012
( िनधाᭅरण वषᭅ / Assessment Year : 2008-09 )
आयकर अपील सं./I.T.A. No. 1374/Mum/2014
( िनधाᭅरण वषᭅ / Assessment Year : 2009-10 )
Hapag Lloyd India बनाम/
बनाम Dy. Commissioner of Income-
Private Limited Vs. tax -10(1)
1501, One Indiabulls Room No.461,Aayakar
Centre, Tower-2, Wing- Bhawan, M.K. Road
B, 15 t h Floor Mumbai- 400 020.
Jupiter Mills, Senapati
Bapat Road
Elphinstone
MUMBAI-400 013.
᭭थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AABCH 7319 B
(अपीलाथᱮ /Appellant) ... (ᮧ᭜यथᱮ / Respondent)
अपीलाथᱮ ओर से / Shri Ajit Kumar jain
Appellant by : Shri Jitendra Jain
Ms. Astha Bhatia and
Ms. Radhika Thakkar
ᮧ᭜यथᱮ कᳱ ओर से/ Shri K.C.P Patnayak
Respondent by :
सुनवाई कᳱ तारीख / Date of 03/12/2014
Hearing :
घोषणा कᳱ तारीख /Date of 14/01/2015
Pronouncement :
आदेश / O R D E R
PER VIJAY PAL RAO, JM:
These two appeals by the assessee are directed against the assessment orders passed u/s. 144C(13) of the Income tax Act, 1961 (the Act) in pursuant to the 2 ITA Nos.7771/12 & 1374/14 Hapag Lloyd India Pvt. Ltd.
directions of the DRP u/s. 144C(5) for the assessment year 2008-09 and 2009-10 respectively.
2. For the assessment year 2008-09 the assessee has raised various grounds. However, the only issue arising for our consideration and adjudication is whether in the facts and circumstances of the case the AO/TPO/DRP has erred in making the adjustment of Rs.18.37 crores in respect of the international transaction pertaining to the transaction of business support services.
2.1 The assessee is a 100% subsidiary of Hapag Lloyd AG (HLAG) and is a captive unit engaged in providing business support services to its parent company. The assessee company assisted in booking shipments requirements required to be moved from one location to another. The assessee has entered into a shipping agency agreement with HLAG, according to which it was appointed as the agent for HLAG. The assessee was also authorized to appoint sub-agents with prior written approval of HLAG. As per the agreement the assessee is entitled to receive cost plus(+) 10%. The assessee has reported the international transactions, interalia, provision of business support services of Rs.39,63,61,566/-. The assessee selected TNMM as the most appropriate method and used OP/TC as PLI and work out the margin of the comparables at 8.78% in comparison to 10% of the assessee. Accordingly, the assessee claimed the price charged from the AE as arms-length. The TPO noted that the assessee had paid commission of Rs.17.93 crores. The assessee was asked to give the name of earlier agent who was managing the business of HLAG in India. The agents name was searched by the TPO from the internet being German Express Shipping Agency Pvt. Ltd. (GESA). The assessee was asked to file copy of agreement between GESA and HLAG. The assessee submitted that the same is not available with the assessee as there was a fire in which the documents were destroyed. The TPO issued summons u/s.131 of the Income tax Act to GESA, to file both the agreements. The copies of the agreements were filed. Consequently, the TPO issued a show-cause to the assessee as to why an internal CUP in the form of sub-agency between the assessee 3 ITA Nos.7771/12 & 1374/14 Hapag Lloyd India Pvt. Ltd.
and GESA should not be applied for the purpose of determination of ALP. The assessee contended before the TPO that the sub-agency agreement cannot be applied as CUP as it was not the agreement between the GESA and HLAG. The TPO did not accept the assessee's submission and adopted CUP as most appropriate method by considering the fact that before the appointment of assessee as an agent, GESA was sole agent of whole territory of India and after sub agent agreement, sub-agent was performing exactly the same services to AG for the territory including India and Nepal but excluding the territory of the assessee . Accordingly the TPO proposed the adjustment of Rs.18,37,36,236/- on the basis of the ALP determined at Rs.38,28,51,634/- by applying CUP as most appropriate method.
3. The assessee filed objections before DRP and contended that CUP is not the most appropriate method as stringent comparability is required under this method. The agency agreement between GESA and HLAG is not appropriate CUP as it was already terminated on 31st December 2006. Similarly sub agency agreement between GESA and the assessee is not an appropriate CUP. It was contended that business decision cannot be questioned by the Income tax authorities. The DRP did not accept the contention of the assessee and confirmed the action of the AO/TPO.
4. Before us, the ld. AR has submitted that the TPO is not justified in adopting the commission paid to sub-agent as CUP for determining the ALP in respect of support services provided by the assessee to the AE. The agreement between HLAG and GESA was terminated on 31.12.2006. Therefore, the said agreement is not a contemporary price for the year under consideration. The assessee was appointed as shipping agent by HLAG vide agreement dated 01/01/2007. As per Article-5 of the agreement, the assessee was authorised to appoint sub-agent with prior approval of HLAG. Accordingly, the assessee appointed GESA as sub-agent vide agreement dated 21/02/2007 w.e.f. 01/01/2007. GESA has performed the services for territories including all of Inidia and Nepal but, excluded territory of the assessee as demarcated in the sub agency agreement. The assessee remunerated GESA on the basis of the rate provided 4 ITA Nos.7771/12 & 1374/14 Hapag Lloyd India Pvt. Ltd.
in the sub-agency agreement . The assessee is entitled to receive cost + 10% from AE. The assessee received the same mark-up from AE on the charges paid to GESA. The ld. AR has submitted that the assessee selected 7 comparable companies and arrived at arithmetic mean of 8.7 %. He has referred to Rule 10B(1)(a) of the Income tax Rules, 1962 and submitted that the CUP is the most direct method made to be applied only when an appropriate internal or external comparable is available. A minor change in the properties of product, circumstances of trade may have a significant effect on the price. Thus, CUP method requires a high degree of comparability in respect of quality of product or services, contractual terms, level of market (whole sale/retail), geographical market in which the transaction takes place, date of transaction, intangible properties associated with the sale, foreign currency received, alternatives realistically available with the buyer and seller etc.
5. The ld. AR has pointed out that the TPO considered the transaction with the GESA and assessee as CUP incomparison to the transaction entered between assessee and HLAG. When the associate enterprise of the assessee do not receive the same services from any unrelated party in India, then the transaction between assessee and GESA cannot be applied as CUP for comparison of the transaction between the assessee and AE. He has referred the United Nations Practical Manual on Transfer Pricing for Developing Countries and submitted that only in the given instances a price can be considered as CUP but the transaction between the assessee and GESA does not fall under the internal or external comparables as discussed in the United Nations Practical Manual on Transfer Pricing . GESA acts as sub-agent to the assessee and assessee remunerates GESA on commission basis. The price paid to GESA is operating cost to the assessee on which the assessee charges 10% from AE. The basis and model of remuneration between assessee and GESA is entirely different from the remuneration of the assessee received from AE. Thus, the ld. AR submitted that transaction between assessee and GESA cannot be applied as CUP. Even otherwise when the agreement between HLAG was terminated on December 31, 2006 and was not in existence during the financial year under consideration, the same cannot be applied as a comparable 5 ITA Nos.7771/12 & 1374/14 Hapag Lloyd India Pvt. Ltd.
transaction. When there was no agreement and no service was rendered by GESA to HLAG during the year under consideration then, in the absence of current year data, the non-existing agreement cannot be considered as CUP. The ld. AR has also contended that there is a difference between services rendered by the GESA to assessee and services by the assessee to HLAG. He has pointed out that GESA refers to customer service booking and documentation service to assessee under sub agency agreement, whereas the assessee does not provide such services to HLAG under agency agreement. The assessee is a long term service provider for AE as compared to GESA. Further, the GESA is required to furnish bank guarantee which is not required by the assessee. Thus, the ld. AR has submitted that the controlled transactions, level of market, geographical market, risk involved varies in the transaction with GESA and the transaction with AE. The business model of the assessee and commercial expediency cannot be questioned by the TPO when the assessee is receiving a mark up of cost + 10% from the AE. In support of his contentions the ld. AR has relied on the decision of this Tribunal in the case of UCB India Pvt. Ltd. vs. ACIT dated February 06, 2009 (2009-TII-02-ITAT-MUM-TP) ITA No.428 & 429/Mum/2007 for assessment years 2002- 03 and 2003-04 5.1 On the other hand the ld. DR has submitted that HLAG has entered into an agreement with GESA w.e.f. 01/05/1993. The said agreement was continued till 31.12.2006 and GESA was the sole shipping agent of the HLAG. The assessee was appointed as shipping agent w.e.f. 01/01/2007 under which the assessee has appointed GESA as sub-agent w.e.f. 01/01/2007. GESA as sub agent was performing the same services as it was performing as the agent of HLAG. Therefore, the price between GESA and the assessee which is same as paid by HLAG to GESA under the agency agreement is internal CUP. The ld. DR has further contended that the assessee did not co-operate in the proceedings before the TPO and the relevant information and documents were not furnished by the assessee . The TPO obtained the agreement between GESA and HLAG as well as copy of sub agency agreement between assessee and GESA by issuing notice u/s. 131 to GESA. When internal CUP was available which is primary method for 6 ITA Nos.7771/12 & 1374/14 Hapag Lloyd India Pvt. Ltd.
bench marking the transaction, the TPO was right in rejecting the TP documents of the assessee. He has further submitted that even as per the provisions of Transfer Pricing provision two years data can be used for the purposes of determining the ALP. The agreement between GESA and HLAG falls within the two years prior to the assessment year under consideration. He has relied upon the orders of the authorities below and submitted that by new arrangements the assessee has substituted 3rd party for providing services to AE. The assessee entered into the shoes of the 3rd party, therefore, internal CUP is available. The terms and conditions of the agreement between HLAG and GESA as well as agreement between the assessee and GESA are identical. The assessee and GESA are otherwise doing the identical business and providing identical support service to HLAG. Thus, the ld. DR has submitted the internal CUP available in this case which is most appropriate method of ALP.
6. We have considered the rival submissions as well as relevant material on record. Upto 31/12/2006 GESA was providing the services for booking shipments to HLAG under agency agreement of 1993. GESA was charging a certain percentage on the freight turnover as commission apart from fixed charges @ US$ 10 per inland box. Other fee is as per RBI guidelines as well a fee for consignment delivery and bill of lading.
6.1 On the other hand the assessee was appointed as agent w.e.f. 01/01/2007 and is remunerated for the services rendered to AE at cost plus 10% mark-up. The assessee was also authorized by the AE HLAG to appoint GESA as sub-agent for providing services for certain territories of India and the entire territory of Nepal. The sub-agent is remunerated on the same basis as it used to receive the commission under 1993 agreement. The assessee benchmarked its international transactions by adopting TNMM as most appropriate method. The TPO did not accept TNMM method and applied internal CUP being the price/commission received by GESA from HLAG under 1993 agreement, as well as under sub-agency agreement dated 27/02/2007 w.e.f. 01/01/2007. It is pertinent to note that after the termination of agreement between 7 ITA Nos.7771/12 & 1374/14 Hapag Lloyd India Pvt. Ltd.
HLAG and GESA w.e.f. 31/12/2006, GESA was not providing services to HLAG, but under the sub agency agreement, the services are being provided to the assessee. The question arises whether the price charged for services by GESA to HLAG upto 31.12.2006 can be considered as internal CUP for the purpose of determination of ALP for the services provided by the assessee to AE during the FY 2007-08 onwards. The TPO supported his action by referring Rule 10B(4) and took the old price to compare with the current years price. It appears that the TPO misunderstood the proviso to Rule 10B(4) of the Income tax Rules. In ordinary situation only current year/contemporaneous data can be used for comparing uncontrolled price with the controlled price. Only in the case of exceptional circumstances, the data relating to earlier years but not more than two years prior to the current year, can be used, if, such data reveals facts which can have an influence on the determination of arms- length-price in relation to the international transaction. Therefore, the two years prior data can be used along with the current year data. The situation under which the older data can be used is illustrated under proviso to Rule 10D(4) as under :-
" 10D(4) The information and documents specified under sub-rule (1) and (2), should, as far as possible, be contemporaneous and should exist latest by the specified date referred to in clause (iv) of section 92F:
Provided that where an international transaction continue to have effect over more than one previous year, fresh documentation need not be maintained separately in respect of each previous year, unless there is any significant change in the nature of terms of the international transaction, in the assumptions made, or in any other factor which could influence the transfer price, and in the case of such significant change, fresh documentation as may be necessary under sub-rules (1) and (2) shall be maintained bring out the impact of the change on the pricing of the international transaction."
6.1.1 Therefore, the use of earlier data is an exception and cannot be applied in exclusion of current year data. In other words, in the case of existence of exceptional circumstances the prior two years data along with current year data can be used. Once the GESA ceases to be agent of HLAG w.e.f. 31.12.2006, then in the absence of current/contemporary data / uncontrolled price, the price of prior year cannot be 8 ITA Nos.7771/12 & 1374/14 Hapag Lloyd India Pvt. Ltd.
considered for determination of ALP in relation to international transaction entered in current year.
6.2 The another aspect of considering the said price between GESA and assessee as internal CUP is that it does not satisfy the basic ingredient of a transaction between an unrelated party and associate enterprise of the assessee in the parity of the services provided by the assessee to the AE. United Nations Practical Manual on Transfer Pricing for Developing Countries has discussed the comparable uncontrolled price (CUP) in para-6.2.1.1 as under :-
"6.2.1.1 The comparable Uncontrolled Price (CUP) Method compares the price charged for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. The CUP method may also sometimes be used to determine the arm's length royalty for the use of an intangible asset. CUPs may be based on either "internal"
comparable transactions or on "external" comparable transactions. Figure 6.1 below explains this distinction in the context of a particular case study.
Figure 6.1 Comparable Uncontrolled Price Method 9 ITA Nos.7771/12 & 1374/14 Hapag Lloyd India Pvt. Ltd.
6.2.1 In the case of the assessee, GESA does not provide services to HLAG . Therefore, it cannot be considered as internal CUP. Moreover, the assessee is providing the services to the AE and receiving the remuneration and in turn getting part of the job done through sub agent GESA and remunerating it by paying the commission as per sub agency agreement. Out of the total services provided by the assessee a part is performed through sub-agent and the remaining is performed by the assessee itself. It is like export of goods partly manufactured by the assessee and partly purchased from third party. However, purchase price of the goods exported cannot be applied as CUP for sale price charged to the AE. Accordingly considering the price received by GESA as CUP is contrary to the transfer pricing regulation. We do not rule out the CUP as most appropriate method for determination of ALP of international transaction in question. However, the comparable uncontrolled price must be a proper uncontrolled price in compliance of provisions of transfer pricing.
6.2.2 There is one more fallacy in the TPO's order regarding bifurcating the international transactions into two segments for determining the ALP. The TPO accepted the price charged by the assessee in respect of services provided through sub- agency, but while computing the ALP it had ignored the CUP and took the price charged by the assessee as ALP. Further, the services provided by the assessee on its own were compared with CUP. Therefore, two separate ALP were determined by the TPO for the same service provided by the assessee to AE. Even if the CUP is adopted as most appropriate method ALP cannot be more than price received by GESA. Whereas the TPO has taken into consideration the price charged by the assessee with 10% mark-up. Hence, the computation of ALP is otherwise not based on correct uncontrolled price.
6.2.3 We may clarify that the international transaction in question should be considered as one and price received by the assessee in total has to be compared with the ALP. The assessee received the price for providing the service as per the agency agreement. Therefore, the service provided by the assessee to the AE are closely interlinked and price of one part is dependent on the price of the other part. Therefore, 10 ITA Nos.7771/12 & 1374/14 Hapag Lloyd India Pvt. Ltd.
the entire services provided by the assessee has to be treated as one international transaction for the purpose of determining the ALP.
6.2.4 In view of the above discussion, as well as the facts and circumstances of the case, we set aside the issue to the record of TPO/AO, to decide the same afresh, by considering in the light of the above observation as well as the decision of this Tribunal in the case of UCB India Pvt. Ltd. vs. ACIT dated February 06, 2009 (2009-TII-02- ITAT-MUM-TP) ITA No.428 & 429/Mum/2007 for assessment years 2002-03 and 2003- 04(supra).
7. For the assessment year 2009-10 the assessee has raised the following grounds :-
"Aggrieved by the order passed by the learned Assessing Officer ('AO'), giving effect to the order under Section 92CA(3) of the Income-tax Act, 1961 ('the Act) passed by the learned Transfer Pricing Officer (TPO), in pursuance to the directions of the Honble Dispute Resolution Panel - ('the Honble DRP'), under Section 143(3) read with Section 144C(13) of the Act dated December 19, 2013 ('the assessment order'), the Appellant respectfully submits that the learned AO, the learned TPO and the Hon'ble DRP have erred on the following grounds each of which are without prejudice to each other:
TRANSFER PRICING GROUNDS
1. GENERAL 1.1 The Learned AO erred in assessing the income of the Appellant under the normal provisions of the Act at INR 35,36,29,790 based on the directions received from Hon'ble DRP upholding the transfer pricing adjustment proposed by the Learned TPO.
1.2 The Learned AO/ TPO erred in proposing and the Hon'ble DRP further erred in upholding an adjustment of INR 29,55,30,462 in respect of the international transaction pertaining to provision of business support services, alleging that the same to be not at arm's length in terms of the provisions of Sections 92C(1) and 92C(2) of the Act read with Rule 10D of the Income-tax Rules,1962 ('the Rules').
1.3 That Learned DRP erred in law and on facts, by not adhering to the principles of natural justice by summarily rejecting the Appellant's objections and disregarding the material placed on records, thereby erred in not following the procedure laid down in section 144C(5), 144C(6) and 144C(7) of the Act..
1.4 The Learned AO/DRP/TPO has erred in making several observations and findings which are based on surmises and incorrect understanding/interpretation of facts and law.
1.5 That on the facts and circumstances of the case and in law, The Learned 11 ITA Nos.7771/12 & 1374/14 Hapag Lloyd India Pvt. Ltd.
AO/DRP/TPO has erred in rejecting the business model adopted by the Appellant without any cogent reason.
2. MOST APPROPRIATE METHOD 2.1 Not considering the impact of the business operations of the Appellant, the industry in which it operates and the Functional, Asset and Risk (FAR') profile of the Appellant as submitted in the transfer pricing documentation and during assessment proceedings.
2.2 In rejecting the transfer pricing documentation and methodology adopted by the Appellant; being Transactional Net Margin Method ('TNMM') for benchmarking the international transactions pertaining to provision of business support services, without any cogent reason. 2.3 In adopting Comparable Uncontrolled Price ('CUP') as the Most Appropriate Method ('MAM') for benchmarking the international transactions pertaining to provision of business support services as well as in presuming that the FAR in relation to proposed CUP is similar to that of the Appellant and consequently has failed to satisfy the comparability criteria as provided in Rule 1OB of Income Tax Rules, 1962 ('Rules').
3. INAPPLICABILITY OF THE AGREEMENT WITH GESA AS AN APPROPRIATE CUP 3.1 Usage of Agency agreement between German Express Shipping Agency Private Limited ('GESA') and Hapag Lloyd AG ('HLAG') as CUP, even though the subject agreement was not in existence during AY 2009-10. 3.2 Using powers u/s 131 in a selective manner and not providing annual accounts of GESA to the Appellant.
3.3 Without prejudice, whilst considering CUP as the MAM, the Learned AO/ITPO has erred in computation of the arm's length price as the Learned TPO has added the reimbursement received from HLAG for payment made to GESA with a mark-up of 10 percent to the commission receivable.
CORPORATE TAX GROUNDS
4.RATE OF DEPRECIATION ON COMPUTER HARDWARE: Rs 14,65,292 That on the facts and circumstances of the case and in law, the learned AO erred in proposing and the Hon'ble DRP erred in granting depreciation on printers, scanners and Electronic Token Display System at the rate of 15 percent being the rate applicable to other machinery and plant instead of 60 percent being the specific rate applicable to 'Computers including computer software' as claimed by the Appellant.
5.RATE OF DEPRECIATION ON COMPUTER SOFTWARE: Rs 6,80,185 That on the facts and circumstances of the case and in law, the learned AO erred in proposing and the Hon'ble DRP erred in granting depreciation on computer software at the rate of 25 percent being the rate applicable to Intangibles instead of 60 percent being the rate applicable to Computers including computer software' as claimed by the Appellant.
6. PROPORTIONATE DISALLOWANCE OF DEPRECIATION BASED ON NUMBER OF EMPLOYEES: Rs 6,21,539 6.1 That on the facts and circumstances of the case and in law, the Hon'ble DRP erred in proposing disallowance of depreciation on allocated cost 12 ITA Nos.7771/12 & 1374/14 Hapag Lloyd India Pvt. Ltd.
proportionate to excess of number of employees over the number of software licenses obtained.
6.2 That on the facts and circumstances of the case and in law, the Hon'ble DRP further erred in directing disallowance of depreciation on computer hardware (ie printers, scanners and Electronic Token Display System) in above proportion without appreciating that the same is not related in any manner with the number of employees employed by the Appellant.
6.3 That on the facts and circumstances of the case and in law, the Learned AO erred, contrary to direction of Hon'ble DRP, in disallowing proportionate cost of above items instead of disallowing the proportionate depreciation.
7.LEVY OF INTEREST UNDER SECTION 234D: Rs 2,04,647 That on the facts and circumstances of the case and in law, the learned AO has erred in computing interest liability under section 234D of the Act by computing the interest for 35 months, whereas, the same should have been calculated for 34 months i.e for every month or part of the month from the date of grant of earlier refund (April 2011) to the date of completion of regular assessment (January 2014), resulting into an additional interest liability amounting to Rs 2,04,647.
The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the Hon'ble Income-tax Appellate Tribunal to decide this appeal according to the law.
For the above and other grounds and reasons which may be submitted during the course of hearing of this appeal, the Appellant requests that the appeal be allowed as prayed."
7.1 Ground No.1 to 3 regarding transfer pricing adjustment.
7.1.1 The issue involved in these grounds is identical and common to the issue involved in assessment year 2008-09. In view of our finding on this issue for the assessment year 2008-09 this issue is set aside to the record of AO/TPO for fresh consideration on the same terms.
8. Ground No.4 is regarding rate of depreciation on computer hardware.
8.1 The assessee claimed depreciation @ 60% on computer including printer, scanner and electronic token display system all part of block of asset of computer. The AO held that the peripherals item do not fall under the definition of computer and allowed depreciation only @ 15%. The DRP confirmed the action of the AO without any discussion.
13ITA Nos.7771/12 & 1374/14 Hapag Lloyd India Pvt. Ltd.
8.1.2 Before us, the ld. AR has submitted that this issue is now covered by various decisions of Hon'ble High Courts as well as this Tribunal. He has relied upon the judgment of Hon'ble Delhi High Court in case of CIT vs. BSES Yamuna Powers Ltd. (358 ITR 47). He has also relied upon the decision of the Special Bench of this Tribunal in the case of DCIT vs. Datacraft India Ltd. (40 SOT 295)(Mum)(SB)/[2010]. On the other hand the ld. DR has relied upon the orders of authorities below.
8.2 We have considered the rival submissions as well as relevant material on record. The issue of allowability of depreciation @ 60% on the computer accessories and peripherals is no more res-integra. In the case of BSES Yamuna Powers Ltd. (supra), the Hon'ble Delhi High Court, while dealing with the identical question has held in para- 6 as under :-
"We are in agreement with the view of the Tribunal that computer accessories and peripherals such as, printers, scanners and server etc., form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to depreciation at the higher rate of 60 percent."
8.2.1 Further, the Special Bench of this Tribunal in case of Data Craft India Ltd.(supra), has held in para-32 and 33 as under :-
32 . Now we will advert to the decisions relied on by the rival parties. We have set out above the cases decided by various Benches of the Tribunal in favour of the assessee. The lead order i s i n t h e ca s e o f S a m i r a n M a j u m d a r ( s u p r a ) w h i ch h a s b een followed, directly or indirectly, in most of the subsequent cases. We will take up this case for discussion, in which the question was whether printer and scanner could be allowed a higher rate of depreciation as applicable to computers. The Bench noticed that the printer and scanner cannot be used without computer. It was on this appreciation of the factual position that the printer and scanners were held to be part of computer qualifying for depreciation at the rate applicable to computer. In the opposition the orders taking view in favour of the revenue are led by the case of Routermania Technologies (P.) Ltd. (supra). In this case it was observed that the router is a device which links or connects the computers for the exchange of relevant data. In reaching the conclusion that router is not eligible for depreciation at the rate applicable to computer, the Bench noticed that 14 ITA Nos.7771/12 & 1374/14 Hapag Lloyd India Pvt. Ltd.
the router at its o w n d o e s n o t p e r f o r m a n y l o g i c a l , a r i t h m e t i c a l o r m e m o r y functions by manipulations of electronic, magnetic or optical impulse.
33. We prefer the view taken in the case of Samiran Majumdar (supra) over that in the case of Routermania Technologies (P.) Ltd.(supra); With utmost respect, the Mumbai Bench had taken a narrow view on this issue, by holding that only a device which c a n p e r f o r m l o g i c a l , a r i t h m e t i c a l o r m e m o r y f u n c t i o n s b y manipulations of electronic impulses etc., is computer. It has restricted the mean ing of com puter only to the CPU of the computer and pulled out the input and output devices from the ambit of computer. No doubt the function of the computer, as one composite unit, is to perform logical, arithmetical or memory functions etc., but it is not only the equipment which performs such functions that can be called as computer; All the input and output devices, as discussed above, which support in the receipt of input and outflow of the output are also part of computer. CPU alone, in our opinion, cannot be considered as synonymous to the expression 'Computer'. The function of CPU is akin to the brain playing a pivotal role in the conduct of the body. As we do not call the brain alone as the body, similarly the CPU alone cannot be described as computer. Thus the computer has to necessarily include the input and output devices within its scope, subject to their exclusive user with the computer, as discussed above. If we constrict the definition of computer only to processing unit, as has been held in the case of Routermania Technologies (P.) Ltd (supra), then even the keyboard and mouse etc., will not qualify to be called as computer because these equipments also do not perform logical, arithmetical or memory functions. In the light of the meaning of 'computer' discussed in earlier paras, we are inclined to agree with the view taken by the Kolkata Bench in Samiran Majumdar's case (supra)."
8.2.2 Following the above, judgment of Hon'ble High Court as well as the Special Bench of this Tribunal, we allow the claim of depreciation on printer, scanner, electronic token display system @ 60%.
9. Ground No.5 regarding depreciation on software.
9.1 The assessee claimed depreciation on software @ 60%. However, the AO allowed the depreciation at 25% on software. The DRP confirmed the action of the AO.
9.2 Before us, the ld. AR submitted that this issue is covered in favour of the assessee by the various decisions of this Tribunal. He has relied upon the following decisions :-
i) Hindustan Construction Company Ltd. vs. Dy. Commissioner of Income-tax - 140 ITD 642 (Mum);15
ITA Nos.7771/12 & 1374/14 Hapag Lloyd India Pvt. Ltd.
ii) Maruti Udyog Ltd. vs. Dy. Commissioner of Income-tax - 92 ITD 119 (Del.) 9.2.1 On the other hand ld. DR has relied upon the orders of the authorities below.
9.3 After considering the rival submissions as well as relevant material on record, we note that an identical issue was considered by the Delhi Bench of the Tribunal in case of Maruti Udyog Ltd. (supra), in para 73 as under :-
"3. Now the only question is whether purchase of software is a capital asset. There is no dispute that software is a capital asset. There is no dispute that software is an intangible asset. Hardware, commonly called as computer, is a tangible asset which by itself cannot function. The computer can function only with the help of software. Software is akin to know-how as held by the Hon'ble Rajasthan High Court in the case of Arawali Constructions Co. (P) Ltd. (supra). In this judgment, it has been clearly held that expenditure on purchase of software is a capital expenditure. There is no contrary judgment on this aspect of issue. Hence, it has to be held that software is an asset. Admittedly, the assessee is not in the business of software. Hence, we are further of the view that software was a capital asset as far as the present assessee is concerned. The IT Rules, 1962, as amended w.e.f. 1st April, 2003, rather helps the Revenue and not the assessee inasmuch as it provides for depreciation on software at the rate of 60 per cent. By providing higher depreciation, it cannot be said that prior to 1st April, 2003, it was revenue expenditure. It was always a capital asset. Prior to 1st April, 2003, the assessee was entitled to normal rate of depreciation which was enhanced to 60 per cent by the amendment considering the rapid wear and tear. The judgment of Supreme Court in the case of Scientific Engg. House (P) Ltd. v. CIT (1986) 157 ITR 86 (SC) also supports the view taken by us inasmuch as their Lordships held that know-how is part of plant and machinery and, assessee is entitled to depreciation thereon. Before concluding this issue, we would like to refer to one more judgment of Supreme Court in the case of Arvind Mills Ltd. v. CIT (1992) 197 ITR 422 (SC) for the proposition "The expenditure incurred on capital asset does not lose the character of capital expenditure and does not become a revenue expenditure on the score that the said capital expenditure also ultimately ensures to the effective running of the business". In view of the above discussion, it is held that expenditure was incurred on acquisition of capital assets and thus, it was a capital expenditure. Resultantly, the same could not be allowed as revenue expenditure."
9.4 While deciding the question of revenue or capital nature of expenditure in respect of acquisition of software, the Tribunal has held that depreciation @ 60% is allowable on software. In the case of Hindustan Construction Co. vs. DCIT (supra), the Tribunal while dealing with an identical issue has held in para 39 as under :-
"The assessee incurred the expenses for purchase of software development of E-Construct suit. The nature of the programme purchased 16 ITA Nos.7771/12 & 1374/14 Hapag Lloyd India Pvt. Ltd.
by the assessee clearly shows that these programme were specifically and exclusively designed for the purpose of the business of the assessee and not a general software. Accordingly, the expenditure has been laid out for acquiring the intangible assets to be used by the assessee for a number of years and therefore, the same will have an enduring benefit. However, since this intangible asset is part and parcel of computation; therefore, the assessee is entitled for depreciation for the year under consideration at 60 percent. Accordingly, AO was directed to allow the depreciation on this amount at 60 percent ."
9.4.1 Following the above decision of the Tribunal, we allow the claim of 60% of depreciation on software.
10. Ground No.6 of the assessee's appeal is directed against the direction of DRP for proportionate disallowance of depreciation on computer and software, based on the number of employees of the assessee. The DRP noticed that the cost of software purchased by AE was allocated on the basis of number of personal computers, but the employees of the assessee are less than the number of personal computers. Accordingly, the AO was directed not to allow proportionate depreciation on 18 software licences out of total 169 licences, cost of which was allocated to the assessee by HLAG.
10.1 Before us the ld. AR has submitted that the condition for allowing depreciation is use of asset for business purpose, and, not the number of employees. He has further contended that while giving effect to the directions of DRP, the AO has disallowed the depreciation not only of 18 software licences but on the hardware and other peripherals, which were purchased by the assessee from third parties. He has referred to para-6 of the DRP whereby the AO was directed not to allow proportionate depreciation on 18 software licences out of 169 licences, cost of which was allocated by HLAG to the assessee. Whereas while giving effect to the said directions of the DRP, the AO disallowed the proportionate cost of additions to computer hardware assets including scanner, printer and electronic token display as well as computer software asset purchased by assessee from third party. The ld. AR has submitted that even as 17 ITA Nos.7771/12 & 1374/14 Hapag Lloyd India Pvt. Ltd.
per directions of DRP the amount for disallowance of proportionate depreciation on software licence would be Rs.49,513/- whereas the AO has disallowed depreciation of Rs.1,03,769/-.
10.2 On the other hand the ld. DR has submitted that the assessee failed to produce the invoices of purchase of computer accessories and licences. Therefore, the AO is justified in disallowing the depreciation.
10.3 We have considered the rival submissions as well as relevant material on record. DRP while dealing with the issue of depreciation on computer accessories and software directed the AO as under :-
"On the facts and circumstances as are available on record, it is evident that the cost allocation is not evidenced by invoices before us though seems to have been found acceptable by the TPO as there is no adjustment made in this regard in the TPO's order. Therefore, cost allocation per se is not being disturbed. In so far as depreciation thereon is concerned, we find that the assessee has not established use of these assets in so far as the difference of 18 (between user and number of employees) is concerned. Therefore, the AO is directed to not allow the proportionate depreciation on the difference of 18 in number on the rate s as calculated by him in the draft order. We also find the AO's order regarding rates of depreciation acceptable, therefore, there is no change in the rates of depreciation. The objection is disposed of accordingly."
10.3.1 Thus, it is clear from the directions of the DRP that the proportionate disallowance of depreciation was directed only in respect of software cost allocated by AE and not on any other asset. Therefore, the AO has not followed the directions correctly while passing the impugned order whereby he disallowed the proportionate depreciation on the entire computer block of asset.
10.4 As regards proportionate disallowance based on the number of employees is concerned, we are of the view that the personal computers in any establishment/organization are not restricted to the number of employees at any given point of time. The strength of the employees may vary depending upon the capacity at which the company is working. Further, keeping extra computer for meeting any 18 ITA Nos.7771/12 & 1374/14 Hapag Lloyd India Pvt. Ltd.
emergent situation of non-functional computer or under repair computer is not an unusual practice. Therefore, when the number of computer is not disputed then software installed on the existing computer cannot be treated as excess or not for business use of the assessee. Hence, we do not find any logic or substance in the directions of the DRP in restricting the depreciation of software licence to the extent of number of employees working with the assessee. Accordingly, the orders of the authorities below qua this issue are set aside and claim of the assessee is allowed in full.
11. Ground No.7 is regarding interest under section 234D.
11.1 The ld. AR has submitted that there is a calculation mistake in computing interest under section 234D. He has referred the statement showing computation of interest on excess refund under section 234D of the Income tax Act at page No.374 of the paper book and submitted that the AO charged excess interest to the tune of Rs.2,04,647/-.
11.2 On the other hand the ld. DR has submitted that it is a matter of rectification under section 154 and cannot be raised in the appeal.
12. After considering the rival submissions as well as relevant material on record, we direct the AO to verify the alleged working mistake in computation of interest under section 234D.
13. In the result, appeal for the assessment year 2008-09 is allowed for statistical purposes; Appeal for the assessment year 2009-10 is allowed in part and partly allowed for statistical purposes.
Order pronounced in the open court on 14th January, 2015. . आदेश कᳱ घोषणा खुले ᭠यायालय मᱶ ᳰदनांकः 14/01/2015 को कᳱ गई ।
Sd/- Sd/-
(N.K. Billaiya) (Vijay Pal Rao )
लेखा सद᭭य / ACCOUNTANT MEMBER ᭠याियक सद᭭य / JUDICIAL MEMBER
मुंबई Mumbai; ᳰदनांक Dated 14/01/2015
व.िन.स./ Jv, Sr. PS
19
ITA Nos.7771/12 & 1374/14
Hapag Lloyd India Pvt. Ltd.
आदेश कᳱ ᮧितिलिप अᮕेिषत/Copy
षत of the Order forwarded to :
1. अपीलाथᱮ / The Appellant
2. ᮧ᭜यथᱮ / The Respondent.
3. आयकर आयुᲦ(अपील) / The CIT(A)-
4. आयकर आयुᲦ / CIT
5. िवभागीय ᮧितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR,
ITAT, Mumbai
6. गाडᭅ फाईल / Guard file.
आदेशानुसार/
ार BY ORDER,
स᭜यािपत ᮧित //True Copy//
उप/सहायक
उप सहायक पंजीकार (Dy./Asstt. Registrar)
आयकर अपीलीय अिधकरण,
अिधकरण मुंबई / ITAT, Mumbai