M/s. I 2 TECHNOLOGIES INDIA P. LTD., MUMBAI V. ACIT, CIR-8(2), MUMBAI

ITA 1122/MUM/2006

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 3659 (ITAT-MUMBAI)
• Duration Of Justice: 10 year(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-03-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 24-03-2015
• Assessment Year: 2002-2003
• Appeal Filed On: 15-02-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SAMBIT MISHRA
• Assessee Lawyers: ARVIND SONDE
• Keywords: Depreciation; Transfer pricing; International transaction; Wholly owned subsidiary; Revenue expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH K, MUMBAI BEFORE SHRI G.S.PANNU, ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH, JUDICIAL MEMBER ITA NO. 1122/MUM/2006 (ASSESSMENT YEAR : 2002-03) M/S. I 2 TECHNOLOGIES INDIA PVT. LTD. 143-C, S.D.F-V, SEEPZ, ANDHERI EAST, MUMBAI 400096 PAN:AABCC 5420G ... APPELLANT VS. THE ACIT, CIR. 8(2), MUMBAI. .... RESPONDENT ITA NO. 1197/MUM/2006 (ASSESSMENT YEAR : 2002-03) THE ACIT, CIR. 8(2), MUMBAI. ...... APPELLANT VS. M/S. I 2 TECHNOLOGIES INDIA PVT. LTD. 143-C, S.D.F-V, SEEPZ, ANDHERI EAST, MUMBAI 400096 ..... RESPONDENT ASSESSEE BY : SHRI ARVIND SONDE RESPONDENT BY : SHRI SAMBIT MISHRA DATE OF HEARING : 10/03/2016 DATE OF PRONOUNCEMENT : 10/03/2016 2 ITA NO. 1122&1197/MUM/2006 (ASSESSMENT YEAR : 2002-03) ORDER PER G.S. PANNU,AM: THE CAPTIONED CROSS-APPEALS FILED BY THE ASSESSEE AND REVENUE PERTAINING TO A.Y. 2002-03 ARE DIRECTED AGAINST AN ORDER PASSED BY LD. CIT(A)-VIII, MUMBAI DATED 12/12/2005, WHICH IN TURN ARISES OUT OF AN ORDER PASSED BY AO UNDER SECTION 143(3) OF THE IN COME TAX ACT, 1961 (THE ACT) DATED 29/03/2005. 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE AS WELL AS REVENUE READ AS UNDER:- GROUNDS OF ASSESSEES APPEAL:- A] THE ORDER OF THE CIT (APPEALS) IS BAD IN LAW AN D ON FACTS AS HE HAS FAILED TO INTERFERE WITH A PATENTLY ILLEGAL ORDER PASSED B Y THE TPO AND INCORPORATED BY THE AO IN THE ASSESSMENT ORDER. THE LEARNED CIT (APPEALS) OUGHT TO HAVE REALIZED THAT THE INTEREST COST INCLUDED BY THE TPO IS ONLY A NOTIONAL EXPENSE AND NOT A REAL ONE. THE LEARNED CIT (APPEALS) ERRED IN IGNORING THE FACT THAT THE ADJUSTMENT MADE WITH REGARD TO TRAVEL EXPENSES HAD TO BE IGNORED. THE LEARNED CIT (APPEALS) FURTHER ERRED IN NOT ADOPTING THE CUP METHOD AND APPLYING THE AVAILABLE DATA WITH RESPECT TO THE FIN ANCIAL YEAR 2001-02. THE CIT (APPEALS) ALSO ERRED IN ACCEPTING THE ACTION TA KEN BY THE TPO IN ELIMINATING THE DATA PERTAINING TO COMPANIES HAVING TURNOVER LESS THAN RS.5 CRORES. IN GENERAL, THE CIT (APPEALS) ERRED IN UPHO LDING THE ORDER OF THE TPO AS INCORPORATED IN THE AO. B] THE APPELLANT SUBMITS THAT THE PROVISIONS OF SE CTION 92C(4) WOULD APPLY ONLY WHEN THE AO INDEPENDENTLY MAKES AN ASSESSMENT AND NOT WHEN THE TPO PASSES AN ORDER WHICH ACCORDING TO THE AO IS BI NDING ON HIM. HENCE, THE DENIAL OF EXEMPTION UNDER SECTION 1OA WITH RESPECT TO THE ADJUSTMENT MADE BY THE TPO IS OPPOSED TO LAW AND TO FACTS. C] THE CIT (APPEALS) FAILED TO REALIZE THAT SOFTWA RE EXPENSES ARE REVENUE IN NATURE AND FULLY ALLOWABLE. 3 ITA NO. 1122&1197/MUM/2006 (ASSESSMENT YEAR : 2002-03) D] THE CIT (APPEALS) ERRED IN UPHOLDING THE DENIAL OF RELIEF UNDER SECTION 1OA WITH RESPECT TO INTEREST RECEIVED ON TEMPORARY INVE STMENT OF SURPLUS FUNDS. E] FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING MAY BE ALLOWED. GROUND OF REVENUES APPEAL:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN DIREC TING THE ASSESSING OFFICER TO ALLOW DEPRECIATION @ 60% AS AGAINST 25 % ALLOWED BY HIM, CONSIDERING THAT THE AMENDMENT WAS EFFECTIVE FROM A .Y.2003-04, WITHOUT APPRECIATING THE FACTS OF THE CASE. 2. THE SUBSTANTIVE DISPUTE IN THE APPEAL OF THE ASS ESSEE RELATES TO THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTM ENT WITH RESPECT TO THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASS ESSEE WITH ITS ASSOCIATED ENTERPRISE. AT THE TIME OF HEARING, IT WAS A COMMON POINT BETWEEN THE PARTIES THAT THE ISSUE MAY BE SET-ASIDE TO THE FILE OF THE ASSESSING OFFICER /TRANSFER PRICING OFFICER TO CARR Y OUT THE PROCEEDINGS AFRESH ON ACCOUNT OF A FUNDAMENTAL ERROR THAT HAS C REPT IN. ELABORATING THE ISSUE, THE LD. REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF M/S. I2 TE CHNOLOGIES INC., NETHERLANDS AND IT IS PROVIDING SOFTWARE DEVELOPMEN T AND CONSULTANCY SERVICES TO ITS ASSOCIATED ENTERPRISE. IT IS BEING REMUNERATED AT COST PLUS 10% MARK-UP FOR RENDERING SUCH SERVICES. IT WAS POINTED OUT THAT THE TRANSFER PRICING OFFICER HAS USED THE TNM METHO D FOR THE PURPOSES OF DETERMINING THE ARM'S LENGTH PRICE OF SOFTWARE D EVELOPMENT SERVICES RENDERED BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRI SE. IN CARRYING OUT SUCH COMPARABILITY ANALYSIS, DATA OF THE COMPARABL ES WHICH HAS BEEN USED IS CORRESPONDING TO FINANCIAL YEAR 2000-01, W HEREAS THE FINANCIAL 4 ITA NO. 1122&1197/MUM/2006 (ASSESSMENT YEAR : 2002-03) YEAR RELEVANT FOR THE ASSESSMENT YEAR UNDER CONSIDE RATION IS 2001-02. ANOTHER AREA OF DISPUTE POINTED OUT BY THE LD. REP RESENTATIVE FOR THE ASSESSEE IS THAT THE ACTION OF THE TRANSFER PRICING OFFICER IN IMPUTING A MARK-UP ON ACCOUNT OF INTEREST PAYABLE ON THE INTER EST FREE LOANS TAKEN BY THE ASSESSEE FROM THE ASSOCIATED ENTERPRISE. TH IRDLY, IT WAS POINTED OUT THAT THE LOWER AUTHORITIES HAVE FURTHER ERRED I N INCLUDING TRAVEL EXPENSES REIMBURSED TO THE ASSESSEE BY ITS ASSOCIAT ED ENTERPRISE AND IN IMPUTING THE MARK-UP ON THE SAME WITHOUT APPREC IATING THAT IN THE CASE OF REIMBURSEMENT OF EXPENDITURE, NO MARK-UP I S CHARGEABLE. 3. ON THE ASPECT OF USE OF THE DATA RELATING TO THE RELEVANT FINANCIAL YEAR, THE PROVISIONS OF RULE 10B(4) OF THE INCOME TAX RULES, 1962 ARE QUITE PERTINENT. IN TERMS OF SUB-RULE(4) OF RULE 10 B IT IS PRESCRIBED THAT THE DATA TO BE USED IN ANALYSING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION SHAL L BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH INTERNATIONAL TRANSA CTION HAS BEEN ENTERED INTO. IN THE PRESENT CASE, THE INTERNATION AL TRANSACTION WHICH HAS BEEN SUBJECT TO THE COMPARABILITY ANALYSIS HAS BEEN ENTERED INTO BY THE ASSESSEE IN FINANCIAL YEAR 01/04/2001 TO 31/03 /2002 AND, THEREFORE, THE DATA TO BE USED OF THE COMPARABLE CO NCERNS MUST CORRESPOND TO SUCH FINANCIAL YEAR AS PRESCRIBED BY RULE 10B(4) OF THE RULES. IT WAS A COMMON POINT BETWEEN THE PARTIES BEFORE US THAT THE IMPUGNED TRANSFER PRICING/ASSESSMENT PROCEEDINGS S UFFER FROM THE INFIRMITY OF NON-COMPLIANCE WITH THE ABOVE REQUIR EMENT OF RULE 10B(4) OF THE RULES. ACCORDINGLY, WITHOUT GOING F URTHER INTO ANY OTHER 5 ITA NO. 1122&1197/MUM/2006 (ASSESSMENT YEAR : 2002-03) DISPUTES BETWEEN ASSESSEE AND THE REVENUE WITH REGA RD TO THE TRANSFER PRICING ADJUSTMENT, IT IS DEEMED PROPER TO SET-ASI DE THE ORDER OF THE CIT(APPEALS) AND RESTORE THE MATTER BACK TO THE FIL E OF THE ASSESSING OFFICER / TRANSFER PRICING OFFICER TO REVISIT THE PROCESS OF DETERMINATION OF ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSAC TION IN ACCORDANCE WITH LAW. NEEDLESS TO MENTION, THE ASSESSING OFF ICER / TRANSFER PRICING OFFICER SHALL ALLOW THE ASSESSEE AN APPROPRIATE OP PORTUNITY OF BEING HEARD BEFORE PASSING AN ORDER AFRESH AS PER LAW. 4. WITH REGARD TO THE OTHER ASPECTS OF THE TRANSFE R PRICING RELATING TO MARK-UP ON INTEREST ON LOANS RAISED FROM ASSOCIA TED ENTERPRISE AND THE REIMBURSEMENT OF TRAVEL EXPENSES, ETC., THE SAM E ARE ALSO RESTORED BACK TO THE FILE OF ASSESSING OFFICER / TRANSFER PR ICING OFFICER FOR PROCEEDING AFRESH IN LINE WITH OUR AFORESAID DIRECT ION. IN THIS MANNER GROUNDS A& B OF THE ASSESSEES APPEAL ARE DISPOSED OFF. 5. IN SO FAR AS GROUNDS OF APPEAL NO. C IS CONCE RNED, THE SAME HAS NOT BEEN PRESSED AND ACCORDINGLY THE SAME IS DI SMISSED. 6. IN SO FAR AS GROUND NO. D OF ASSESSEES APPEA L IS CONCERNED, THE SAME RELATES THE ALLOWABILITY OF RELIEF UNDER S ECTION 10A OF THE ACT WITH RESPECT TO INTEREST INCOME, WHICH ISSUE WAS AL SO AGREED BY THE PARTIES TO BE RESTORED BACK TO THE FILE OF ASSESSIN G OFFICER / TRANSFER 6 ITA NO. 1122&1197/MUM/2006 (ASSESSMENT YEAR : 2002-03) PRICING OFFICER TO BE ADJUDICATED AFRESH IN ACCORDA NCE WITH LAW. WE DIRECT ACCORDINGLY. 7. ACCORDINGLY, IN SO FAR AS APPEAL OF THE ASSESSEE IS CONCERNED, THE SAME IS TREATED AS PARTLY ALLOWED, AS ABOVE. 8. IN THE APPEAL OF THE REVENUE, THE SOLITARY ISSUE RELATES TO THE ACTION OF THE CIT(APPEALS) IN DIRECTING THE ASSESSI NG OFFICER TO ALLOW A DEPRECIATION @60% ON THE COST OF SOFTWARE ACQUIRED . THE BACKGROUND OF THE DISPUTE IS THAT IN THE RETURN OF INCOME ASSE SSEE CLAIMED AN EXPENDITURE OF RS.37,70,869/- INCURRED TOWARDS ACQU ISITION OF SOFTWARE AS REVENUE EXPENDITURE. THE ASSESSING OFFICER TREA TED THE SAME AS CAPITAL NATURE AND ALLOWED DEPRECIATION ON THE SAME @25% TREATING IT TO AN INTANGIBLE ASSET. THE CIT(APPEALS) AFFIRMED THE STAND OF THE ASSESSING OFFICER THAT SUCH AN EXPENDITURE WAS CA PITAL IN NATURE BUT ALLOWED DEPRECIATION ON IT AT HIGHER RATE OF 60% A S AGAINST 25% ALLOWED BY THE ASSESSING OFFICER. THE ASSESSEES GRIEVANC E AGAINST THE DECISION OF THE CIT(APPEALS), MANIFESTED BY GROUND OF APPEAL NO. C IN THE CROSS- APPEAL HAS NOT BEEN PRESSED BEFORE US. THE R EVENUE IN ITS APPEAL IS CONTESTING THE ACTION OF THE CIT(APPEALS) IN ALLOW ING DEPRECIATION @60% AS AGAINST 25% ALLOWED BY THE ASSESSING OFFIC ER. 9. ON THIS ASPECT, IT WAS A COMMON POINT BETWEEN TH E PARTIES THAT THE ORDER OF THE CIT(APPEALS) DESERVES TO BE REVERS ED IN AS MUCH AS 60% DEPRECIATION RATE ON COMPUTER SOFTWARE HAS BE EN INSERTED IN 7 ITA NO. 1122&1197/MUM/2006 (ASSESSMENT YEAR : 2002-03) APPENDIX-1 TO THE INCOME TAX RULES, 1962 CLASSIFYIN G THE COMPUTER SOFTWARE AS A TANGIBLE ASSET UNDER THE HEAD PLAN T IS W.E.F. 01/04/2003. AS A CONSEQUENCE, SO FAR AS THE INSTAN T ASSESSMENT YEAR IS CONCERNED, THE ALLOWANCE OF DEPRECATION ON COMPUTE R SOFTWARE SHALL BE GOVERNED BY THE DECISION OF THE TRIBUNAL IN THE CASE OF AMWAY INDIA ENTERPRISES VS. DCIT, 111 ITD 112 (DELHI)(SB), WHER EBY THE DEPRECIATION UNDER SECTION 32(1)(I) OF THE ACT ON COMPUTER SOF TWARE HAS BEEN HELD TO BE ALLOWABLE @ 25%. THUS, WE SET-ASIDE THE OR DER OF THE CIT(APPEALS) ON THIS ASPECT AND ALLOW THE PLEA OF THE REVENUE. 10. RESULTANTLY, WHEREAS THE APPEAL OF THE ASSESSE E IS PARTLY ALLOWED, THAT OF THE REVENUE IS ALLOWED. 11. THE ABOVE DECISION WAS PRONOUNCED IN THE OPEN COURT IN THE PRESENCE OF BOTH THE PARTIES AT THE CONCLUSION OF T HE HEARING ON 10/03/2016. SD/ SD/- (AMARJIT SINGH) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT ME MBER MUMBAI, DATED 10/03/2016 VM , SR. PS COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT , 2. THE RESPONDENT. 3. THE CIT(A)- 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. BY ORDER, //TRUE COPY//