Cisco Systems Capital (India) Private Limited, Bangalore V. Addl.C.I.T., Bangalore

ITA 1558/BANG/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80682 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 9 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-09-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 25-07-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 29-11-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRISCILLA SINGSIT
• Keywords: Depreciation; Transfer pricing; International transaction; Corroborative evidences; Commercial expediency
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH C : BANGALORE BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI RAJENDRA , ACCOUNTANT MEMBER IT (TP) A NO. 1 558 / BANG/20 1 2 (ASSESSMENT YEAR: 20 0 8 - 0 9 ) M/S.CISCO SYSTEMS CAPITAL (INDIA) PVT.LTD. DIVYASHREE CHAMBERS, B WING, NO.11, O SHAUGHNESSEY ROAD, OFF. LANGFORD ROAD, BANGALORE - 25 . PAN: AACCC4552A APPELLANT VS. A DDL. COMMISSIONER OF INCOME - TAX, RANGE - 11 , BANGALORE. RESPONDENT APPELLANT BY: SHRI RAJAN VORA, CA. R ESPONDENT BY : M S.PRISCILLA SINGSIT, CIT(DR). DATE OF HEARING: 14 - 07 - 2014 . DATE OF P RONOUNCEMENT : 19 - 0 9 - 014. O R D E R PER SMT. P.MADHAVI DEVI, JM : THIS IS AN APPEAL FILED BY THE ASSESSEE DIRECTED AGAINST THE ORDER OF THE AO DATED 12 - 10 - 2012 FOR THE ASSESSMENT YEAR 2008 - 09 PASSED IN CO MPLIANCE WITH THE DIRECTIONS OF THE DRP U/S 144C OF THE INCOME - TAX ACT, 1961[HEREINAFTER REFERRED TO AS 'THE ACT']. ITA NO . 1 558 /BANG/2012 M/S.CISCO SYSTEMS CAPITAL(INDIA) PVT.LTD. PAGE 2 OF 20 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE - COMPANY , WHICH IS ENGAGED IN THE BUSINESS OF LEASING AND FINANCE AND IS A NON - BANKING FINANCE COMPANY REGISTERED WITH RBI , FILED ITS RETURN OF INCOME FOR THE RELEVANT ASSESSMENT YEAR. DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE ACT, THE ASSESSING OFFICER ( AO ) OBSERVED THAT THERE IS AN INTERNA TIONAL TRANSACTION OF THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISE (AE). HE, THEREFORE, MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINATION OF THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION. THE TPO DETERMINED THE ALP AND AFTER RECEIVING THE SAID REPORT, THE AO DRAFTED THE ASSESSMENT ORDER WHICH WAS SERVED UPON THE ASSESSEE. ON RECEIPT OF THE SAME, THE ASSESSEE RAISED ITS OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP) ON THE ISSUES AGAINST WHICH THE ASSESSEE IS AGGR IEVED . T HE DRP , HOWEVER, CONFIRMED THE DRAFT ASSESSMENT ORDER PASSED BY THE AO. PURSUANT THERETO, THE AO PASSED THE ASSESSMENT ORDER U/S 143(3) READ WITH SECTION 144C OF THE ACT, AGAINST WHICH THE ASSESSEE IS IN APPEAL BEFORE US. 3. DURING THE ASSESSMEN T PROCEEDINGS U/S 143(3) R.W.SEC.144C OF THE ACT, THE AO PERUSED THE BOOKS OF ACCOUNT OF THE ASSESSEE AND FROM THE PROFIT AND LOSS ACCOUNT FILED BY THE ASSESSEE FOR THE RELEVANT ASSESSMENT YEAR, HE OBSERVED THAT THE ASSESSEE HAS CLAIMED DEPRECIATION OF RS. 6.48 CRORES UNDER THE COMPANIES ACT WH ILE UNDER THE INCOME - TAX ACT THE DEPRECIATION ITA NO . 1 558 /BANG/2012 M/S.CISCO SYSTEMS CAPITAL(INDIA) PVT.LTD. PAGE 3 OF 20 CLAIM WAS RS.80.43 CRORES. HE OBSERVED THAT ONE OF THE REASONS FOR THE DIFFERENCE IS THE CLAIM OF HIGHER RATE OF DEPRECIATION I.E. 60% ON THE ROUTERS AND SWITCHES TREATING THEM AS COMPUTERS . A CCORDING TO THE AO , THEY WERE PLANT AND MACHINERY LEASED OUT BY THE ASSESSEE AND THEREFORE, DEPRECIATION AT THE RATE OF 15% ONLY WAS ALLOWABLE. THE AO CONSIDERED THE BUSINESS MODULE OF THE ASSESSEE AND ALSO THE DEFINITION OF THE WORD S COMPUTER , COMPUTER NETWORK AND COMPUTER SOFTWARE AND COMPUTER SYSTEM GIVEN UNDER THE INFORMATION TECHNOLOGY ACT OF 2000 AND HELD THAT THE ROUTERS AND SWITCHES ARE THE NETWORK EQUIPMENT WHICH FALL UN DER THE DEFINITION OF COMPUTER NETWORK AND NOT UNDER THE DEFINITION OF COMPUTER . HE ALSO EXAMINED THE NATURE OF THE WORK CARRIED OUT BY ROUTERS AND SWITCHES AS WELL AS T HEIR LIFE - SPAN TO HOLD THAT THEY ARE PLANT AND MACHINERY AND NOT COMPUTER OR COMPUTER SYSTEM . HE ACCORDINGLY ALLOWED DEPREC IATION ON ROUTERS AND SWITCHES AT THE RATE OF 15% ONLY. SIMILARLY, ON AUDIO VISUAL CONFERENCING EQUIPMENT AND VIDEO ST REAMING EQUIPMENT S ALSO, THE AO APPLIED THE FUNCTIONALITY TEST AND HELD THAT THEY HAVE AN INDEPENDENT FUNCTIONALITY AND EXISTENCE. HE HEL D THEM ALSO TO BE ONLY PLANT AND MACHINERY ELIGIBLE FOR DEPRECIATION AT THE RATE OF 15%. HE ACCORDINGLY DISALLOWED THE SUM OF RS.60,32,35,108/ - AS EXCESS DEPRECIATION CLAIMED BY THE ASSESSEE. ITA NO . 1 558 /BANG/2012 M/S.CISCO SYSTEMS CAPITAL(INDIA) PVT.LTD. PAGE 4 OF 20 4. AGGRIEVED BY THE DRAFT ASSESSMENT ORDER , IN WHICH THE DIS ALLOWANCE WAS PROPOSED, THE ASSESSEE RAISED OBJECTIONS BEFORE THE DRP WH ICH CONFIRMED THE DRAFT ASSESSMENT ORDER PURSUANT TO WHICH THE ASSESSMENT ORDER WAS PASSED RESTRICTING THE DEPRECIATION CLAIM A T 15%. 5. LEARNED COUNSEL FOR THE ASSESSEE, SHRI RAJAN V ORA, SUBMITTED THAT THE AO, FOR THE ASSESSMENT YEAR 2006 - 07 WHICH IS PLACED AT PAGES 497 TO 520 OF THE PAPER BOOK FILED BY THE ASSESSEE ON 14 - 7 - 2014, HAS ACCEPTED THAT DEPRECIATION AT THE RATE OF 60% IS ALLOWABLE ON ROUTERS AND SWITCHES ON THE BASIS OF THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF CIT VS. M/S.BIRLASOFT INDIA LTD.,(SLP(CIVIL) NO.20645/2012) WHEREIN THE HON BLE SUPREME COURT HAS AFFIRMED THE HON BLE DELHI HIGH COURT S DECISION OF ALLOWING DEPRECIATION AT THE RATE OF 60% ON COMPUTER PERIPHERALS SUCH AS CD WRITER, NETWORK CABLES, SWITCHES, ISOLATORS ETC., HE SUBMITTED THAT FOLLOWING THE DECISION OF THE AO FOR THE EARLIER ASSESSMENT YEARS IN THE ASSESSEE S OWN CASE, DEPRECIATION AT THE RATE OF 60% SHOULD BE ALLOWED ON ROUTERS AND SWIT CHES FOR THE RELEVANT ASSESSMENT YEAR ALSO FOR THE SAKE OF UNIFORMITY AND FINALITY TO THE ISSUE. HE ALSO PLACED RELIANCE UPON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF CIT VS. DATACRAFT INDIA LTD. REPORTED IN 113 TTJ 377 IN SUPPORT O F HIS CONTENTION THAT ROUTERS AND SWITCHES ARE ALSO COMPUTERS AND ARE ELIGIBLE FOR DEPRECIATION AT 60%. ITA NO . 1 558 /BANG/2012 M/S.CISCO SYSTEMS CAPITAL(INDIA) PVT.LTD. PAGE 5 OF 20 THE LEARNED DEPARTMENTAL REPRESENTATIVE, MS.PRISCILLA SINGSIT, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 6. HAVING HEARD BOT H THE PARTIES AND HAVING CONSIDERED THE RIVAL CONTENTIONS AS WELL AS THE MATERIAL ON RECORD, WE FIND THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE APEX COURT AS WELL AS THE SPECIAL BENCH (CITED SUPRA) AS REGARDS DEPRECIATION ON ROUTERS AND SWITCHES IS CONCERNED AND THE AO, FOR THE ASSESSMENT YEAR S 2006 - 07, 2007 - 08 AND 2010 - 11, HAS FOLLOWED THE SAME IN ALLOWING DEPRECIATION AT THE RATE OF 60%. IN VIEW OF THE SAME, WE DIRECT THE AO TO ADOPT THE SAID RATIONALE FOR THE RELEVANT ASS ESSMENT YEAR ALSO AND ALLOW DEPRECIATION AT THE RATE OF 60% ON ROUTERS AND SWITCHES. 7. AS REGARDS AUDIO VISUAL CONFER ENCING EQUIPMENTS AND VIDEO STREAMING EQUIPMENTS , THE LEARNED COUNSEL FOR THE ASSESSEE HAS FILED DETAILED SUBMISSIONS BEFORE THE AO AS WE LL AS BEFORE US TO CONVINCE US THAT THEY ARE ALSO PART OF THE COMPUTER SYSTEM AND ARE NOT INDEPENDENTLY FUNCTIONAL. HE HAS DR AWN OUR ATTENTION TO THE DETAILED SUBMISSIONS FILED BY THE ASSESSEE WHICH HAS ALSO BEEN REPRODUCED BY THE AO IN HIS ORDER. ITA NO . 1 558 /BANG/2012 M/S.CISCO SYSTEMS CAPITAL(INDIA) PVT.LTD. PAGE 6 OF 20 THE L EARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THEY HAVE CONSIDERED THE ISSUE AT LENGTH AND HAVE GIVEN ELABORATE REASONS FOR TREATING THESE EQUIPMENTS AS PLANT AND MACHINERY ONLY AN D NOT AS COMPUTER. 8. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THE RIVAL CONTENTIONS, WE FIND THAT TO TREAT THE EQUIPMENT AS COMPUTER OR COMPUTER SYSTEM, THE NATURE OF THE EQUIPMENT AND THE FUNCTION S THEY PERFORM ARE TO BE EXAMINED. 8.1 AS P ER THE DETAILS FURNISHED BY THE LEARNED COUNSEL FOR THE ASSESSEE, AUDIO AND VIDEO CONFERENCING SYSTE M COMPRISE OF AUDIO - VIDEO DEVICE S /EQUIPMENT S WHICH FACILITATE IN BRINGING PEOPLE AT DIFFERENT SITES TOGETHER FOR A MEETING. BESIDES THE AUDIO AND VISUAL AN D MEETING ACTIVITIES, THESE SYSTEMS CAN ALSO BE USED TO SHARE DOCUMENT, COMPUTER INFORMATION AND BOARDS , CONFERENCING WORK S ACROSS IT NET - WORK, ISD THROUGH COMPUTERS/COMPUTER NETWORK ETC., AND AUDIO/VIDEO FACILITY CONSIST OF MANY ELEMENTS INCLUDING THE US E OF CODEC WHICH STANDS FOR CODER - DECODER. C ODE C IS A DEVICE , WHICH CONVERTS AND COMPRESSES AN ANALOG AUDIO - VIDEO SIGNAL INTO DIGITAL DATA AND THEN SENDS IT OVER A DIGITAL LINE. THE DECODER REVERSES THE PROCESSES AT THE RECEIVING END AND THIS COMPRESSION AND DECOMPRESSION ALLOWS LARGE AMOUNT OF DATA TO BE TRANSFERRED ITA NO . 1 558 /BANG/2012 M/S.CISCO SYSTEMS CAPITAL(INDIA) PVT.LTD. PAGE 7 OF 20 ACROSS A NETWORK AT CLOSE TO REAL TIME. CONFERENCING SYSTEMS MAKE US E OF VARIOUS END POINTS IN A SYSTEM SUCH AS VIDEO INPUT CONSISTING OF CAMERA, VIDEO OUTPUT IN THE FORM OF MICROPHONES AND SPEAKERS ETC. THE DATA TRANSMISSION HAPPENS IN A NUMBER OF WAYS DEPENDING ON THE TECHNOLOGY BEING USED INCLUDING DIGITAL TECHNOLOGIES AS WELL AS ANALOG TECHNOLOGIES, BROADBAND INTERNET CONNECTION AND RADIO FREQUENCIES WHICH CAN INCLUDE SATELLITE TRANSMISS ION AND W IFI . THEREFORE, ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, COMPUTER SYSTEM IS EXTREMELY IMPORTANT TO CONFERENCING PROCESS AND THEREFORE THE AUDIO VISUAL TRANSMISSION EQUIPMENT SHOULD BE CONSIDERED AS PART OF A COMPUTER. 8.2 REGARDING TH E V IDEO STREAMING EQUIPMENT, IT WAS SUBMITTED THAT THE VIDEO STREAMING ALLOWS USER TO BEGIN VIEWING THE VIDEO CLIPS STORED IN A SERVER WITHOUT FIRST DOWNLOADING THE ENTIRE FILE AND AFTER A BRIEF PERIOD OF INITIATING AND BUFFERING, THE FILE WILL BEGIN TO ST REAM OR PLAY IN REAL TIME. VIDEO STREAMING INVOLVES A SERI ES OF STEPS INVOLVING THE USE OF MEDIA CONTENT, A COMPUTER THAT RUNS ENCODING SOFTWARE, SERVERS FOR UPHOLDING THE STREAMED MEDIA FORMAT AND ACCESS TO SUCH MEDIA THROUGH VARIOUS DEVICES. FROM THE A BOVE SUBMISSIONS, IT IS CLEAR THAT THE EQUIPMENT USED BY THE ASSESSEE FOR AUDIO VISUAL CONFER ENCI NG AND ALSO VIDEO STREAMING INVOLVES THE USE OF COMPUTER. AS CERTAIN INPUT AND OUTPUT EQUIPMENT MAY HAVE INDEPENDENT ITA NO . 1 558 /BANG/2012 M/S.CISCO SYSTEMS CAPITAL(INDIA) PVT.LTD. PAGE 8 OF 20 FUNCTIONALITY AND EXISTENCE BUT THE COMPU TER DEVICES WHICH ARE INVOLVED IN THESE ACTIVITIES WOULD BE OF NO USE IF THESE INPUT AND OUTPUT DEVICES ARE NOT USED. THEREFORE, THOUGH THE INPUT AND OUTPUT DEVICES MAY HAVE INDEPENDENT EXISTENCE AND FUNCTIONALITY IN SO FAR AS THE ACTIVITY OF THE ASSESSEE IS CONCERNED, THEY DO FORM PART OF THE COMPUTER NETWORK SYSTEM WITHOUT WHICH THE COMPUTER USE D FOR THE PURPOSE OF AUDIO AND VIDEO CONFER ENC ING WOULD BE USELESS. THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DATACRAFT INDIA LTD. , (CITED SUPRA) HAS HELD THAT PERIPHERAL EQUIPMENTS USED ALONG WITH COMPUTER ARE ALSO PART OF THE COMPUTER. WE FIND THAT A SIMILAR ISSUE HAD COME UP BEFORE B BENCH OF THE TRIBUNAL AT DELHI IN THE CASE OF M/S.CRABTREE INDIA LTD. VS. ACIT IN ITA NOS.3638 & 3639/ DEL /2008 AND THE TRIBUNAL VIDE ORDERS DATED 25 - 2 - 2010 HAS HELD THAT VIDEO CONFER ENCING SYSTEM IS A COMPUTER DEVICE THAT ACCEPTS INFORMATION IN THE FORM OF DIGITAL DATA BY WAY OF VIDEO INPUT I.E. WITH THE HELP OF WEB/CAM OR VIDEO CAMERA AND AUDIO INPUT WITH THE HELP OF MICR OPHONE AND THE SYSTEM THEREAFTER PROCESSED THE DATA AND TRANSFER THROUGH ANALOGUE OR DIGITAL TELEPHONE NETWORK OR LAN AND DIGITAL GIVES THE OUTPUT DATA BY WAY OF AUDIO VIDEO OU T PUT. THEREFORE, IT IS A TECHNICAL DEVICE WHOSE FUNCTIONS ARE SIMILAR TO THE CO MPUTER BECAUSE BASICALLY COMPUTER ALSO RESPONDS TO A SPECIFIC SET OF INSTRUCTIONS IN A WELL DEFINED MANNER. THE TRIBUNAL CONSIDERED THE DECISION OF THE ITAT, CALCUTTA BENCH IN THE CASE OF ITO VS. SIMRAN MAJUMDAR (98 ITD 119) WHEREIN THE TRIBUNAL HAD ITA NO . 1 558 /BANG/2012 M/S.CISCO SYSTEMS CAPITAL(INDIA) PVT.LTD. PAGE 9 OF 20 CONSI DERED THE SIMILAR ISSUE WHEREIN DEPRECIATION AT THE RATE OF 60% WAS CLAIMED ON PRINTERS AND SCANNERS AND IT WAS HELD THAT THEY WERE ELIGIBLE FOR DEPRECIATION AT THE RATE OF 60%. THE TRIBUNAL, HOWEVER, HELD THAT THE CONTENTIONS OF THE ASSESSEE THEREIN WERE NOT BEFORE THE AO AND THEREFORE THE ISSUE WAS SET ASIDE TO THE FILE OF THE AO TO CONSIDER EACH OF THE ITEMS IN DETAIL AND FIND OUT WHICH CAN BE EQUATED AND CONSTRUED AS COMPUTER FOR THE PURPOSE OF GRANTING DEPRECIATION AT THE RATE OF 60% AFTER PROVIDING T HE ASSESSEE DUE OPPORTUNITY OF HEARING. 8.3 IN THE CASE BEFORE US ALSO, ALL THE COMPONENTS OF THE EQUIPMENT ARE NECESSARY FOR FULFILLMENT OF THE OBJECTIVE OF THE AUDIO - VISUAL CONFERENCING AND VIDEO STREAMING . S OME OF THE COMPONENTS MAY EXIST INDEPENDE NTLY AND MAY ALSO BE FUNCTIONING INDEPENDENTLY BUT IN THE ASSESSEE S BUSINESS THEY ARE ONLY PERFORMING THE FUNCTIONS AS INPUT AND OUTPUT DEVICES . THE ASSESSEE CAN ALSO USE THIS EQUIPMENT INDEPENDENT OF THE COMPUTER SYSTEM USED IN THE AUDIO VISUAL CONFEREN CING AND VIDEO STREAMING ACTIVITY. BUT DID THE ASSESSEE USE THEM INDEPENDENTLY IS THE QUESTION. IN VIEW OF THE SAME, WE ARE OF THE OPINION THAT THE AO , INSTEAD OF CLASSIFYING THE ENTIRE EQUIPMENT AS PLANT AND MACHINERY AND NOT COMPUTER, IS REQUIRED TO EX AMINE EACH ITEM IN DETAIL AS REGARDS ITS FUNCTIONAL DEPENDEN CY ON THE COMPUTER AND ITS INDEPENDENT EXISTENCE . THE ITEMS WHICH ARE FUNCTIONALLY DEPENDENT ON COMPUTERS ARE DEFINITELY PART OF COMPUTER AND THE ITA NO . 1 558 /BANG/2012 M/S.CISCO SYSTEMS CAPITAL(INDIA) PVT.LTD. PAGE 10 OF 20 ITEMS WITH INDEPENDENT EXISTENCE MAY NOT BE COMPU TERS BUT WHEREVER IT IS FOUND THAT THE DEVICE IS NOT USED INDEPENDENT OF THE COMPUTER SYSTEM AND THE PURPOSE OF AUDIO VISUAL CONFERENCING AND VIDEO STREAMING, THE SAME SHALL BE TREATED AS COMPUTERS AND WHEREVER IT IS USED INDEPENDENTLY FOR ANY OTHER PURPOS E IT SHALL BE TREATED AS PLANT AND MACHINERY. THE AO , SHALL , THUS ALLOW DEPRECIATION AT THE RATE OF 60% ON THE EQUIPMENT WHICH COULD BE CLASSIFIED AS COMPUTER AND AT THE RATE OF 15% ON THE EQUIPMENT WHICH COULD BE CLASSIFIED AS PLANT AND MACHINERY. THIS ISSUE IS ACCORDINGLY SET ASIDE TO THE FILE OF THE AO FOR RE - ADJUDICATION IN ACCORDANCE WITH LAW AND OUR OBSERVATION ABOVE. 9. THE ASSESSEE ALSO ADVANCED AN ALTERNATIVE ARGUMENT THAT ONCE THE EQUIPMENT HAS ENTERED THE FLEET OF ASSET S AND DEPRECIATION HA S BEEN ALLOWED AT THE RATE OF 60% IN THE EARLIER YEARS, THE SAME CANNOT BE TREATED AS PLANT AND MACHINERY DURING THE RELEVANT ASSESSMENT YEAR AND DEPRECIA TION GRANTED AT LOWER RATE OF 15 %. THE ASSESSEE HAS FILED COPIES OF ASSESSMENT ORDERS FOR THE ASSESSM ENT YEARS 2006 - 07, 2007 - 08 AND 2010 - 11 AND WE FIND THAT FOR ALL THE ASSESSMENT YEARS, THE REVENUE HAS BEEN TAKING A CONSISTENT STAND THAT DEPRECIATION ON AUDIO VIDEO CONFERENCING AND VIDEO STREAMING EQUIPMENT IS ALLOWABLE ONLY AT THE RATE OF 1 5 %. HOWEVER, SINCE WE HAVE ALREADY HELD THAT THE ABOVE EQUIPMENT IS TO BE TREATED AS COMPUTERS, THE ALTERNATIVE GROUND NEEDS NO ADJUDICATION AND HENCE IS REJECTED. ITA NO . 1 558 /BANG/2012 M/S.CISCO SYSTEMS CAPITAL(INDIA) PVT.LTD. PAGE 11 OF 20 10. GROUND NO.2 IS AGAINST THE CONFIRMATION OF THE DISALLOWANCE OF THE ADMINISTRATIVE SUPPORT SERVICES FEE INCURRED BY THE ASSESSEE BY APPLYING THE PROVISIONS OF SEC.40A(2)(B) OF THE ACT BY TREATING THE SAME AS BEING EXCESSIVE/UNREASONABLE. 10.1 BRIEF FACTS OF THE CASE RELATING TO THIS ISSUE ARE THAT AS PER PROFIT & LOSS ACCOUNT OF THE ASSESSEE, THE AS SESSEE - COMPANY HAD CLAIMED PAYMENT OF MANAGEMENT FEE OF RS.10,37,82,167/ - TO M/S.CISCO INDIA PVT. LTD. CONSIDERING THE HIGH QUANTUM OF MANAGEMENT FEE DEBITED, THE AO ASKED THE ASSESSEE TO EXPLAIN THE BUSINESS EXPEDIENCY OF THE MANAGEMENT FEE DEBITED AND W HY THE SAME SHOULD NOT BE TREATED AS EXCESSIVE AND UNREASONABLE U/S 40A(2) OF THE ACT. THE ASSESSEE SUBMITTED AN EXPLANATION THAT M/S.CISCO INDIA PVT. LTD. , IS INTO THE BUSINESS OF LEASING AND FINANCING AND THE FUNCTIONS OF M/S.CISCO INDIA PVT. LTD. , AS A WHOLE , AND THE MANNER IN WHICH EVEN THE ROUTINE OPERATIONS ARE CONDUCTED WILL ENTAIL SPECIALIZED KNOWLEDGE AND TECHNIQUES IN THE FIELD OF LEASE MANAGEMENT, FI N ANC E , FORECASTING, PLANNING ETC. AND DUE TO THE UNIQUENESS OF THE NATURE OF SERVICES, IT IS TH E BASIC BUSINESS NECESSITY/REQUIREMENT FOR M/S.CISCO INDIA PVT. LTD., TO AVAIL SUCH SERVICES FROM CISCO SINGAPORE, CISCO AUSTRALIA AND CISCO INDIA. IT IS SUBMITTED THAT M/S.CISCO INDIA LTD., DOES NOT HAVE ANY EMPLOYEE ON ITS PAY - ROLL TO ASSIST IN CARRYI NG OUT ITS LEASE FINANCING BUSINESS IN INDIA AND ACCORDINGLY ITA NO . 1 558 /BANG/2012 M/S.CISCO SYSTEMS CAPITAL(INDIA) PVT.LTD. PAGE 12 OF 20 ALL FUNCTIONS TO BE UNDERTAKEN IN RELATION TO THE LEASE FINANC ING BUSINESS IN INDIA SUCH AS FINANCE, TREASURY, RISK MANAGEMENT, LEGAL, GENERAL ADMINISTRATION AND OTHER SIMILAR ACTIVITIES ETC., AR E PROVIDED BY CISCO SINGAPORE AND CISCO AUSTRALIA TO CISCO CAPITAL INDIA AND CERTAIN OTHER SUPPORT SERVICES ARE PROVIDED BY CISCO INDIA. IT WAS SUBMITTED THAT THE MANAGEMENT FEE INCURRED BY CISCO CAPITAL INDIA AMOUNTING TO RS.10,37,82,167/ - REFLECTS A SU BSTANTIAL PORTION OF ALL THE ADMINISTRATIVE EXPENSES INCURRED BY CISCO CAPITAL INDIA AND THUS ACCORDING TO HIM, IT HAS CLEARLY SATISFIED THE TEST OF COMMERCIAL EXPEDIENCY AND HENCE SHOULD BE ALLOWED FOR INCOME - TAX COMPUTATION PURPOSE S . IT WAS ALSO SUBMITTE D THAT THE TRANSACTIONS WITH CISCO SINGAPORE AND CISCO AUSTRALIA BEING INTERNATIONAL TRANSACTIONS, ARE PENDING DETERMINATION OF ARMS LENGTH PRICE (ALP) BY THE TRANSFER PRICING OFFICER (TPO) AND ACCORDINGLY THERE WAS NO REQUIREMENT TO SEPARATELY DETERMINE A LLOWABILITY OF THE EXPENSES UNDER OTHER PROVISIONS OF THE ACT AS FOR THE DETERMINATION OF ALP , THE TPO WILL ALSO CONSIDER VARIOUS FACTORS INCLUDING BUSINESS REQUIREMENT FOR INCURRING OF SUCH EXPENDITURE AND WHETHER INCURRING OF SUCH EXPENSES HELP ED THE ASS ESSEE. HE FURTHER SUBMITTED THAT U/S 40A(2) OF THE ACT, THE DISALLOWANCE IS ATTRACTED ONLY WHEN AN ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERSON REFERRED TO IN CLAUSE (B) OF SUB - SECTION (2) OF SEC.40A. SINCE CISCO SINGAPORE AND CISCO AUTRALIA AND CISCO INDIA DO NOT FALL UNDER ANY OF THE CATEGORIES OF ITA NO . 1 558 /BANG/2012 M/S.CISCO SYSTEMS CAPITAL(INDIA) PVT.LTD. PAGE 13 OF 20 PERSONS UNDER CLAUSE (B) OF SUB - SEC.(2) OF SEC.40A OF THE ACT, NO DISALLOWANCE 40A(2) IS CALLED FOR. THE AO, HOWEVER, DID NOT ACCEPT THE ASSESSEE S CONTE NTION AND HELD THAT THE ASSESSEE WOULD HAVE RECEIVED CERTAIN SERVICES TO CONDUCT ITS BASIC BUSINESS OF LEASE FINANCING IN AN EFFICIENT AND EFFECTIVE MANNER FOR WHICH THE ASSESSEE HAS ALREADY INCURRED A SUM OF RS.2,43,55,141/ - UNDER VARIOUS HEADS OTHER THAN MANAGEMENT FEE. HE, THEREFORE, HELD THAT THE TOTAL ADMINISTRATIVE EXPENSES TO BE ALLOWED ARE TO BE RESTRICTED AT 5% OF THE TOTAL OPERATING INCOME OF THE ASSESSEE DECLARED FOR THE YEAR. HE , ACCORDINGLY , COMPUTED THE DISALLOWANCE U/S 40A(2) OF THE ACT AT RS .6,57,37,480/ - AND BROUGHT IT TO TAX. 10.2 AGGRIEVED, THE ASSESSEE RAISED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP) WHICH CONFIRMED THE DISALLOWANCE AND THE ASSESSEE IS IN APPEAL BEFORE US. 10.3 THE LEARNED COUNSEL FOR THE ASSESSEE REITERA TED THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE AO AND THE DRP. IN ADDITION THERETO, THE LEARNED COUNSEL FOR THE ASSESSEE ALSO SUBMITTED THAT THE FEES RECEIVED FROM CISCO CAPITAL INDIA FOR PROVI DING THE SUPPORT SERVICES HAD BEEN OFFERED TO TAX BY CISC O INDIA IN ITS RETURN OF INCOME FOR THE FINANCIAL YEAR 2007 - 08 AND THEREFORE THE DISALLOWANCE OF SUCH FEE PAID IN THE HANDS OF CISCO CAPITAL INDIA WAS INAPPROPRIATE AS IT RESULTS IN ECONOMIC DOUBLE ITA NO . 1 558 /BANG/2012 M/S.CISCO SYSTEMS CAPITAL(INDIA) PVT.LTD. PAGE 14 OF 20 TAXATION. IN SUPPORT OF THIS CONTENTION, THE LEARNED COUN SEL FOR THE ASSESSEE PLACED RELIANCE UPON THE RULING OF THE HON BLE SUPREME COURT IN THE CASE OF CIT VS. GLAXOSMITHKLINE ASIA (P) LTD. (236 ITR 113)(SC) WHEREIN IT HAS BEEN HELD THAT THE PROVISIONS OF SEC.40A(2)(B) OF THE ACT NEED NOT BE INVOKED WHERE THE SAME WOULD TANTAMOUNT TO REVENUE NEUTRAL EXERCISE. IN ADDITION TO THE ABOVE, THE LEARNED COUNSEL FOR THE ASSESSEE ALSO SUBMITTED THAT NO AD HOC DISALLOWANCE CAN BE MADE U/S 40A(2)(A) OF THE ACT. IN SUPPORT OF THIS CONTENTION, HE PLACED RELIANCE UPON THE FOLLOWING DECISIONS: I) SA Y AJI IRON & ENGG. CO. VS. CIT (253 ITR 749)(GUJ); II) M/S.JOHNSON & JOHNSON LTD. VS. ACIT (ITA NOS.3289 & 9437/MUM/2004)(ITAT)(MUM.); AND III) M/S.GOLDCREST EXPORTS VS. ITO (ITA NO.442/MUM/2009) (ITAT)(MUM.) 10.4 IN ADDITION TO ALL THE ABO VE GROUNDS AND ARGUMENTS ON THE ISSUE, T HE ALTERNATIVE GROUND RAISED BY THE ASSESSEE IS THAT WHERE AN ISSUE HAS BEEN REFERRED TO THE TPO FOR DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTION, NO ADJUSTMENT IS REQUIRED TO BE MADE U/S 40A(2) OF THE A CT. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. HE SUBMITTED THAT THE ASSESSEE HAS FAILED TO DEMONSTRATE THAT CISCO INDIA HAD, IN FACT, RENDERED MANAGEMENT SERVICES TO THE ITA NO . 1 558 /BANG/2012 M/S.CISCO SYSTEMS CAPITAL(INDIA) PVT.LTD. PAGE 15 OF 20 ASSESSEE HEREIN AND THEREFORE, THE DISALLOWANCE U/S 40A(2)(B) OF THE ACT WAS JUSTIFIED. 11. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THE RIVAL CONTENTIONS AND ALSO THE MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE HAS FILED BEFORE US ON 14 - 7 - 2014 , THE BREAK - UP OF THE EXPENDITURE AS PER PROFIT AND LOSS ACCOUNT DURING THE FINANCIAL YEAR 2007 - 08. FROM THE SAID DETAILS, IT IS SEEN THAT THE SERVICES RENDERED BY CISCO INDIA TO THE ASSESSEE ARE IN THE NATURE OF FINANCIAL AND A CCOUNTING SERVICES , LEGAL AND TAX RELATED IS SUES INFORMATION SYSTEM AND RELATED ISSUES, TREASURY SERVICES, ASSET MANAGEMENT/RESIDUAL VALUE ANALYSIS, CREDIT ANALYSIS AND DEAL EXECUTION. THE AO HAS NOT DOUBTED THE RENDERING OF SERVICES BY CISCO INDIA TO THE ASSESSEE BUT HAS RESTRICTED THE ALLOWABLE E XPENDITURE TO 5% OF THE OPERATING EXPENSES WHICH MEANS THAT HE HAS ONLY DOUBTED THE REASONABLENESS OF THE QUANTUM OF PAYMENT. BUT TO INVOKE THE PROVISIONS OF SEC.40A(2) OF THE ACT, A S RIGHTLY POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE AO CANN OT MAKE AN AD HOC DISALLOWANCE U/S 40A OF THE ACT BUT HAS TO DE TERMINE THE EXPENSES WHICH ARE E XCESSIVE AND UNREASONABLE. THE AO, IN THE CASE BEFORE US, HAS FAILED TO POINT OUT ANY PARTICULAR EXPENDITURE WHICH ACCORDING TO HIM, IS EXCESSIVE OR UNREASONABL E BUT HAS MADE AN AD HOC DISALLOWANCE WHICH IS NOT SUSTAINABLE . FURTHER, AS RIGHTLY POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE, DISALLOWANCE U/S 40A(2) CAN BE ITA NO . 1 558 /BANG/2012 M/S.CISCO SYSTEMS CAPITAL(INDIA) PVT.LTD. PAGE 16 OF 20 MADE ONLY IF THE ALLEGED EXCESSIVE AND UNREASONABLE PAYMENT IS MADE TO ANY PERSON ENUME RATED UNDER CLAUSE (B) OF SUB - SEC.(2) OF SEC.40A OF THE ACT. IN THE CASE BEFORE US, T HE AO HAS NOT BROUGHT OUT ANYTHING ON RECORD TO SHOW THAT CISCO INDIA LTD., FALLS IN ANY OF THE CATEGORIES OF PERSONS ENUMERATED UNDER CLAUSE (B) OF SUB - SECTION (2) OF SE C.40A OF THE ACT. THE RECIPIENT OF THE PAY MENT I.E. CISCO INDIA , DEFINI TELY DOES NOT FALL UNDER ANY OF THE CATEGOR IES OF PERSON S UNDER CLAUSE (B) OF SUB - SEC.(2) OF SEC.40A. THE AO HAS NOT CARRIED OUT ANY EXERCISE TO BRING ON RECORD THAT CISCO INDIA HAS G OT SUBSTANTIAL INTEREST IN THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THAT IT FALLS IN ANY OF THE CATEGORIES OF PERSONS . IN VIEW OF THE SAME, WE ARE OF THE OPINION THAT THE DISALLOWANCE U/S 40A(2)(B) OF THE ACT IS NOT CALLED FOR. 11.1 AS REGARDS TH E ALTERNATIVE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE TRANSACTION BETWEEN THE ASSESSEE AND CISCO INDIA LTD., BEING AN INTERNATIONAL TRANSACTION, THE SAME HAS ALREADY BEEN REFERRED TO THE TPO FOR DETERMINATION OF THE ALP AND THEREFORE IT CANNOT BE CONSIDERED FOR DISALLOWANCE U/S 40A OF THE ACT, S INCE WE HAVE ALREADY HELD THAT THE PROVISIONS OF SEC.40A ARE NOT ATTRACTED, WE DO NOT SEE THE NEED TO ADJUDICATE THIS CONTENTION OF THE ASSESSEE. 12. AS REGARDS, GROUND NO.3, IT IS STATED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT IN COMPUTING THE TOTAL INCOME OF ITA NO . 1 558 /BANG/2012 M/S.CISCO SYSTEMS CAPITAL(INDIA) PVT.LTD. PAGE 17 OF 20 THE ASSESSEE, THE AO HAS NOT GIV EN EFFECT TO THE SET OFF OF BROUGHT FORWARD DEPRECIATION /LOSS OF THE EARLIER YEARS . WE DIRECT THE AO TO RE - CONSIDER THIS ISSUE IN ACCORDANCE WITH LAW. 13. AS REGARDS GROUND NO.4 WHICH RELATES TO TRANSFER PRICING ADJUSTMENT MADE TO THE PAYMENT MADE BY THE ASSESSEE TO AVAIL ADMINISTRATIVE SUPPORT SERVICES, THE BRIEF FACTS ARE AS UNDER: THE AO REFERRED THE INTERNATIONAL TRANSACTION OF THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISE FOR DETERMINATION OF THE ALP TO THE TPO U/S 92CA OF THE ACT. THE TPO OBSERVED THAT THE ASSESSEE HAS CLAIMED TO HAVE MADE PAYMENT OF RS.2,16,37,189/ - TOWARDS ADMINISTRATIVE SUPPORT SERVICES. THE TPO CALLED FOR DETAILS AND AFTER VERI FYING THE SAME, HELD THAT THE ASSESSEE HAS FAILED TO EXPLAIN ITS CLAIM FOR PAYMENT OF ADMINISTRATIVE SUPPORT FEE. THEREFORE, HE DISALLOWED THE CLAIM OF EXPENDITURE AND MADE THE ADJUSTMENT AND BROUGHT IT TO TAX. 13.1 AGGRIEVED, THE ASSESSEE FILED OBJ ECTIONS BEFORE THE DRP WH ICH CONFIRMED THE ORDER OF THE AO PURSUANT TO WHICH THE ASSESSMENT ORDER WAS PASSED AND THE ASSESSEE IS IN APPEAL BEFORE US. 13.2 HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THE RIVAL CONTENTIONS AND ALSO MATERIAL ON RE CORD, WE FIND THAT THE AO HAS GIVEN A FINDING THAT THE TAX PAYER DID NOT PRODUCE ANY ITA NO . 1 558 /BANG/2012 M/S.CISCO SYSTEMS CAPITAL(INDIA) PVT.LTD. PAGE 18 OF 20 SUPPORTING EVIDENCE TO ESTABLISH THAT THE SERVICES WERE ACTUALLY RECEIVED BY IT. SIMILARLY, BEFORE US ALSO, EXCEPT FOR STATING THAT THE ASSESSEE HAS RECEIVED ADMINISTRATI VE MANAGEMENT SERVICES, NO EVIDENCE IS PRODUCED BEFORE US TO SUBSTANTIATE THE CLAIM. THE ASSESSEE HAS FILED COPIES OF AGREEMENT WITH THE ASSOCIATED ENTERPRISES IN SUPPORT OF ITS CONTENTION S THAT SERVICES WERE RENDERED PURSUANT TO THE SAID AGREEMENT AND TH E PAYMENT FOR SUCH SERVICES IS ALLOWABLE. THE ASSESSEE HAS FURTHER SUBMITTED THAT THE ASSESSEE HAS PAID THE ADMINISTRATIVE SERVICES FEE AT 5% OF COST WHICH WAS LESS THAN THE AVERAGE MARGIN OF 13 COMPARABLES COMPANIES. A CHART DISPLAYING THE MARGINS OF C OMPARABLE CASES AS WELL AS THE ASSESSEE - COMPANY IS ALSO FILED BEFORE US. WE FIND THAT THE T PO HAS HELD THAT THE ASSESSEE HAS FAILED TO PRODUCE ANY EVIDENCE TO SUBSTANTIATE I T S CLAIM OF RECEIVING SERVICES , BUT HAS NOT COMPARED THE MARGINS DECLARED BY THE A SSESSEE WITH THE MARGINS OF THE COMPARABLE COMPANIES FOR SIMILAR SERVICES. IN ORDER TO SUBSTANTIATE THE CLAIM, THE ASSESSEE NOT ONLY HAS TO FILE THE COPIES OF AGREEMENT WITH THE ASSOCIATED ENTERPRISE TO SHOW THAT THERE IS A LIABILITY OF THE ASSESSEE TO PA Y, BUT THAT I T IS ALSO ESSENTIAL TO PROVE THAT THE ASSOCIATED ENTERPRISE HAS RENDERED SERVICES TO THE ASSESSEE FOR WHICH MANAGEMENT FEE IS BEING PAID. WHEN THIS WAS PUT TO THE LEARNED COUNSEL FOR THE ASSESSEE, HE SUBMITTED THAT THE ASSESSEE IS IN POSSESSI ON OF THE RELEVANT EVIDENCE TO PROVE THAT THE RELEVANT SERVICES HAVE BEEN RENDERED BY THE ASSOCIATED ITA NO . 1 558 /BANG/2012 M/S.CISCO SYSTEMS CAPITAL(INDIA) PVT.LTD. PAGE 19 OF 20 ENTERPRISE. HE PRAYED THAT THE ISSUE MAY BE REMANDED TO THE FILE OF THE TPO FOR RE - ADJUDICATION OF THE ISSUE BY GIVING THE ASSESSEE AN OPPORTUNITY TO PROD UCE THE RELEVANT MATERIAL BEFORE THE TPO. ACCEPTING THE CONTENTION OF THE ASSESSEE, WE REMAND THIS ISSUE TO THE FILE OF THE TPO WITH A DIRECTION TO ALLOW THE ASSESSEE TO PRODUCE THE RELEVANT EVIDENCE IN SUPPORT OF ITS CONTENTION THAT IT HAS RECEIVED MANAGE MENT SERVICES FROM ITS ASSOCIATED ENTERPRISE AND THEREAFTER THE TPO SHALL DETERMINE THE ALP AFTER CONSIDERING THE MARGINS OF THE COMPARABLE COMPANIES IN SIMILAR SET OF FACTS. IN VIEW OF THE SAME, THE ISSUE IS SET ASIDE TO THE FILE OF THE AO/TPO FOR RE - ADJ UDICATION. 14. AS REGARDS GROUND NO.5, WE REMIT THIS GROUND ALSO TO THE FILE OF THE AO FOR VERIFICATION OF THE ASSESSEE S CONTENTION AND GRANTING OF RELIEF, IF ANY TO THE ASSESSEE, IN ACCORDANCE WITH LAW. 15. IN THE RESULT, THE ASSESSEE S APPEAL IS PARTL Y ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 19 TH OF SEPTEMBER , 2014. SD/ - SD/ - (RAJENDRA) (SMT. P.MADHAVI DEVI) ACCOUNTANT MEMBER JU DICIAL MEMBER EKSRINIVASULU ITA NO . 1 558 /BANG/2012 M/S.CISCO SYSTEMS CAPITAL(INDIA) PVT.LTD. PAGE 20 OF 20 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME - TAX APPELL ATE T RIBUNAL BANGALORE .