M/s Miracle Software Systems (I) Pvt., Ltd., Visakhapatnam V. THE DCIT, Visakhapatnam

ITA 43/VIZ/2015

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 4969 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 7 year(s) 5 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-07-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: DB
• Assessment Year: 2008-2009
• Appeal Filed On: 21-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: I. KAMA SASHTRI
• Keywords: Depreciation
• Section: 32; 10B

Judgement Text

आयकर अपीऱीयअधिकरण, विशाखापटणम पीठ, विशाखापटणम IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM श्री द ु व्ि ू रु आर एऱ रेड्डी, न्याययक सदस्य एिं श्री एस बाऱाक ृ ष्णन, ऱेखा सदस्य के समक्ष BEFORE SHRI DUVVURU RL REDDY, HON’BLE JUDICIAL MEMBER & SHRI S BALAKRISHNAN, HON’BLE ACCOUNTANT MEMBER आयकर अऩीऱ सं./ I.T.A. No.43/Viz/2015 (ननधधारण वषा / Assessment Year :2008-09) M/s. Miracle Software Systems (I) Pvt Ltd., Visakhapatnam. PAN: AABCM 4988 R Vs. DCIT, Circle-3(1), Visakhapatnam. (अऩीऱधथी/ Appellant) (प्रत्यथी/ Respondent) अऩीऱधथी की ओर से/ Appellant by : Sri I. Kama Sashtri, CA प्रत्यधथी की ओर से / Respondent by : Sri SPG Mudaliar, Sr. AR स ु नवधई की तधरीख / Date of Hearing : 31/05/2022 घोषणध की तधरीख/Date of Pronouncement : 21/07/2022 O R D E R PER S. BALAKRISHNAN, Accountant Member : This appeal filed by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals) (in short Ld. CIT(A), Visakhapatnam in ITA No. 0785/2011-12/DCIT C-3(1) VSP/2014-15, dated 30/10/2014 arising out of the order passed 2 U/s. 144C(3) of Income Tax Act, 1961 (in short the Act) for the AY 2008-09. 2. In this appeal there is a delay of 12 days in filing the appeal before the Tribunal. In this regard, the Ld. Authorized Representative (Ld. AR) brought our attention to the affidavit filed by Ms. LVN Madhavi D/o. L. Nageswara Rao, Director of the assessee-company and submitted that during the relevant period the Director, who is looking after the accounting and tax matter, was not available in India and therefore the appeal was filed beyond the prescribed time limit with a delay of 12 days. Therefore it was pleaded that the delay may be condoned. On perusal of the affidavit filed before the Tribunal as well as considering the submissions of the Ld. AR, we find that there is a reasonable and sufficient cause for not filing the within the stipulated time and therefore we of the considered view that the this is a fit case to condone the delay. Accordingly, we hereby condone the delay of 12 days in filing the appeal and proceed to adjudicate the case on merits. 3. Brief facts of the case are that the assessee is a Private Limited Company engaged in the business of software development, Business Process Outsourcing and consultancy 3 services, filed the return of income for the AY 2008-09 admitting a total income of Rs. 3,07,18,050/-. The case was selected for scrutiny and in response to the assessee’s international transactions with the AEs, the AO referred the matter to the TPO to determine the Arm’s Length Price (ALP). The assessee has reported software development services to AEs for an amount of Rs. 6,95,72,683/-. The TPO vide his order u/s. 92CA(3) of the Act dated 28/10/2011 determined the ALP at Rs. 8,92,40,880/- resulting in forward adjustment of Rs. 2,40,22,257/-. Accordingly, the AO made addition of Rs. 2,40,22,257/- to the total income of the assessee. Aggrieved by the order of the Ld. AO, the assessee is in appeal before the Ld. CIT(A). The assessee’s representative before the Ld. CIT(A) raised a ground relating to extraordinary depreciation. The Ld. CIT(A) considering the submissions made by the assessee’s representative, partly allowed the appeal. Aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us. 4. The assessee has raised the following grounds of appeal: “1. On the f acts and in the circumstances of the case and in law, the Ld. AO/TPO erred in applying the provisions of transf er pricing when the appellant is eligible f or the tax holiday under section 10A of the Act. 2. The Ld. CIT(A) is not correct in rejecting/modif ying the claim f or elimination of depreciation, the same being an 4 extraordinary item, for calculation of Prof it Level Indicator while making the comparability analysis with the comparables selected by the TPO. 3. The Ld. CIT(A) is not correct in rejecting the plea of the assessee to give relief for positive working capital adjustment of +3.76 as against the negative working capital adjustment made by the TPO/AO of (-)2.07. 4. The appellant craves leave to add to, amend, or alter any or all the above grounds of appeal.” 5. The Ld. AR pleaded that the assessee has incurred huge depreciation during the previous year and hence the calculation of Profit Level Indicator (PLI) including the depreciation as operating cost is in accordance with the principles laid down. The Ld. AR pleaded that the PLI of the testing entity should be before the depreciation. The Ld. AR also relied on Guidance Note issued by the Institute of Chartered Accountants of India (ICAI), suggesting cash profit by sales as one of the ratios to be applied for computing the ALP under TNMM as per the Indian Regulations. The Ld. AR also pleaded that the comparables adopted by the TPO do not have an extraordinary depreciation as in the case of the assessee. The Ld. AR also further submitted that if the operating cost excludes depreciation the ALP of the assessee is more that the PLI of the comparables. The Ld. AR therefore prayed that the depreciation should be fully excluded from operating cost while calculating the ratio of cash profit to 5 sales. The Ld. AR also pleaded that the comparables should be almost similar to that of assessee. The Ld. AR apart from the various cases, heavily relied on the Schefenacker Motherson Ltd vs. Income Tax Officer & Anr reported in [2010] 2 ITR 0196 (Delhi Trib.) wherein the depreciation leading to material differences while computing the ALP was not considered. The Ld. AR argued that the Ld. CIT(A) has not considered the non-utilization of full capacity of the assessee and accordingly not given effect to the extraordinary depreciation submitted by the assessee. Per contra, the Ld.CIT-DR submitted that the claim of extraordinary depreciation and its inclusion in the operating cost was never raised by the assessee before the TPO and only before the Ld. CIT (A). The Ld. CIT-DR relied on the orders of the Ld. Revenue Authorities. 6. We have heard both the sides and gone through the material available on record and the orders of the Authorities below. The first contention of the Ld. AR is the depreciation should not form part of the operating cost since the assessee has incurred huge capital additions and the depreciation should be considered as an extraordinary item and cannot form part of the computation in the determination of ALP. The Ld. CIT(A) in his order observed 6 that the addition to the assets were made to the assessee’s export unit at Bhogapuram and the depreciation claimed was relating to that unit only. The Bhogapuram unit is exclusively used for the software development and is a self-contained unit. Admitted facts are that the assessee has not rejected the comparables adopted by the TPO but only objected to the inclusion of the depreciation in the operating cost. As per AS-6 issued by the ICAI, the concept of depreciation is as follows: “Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to change a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortization of assets whose useful life is predetermined.” 7. Rule 10B of the IT Rules, 1962 specifies that the comparability of international transaction in an uncontrolled transactions shall be adjusted with the functions performed taking into account the assets employed or to be employed and there is assumption by the respective parties to the transactions. 7 Hence, as rightly pointed by the Ld. CIT(A) in para 4.19 that the unit situated at was exclusively engaged in the export activities and only reported export transactions relating to the services to Associated Enterprises (AEs). Therefore, the assets deployed in Bhogapuram Unit for the provision of such services to the AE and their corresponding cost therefore would be an important component of the operating cost for the services rendered. The Ld. CIT(A) in para 4.25 observed as follows: “4.25. As regards extraordinary depreciation, it was submitted that the depreciation f or the subject year of Rs. 3,74,21,303/- was substantially higher to the depreciation claimed in the earlier year of Rs. 1,56,50,135/-. It was contended that the increase of 139% was extraordinary and such vast diff erence was has to be eliminated. It was also submitted that the extraordinary depreciation was Rs. 1,87,86,505/- taking into account the average of percentage of depreciation claimed in the earlier years. The pleas were examined. On verif ication of the depreciation schedule it is noted that the depreciation claimed f or the AY 2006-07 was Rs. 3,28,76,323/- and not Rs. 1,56,50,135/- as contended. The claim that there was 139% increase over the earlier year is not correct. In view of the discrepancy, the computation given by the assessee f or arriving at the quantum of ordinary depreciation and extraordinary depreciation cannot be relied on.” 8. The Ld. AR could not controvert to the findings of the Ld. CIT(A) before us. The Ld. CIT(A) in para 4.27 has considered the quantum of extraordinary depreciation from the records produced by the assessee and has concluded that the extraordinary depreciation on account of non utilization of capacity would be 8 Rs. 1,38,03,107/-. The Ld. AR also could not produce any evidences for non-utilization of capacity even before us. The Ld. AR also did not raise any technical objection in the order passed by the TPO. Section 32 of the Act, makes it compulsory to take the depreciation into consideration in computing the taxable profit. The assessee has also claimed depreciation while computing the total income in the relevant assessment year. We are also of the considered view that since the assets are used by the assessee with respect to the services provided to AE and hence the depreciation of such assets of Bhogapuram Unit should necessarily form part of the operating cost and should be considered in the computation of ALP of the assessee. The Ld. CIT(A) has rightly considered the extraordinary depreciation and has recomputed the PLI of the assessee as follows: Operating Revenue Rs. 6,52,18,623 Operating Costs Salaries etc 2,74,08,638 Other Admn. Costs (Rs.1,37,78,043 - Rs.32,46,745) 1,05,31,298 Depreciation (Rs. 3,74,21,303 – Rs. 1,38,03,107) 2,36,81,196 Rs. 6,15,58,132 Operating Profit Rs. 36,60,491 OP / OC 5.95% 9 9. In view of the above, we find no infirmity in the order of the Ld. CIT(A) and Ground No.2 raised by the assessee is dismissed. 10. With respect to Ground No.3 regarding the working capital adjustment made in the ALP margin the Ld. CIT(A) in para 4.30 has observed as under: “4.30.I have considered the submissions. I f ind that the figures taken by the TPO relating to assessee’s receivables and payables are not correct. In such f actual scenario, the impugned working capital adjustment is not justif ied. Accordingly, it is held that that there is no requirement f or working capital adjustment in the assessee’s case. The AO may recomputed the ALP margin as directed in the assessee’s case. The AO may recomputed the ALP margin as directed above.” 11. We find from the observations of the Ld. CIT(A) that the Ld. CIT(A) has rejected the working capital adjustment of (-)2.07% arrived by the Ld. TPO but has not considered any working capital adjustments as submitted by the Ld. AR before the Ld. CIT(A). The Ld. CIT(A) has also not rejected the working capital adjustment of (+)3.76% arrived at by the assessee. The Ld. AR therefore pleaded that when the negative working capital adjustment was added back to the PLI a similar treatment should also be given for the positive working capital adjustment while arriving at the computation of ALP. We find merit in the argument of the Ld. AR and direct the AO to give effect to the 10 positive working capital adjustment of (+)3.76% after verifying the same while arriving at the ALP margin of the assessee. 12. Ground No.4 raised by the assessee is general in nature and need not be adjudicated. The Ld. AR did not press the Ground No.1. 13. In the result, appeal filed by the assessee is partly allowed. Pronounced in the open Court on the 21 st July, 2022. Sd/- Sd/- (द ु व्ि ू रु आर.एऱ रेड्डी) (एस बाऱाक ृ ष्णन) (DUVVURU RL REDDY) (S.BALAKRISHNAN) न्याययकसदस्य/JUDICIAL MEMBER ऱेखा सदस्य/ACCOUNTANT MEMBER Dated :21.07.2022 OKK - SPS आदेश की प्रतिलिपि अग्रेपिि/Copy of the order forwarded to:- 1. ननधधाररती/ The Assessee – M/s. Miracle Software Systems (I) Pvt Ltd, MIG-49, Lawsons Bay Colony, Visakhapatnam. 2. रधजस्व/The Revenue – Deputy Commissioner of Income Tax, Circle- 3(1), Aayakar Bhavan, Dabagardens, Visakhapatnam – 530020. 3. The Chief Commissioner of Income Tax, Visakhapatnam. (ii) Commissioner of Income Tax-1, Visakhapatnam. 4. आयकर आय ु क्त (अऩीऱ)/ The Commissioner of Income Tax (Appeals), Visakhapatnam. 11 5. ववभधगीय प्रनतननधध, आयकर अऩीऱीय अधधकरण, ववशधखधऩटणम/ DR, ITAT, Visakhapatnam 6. गधर्ा फ़धईऱ / Guard file आदेशधन ु सधर / BY ORDER Sr. Private Secretary ITAT, Visakhapatnam