ACIT, New Delhi V. M/s Harper Collins Publishers India Ltd., New Delhi

ITA 4790/DEL/2010

• Counselvise Citation: 479020114 RSA 2010
• Duration Of Justice: 3 year(s) 11 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-10-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 02-09-2014
• Assessment Year: 2004-2005
• Appeal Filed On: 02-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Assessee Lawyers: SHAILESH GUPTA; SALIL AGARWAL R P MALL
• Keywords: Depreciation; Transfer pricing; International transaction; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

I.T.A. NO.: 4790/DEL/2010 ASSESSMENT YEAR: 2004-05 PAGE 1 OF 7 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI I BENCH, NEW DELHI [CORAM: PRAMOD KUMAR AM AND C. M. GARG JM] I.T.A. NO.: 4790/DEL/2010 ASSESSMENT YEAR: 2004-05 ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 12(1), NEW DELHI .APPELLANT VS. HARPER COLLINS PUBLISHERS INDIA LTD .RESPONDENT F 26,CONNAUGHT CIRCUS, NEW DELHI 110 001 [ PAN: AAACH0085R] APPEARANCES BY: PEEYUSH JAIN , FOR THE APPELLANT SALIL AGARWAL, R P MALL AND SHAILESH GUPTA, FOR THE RESPONDENT DATE OF CONCLUDING THE HEARING : SEPTEMBER 02, 20 14 DATE OF PRONOUNCING THE ORDER : OCTOBER 13 TH , 2014 O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE APPELLANT ASSESSING O FFICER HAS CHALLENGED CORRECTNESS OF LEARNED COMMISSIONER (APPEALS)S ORD ER DATED 31 ST AUGUST, 2010, IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT), FOR THE ASS ESSMENT YEAR 2004-05. 2. GROUND NO. 1 AND 5 ARE GENERAL IN NATURE AND DON OT REQUIRE ANY SPECIFIC ADJUDICATION. 3, IN GROUND NO. 2, THE ASSESSING OFFICER HAS RAISE D THE FOLLOWING GFRIEVANCE: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LEARNED CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS 1,5 9,446 MADE BY THE AO ON ACCOUNT OF REPLACEMENT OF SOFTWARE AS CAPITAL EXPENDITURE. 4. SO FAR AS THIS ISSUE IS CONCERNED, SUFFICE TO NO TE THAT WHILE THE AO DISALLOWED RS 2,00,000 PAID TOWARDS PURCHASE OF FIN ANCIAL ACCOUNTING SOFTWARE I.T.A. NO.: 4790/DEL/2010 ASSESSMENT YEAR: 2004-05 PAGE 2 OF 7 AND RS 27,780 FOR UPGRADING THE MS OFFICE XP SOFTW ARE, AND ANOTHER RS 60,000 UNDER THE BELIEF THAT THIS AMOUNT REPRESENTS PAYMEN T FOR SOFTWARE FOR WHICH NO BILL IS PRODUCED, ON THE GROUND THAT THESE SOFTWAR E ARE NEW ASSETS, HE ALLOWED DEPRECIATION IN RESPECT OF THE SAME. WHEN THE MATT ER TRAVELLED IN APPEAL BEFORE THE CIT(A), SHE NOTED THAT THERE IS NO INDEPENDENT PAYMENT OF RS 60,000 IT IS ALREADY INCLUDED IN THE PAYMENT OF RS 2,00,000 AND AS SUCH THIS DISALLOWANCE WAS MADE BECAUSE OF WRONG APPRECIATION OF FACTS. AS REGARDS THE PAYMENTS MADE FOR SOFTWARE, SHE NOTED THAT THESE PAYMENTS WE RE MERELY FOR UPGRADATION OF EXISTING SOFTWARE USED BY THE ASSESSEE, AND, AS SUCH, THE AMOUNTS SO PAID CANNOT BE TREATED AS PAYMENTS FOR NEW ASSETS. THE D ISALLOWANCES WERE THUS DELETED. THE AO IS AGGRIEVED OF THE RELIEF SO GRANT ED BY THE CIT(A) AND IS IN APPEAL BEFORE US. 5. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF A PPLICABLE LEGAL POSITION. 6. WE FIND THAT IT IS AN UNCONTROVERTED POSITION TH AT THE IMPUGNED PAYMENTS WERE MADE FOR THE PURPOSE OF UPGRADING THE SOFTWARE THAT THE ASSESSEE WAS USING AND THAT NO NEW ASSET CAME INTO EXISTENCE. IT IS ALSO WELL SETTLED LEGAL POSITION THAT THE EXPENSES INCURRED ON UPGRADING TH E SOFTWARE ARE TO BE TREATED AS REVENUE EXPENDITURE. LEARNED DEPARTMENTAL REPRES ENTATIVE DID NOT BRING ON RECORD ANY MATERIAL TO DISLODGE THE FINDINGS OF THE CIT(A) OR SERIOUSLY DISPUTE THE SAME. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEA RING IN MIND ENTIRETY OF THE CASE, WE APPROVE THE CONCLUSIONS ARRIVED AT BY THE CIT(A) AND DECLINE TO INTERFERE IN THE MATTER. 7. GROUND NO. 2 IS DISMISSED. 8. IN GROUND NO. 3, THE ASSESSING OFFICER HAS RAISE D THE FOLLOWING GRIEVANCE: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT(A) ERRED IN DELETING THE ADDITION OF RS 60,000 MADE BY THE AO ON ACCOUNT OF SOFTWARE DEVELOPMENT CHARGES P AID TO PARTHA DEVELOPMENT CORPORATION . I.T.A. NO.: 4790/DEL/2010 ASSESSMENT YEAR: 2004-05 PAGE 3 OF 7 9. THIS GROUND IS CLEARLY ILL CONCEIVED INASMUCH AS THE AMOUNT OF RS 2,00,000 FOR FINANCIAL ACCOUNTING SOFTWARE WAS PAID TO PARTHA DEVELOPMENT CORPORATION IN TWO INSTALMENTS ONE OF RS 1,40,000 AND THE OTHER OF RS 60,000. WHILE THE ASSESSING OFFICER TOOK THE ENTIRE AMOUNT OF RS 2,00,000 FOR DISALLOWANCE, HE ALSO MADE A SEPARATE ADDITION OF R S 60,000. THIS ASPECT OF THE MATTER HAS BEEN HIGHLIGHTED IN THE CIT(A)S ORDER A ND NO DEFECTS ARE POINTED OUT IN THE SAID FINDING. IN VIEW OF THIS UNCONTROVERTED FACTUAL FINDING, REVENUES THIS GROUND OF APPEAL IS BASED ON A SIMPLE MISCONCEPTION OF FACTS. WE NEED NOT DEAL WITH THIS MATTER IN ANY MORE DETAIL AND DISMISS THE SAME AS BASED ON MISCONCEPTION OF FACTS 10. GROUND NO. 3 IS THUS DISMISSED. 11. IN GROUND NO. 4, THE ASSESSING OFFICER HAS RAIS ED THE FOLLOWING GRIEVANCE: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT(A) HAS ERRED IN DELETING THE ADDITION O F RS 1,37,87,826 MADE BY THE AO ON ACCOUNT OF DIFFERENCE IN ARMS LE NGTH PRICE. 12. SO FAR AS THIS GRIEVANCE OF THE ASSESSING OFFIC ER IS CONCERNED, RELEVANT MATERIAL FACTS ARE LIKE THIS. THE ASSESSEE COMPANY IS A JOINT VENTURE BETWEEN HARPERCOLLINS PUBLISHERS LTD, UK, WHICH HOLDS 60% O F ITS EQUITY SHARES, AND LIVING MEDIA INDIA LIMITED, WHICH HOLDS 40% OF ITS EQUITY SHARES. ONE OF THE MAJOR BUSINESS ACTIVITY THAT THE ASSESSEE IS ENGAGE D IN IS IMPORT OF BOOKS PRIMARILY FROM ITS AES AND DISTRIBUTION OF THESE IM PORTED BOOKS IN INDIA. DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE IMPORTED B OOKS FROM ITS AE FOR AN AGGREGATE AMOUNT OF RS 3,56,45,087, THE ASSESSEE US ED RESALE PRICE METHOD FOR BENCHMARKING ITS INTERNATIONAL TRANSACTIONS SO FAR AS PURCHASE OF BOOKS IS CONCERNED. THE CLAIM OF THE ASSESSEE WAS THAT ITS P URCHASE IS AT ARMS LENGTH PRICE BECAUSE WHILE ITS GROSS MARGIN FOR THE SALE O F BOOKS, OTHER THAN IMPORTED BOOKS, IS 33.82%, WHEREAS ITS GROSS MARGIN FOR SALE OF IMPORTED BOOKS IS 38.08%. THE TPO, HOWEVER, REJECTED THIS STAND ON T HE GROUND THAT THE COMPARISON OF PROFIT EARNED ON IMPORTED BOOKS WITH PROFIT EARNED ON OTHER BOOKS IS INCORRECT BECAUSE THE LATTER IS AN ENTIREL Y UNCOMPARABLE ACTIVITY ON THE I.T.A. NO.: 4790/DEL/2010 ASSESSMENT YEAR: 2004-05 PAGE 4 OF 7 FACTS OF THIS CASE. IT WAS POINTED OUT THAT, APART FROM DISTRIBUTING BOOKS IMPORTED FROM THE AES, THE ASSESSEE PUBLISHES INDIA N REPRINTS OF FOREIGN BOOKS BY PAYING ROYALTY THEREON, AND THAT THIS ACTIVITY C ANNOT BE COMPARED WITH DISTRIBUTION OF BOOKS. THE VERY FOUNDATION OF ASSES SEE TP APPROACH IN APPLYING RPM METHOD, ACCORDING TO THE TPO, WAS LEGALLY UNSUS TAINABLE INASMUCH WRONG COMPARABLE HAS BEEN PICKED UP. THE TPO FURTHER NOTE D THAT THE ASSESSEES SUBMISSION THAT IT HAS RECEIVED 75.15% DISCOUNT, ON THE UK COVER PRICE, FROM THE AE WHEREAS THE ASSESSEE GIVES 30% DISCOUNT, ON ITS INDIA COVER PRICE TO THE WHOLESALE DISTRIBUTOR. USING THE WHOLESALE DISTRIB UTORS MARGIN AS A VALID COMPARABLE FOR THE APPLICATION OF RPM, AND TREATED THE UK PUBLISHED PRICE AND INDIAN MRP AS THE SAME, THE TPO RECOMPUTED THE ALP ON THE FOLLOWING BASIS: THE FIGURES GIVEN BY THE ASSESSEE SALES 5,65,66,983 LESS : COST OF SALES 3,50,27,598 PROFIT 2,15,39,385 PERCENTAGE OF PROFIT 38.08% TPOS COMPUTATION OF WHOLESALE DISTRIBUTORS MARGIN COVER PRICE OF THE BOOK 14,09,56,128 (RESALE PRICE TO THE DISTRIBUTOR) COST OF BOOKS TO THE DISTRIBUTOR 5,65 ,66,983 GROSS PROFIT 8,43,89,145 PERCENTAGE OF PROFIT 59.86% COMPUTATION OF ALP OF PURCHASES BY THE TPO RESALE PRICE OF BOOKS 5,65,66,983 NORMAL GP 59.68% AMOUNT AS PER CLAUSE (II) OF RULE 10B(1)(B) 2,27,05,986 (I.E. RESALE PRICE AS REDUCED BY MARGINS IN COMPARABLE CASE) AMOUNT AS PER CLAUSE (II) OF RULE 10B(1)(B) 8,48,725 (I.E. DIRECT EXPENSES INCURRED IN PURCHASE ETC) I.T.A. NO.: 4790/DEL/2010 ASSESSMENT YEAR: 2004-05 PAGE 5 OF 7 NET AMOUNT WHICH IS TREATED AS ALP OF THE PURCHASES OF BOOKS 2,18,57,261 13. ON THE BASIS OF AFORESAID CALCULATION, THE TPO CONCLUDED THAT AS THE STATED VALUE OF IMPORTS OF BOOKS IS RS 3,56,45,087, AN ARM S LENGTH ADJUSTMENT IS REQUIRED TO BE MADE WITH RESPECT TO THE DIFFERENCE AMOUNT I.E. RS 1,37,87,826. 14. AGGRIEVED BY THE ALP ADJUSTMENT SO MADE BY THE TPO, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) WHO DELETED THE ALP BY OBSERVING THAT THE GROSS PROFIT MARGIN CANNOT BE WORKED OUT BY RED UCING THE SALE PRICE FROM COVER PRICE. THE ASSESSING OFFICER IS AGGRIEVED BY THE RELIEF SO GIVEN BY THE CIT(A) AND IS IN APPEAL BEFORE US. 15. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF T HE APPLICABLE LEGAL POSITION. 16. A PLAIN LOOK AT THE COMPUTATIONS DONE BY THE T PO SHOWS GLARING INCONSISTENCIES. WHILE THE TPO HAS PROCEEDED ON THE BASIS THAT THE ASSESSEE HAS RECEIVED 85.15% DISCOUNT ON PUBLISHED PRICE OF THE BOOKS AND ALLOWED 30% DISCOUNT ON THE SAME PUBLISHED PRICE TO THE WHOLESA LE DEALERS, THE FIGURES REPRODUCED ABOVE HAVE A DIFFERENT STORY TO SHARE. GOING BY THE BUSINESS MODEL AS PERCEIVED BY THE TPO, WHICH CONSTITUTE FOUNDATIO N OF THE IMPUGNED ALP ADJUSTMENT, FOR EACH PURCHASE OF RS 24.85 (100-85.1 5) BY THE ASSESSEE, THE SALE PRICE HAS TO BE RS 70 (100-30). THE PROFIT MARGIN T HUS WORKS OUT TO 45.15 WHICH WORKS OUT TO MARGIN OF 64.50% OF SALES WHEREAS THE PROFIT MARGIN OF THE ASSESSEE ON SALE OF THESE BOOKS IS ADMITTEDLY 38.08 %. CLEARLY, THEREFORE, THERE IS A DISCREPANCY IN THE PERCEPTIONS OF THE TPO VIS-- VIS ACTUAL FACTS OF THE CASE. THIS DISCREPANCY, HOWEVER, SEEMS TO BE EXPLAINED BY THE ASSESSEES UNCONTROVERTED CLAIM THAT, AS SUBMITTED BY THE ASSE SSEE BEFORE THE AO VIDE CHART ATTACHED TO LETTER DATED 13.12.2006- A COPY OF WHICH IS PLACED BEFORE US AT THE PAPER-BOOK PAGE 144, THE UK COVER PRICE OF THE BOOK AND INDIAN COVER PRICE IS NOT THE SAME. WHILE THE DISCOUNT ALLOWED TO THE ASSESSEE IS ON THE UK PUBLISHED PRICE, THE DISCOUNT ALLOWED TO WHOLESALE DEALER IS ON INDIAN COVER PRICE. FOR EXAMPLE, UK COVER PRICE OF THE BOOK TH E AGE OF KALI- INDIAN TRAVELS I.T.A. NO.: 4790/DEL/2010 ASSESSMENT YEAR: 2004-05 PAGE 6 OF 7 AND ENCOUNTERS IS STATED TO BE UK 8.99 WHEREAS INDIAN COVER PRICE FOR SALE IS STATED TO BE UK 4.99 AND THE DISCOUNT ALLOWED TO THE DISTRIBUTOR IS ON INDIAN COVER PRICE. THERE ARE VARIATIONS IN THE DISCOUNT R ATES ALSO BUT THAT ASPECT, FOR THE PRESENT PURPOSES, IS NOT REALLY MATERIAL. SIMIL ARLY, IN THE CASE OF SLEEPOVER CLUB PONIES THE UK COVER PRICE IS STATED TO BE UK 3.99 WHEREAS INDIAN COVER PRICE IS STATED TO BE UK 2.50. ALL THESE DETAILS WERE BEFORE THE TPO, YET HAS PROCEEDED TO COMPUTE THE HYPOTHETICAL SALE PRICE OF THE BOOKS IN THE HANDS OF THE DISTRIBUTOR ON THE BASIS THAT IT WILL BE EQUIVA LENT TO 402.414869% (I.E. 100/ 24.85 X 100) OF THE PURCHASES IN THE HANDS OF THE A SSESSEE. THIS APPROACH, INCLUDING THE PRESUMPTION UNDERLYING THEREIN, IS CL EARLY ERRONEOUS. THE COMPUTATION OF PROFIT MARGINS OF THE WHOLESALE DIST RIBUTOR, AS COMPUTED BY THE AO, ARE, THEREFORE, ARE ALSO INCORRECT. THE TPO HAS NOT ADOPTED THE PROFIT MARGIN BY THE WHOLESALE DISTRIBUTORS ON THE BASIS OF ACTUA L FIGURES OR THE UNDISPUTED DISCOUNT POLICIES ON COVER PRICES BUT BASED ON CERT AIN HYPOTHESIS WHICH TURNS OUT TO BE BASED ON MISCONCEPTION OF FACTS AND IS, I N ANY CASE, UNSUBSTANTIATED BY MATERIAL ON RECORD. WE ARE, THEREFORE, OF THE VIEW THAT THE VERY FOUNDATION OF IMPUGNED ALP ADJUSTMENT IS UNSUSTAINABLE IN LAW. O UR REASONING MAY HAVE BEEN DIFFERENT BUT OUR CONCLUSION IS THE SAME AS AR RIVED AT BY THE CIT(A). 17. WHEN WE POINTED OUT GLARING ERRORS IN THE APPRO ACH ADOPTED BY THE TPO TO THE LEARNED DEPARTMENTAL REPRESENTATIVE, HE POIN TED OUT THAT THE MANNER IN WHICH RPM HAS BEEN APPLIED TO THE FACTS OF THE CASE IS INCORRECT AND EVEN THE TPO HAS NOT DONE THE ALP DETERMINATION PROPERLY. TH E MANNER IN WHICH TRANSFER PRICING STUDY HAS UNDERSTOOD RPM METHOD IS , ACCORDING TO THE LEARNED DEPARTMENTAL REPRESENTATIVE, IS PATENTLY ERRONEOUS THOUGH EVEN THE TPO HAS OVERLOOKED THE FUNDAMENTAL ERRORS IN THE APPROACH. HE SUGGESTED THAT THE MATTER SHOULD BE RESTORED TO THE FILE OF THE AO/TPO SO THAT THE ALP CAN BE PROPERLY COMPUTED. 18. WE ARE, HOWEVER, NOT INCLINED TO ACCEPT THIS PL EA. THE TP STUDY MAY BE ERRONEOUS BUT IT IS NOT OPEN TO US TO ENLARGE THE S COPE OF ISSUE BEFORE US. IN THE PRESENT CASE, THE TPO HAS DISPUTED ONLY THE MARGIN OF THE WHOLESALER ON THE BASIS OF CERTAIN CALCULATIONS WHICH TURNED OUT TO B E ERRONEOUS. HE, HOWEVER, I.T.A. NO.: 4790/DEL/2010 ASSESSMENT YEAR: 2004-05 PAGE 7 OF 7 DOES NOT DISPUTE THE FACT THAT THE MARGINS OF THE W HOLESALE DISTRIBUTOR CAN BE COMPARED WITH THE MARGINS OF THE ASSESSEE. IT IS A MATTER OF RECORD THAT THE ASSESSEES MARGIN FROM THIS SEGMENT ARE OVER 38% WH EREAS GOING BY THE BUSINESS MODEL ADOPTED BY THE ASSESSEE, MAXIMUM PER MISSIBLE MARGIN FOR THE WHOLESALE DISTRIBUTOR IS 30%. IN THESE CIRCUMSTANCE S, AND WITHIN THE LIMITATIONS THAT WE HAVE, THERE IS NO GOOD REASON TO DISTURB TH E RELIEF GIVEN BY THE CIT(A). IT IS NOT FOR US TO SUPPLEMENT THE WORK DONE AT THE AS SESSMENT LEVEL OR TO STEP INTO THE SHOES OF THE AO AND TPO FOR DECIDING WHAT MORE COULD HAVE BEEN DONE IN A PARTICULAR CASE. WE HAVE ALSO NOTED THAT RIGHT FROM 2004-05 TO 2012-13 THE ALP BENCHMARKING ON THIS BASIS HAS BEEN ACCEPTED BY THE REVENUE AND EVEN THOUGH A REFERENCE WAS MADE TO TPO IN THE ASSESSMENT YEAR 20 10-11, THE TPO DID NOT DISTURB THIS ALP DETERMINATION EITHER. 19. IN VIEW OF ALL THESE FACTS, AND BEARING IN MIND ENTIRETY OF THE CASE, WE APPROVE THE CONCLUSIONS ARRIVED AT BY THE CIT(A) ON THIS ISSUE AS WELL AND DECLINE TO INTERFERE IN THIS MATTER. 20. GROUND NO. 4 IS THUS DISMISSED. 21. IN THE RESULT, THE APPEAL IS DISMISSED. PRONOUN CED IN THE OPEN COURT TODAY ON 13 TH DAY OF OCTOBER, 2014. SD/- SD/- C M GARG PRAMOD KUMAR (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) NEW DELHI, 13 TH DAY OF OCTOBER 2014 COPIES TO: (1) THE ASSESSEE (2) THE ASSESSING OFFI CER (3) CIT (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ETC ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES, NEW DELHI