Appeal Details
Counselvise Citation
[2014] 140 COUNSELVISE.COM (IT) 82163 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
4 year(s) 5 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
18-12-2014
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
I
Next Hearing Date
10-12-2014
Assessment Year
2006-2007
Appeal Filed On
13-12-2010
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH - I : NEW DELHI BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K., JUDICIAL MEMBER ITA NO. 5638 /DEL /201 0 ASSESSMENT YEAR: 200 6 - 20 0 7 FIDELITY BUSINESS SERVICES PRIVATE LIMITED. PINEHURST, EMBASSY GOLD LINKS BUSINESS, PARK, OFF INTERMEDIATE RING ROAD, BANGALORE 560071 ( PAN AA ACF 6175 E ) VS. A DDL. COMMISSIONER OF INCOME - TAX, RANGE 11, NEW DELHI / DEPUTY COMMISSIONER OF INCOME - TAX, CIRCLE - 11(1), NEW DELHI. (APPELLANT) (RESPONDENT ASSESSEE BY : SHRI G.C. SRIVASTAVA, ADVOCATE AND SHRI SAURABHSRIVASTAVA, FCA. RESPONDENT BY: SHRI PEEYUSH JAIN, CIT.D.R. PER: GEORGE GEORGE K., J.M. 1. THIS APPEAL, AT THE INSTANCE OF THE ASSESSEE , IS DIRECTED AGAINST THE ASSESSMENT ORDER DATED 26 .10.201 0 PASSED U/S 143(3) R.W.S 144C ( 13) OF THE I.T. ACT . THE RELEVANT ASSESSMENT YEAR IS 200 6 - 0 7 . 2. THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF FID HOLDINGS (MAURITIUS) LIMITED, THE HOLDING COMPANY, WHICH IS PART OF THE FIDELITY GROUP. DURING THE RELEVANT ASSESSMENT YEAR , THE ASSESSEE WAS ENGAGED IN PROVIDING CONTRACT S OFTWARE D EVELOPMENT AND INFORMATION TECHNOLOGY (IT) ENABLED SERVICES TO ITS ASSOCIATED ENTERPRISES ( AES ). T HE ASSESSEE WAS REMUNERATED COST PLUS MARK UP OF 13% FOR THE CONTRACT SOFTWARE DEVELOPMENT SERVICES AND AT THE RATE OF 15% FOR THE IT ENABLED SERVICES. FOR THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE HAD UNDERTAK EN THE INTERNATIONAL TRANSACTIONS WHICH ARE AS UNDER: - 2 ITA NO. 5638 /DEL /201 0 ASSESSMENT YEAR: 200 6 - 20 07 S.NO. NATURE OF INTERNATIONAL TRANSACTIONS METHOD USED VALUE (IN RS.) 1. SOFTWARE DEVELOPMENT SERVICES TNMM 375 , 37 , 39,674 2. PURCHASE OF FIXED ASSETS TNMM 2 , 80 , 38,672 3. IT ENABLED SERVICES TNMM 229,4 3 , 35,483 4. RECHARGE OF SALARIES TNMM 22,8 8 , 66,501 5. REIMBURSEMENT OF EXPENSES TNMM 20,4 9 , 12,611 3. OUT OF THE ABOVE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE , S L .NO S .2, 4 & 5 WERE ACCEPTED BY THE TPO AT ARM S LENGTH AND NO UPWARD ADJUSTMENT WAS MADE. WITH REFERENCE TO THE S OFTWARE DEVELOPMENT SERVICES AND IT ENABLED SERVICES, THE ASSESSEE ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS A MOST APPROPRIATE METHOD WITH OPERAT ING PROFITS TO THE TOTAL COST ASI TS PROFIT LEVELLED INDICATOR FOR BENCH MARKING ITS TRANSACTION. THE ASSESSEE APPLIED VARIOUS QUANTITY FILTERS FOR COMPUTING THE COMPARABILITY ANALYSIS FOR THE AFORESAID TWO SEGMENTS AND ARRIVED AT THE FOLLOWING RESULTS : - NO. OF COMPARABLE MARGIN OF ASSESSE E MARGIN OF COMPARABLE SOFTWARE DEVELOPMENT SERVICES 35 13% 11% IT ENABLED SERVICES 14 15% 9% 3.1 BASED ON THE ANALYSIS ADOPTED BY THE ASSESSEE , THE PRICING ARRANGEMENT FOR EACH TRANSACTION WITH REFERENCE TO SOFTWARE DEVELOPMENT SERVICES AND IT ENABLED SERVICES WERE SOUGHT TO BE ESTABLISHED AT ARM S LENGTH 4 . THE TPO HAD, HOWEVER, REJECTED THE ASSESSEE S TRANSFER PRICING STUDY AND ARRIVED AT TH E FOLLOWING SET OF COMPAN IES AS COMPARABLE FOR BENCHMARKING THE 3 ITA NO. 5638 /DEL /201 0 ASSESSMENT YEAR: 200 6 - 20 07 ASSESSEE S INTERNATIONAL TRANSACTION OF SOFTWARE DEVELOPMENT AND IT ENABLED SERVICES WITH ITS AE: SOFTWARE DEVELOPMENT SI. NO. NAME OF THE COMPANY MARK UP ON COST (%) 1. TRANSWORLDINFOTECH LTD 25.39% 2. LARSEN & TURBO INFOTECH LTD 11.11% 3. INFOSYS TECHNOLOGIES LTD 40.08% 4. VISUALSOFT TECHNOLOGIES LTD. 12.70% AVERAGE ARM S LENGTH MARK UP ON COST 22.32% IT ENABLED SERVICES SI. NO. NAME OF THE COMPANY MARK UP ON COST (%) 1. E - SERVE INTERNATIONAL LTD. 15.07% 2. NUCLEUS NETSOFT&GIS INDIA LTD 35.89% 3. TRANSWORKS INFORMATION TECHNOLOGIES LTD 19.62% 4. TULSYANTECHNOLGIES LTD 16.48% 5. ALLSEC TECHNOLOGIES LTD. 28.73% AVERAGE ARM S LENGTH MARK UP ON COST 23.15% 5. THE TPO ALSO DENIED THE BENEFIT OF WORKING CAPITAL ADJUSTMENT TO THE ASSESSEE. THE TPO , CONSIDERING THE AVERAGE ARM S LENGTH MARK UP ON THE COST OF COMPARABLE COMPANIES , MADE AN UPWARD ADJUSTMENT OF RS. 30,71,50,845/ - IN RESPECT OF SOFTWARE SEGMENT AND RS.1 6,25,98,555/ - IN RESPECT OF IT ENABLED SERVICES. BASED ON THE TPO S ORDER DATED 14.10.2009, THE ASSESSING OFFICER PASSED A DRAFT ASSESSMENT ORDER. IN THE DRAFT ASSESSMENT ORDER , THE AO ALLOWED THE DEPRECIATION ON THE COMPUTER ACCESSORIES ONLY AT THE RATE O F 15% INSTEAD OF 60% CLAIMED BY THE ASSESSEE , THEREBY DISALLOWING DEPRECIATION CLAIM OF RS.14,90,216/ - . 4 ITA NO. 5638 /DEL /201 0 ASSESSMENT YEAR: 200 6 - 20 07 6 . AGAINST THE DRAFT ASSESSMENT ORDER, ASSESSEE FILED OBJECTIONS ON 28.01.2010 BEFORE THE D.R.P . THE DRP REJECTED THE CONTENTIONS/OBJECTIONS RAISED BY THE ASSESSEE AND CONFIRMED THE DRAFT ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER. THE DRP S FINDING WITH REFERENCE TO CONFIRMATION OF TRANSFER PRICING ADJUSTMENT READS AS UNDER: - 2.3. . THE TPO HAS DEALT IN DETAIL WITH THE OBJECTIONS OF THE ASSESSEE IN THE BODY OF THE TRANSFER PRICING ORDER ITSELF. IN THE MATTER OF WORKING CAPITAL ADJUSTMENT AND RISK ADJUSTMENT ALSO THE ISSUES POINTED OUT BY THE TPO ARE CORRECT AND THERE IS NO SUBSTANTIAL FORCE IN THE ARGUMENT OF THE ASSESSEE TO INTERFERE WITH THE FINDINGS OF THE TPO. ONLY AFTER DISCUSSING IN DETAIL, THE TPO ARRIVED AT THE CONCLUSION OF SELECTING OF COMPARABLE FOR BOTH THE SEGMENTS. DUE OPPORTUNITY OF BEING HEARD APPEARS TO HAVE BEEN GIVEN TO THE ASSESSEE AND THE TPO HAS DISCUSSED IN DETAIL, ALL THE OBJECTIONS RAISED BY THE ASSESSEE. THUS, WE FIND NO COMPELLING REASONS TO INTERFERE WITH THE ORDER OF TPO AND THE ASSESSING OFFICER AND , HENCE , THE SAME ARE CONFIRMED. 6 .1 WITH REFERENCE TO LIMITING DEPRECIATION CLAIMED ON COMPUTER ACCESSORIES , THE FINDING OF THE DRP READS AS UNDER: - 3. IN THE DRAFT ASSESSMENT ORDER PASSED U/S 144C OF THE IT ACT, THE ASSESSING OFFICER HAS DISALLOWED EXCESS CLAIM OF DEPRECIATION ON THE COMPUTER ACCESSORIES BY OBSERVING THAT THE SAME MAY BE ALLOWED @ 15% AND NOT @ 60%. THE ASSESSEE HAS OBJECTED TO THIS ADDITION BY SUBMITTING THAT THIS IS NOT CORRECT SINCE THE COMPUTER ACCESSORIES ARE PART AND PARCEL OF COMPUTERS. IN THIS ISSUE THE OBSERVATION OF THE ASSESSING O FFICER APPEARS TO BE CORRECT HENCE WE DECLINE FROM INTERFERING WITH THE ORDER OF THE ASSESSING OFFICER. 6.2 BASED ON THE DRP S DIRECTION S , FINAL ASSESSMENT ORDER W AS PASSED ON 26.10.20 10 . 7 . AGGRIEVED BY THE ASSESSING OFFICER S ORDER GIVING EFFECT TO DR P DIRECTION , THE ASSESSEE IS IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS: - 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE , THE LEARNED ( LD. ) ADDL. CIT (ASSESSING OFFICER OR AO ) / THE LD. ADDL. CIT (TRANSFER PRICING) - 1(3), NEW DELHI (TRANSFER PRICING OFFICER OR TPO) AND THE LD. DISPUTE RESOLUTION PANEL (THE PANEL) ERRED IN MAKING ADJUSTMENT IN ARM S LENGTH PRICE OF THE APPELLANT S INTERNATIONAL TRANSACTIONS WITH RELATED PARTIES BY RS.46,97,49,400/ - (PERTAINING TO SOFTWARE DEVEL OPMENT SERVICES RS.30,71,50,845 / - AND PERTAINING TO IT ENABLED SERVICES RS.16,25,95,555 / - ). 5 ITA NO. 5638 /DEL /201 0 ASSESSMENT YEAR: 200 6 - 20 07 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. AO AND THE LD. AO AND THE LD. PANEL ERRED IN UPHOLDING THE REJECTION OF TRANSFER PRICING (TP) DOC UMENTATION BY THE LD. TPO. 3. THAT THE LD. AO/TPO AND THE LD. PANEL ERRED IN IGNORING THE LIMITED RISK NATURE OF THE SOFTWARE DEVELOPMENT AND IT ENABLED SERVICES PROVIDED BY THE APPELLANT AND NOT PROVIDING ADJUSTMENT ON ACCOUNT OF RISK DIFFERENTIAL WITH EN TREPRENEURIAL COMPARABLE, AS REQUIRED, WHILE DETERMINING THE ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF THE APPELLANT . 4.1 THAT THE LD. TPO ERRED IN NOT APPLYING MULTIPLE YEAR/PRIOR YEAR DATA FOR COMPARABLE COMPANIES WHILE DETERMINING ARM S LE NGTH PRICE. 4.2. THAT THE LD. TPO ERRED IN USING DATA AS AT THE TIME OF ASSESSMENT PROCEEDINGS, INSTEAD OF THAT AVAILABLE DURING FINANCIAL YEAR 2005 - 06, WHEREIN THE APPELLANT WAS REQUIRED TO PREPARE AND MAINTAIN THE TP DOCUMENTATION. 4.3 THAT THE LD. TPO ERRED IN INCLUDING COMPANIES IN THE COMPARABILITY ANALYSIS, WHICH ARE DIFFERENT FROM THE APPELLANT IN FUNCTIONS, ASSETS AND RISK PROFILE. 4.4 THAT THE LD. TPO ERRED IN REJECTING COMPANIES THAT ARE SIMILAR TO THE APPELLANT, WHILE PERFORMING THE COMPARABILI TY ANALYSIS. 4.5 THAT THE LD. TPO ERRED IN DENYING APPROPRIATE ADJUSTMENT TOWARDS THE WORKING CAPITAL DIFFERENCE BETWEEN THE APPELLANT AND THE ENTREPRENEURIAL COMPANIES SELECTED AS COMPARABLE IN DETERMINATION OF ARM S LENGTH PRICE. 4.6. THAT THE LD. TPO ERRED IN NOT ALLOWING THE BENEFIT OF RANGE OF +/ - 5% AS PROVIDED IN PROVISO TO SECTION 92C(2) OF THE ACT, WHILE DETERMINING THE ARM S LENGTH PRICE. 4.7. THAT LD. PANEL ERRED IN UPHOLDING THE ERRONEOUS ACTIONS OF THE LD. TPO AS STATED IN GROUNDS 4.1 TO 4.6 ABOVE. 5.1 THAT THE LD. AO AND THE LD. PANEL ERRED IN DISALLOWING/ADDING BACK AN AMOUNT OF RS.14,90,216/ - ON ACCOUNT OF DEPRECIATION ON UPS, PRINTER AND WIRELESS DATA CARD CLAIMED BY THE APPELLANT. 5.2 THAT THE LD. AO AND THE LD. PANEL ERRED IN TREATING UPS, PRINTER AND WIRELESS DATA CARD ACQUIRED DURING THE YEAR AS BEING PART OF THE GENERAL BLOCK OF PLANT & MACHINERY FOR THE PURPOSE OF COMPUTING DEPRECIATION INSTEAD OF TREATING THEM AS PART OF COMPUTER BLOCK ELIGIBLE FOR DEPRECIATION @ 60%. 5.3 THAT THE LD. AO AND THE LD. PANEL ERRED IN COMPUTING THE DEPRECIATION ON UPS, PRINTER AND WIRELESS DATA CARD @ 15%. 6. THAT THE LD. AO AND LD. PANEL ERRED IN NOT ALLOWING DEDUCTION UNDER SECTION 10A OF THE ACT ON DISALLOWANCE OF DEPRECIATION ON COMPUTER OF RS.1 4 , 90,216/ - . 7. THAT THE LD. AO ERRED IN CHARGING INTEREST UNDER SECTION 234B OF THE ACT AMOUNTING TO RS.9,24,29,654/ - . 6 ITA NO. 5638 /DEL /201 0 ASSESSMENT YEAR: 200 6 - 20 07 8. THAT THE LD. AO ERRED IN CHARGING INTEREST UNDER SECTION 234C OF THE ACT. 9. THAT THE LD. AO ERRED ON FACTS AND IN LAW IN INITIATING T HE PENALTY PROCEEDINGS AGAINST THE APPELLANT UNDER SECTION 271(1 ) ( C) OF THE ACT. 7.1 HOWEVER, IN THE COURSE OF ARGUMENT BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE CONFINE D HIS ARGUMENTS/ SUBMISSION S TO GROUND NOS. 4.3, 4.5 , 5.1 & 5.2. WE SHALL ADJUDICATE THE ISSUESGROUND - WISE AS UNDER: - GROUND NO.4.3 8. WITH REFERENCE TO THE ABOVE GROUND, THE ASSESSEE IS AGGRIEVED BY INCLUSION OF INFOSYS TECHNOLOGIES LTD IN SOFTWARE DEVELOPMENT SERVICES SEGMENT AND NUCLEUS NETSOFT&GIS INDIA LIMITED IN ITES SEGMENT AS COMPARABLE COMPANIES. WE SHALL DEAL WITH THESE INCLUSIONS OF THOSE COMPANIES AS UNDER: INFOSYS TECHNOLOGIES LIMITED [INFOSYS] : 9. THE TPO HAD INCLUDED INFOSYS AS COMPARABLE COMPANY FOR THE REASON THAT THE ASSESSEE , APART FROM PROVIDING S OFTWARE AND ITES SERVICES , IS ALSO ENGAGED IN PROVIDING SIGNIFICANT VALUE ADDED FINANCIAL SERVICES TO ITS CUSTOMERS AND INVESTORS. THE RELEVANT OBSERVATIONS OF THE TPO TO INCLUDE INFOSYS AS COMPARABLE COMPANY ARE AS FOLLOWS: 6.5.3. THEREFORE, ON THE BASIS OF ANALYSIS OF FUNCTIONS PERFORMED BY THE ASSESSEE IN INDIA, IT IS APPARENT THAT THE ASSESSEE ALSO, APART FROM PROVISION OF SOFTWARE DEVELOPMENT AND IT SERVICES, IS ENGAGED IN PROVIDING SIGNIFICANT VALUE ADDED FINANCIAL SERV ICES TO ITS CUSTOMERS AND INVESTORS. THE CLAIM OF THE ASSESSEE THAT INFOSYS LEVERAGES OUT OF ITS BRAND AND, THEREFORE, IS NOT COMPARABLE, IS NOT CORRECT TO THE EXTENT THAT THE ASSESSEE ALSO IS LEVERAGING OUT OF THE BRAND OF ITS PARENT. MORE IMPORTANTLY, THE ASSESSEE HAS ITSELF ESTABLISHED SIGNIFICANT BRAND PRESENCE IN INDIA ON ACCOUNT OF VARIOUS SERVICES RELATING TO FINANCIAL SECTOR BEING OPERATED BY THE ASSESSEE. THE ASSESSEE IS ENGAGED IN MANAGING HUGE INVESTOR FUNDS THROUGH ITS VARIOUS FUND MANAGEMENT SCHEMES LISTED ABOVE , THEREFORE , THESE TWO COMPANIES, NAMELY INFOSYS TECHNOLOGIES LTD AND VISUAL - SOFT TECHNOLOGIES LTD ARE CONSIDERED AS FUNCTIONALLY COMPARABLE FOR PURPOSE OF COMPARABILITY ANALYSIS WITH THE ASSESSEE. 7 ITA NO. 5638 /DEL /201 0 ASSESSMENT YEAR: 200 6 - 20 07 9.1. THE ASSESSEE HAD CHALLENGED THE INCLUSION OF INFOSYS AS A COMPARABLE COMPANY . A CCORDING TO THE ASSESSEE, INFOSYS IS FUNCTIONAL DISSIMILAR ON ACCOUNT OF THE FOLLOWING FACT OR S: (I) DIVERSIFIED NATURE OF OPERATION; (II) INFOSYS TECHNOLOGIES LTD IS HAVING OWNERSHIP OF BRANDED/PROPRIETARY PRODUCTS; (III) ONSITE VERSUS OFFSHORE SERVICES; (IV)HIGH TURNOVER; (V) INFOSYS TECHNOLOGIES LTD HAS HUGE INTANGIBLE ASSETS AND HIGH EXPENDITURE ON BRAND BUILDING AND SELLING & MARKETING EXPENSES; & (VI) HUGE EXPENDITURE ON R & D 9.2. THE DRP DISMISSED THE OBJECTIONS OF THE ASSESSEE WITHOUT MUCH DISCUSSION/DELIBERATION. 9.3. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIALS ON RECORD. THE ANNUAL REPORT/WEBSITE OF INFOSYS PROVIDES INFORMATION ON THE DIVERSE NATURE OF SERVICES PROVIDED BY IT AS INFOSYS IS THE LARGEST PUBLICLY HELD SOFTWARE DEVELOPMENT COMPANY IN INDIA. IT SERVICE PROFILE INCLUDES CONSULTING APPLICATION DESIGN, DEVELOPMENT , RE - ENGINEERING AND MAINTENANCE, SYSTEMS INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION, BUSINESS PROCESS MANAGEMENT. THE COMPANY HAS DIVERSE DOMAIN EXPERTISE IN AREAS SUCH AS ENGINEERING ENTERPRISES FINANCIAL SERVICES, HEALTHCARE, TECHNOLOGY, MANUFA CTURING, RETAIL AND DISTRIBUTION, TELECOM, TRANSPORTATION, UTILITIES AND ENERGY. UNLIKE THE ASSESSEE, INFOSYS IS EXTREMELY DIVERSIFIED AND UNDERTAKES A WIDE RANGE OF SERVICES APART FROM SOFTWARE DEVELOPMENT. SINCE THE REVENUE AND PROFITABILITY FOR SOFTWA RE DEVELOPMENT CANNOT BE ASCERTAINED FROM THE DATA IN THE ANNUAL REPORT, INFOSYS CANNOT BE INCLUDED AS COMPARABLE. MOREOVER, INFOSYS HAD, DURING THE FY 2005 - 06, EARNED ALMOST 49.8 % OF ITS SOFTWARE SERVICE INCOME FROM ONSITE SERVICES AS AGAINST THE ASSESS EE WHICH HAD EARNED ITS ENTIRE INCOME FROM PROVISION OF SERVICES OFFSHORE. NATURALLY, ONSITE 8 ITA NO. 5638 /DEL /201 0 ASSESSMENT YEAR: 200 6 - 20 07 SERVICES COMMAND HIGHER BILLABLE RATES AND, CONSEQUENTLY, INFOSYS CANNOT BE COMPARED WITH THE ASSESSEE WHICH EARNS ITS ENTIRE INCOME FROM OFFSHORE SERVICES. THE ANNUAL REPORT OF INFOSYS FURTHER PROVIDES THAT THE PROFITS DERIVED BY IT WERE PREDOMINANTLY DUE TO BRAND PROFITS SINCE IT OWNS A SUBSTANTIAL INTANGIBLE ASSETS VALUED AT INR 69,552 CRORES COMPRISING BRAND VALUE ITSELF AT INR 22,915 CRORES. FURTHER, INFOSY S UNDERTAKES SUBSTANTIAL RESEARCH & DEVELOPMENT ON ITS OWN ACCOUNT LEADING TO CREATION OF VALUABLE NON - ROUTINE IPRS.MOREOVER, THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. AGNITY INDIA TECHNOLOGIES (P) LTD REPORTED IN (2013) 219 TAXM AN 26 (D EL) HAD DIRECTED TO EXCLUDE INFOSYS TECHNOLOGIES LIMITED FROM THE LIST OF COMPARABLE ON ACCOUNT OF ITS GIANT - NESS WHICH WAS DECIDED ON CUMULATIVE FACTORS INCLUDING RISK PROFILE, NATURE OF SERVICE, TURNOVER, OWNERSHIP OF BRAND, ONSITE VERSUS OFFSHORE SERVIC E, EXPENDITURE ON R & D AND ADVERTISEMENT ETC., THEREFORE, FOR THE AFORE - SAID REASON, WE HOLD THAT INFOSYS TECHNOLOGIES LTD CANNOT BE HELD TO BE A COMPARABLE COMPANY TO THAT OF THE ASSESSEE AND, ACCORDINGLY, WE DIRECT THAT THE SAME IS TO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES FOR BENCHMARKING THE ASSESSEE S INTERNATIONAL TRANSACTION OF ITS SOFT - WARE SEGMENT. IT IS ORDERED ACCORDINGLY. NUCLEUS NETSOFT&GIS INDIA LTD [ITES SEGMENT] : 10. THIS COMPANY WAS INCLUDED AS COMPARABLE IN THE ASSESSEE S TP STUDY. THE ASSESSEE HAD NOT RAISED ANY OBJECTION AGAINST THE INCLUSION OF THE SAID COMPANY BEFORE THE TPO. FOR THE FIRST TIME, THE ASSESSEE RAISED OBJECTION AGAINST THE INCLUSION OF NUCLEUS NETSOFT&GIS INDIA LTD BEFO R E THE DRP WHICH WAS NOT SPECIFICALLY CONSIDERED BY THE DRP. 10.1. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. THOUGH THIS COMPANY WAS INCLUDED BY THE ASSESSEE ITSELF AS 9 ITA NO. 5638 /DEL /201 0 ASSESSMENT YEAR: 200 6 - 20 07 COMPARABLE, BUT, IN VIEW OF THE ORDER OF THE SPECIAL BENCH IN THE C ASE OF DCIT V. QUARK SYSTEMS (P) LTD REPORTED IN (2010) 132 TTJ (CHD) (SB), THE ASSESSEE CAN RESCIND FROM ITS EARLIER ADMISSION PROVIDED THE ASSESSEE IS ABLE TO POINT OUT ANY MATERIAL DIFFERENCE WITH THE ASSESSEE AND COMPARABLE COMPANIES AND SUITABLE ADJUS TMENT COULD NOT BE MADE TO IRON OUT THE DIFFERENCE. FROM THE PERUSAL OF THE ANNUAL REPORT OF NUCLEUS NETSOFT&GIS INDIA LTD, PRIMA FACIE, WE FIND THAT THE SAID COMPANY IS FUNCTIONAL LY DISSIMILAR TO THAT OF THE ASSESSEE ON ACCOUNT OF DIVERSIFIED OPERATION. MOREOVER, DURING THE RELEVANT FINANCIAL YEAR, NUCLEUS NETSOFT&GIS INDIA LTD UNDERWENT RESTRUCTURING EXERCISE ON ACCOUNT OF AMALGAMATION WHICH IMPACTED THE FINANCIAL STATEMENT OF THE COMPANY. HOWEVER, SINCE THE ASSESSEE HAD NEITHER RAISED ANY OBJECTION OF NUCLEUS NETSOFT&GIS INDIA LTD BEING INCLUDED AS COMPARABLE COMPANY BEFORE THE TPO NOR THE DRP CONSIDERED THE ASSESSEE S OBJECTION, WE DEEM IT APPROPRIATE IN THE INTERESTS OF NATURAL JUSTICE AND EQUITY TO RESTORE THIS ISSUE TO THE FILE OF TPO FOR CONSIDERA TION. IT IS ORDERED ACCORDINGLY. GROUND NO.4.5: 11. IN THIS GROUND, THE ASSESSEE RAISES THE ISSUE OF NOT GRANTING WORKING CAPITAL ADJUSTMENT BY THE TPO AND DRP . THE TPO DENIED THE ASSESSEE S CLAIM FOR WORKING CAPITAL ADJUSTMENT BY OBSERVING AS UNDER : 8.11. THE REQUISITE INFORMATION FOR MAKING THE WORKING CAPITAL ADJUSTMENT HAS NOT BEEN FURNISHED BY THE ASSESSEE IN THE CASE OF THE COMPARABLE. IT IS EVIDENT FROM ABOVE FINDINGS THAT THE ASSESSEE HAS NOT FURNISHED POSITION OF PAYABLES AND RECEIVABLES OF THESE COMPARABLE AT BEGINNING AND END OF THE YEAR. THE ASSESSEE HAS NOT MADE AVAILABLE BIFURCATION OF TRADE CREDITORS AND NON - TRADE CREDITORS AND TRADE DEBTORS AND CREDITORS OF THE COMPANY PERTAINING TO EACH SEGMENT. THESE FINDINGS CLEARLY PROVE THAT QUA LITY OF DATA AS USED BY THE ASSESSEE FOR WORKING CAPITAL ADJUSTMENT CANNOT BE RELIED UPON. THE AR FOR THE ASSSESSEE EVEN FAILED TO PROVIDE RELATABLE DOCUMENTATION FOR COMPARABILITY ADJUSTMENT. AS MENTIONED ABOVE IN PARA 7.5 OF THIS ORDER THAT OERCD DRAFT REPORT STIPULATES QUALITY OF DATA AND RELATABLE DOCUMENTATION AS ESSENTIAL REQUIREMENTS FOR COMPARABILITY ADJUSTMENT. HOWEVER, IN THIS CASE THE AR FOR THE ASSESSEE HAS FAILED TO FURNISH ABOVE CRITICAL INFORMATION NEEDED FOR MAKING REASONABLY ACCURATE WO RKING CAPITAL ADJUSTMENT AS STIPULATED 10 ITA NO. 5638 /DEL /201 0 ASSESSMENT YEAR: 200 6 - 20 07 UNDER RULE 10B (3)(II). ACCORDINGLY, THE CLAIM OF THE ASSESSEE FOR WORKING CAPITAL ADJUSTMENT CANNOT BE ACCEPTED. 8.12. THE OBJECTIVE OF THE ADJUSTMENTS TO ACCOUNTS RECEIVABLE (AR) AND ACCOUNTS PAYABLES (AP), ARE TO REMOVE THE INTEREST EMBEDDED IN THE AR/AP, ATTRIBUTABLE TO THE DIFFERENT LEVELS OF AR/AP, CARRIED BY THE COMPARABLE AND BY THE TESTED PARTY. SINCE THE ASSESSEE HAS REQUESTED FOR WORKING CAPITAL ADJUSTMENT, THE ONUS WAS ON THE ASSESSEE TO FURNISH EVIDENC E OF DIFFERENT CAPITAL INTENSITY AND COMPUTATION OF WORKING CAPITAL ADJUSTMENT WITH SUPPORTING EVIDENCE, HOWEVER, COMPUTATION OF WORKING CAPITAL ADJUSTMENT HAS NOT BEEN FURNISHED BY THE ASSESSEE AND THE QUANTUM OF WORKING CAPITAL ADJUSTMENT HAS NOT BEEN DE TERMINED BY IT, I AM NOT IN A POSITION TO OFFER SPECIFIC COMMENTS ON THE ADMISSIBILITY OF THE WORKING CAPITAL ADJUSTMENT DUE TO LACK OF REQUISITE INFORMATION ALONG WITH SUPPORTING EVIDENCES. IN VIEW OF THE ABOVE DISCUSSIONS, I REJECT THE CLAIM OF THE ASSE SSEE FOR WORKING CAPITAL ADJUSTMENT. 11.1. THE DRP HAD NOT GIVEN ANY ELABORATE REASONING FOR REJECTING THE ASSESSEE S PLEA FOR GRANT OF WORKING CAPITAL ADJUSTMENT. 11.2. WE HAVE DULY HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS ON RECORD. THE TPO HAD REJECTED THE ASSESSEE S CLAIM FOR WORKING CAPITAL ADJUSTMENT, PRIMARILY FOR THE REASON THAT THERE WAS NO ACCURATE OR SUFFICIENT DATA/WORKING GIVEN BY THE ASSESSEE TO MAKE RELIABLE WORKING CAPITAL ADJUSTMENT. THIS FINDING OF THE TPO HAS BEEN CONTES TED BY THE ASSESSEE BEFORE THE DRP. THE ASSESSEE CONTENDED THAT IT HAD WORKED OUT THE COMPUTATION FOR WORKING CAPITAL ADJUSTMENT WITH ACCURATE AND SUFFICIENT DATA AND ALSO IN ACCORDANCE WITH THE SETTLED ECONOMIC PRINCIPLE. THE RELEVANT PORTION OF THE ASS ESSEE S OBJECTION BEFORE THE DRP READS AS UNDER: IN THIS REGARD, SO AS TO EXPLICITLY/ INDISPUTABLY REBUT THE LEARNED TPO S CLAIM OF NON - AVAILABILITY OF SUFFICIENT AND ACCURATE DATA AND FOR YOUR HONOUR S READY REFERENCE, A COMPUTATION OF THE WORKING CAPI TAL ADJUSTED COST PLUS MARK - UP OF THE 35 COMP A RABLE COMPANIES IN THE CONTRACT SOFTWARE DEVELOPMENT SEGMENT AND 14 COMPARABLE COMPANIES IN THE IT ENABLED SERVICES SEGMENT, TO THE HOLDING DAYS OF THE ASSESSEE (AND ALSO THE UP - DATED UNADJUSTED MARK UP ON COST ON A WITHOUT PREJUDICE BASIS) AS SUBMITTED VIDE SUBMISSION DATED DECEMBER 23 , 2008 IS PROVIDED VIDE EXHIBIT 1 AND 2 RESPECTIVELY. ALSO THE WORKING CAPITAL ADJUSTED MARK UP ON COST OF THE 4 COMPANIES IN THE CONTRACT SOFTWARE DEVELOPMENT SERVICES SEGMENT AND 5 COMPANIES IN THE IT ENABLED SERVICES SEGMENT, SELECTED BY THE LEARNED TP O FOR DETERMINING THE ARM S LENGTH MARGIN IS ATTACHED HEREWITH AS EXHIBIT 3 AND 4 11 ITA NO. 5638 /DEL /201 0 ASSESSMENT YEAR: 200 6 - 20 07 RESPECTIVELY. THE SAID COMPUTATION DEMONSTRATES THAT NOT ONLY ACCURATE AND SUFFICIENT DATA IS INDEED AVAILABLE, BUT, ALSO THAT IT HAS BEEN APPLIED IN DUE ACCORDANCE WITH T HE SETTLED ECONOMIC PRINCIPLES. [SOURCE: P 71 & 72 OF PB] 11.3. AS MENTIONED EARLIER, THE DRP HAD NOT ELABORATELY CONSIDERED THE ASSESSEE S OBJECTION AND SINCE THE ASSESSEE HAS CONTESTED THE TPO S FINDING THAT NO ACCURATE AND SUFFICIENT DATA WAS AVA ILABLE TO MAKE RELIABLE WORKING CAPITAL ADJUSTMENT, WE DEEM IT APPROPRIATE TO RESTORE THIS ISSUE ON THE FILE OF THE T PO FOR DE NOVO CONSIDERATION. IT IS ORDERED ACCORDINGLY. GROUND NOS. 5.1, 5.2 & 5.3: 12. IN THE ABOVE GROUNDS, THE ASSESSEE HAS RAISED THE ISSUE OF RESTRICTING THE DEPRECIATION CLAIM TO 15% INSTEAD OF 60% ON COMPUTER PER I P H ERAL/ACCESSORIES. 12.1. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT MATERIALS ON RECORD. THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY TH E ORDER OF THE EARLIER BENCH OF THIS TRIBUNAL IN THE ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 2005 - 06 IN ITA NO.2198/11 DATED 27.9.2013. THE RELEVANT FINDINGS OF THE TRIBUNAL READ AS UNDER: 6. WITH THE ASSISTANCE OF LEARNED REPRESENTATIVE, WE HAVE GON E THROUGH THE RECORD CAREFULLY. THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF BSES RAJDHANI REPORTED IN _____ WHEREIN HON BLE HIGH COURT HAS HELD THAT DEPRECIATION ON COMPUTERS PERI PHERAL, NAMELY, UPS & PRINTERS WOULD BE ADMISSIBLE @ 60%. THE ITAT, CALCUTTA IN THE CASE OF SIMRONMAJUMDAR REPORTED IN 98 ID [ITD] 119 HAS ALSO HELD TO THIS EFFECT. LEARNED FIRST APPELLATE AUTHORITY HAS FOLLOWED TWO ORDERS OF THE ITAT, NAMELY, EXPADIATOR INTERNATIONAL INDIA PVT. LTD V. ADD L. CIT REPORTED IN 118 TTJ 652 AND ACIT VS. SIMCOM SYSTEM INDIA PVT. LTD TAKING INTO CONSIDERATION THE ORDER OF THE LEARNED CIT (APPEALS), IN THE LIGHT OF HON BLE HIGH COURT S DECISION IN THE CASE OF BSES RAJDHANI, WE DO NOT FIND ANY MERIT IN THIS GROUND OF APPEAL. IT IS REJECTED. 12 ITA NO. 5638 /DEL /201 0 ASSESSMENT YEAR: 200 6 - 20 07 12.2. IN THE LIGHT OF THE ABOVE ORDER OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEE S OWN CASE FOR THE AY 2005 - 06 (SUPRA), WE HOLD THAT THE ASSESSEE BE GRANTED DEPRECIATION AT TH E RATE OF 60% ON COMPUTER ACCESSORIES/PERIPHERALS. IT IS ORDERED ACCORDINGLY. 13. IN THE RESULT, THE ASSESSEE S APPEAL IS PARTLY ALLOWED AS INDICATED ABOVE. ( ORDER PRONOUNCED IN THE OPEN COURT ON D E C E M B E R 1 8 . 1 2 . 2014. ) S D / - S D / - ( R.S. SYAL ) (GEORGE GEORGE K.) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 1 8 / 1 2 / 2014. COPY FORWARDED TO 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST . REGISTRAR, ITAT, NEW DELHI
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