Aircom International (India) Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 5743/DEL/2011

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 2708 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 7 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-07-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 07-06-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 23-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Assessee Lawyers: SANDEEP S KARHAIL; NAGESHWAR RAO S
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Additional evidence; Wholly owned subsidiary; Revenue expenditure
• Section: 143(3); 133(6); 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER ITA NO.5743/DEL/2011 ASSESSMENT YEAR : 2007-08 AIRCOM INTERNATIONAL (INDIA) PVT. LTD., M-12, BALRAMA HOUSE, KARAMPURA COMMERCIAL COMPLEX, NEW DELHI. PAN: AADCA0915A VS. DCIT, CIRCLE-1(1), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI SANDEEP S. KARHAIL & SHRI NAGESHWAR RAO, ADVOCATES DEPARTMENT BY : SHRI AMRENDRA KUMAR, CIT, DR DATE OF HEARING : 26.07.2017 DATE OF PRONOUNCEMENT : 27.07.2017 ORDER PER R.S. SYAL, VP: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE FINAL ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER (A O) U/S 143(3) READ ITA NO.5743/DEL/2011 2 WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (HERE INAFTER ALSO CALLED THE ACT) ON 25.10.2011 IN RELATION TO THE ASSESSM ENT YEAR 2007-08. 2. THE FIRST ISSUE ASSAILED BEFORE US IS THE ADDITI ON OF RS.25,05,480/- MADE BY THE ASSESSING OFFICER IN RELATION TO THE IN TERNATIONAL TRANSACTION OF SOFTWARE DEVELOPMENT SERVICES. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS A 100% SUBSIDIARY OF AIRCOM INTERNATIONAL LTD., UK., ENGA GED IN THE BUSINESS OF SOFTWARE SOLUTIONS AND CONSULTANCY SERVICES IN THE AREA OF TELECOMMUNICATION INDUSTRY. THE ASSESSEE, AN INDIA N COMPANY, REPORTED CERTAIN INTERNATIONAL TRANSACTIONS IN FORM NO.3CEB. FOR THE PURPOSES OF TRANSFER PRICING ANALYSIS, THE ASSESSEE DIVIDED ITS BUSINESS INTO THREE BROADER CATEGORIES, VIZ., (I) SOFTWARE DEVELOPMENT; (II) SOFTWARE DEPLOYMENT, TRAINING, CONSULTANCY AND EQUIPMENT REN TAL; AND (III) SUPPORT SERVICES WHICH INCLUDE LICENCE FEE PAID AND SUPPORT AND MAINTENANCE FEES PAID. IN RESPECT OF SOFTWARE DEV ELOPMENT SERVICES, THE ASSESSEE USED TRANSACTIONAL NET MARGIN METHOD ( TNMM) AS THE MOST APPROPRIATE METHOD WITH PROFIT LEVEL INDICATOR (PLI) OF OPERATING ITA NO.5743/DEL/2011 3 PROFIT TO TOTAL COST (OP/TC). THE ASSESSEE COMPUTE D ITS OWN PLI AT 10.16% AS AGAINST THAT OF COMPARABLES AT 12.13% AND CLAIMED THAT THE INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES, TRANSACTED AT RS.4,20,56,439/-, WAS AT A RMS LENGTH PRICE (ALP). THE ASSESSING OFFICER (AO) MADE REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR THE DETERMINATION OF THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS. THE TPO DID NOT DI SPUTE THE CATEGORY- WISE ACCOUNTS DRAWN UP BY THE ASSESSEE IN THE ABOVE REFERRED THREE SEGMENTS AND WENT ON TO ANALYZE THE SAME. AS REGAR DS THE INTERNATIONAL TRANSACTIONS RELATING TO SOFTWARE DEVELOPMENT SERV ICES, THE TPO OBSERVED THAT THE ASSESSEE DEVELOPED SOME SOFTWARE TO BE USED AS INPUT FOR THE PRODUCT ENTERPRISE SUITE SOLD/LICENSED BY THE AIRCOM GROUP WORLDWIDE. THE ASSESSEE WAS BEING REMUNERATED ON C OST PLUS 10% MARK-UP. AS AGAINST THE ASSESSEES SELECTION OF 24 COMPANIES AS COMPARABLE, THE TPO, APPLYING CERTAIN FILTERS, REST RICTED THE NUMBER OF COMPARABLE COMPANIES TO FIVE. THEIR AVERAGE OP/TC WAS COMPUTED AT 28.33% WHICH, AFTER CARRYING OUT WORKING CAPITAL AD JUSTMENT, WAS REVISED TO 28.46%. BY APPLYING THIS AS ARMS LENGT H MARGIN, THE TPO ITA NO.5743/DEL/2011 4 WORKED OUT THE ALP OF THE `SOFTWARE DEVELOPMENT SER VICES RENDERED BY THE ASSESSEE AT RS.4.54 CRORE AND ODD. SINCE THE A SSESSEE DECLARED THE VALUE OF INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE SERVICES AT RS.4.20 CRORE, THE TPO WORKED OUT THE SHORTFALL, BE ING, THE AMOUNT OF TRANSFER PRICING ADJUSTMENT AT RS.34,04,363/-. THE ASSESSEE ASSAILED THE TPOS DETERMINATION OF THE ALP BEFORE THE DISPUTE R ESOLUTION PANEL (DRP). ONE COMPANY WAS EXCLUDED BY THE DRP. THE T PO, IN HIS ORDER GIVING EFFECT TO THE DIRECTION OF THE DRP, COMPUTED AVERAGE OP/TC OF THE REMAINING FOUR COMPANIES AT 25.80%. AFTER CARR YING OUT THE WORKING CAPITAL ADJUSTMENT, THE AVERAGE MEAN PLI OF FOUR COMPARABLE COMPANIES WAS COMPUTED AT 25.92%. TREATING THE SAM E AS A BENCHMARK, HE WORKED OUT TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.25,05,480/- IN THE SEGMENT OF SOFTWARE DEVELOPMENT SERVICES. THE ASSESSING OFFICER, IN HIS FINAL ASSESSMENT ORDER, MADE AN A DDITION FOR THIS SUM, AGAINST WHICH THE ASSESSEE HAS COME UP IN APPEAL BE FORE US. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE AS REGARDS THE APPLICATION OF ITA NO.5743/DEL/2011 5 TNMM AS THE MOST APPROPRIATE METHOD OR THE PLI FOR THE INTERNATIONAL TRANSACTION OF `PROVISION OF SOFTWARE DEVELOPMENT S ERVICES. SIMILARLY, THERE IS NO DISPUTE ABOUT THE ASSESSEES CALCULATIO N OF ITS OWN MARGIN FROM THE INTERNATIONAL TRANSACTION. THE ASSESSEE H AS RESTRICTED ITS CHALLENGE BEFORE US ONLY TO THE INCLUSION OF TWO CO MPANIES, NAMELY, KALS INFORMATION SYSTEMS LTD. (SEG.) AND SASKEN COM MUNICATION TECHNOLOGIES LTD. (SEG.). 5. BEFORE PROCEEDING TO CONSIDER THE COMPARABIL ITY OR OTHERWISE OF THE TWO COMPANIES, IT IS SINE QUA NON TO CONSIDER THE NATURE OF WORK PERFORMED BY THE ASSESSEE UNDER THIS SEGMENT. ON A SPECIFIC QUERY, IT WAS SUBMITTED BY THE LD. AR THAT NO SPECIFIC AGREEM ENT WAS ENTERED INTO BETWEEN THE ASSESSEE AND ITS AE FOR THE PROVISION O F SOFTWARE DEVELOPMENT SERVICES. MAKING A REFERENCE TO THE TR ANSFER PRICING STUDY REPORT, THE LD. AR BROUGHT TO OUR NOTICE THAT AIRCO M WAS ESTABLISHED IN 1995 IN UK BY A GROUP OF LEADING CELLULAR COMMUNICA TION SPECIALISTS TO SATISFY THE DEMANDS OF NETWORK OPERATORS AND INFRAS TRUCTURE SUPPLIERS FOR EXPERT MOBILE NETWORK ENGINEERING SERVICES AND SOFT WARE TOOLS. AIRCOM ITA NO.5743/DEL/2011 6 GROUP PROVIDES SOLUTIONS FOR THREE KEY AREAS VIZ., CONSULTING, SOFTWARE AND TRAINING. AIRCOM `ENTERPRISE SUITE IS A PC B ASED SOLUTION FOR ALL ASPECTS OF NETWORK ENGINEERING. IT INCLUDES TOO LS FOR RADIO PLANNING, BACKHAUL/CORE PLANNING AND PERFORMANCE ENGINEERING AND CONFIGURATION MANAGEMENT. ENTERPRISE SUITE OFFERS THE ADVANTAGE OF SEAMLESS WORKING MANAGEMENT BETWEEN DISCIPLINES THROUGHOUT T HE ORGANIZATION AND AVOIDS THE DATA TRANSFER PROBLEMS. AIRCOM HAS A TOTAL OF ALMOST 150 SOFTWARE CUSTOMERS OF WHICH NEARLY 75 ARE LEADING N ETWORK OPERATORS COMING FROM 50 COUNTRIES AROUND THE WORLD. THE ASS ESSEE DEVELOPS SOFTWARE AS PER THE REQUIREMENTS OF AIRCOM, UK, WHI CH IS DONE ON THE SERVER OF AIRCOM, UK. SOFTWARE DEVELOPED BY THE AS SESSEE ACT AS INPUTS FOR THE ENTERPRISE SUITE OF PRODUCTS WHICH ARE SOLD /LICENSED BY THE AIRCOM GROUP WORLD-WIDE. THE FUNCTIONS PERFORMED B Y THE ASSESSEE INCLUDE DESIGN OF THE SOFTWARE AND ITS DEVELOPMENT. WITH THE ABOVE BACKDROP OF THE NATURE OF ACTIVITIES CARRIED OUT BY THE ASSESSEE UNDER THE PROVISIONS OF SOFTWARE DEVELOPMENT SERVICES SEGME NT, LET US SEE THE COMPARABILITY OR OTHERWISE OF THE TWO COMPANIES ASS AILED BEFORE US. ITA NO.5743/DEL/2011 7 6. AT THIS JUNCTURE, WE WOULD LIKE TO DEAL WITH THE PRELIMINARY OBJECTION TAKEN UP BY THE LD. DR. IT WAS SUBMITTED THAT BOTH THE COMPANIES, NAMELY, KALS INFORMATION SYSTEMS LTD. ( SEG.) AND SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG.) WERE CHOSEN BY THE ASSESSEE ITSELF AS COMPARABLE. HAVING DONE SO, IT WAS CONT ENDED THAT THE ASSESSEE CANNOT NOW TURN AROUND AND SEEK EXCLUSION OF THESE COMPANIES BEFORE THE TRIBUNAL. 7. WE ARE DISINCLINED TO SUSTAIN THE PRELIMINARY OBJECTION TAKEN BY THE LD. DR THAT THE ASSESSEE SHOULD BE PROHIBITED F ROM TAKING A STAND CONTRARY TO THE ONE WHICH WAS TAKEN AT THE STAGE OF THE TP STUDY OR DURING THE COURSE OF PROCEEDINGS BEFORE THE TPO. IT GOES WITHOUT SAYING THAT THE OBJECT OF ASSESSMENT IS TO DETERMINE THE I NCOME IN RESPECT OF WHICH THE ASSESSEE IS RIGHTLY CHARGEABLE TO TAX. AS THE INCOME NOT ORIGINALLY OFFERED FOR TAXATION, IF OTHERWISE CHARG EABLE, IS REQUIRED TO BE INCLUDED IN THE TOTAL INCOME, IN THE SAME BREATH, A NY INCOME WRONGLY INCLUDED IN THE TOTAL INCOME, WHICH IS OTHERWISE NO T CHARGEABLE, SHOULD BE EXCLUDED. THERE CAN BE NO ESTOPPEL AGAINST THE P ROVISIONS OF THE ACT. ITA NO.5743/DEL/2011 8 EXTENDING THIS PROPOSITION FURTHER TO THE CONTEXT O F THE TRANSFER PRICING, IF THE ASSESSEE FAILS TO REPORT AN OTHERWISE COMPAR ABLE CASE, THEN THE TPO IS OBLIGED TO INCLUDE IT IN THE LIST OF COMPARA BLES, AND IN THE SAME MANNER, IF THE ASSESSEE WRONGLY REPORTED AN INCOMPA RABLE CASE AS COMPARABLE IN ITS TP STUDY AND THEN LATER ON CLAIMS THAT IT SHOULD BE EXCLUDED THEN, THERE SHOULD BE NOTHING TO FORBID TH E ASSESSEE FROM CLAIMING SO, PROVIDED THE COMPANY SO ORIGINALLY RE PORTED AS COMPARABLE IS, IN FACT, NOT COMPARABLE. SIMPLY BECAUSE A COMP ANY WAS WRONGLY CHOSEN BY THE ASSESSEE AS COMPARABLE, CANNOT TIE HI S HANDS IN CONTENDING BEFORE THE TRIBUNAL THAT A PARTICULAR COMPANY WAS W RONGLY CONSIDERED AS COMPARABLE WHICH IS, IN FACT, NOT. THERE IS NO DIF FERENCE IN THE SITUATION WHERE THE ASSESSEE CLAIMS THAT A WRONG COMPANY INAD VERTENTLY INCLUDED FOR THE PURPOSE OF COMPARISON SHOULD BE EXCLUDED AN D THE SITUATION IN WHICH THE REVENUE DOES NOT ACCEPT A PARTICULAR COMP ANY CHOSEN BY THE ASSESSEE AS COMPARABLE. THE UNDERLYING OBJECT OF T HE ENTIRE EXERCISE IS TO DETERMINE THE ARMS LENGTH PRICE OF AN INTERNATI ONAL TRANSACTION. SIMPLY BECAUSE A COMPANY WAS WRONGLY CONSIDERED BY THE ASSESSEE AS COMPARABLE, CANNOT, ACT AS A DETERRENT FROM CHALLEN GING THE FACT THAT THIS ITA NO.5743/DEL/2011 9 COMPANY IS, IN FACT, NOT COMPARABLE. THE SPECIAL BENCH OF THE TRIBUNAL IN DCIT VS. QUARK SYSTEMS PVT. LTD. (2010) 132 TTJ (CH D) (SB) 1 HAS HELD THAT A CASE WHICH WAS INCLUDED BY THE ASSESSEE AND ALSO BY THE TPO IN THE LIST OF COMPARABLES AT THE TIME OF COMPUTING ALP, CAN BE EXCLUDED BY THE TRIBUNAL, IF THE ASSESSEE PROVES TH AT THE SAME WAS WRONGLY INCLUDED. SIMILAR VIEW HAS BEEN UPHELD BY T HE HON'BLE DELHI HIGH COURT IN XCHANGING TECHNOLOGY SERVICES INDIA PVT LTD [TS-446 - HC-2016(DEL)-TP]. THE HONBLE BOMBAY HIGH COURT IN TATA POWER SOLAR SYSTEMS LTD [TS-1007-HC-2016(BOM)-TP] AND THE HONBLE PUNJAB & HARYANA HIGH COURT IN CIT VS. MERCER CONSULTING (INDIA) P. LTD. (2017) 390 ITR 615 (P&H) HAVE ALSO APPROVED SIMILAR VIEW. IN VIEW OF THE FOREGOING DISCUSSION, WE DO NOT FIND AN Y SUBSTANCE IN THE PRELIMINARY OBJECTION TAKEN BY THE LD. DR. 8. NOW WE ESPOUSE BOTH THE COMPANIES IN SERIATIM FOR CONSIDERATION AS TO THEIR COMPARABILITY OR OTHERWISE. ITA NO.5743/DEL/2011 10 (I) KALS INFORMATION SYSTEMS LTD. (SEG.) 9.1. BASED ON THE CURRENT YEAR DATA THEN AVAILABLE IN PUBLIC DOMAIN AT THE STAGE OF PROCEEDINGS BEFORE THE TPO, THE ASSESS EE SUBMITTED THAT THIS COMPANY IS PRIMARILY A SOFTWARE PRODUCT COMPANY. F OR THIS PROPOSITION, THE ASSESSEE RELIED ON THE WEBSITE OF THE COMPANY. THE TPO CALLED FOR INFORMATION U/S 133(6) FROM THIS COMPANY, WHICH WAS REPLIED AS UNDER:- PARA 3 OF YOUR LETTER: THE CORE OF OUR BUSINESS MAY BE CLASSIFIED AS THAT OF PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER. IN ESSENCE WE GET PR OJECT (SOFTWARE DEVELOPMENT) ORDERS FROM OUR CLIENTS DRAWN FROM VAR IOUS VERTICALS SUCH AS INSURANCE, TELECOM, MANUFACTURING, ETC. WE EXEC UTE THE PROJECT THROUGH THE ENTIRE SDLC (SOFTWARE DEVELOPMENT LIFE CYCLE) IN MOST CASES I.E., STARTING FROM DESIGN TO DELIVERY, TES TING AND TRAINING. IN SOME INSTANCES ESPECIALLY IN THE INSURANCE VERTICAL WE USE READY MADE OBJECT LIBRARIES (CODE THAT IS ALREADY WRITTEN) AND BUILD CUSTOMIZED PORTIONS ON THE TOP OF THAT. THE USE OF READY MADE OBJECT LIBRARIES IS ONLY TO THE TUNE OF ABOUT (0.33 TO 3)% IN THE YEAR OF 2005-06 AND 2006- 07. THESE APART WE HAVE A SMALL AMOUNT OF REVENUE FROM DOMESTIC TRAINING ACTIVITIES CONTRIBUTING BETWEEN 0.7% TO 8.56% IN TH E YEAR 2005-06 AND 2006-07. 9.2. ON THE BASIS OF THE ABOVE, THE TPO CAME TO HO LD THAT THE SOFTWARE PRODUCTS CONSTITUTE ONLY 3% OF ITS REVENUE S AND TRAINING CONSTITUTES ONLY 8.56%. THUS THE REVENUES FROM SOFT WARE ITA NO.5743/DEL/2011 11 DEVELOPMENT SERVICES CONSTITUTE MORE THAN 88% OF TH E TOTAL OPERATING REVENUE AND HENCE IT QUALIFIES TO BE INC LUDED IN THE LIST OF COMPARABLES. 9.3. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE ENTIRE PREMISE OF THE TPOS INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLE S IS THAT THE SOFTWARE PRODUCTS CONSTITUTE ONLY 3% OF ITS REVENUE. THIS I NFERENCE HAS BEEN DRAWN ON THE BASIS OF THE INFORMATION SUPPLIED BY T HIS COMPANY STATING: THE USE OF READYMADE OBJECT LABORATORIES IS ONLY T O THE TUNE OF ABOUT (0.33 TO 3) % IN THE YEAR 2005-06 AND 2006-07. W E FAIL TO COMPREHEND AS TO HOW THE ABOVE LINE CONVEYS THAT THE SOFTWARE PRODUCTS REVENUE STANDS AT 3%. WHAT HAS BEEN WRITTEN IS THAT THE CO MPANYS USE OF THE READYMADE OBJECT LABORATORIES IS ONLY TO THE TUNE O F MAXIMUM 3%. BY NO IMAGINATION THIS CAN BE CONSTRUED AS REVENUES FR OM SOFTWARE PRODUCTS. WHEN WE PERUSE THE ANNUAL REPORT OF THIS COMPANY, WHICH IS AVAILABLE IN THE PAPER BOOK, IT CAN BE SEEN THAT TH ERE IS NO SUCH MENTION OF SOFTWARE PRODUCTS REVENUE LIMITED TO 3%. ON THE CONTRARY, IT HAS BEEN ITA NO.5743/DEL/2011 12 MENTIONED IN THE NOTES TO THE FINANCIAL STATEMENT T HAT: THE COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE AND SOFTWARE PRO DUCTS SINCE ITS INCEPTION. THE COMPANY CONSISTING OF STPI UNIT IS ENGAGED IN SOFTWARE PRODUCTS AND DEVELOPMENT OF SOFTWARE AND IS ALSO UN DERTAKING TRAINING ACTIVITY OF SOFTWARE PROFESSIONALS ON ONLINE PROJEC TS. NOT ONLY THE REVENUES OF THE SEGMENT CONSIDERED BY THE TPO ALSO INCLUDE THE REVENUE FROM SOFTWARE PRODUCTS, BUT ALSO FROM TRAINING IMPA RTED ON COMMERCIAL BASIS. IT IS CLEAR THAT THE ASSESSEE IS NOT PROVID ING ANY TRAINING UNDER THIS SEGMENT, WHICH HAS BEEN RATHER INCLUDED BY THE ASSE SSEE IN THE SECOND CATEGORY OF THE ASSESSEES BUSINESS, NAMELY, SOFTW ARE DEPLOYMENT, TRAINING, CONSULTANCY AND EQUIPMENT RENTAL. SINCE THE ASSESSEES ACTIVITY UNDER THIS SEGMENT DOES NOT INCLUDE ANY RE VENUE FROM TRAINING, BUT THE REVENUE OF KALS INFORMATION SYSTEMS LTD., F OR THE PURPOSE OF COMPARISON INCLUDES INCOME FROM TRAINING, THIS COMP ANY CEASES TO BE COMPARABLE WITH THE ASSESSEES SEGMENT OF `SOFTWAR E DEVELOPMENT SERVICES. SIMILAR VIEW HAS BEEN TAKEN BY THE TRIB UNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2006-07, A COPY OF WHOSE ORDER HAS BEEN MADE AVAILABLE ON RECORD. AFTER MAKING ELABOR ATE DISCUSSION ON ITA NO.5743/DEL/2011 13 THE ISSUE, THE TRIBUNAL, IN PARA 16, HAS CONCLUDED THAT KALS INFORMATION SYSTEMS LTD. (SEG.) IS NOT COMPARABLE WITH THE ASSE SSEES SEGMENT OF SOFTWARE DEVELOPMENT SERVICES. IN REACHING THIS CO NCLUSION, THE TRIBUNAL ALSO RELIED ON THE DECISION OF THE DELHI BENCH OF T HE TRIBUNAL IN TOLUNA INDIA (P) LTD. VS. ACIT (2014) 151 ITD 177 (DEL ). RESPECTFULLY FOLLOWING THE PRECEDENTS, WE HOLD THAT KALS INFORMA TION SYSTEMS LTD. (SEG.) SHOULD BE EXPUNGED FROM THE SET OF COMPARABL ES. (II) SASKEN COMMUNICATION TECHNOLOGIES LTD. 10.1. THIS COMPANY WAS INCLUDED BY THE ASSESSE E IN ITS LIST OF COMPARABLES. THE TPO CHANGED THE MARGIN OF THIS CO MPANY. THE ASSESSEES CONTENTION ABOUT THE INCORRECT COMPUTATI ON OF THE MARGIN WAS TURNED DOWN BY THE TPO. THAT IS HOW THIS COMPANY W AS FINALLY INCLUDED IN THE LIST OF COMPARABLES. NOW, THE ASSE SSEE ASSAILS THE SUO MOTU INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABL ES. THE LD. AR CONTENDED THAT THIS COMPANY WAS WRONGLY CONSIDERED AS COMPARABLE AND, HENCE, SHOULD BE EXCLUDED ON THE PREMISE THAT CERTAIN ACQUISITIONS ITA NO.5743/DEL/2011 14 TOOK PLACE DURING THE RELEVANT YEAR IN RELATION TO THIS COMPANY AND THAT IS THE REASON FOR WHICH ITS PROFITABILITY FIGURES GOT SKEWED. 10.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE FINAN CIAL RESULTS OF THIS COMPANY STAND DISTORTED DUE TO CERTAIN ACQUISITIONS MADE BY IT DURING THE RELEVANT YEAR. IT IS EVIDENT FROM THE ANNUAL R EPORT OF THIS COMPANY WHICH IS AVAILABLE IN THE PAPER BOOK. IT HAS BEEN CATEGORICALLY MENTIONED IN ITS ANNUAL REPORT THAT DURING THE YEAR THIS COMPANY ACQUIRED BOTNIA HITECH OY, FINLAND AND ITS TWO WHOL LY OWNED SUBSIDIARIES. IT HAS ALSO BEEN STATED IN THE SAME PARA THAT DURING THE YEAR THE COMPANY ALSO SUCCESSFULLY COMPLETED THREE MERGE RS, NAMELY, SASKEN NETWORK SYSTEMS LTD., AND INTEGRATED SOFTTECH SOLUT IONS PVT. LTD., THE TWO INDIAN BASED WHOLLY OWNED SUBSIDIARIES WHICH ME RGED WITH THE ASSESSEE. THUS, IT IS ABUNDANTLY PATENT THAT THE S EGMENTAL RESULTS TAKEN BY THE TPO OF THIS COMPANY HAVE BEEN INFLUENCED BY THE MERGERS AND ACQUISITIONS TAKING PLACE DURING THE YEAR, THEREBY MAKING SUCH FINANCIAL RESULTS AS INCOMPARABLE. ITA NO.5743/DEL/2011 15 10.3. THE MUMBAI BENCH OF THE TRIBUNAL IN PETRO ARALDITE (P) LTD. VS. DCIT (2013) 154 TTJ (MUM) 176, HAS HELD THAT A COMPANY CANNOT BE CONSIDERED AS COMPARABLE BECAUSE OF EXCEPTIONAL FIN ANCIAL RESULTS DUE TO MERGERS/DEMERGERS. SIMILAR VIEW HAS BEEN BOLSTERED BY THE DELHI BENCH OF THE TRIBUNAL IN SEVERAL CASES INCLUDING CIENA INDIA PVT. LTD. VS. DCIT (ITA NO.3324/DEL/2013) VIDE ITS ORDER DATED 23.4.20 15. IN VIEW OF THE FACT THAT THERE WERE MERGERS DURING THE YEAR, WE HO LD THAT THIS COMPANY CANNOT BE CONSIDERED AS COMPARABLE DUE TO THESE EXT RA-ORDINARY FINANCIAL EVENTS. ACCORDINGLY, THE SAME IS DIRECTED TO BE EX CLUDED FROM THE FINAL LIST OF COMPARABLES. 11. THE NEXT ISSUE RAISED IN THIS APPEAL IS AGAINST THE TRANSFER PRICING ADJUSTMENT IN RELATION TO INTRA-GROUP SERVICES. TH E ASSESSEE PAID A SUM OF RS.67 LAC AND ODD AS MANAGEMENT FEES, WHICH WAS CLAIMED AS PAYMENT TO AES ON COST TO COST BASIS. ON BEING CAL LED UPON TO FURNISH THE DETAILS OF SUCH EXPENSES, THE ASSESSEE SUBMITTE D THAT THIS INCLUDE IT CHARGES; GENERAL MANAGEMENT, FINANCE, LEGAL & CONSU LTING SUPPORT; AND SALES AND MARKETING & TRAINING SUPPORT. THE TP O EXAMINED THE ITA NO.5743/DEL/2011 16 ABOVE THREE BROAD CATEGORIES OF SERVICES CLAIMED TO HAVE BEEN AVAILED BY THE ASSESSEE AND OBSERVED THAT THE SERVICES WERE EI THER NOT RECEIVED OR WERE DUPLICATE IN NATURE. THAT IS HOW, HE DETERMIN ED NIL ALP OF THE INTERNATIONAL TRANSACTION OF PAYMENT TO AES AMOUNTI NG TO RS.67,09,033/- THE ASSESSEE IS AGGRIEVED AGAINST THE ADDITION THUS MADE BY THE ASSESSING OFFICER IN HIS FINAL ORDER ON THIS SCORE. 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE HAS FILED A SEPARA TE PAPER BOOK CONTAINING MORE THAN 400 PAGES WHICH ARE IN THE NAT URE OF ADDITIONAL EVIDENCE. THE LD. AR CONTENDED THAT SUCH DETAILS A BOUT THE AVAILING OF INTRA-GROUP SERVICES WERE NOT AVAILABLE AT THE RELE VANT TIME AND THE SAME MAY BE TAKEN INTO CONSIDERATION AT THIS STAGE. FOR TIFYING THE INCURRING OF ACTUAL EXPENSES WHICH ARE NOT DUPLICATE IN NATURE, THE LD. AR CONTENDED THAT THE ADDITIONAL EVIDENCE WILL PROVE THE FACTUM OF HAVING AVAILED SUCH SERVICES. IN VIEW OF THE FACT THAT SUCH ADDITIONAL EVIDENCE COULD NOT BE CONSIDERED BY THE TPO/ASSESSING OFFICER, WE CONSIDE R IT EXPEDIENT TO SET ASIDE THE IMPUGNED ORDER ON THIS SCORE AND REMIT TH E MATTER TO THE FILE OF ITA NO.5743/DEL/2011 17 ASSESSING OFFICER/TPO FOR RE-DECIDING IT, AFTER CON SIDERING THE ADDITIONAL EVIDENCE FILED BY THE ASSESSEE. 13. TO SUM UP, WE SET ASIDE THE IMPUGNED ORDER ON T HE ISSUE OF TWO ADDITIONS TOWARDS TRANSFER PRICING ADJUSTMENTS AND REMIT THE MATTER TO THE FILE OF AO/TPO FOR FRESH DETERMINATION OF THE A LP OF THESE INTERNATIONAL TRANSACTIONS IN CONSONANCE WITH OUR A BOVE DIRECTIONS. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REA SONABLE OPPORTUNITY OF BEING HEARD IN SUCH FRESH PROCEEDINGS. 14. THE NEXT ISSUE IS AGAINST ALLOWING DEPRECIATION ON COMPUTER PERIPHERALS AT 15% INSTEAD OF 60% CLAIMED BY THE AS SESSEE. THE FACTS APROPOS THIS ISSUE ARE THAT THE ASSESSEE CLAIMED DE PRECIATION OF RS.102,84,775/- ON COMPUTERS. SUCH DEPRECIATION WA S CLAIMED @ 60%. THE ASSESSING OFFICER CALLED FOR THE DETAILS OF THE ASSETS PURCHASED, ON WHICH SUCH DEPRECIATION WAS CLAIMED. THE ASSESSEE FURNISHED THE DETAILS. RELYING ON CERTAIN DECISIONS, THE ASSESSE E CONTENDED THAT THE DEPRECIATION SHOULD BE ALLOWED @ 60%. THE ASSESSIN G OFFICER DID NOT DISPUTE THAT SOME OF THE ITEMS LIKE UPS, SWITCHES, MICROWAVE, RADIO, ITA NO.5743/DEL/2011 18 CAMERA, CABLE, PORT AND CONNECTORS, ETC., WERE IN T HE NATURE OF COMPUTER PERIPHERALS NOT HAVING A STAND-ALONE APPL ICATION. HE HELD SUCH ITEMS AS ELIGIBLE FOR DEPRECIATION @ 60%. HOWEVER, AS REGARDS PRINTERS, SCANNERS AND NT SERVERS, THE ASSESSING OFFICER HELD THEM AS NOT COMPUTER PERIPHERALS. BIFURCATION WAS MADE OF THE TOTAL AMOUNT OF DEPRECIATION CLAIMED BY THE ASSESSEE ON COMPUTERS. THE FIRST PART TREATED BY HIM AS COMPUTER PERIPHERALS, WAS SUBJECT ED TO DEPRECIATION @ 60% AND THE OTHER PART CONSISTING OF PRINTERS, SCAN NERS AND NT SERVERS WAS ALLOWED DEPRECIATION @ 15%. THIS LED TO AN ADD ITION OF RS.16,92,047/-. THE ASSESSEE IS IN APPEAL AGAINST THIS ADDITION. 15. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT CAN BE SEEN THAT THE ASSESS ING OFFICER HIMSELF ALLOWED DEPRECIATION @ 60% ON CERTAIN ITEMS BY TREA TING THEM AS COMPUTER PERIPHERALS. THE TEST FOR THE HIGHER DEPRE CIATION SEEMS TO HAVE BEEN THE NON STAND-ALONE APPLICATION OF THE ITEMS. THE HON'BLE DELHI HIGH COURT IN CIT VS. BSES YAMUNA POWERS LTD. (2010) TIOL-636-HC- DEL-IT , HAS HELD THAT ROUTERS AND SWITCHES CAN BE CLASSIF IED AS ITA NO.5743/DEL/2011 19 COMPUTERS AND, HENCE, ENTITLED TO HIGHER DEPRECIATI ON @ 60%. SIMILAR VIEW HAS BEEN TAKEN BY THE SPECIAL BENCH OF THE TRI BUNAL IN DCIT VS. DATA CRAFT INDIA LTD. (2010) 133 TTJ (MUM) (SB) 377 . IN VIEW OF THE ABOVE DECISIONS, IT IS CLEAR THAT THE ITEMS OF COMP UTER PERIPHERALS, WHICH WORK IN TANDEM WITH COMPUTERS, CAN BE RIGHTLY CLASS IFIED AS COMPUTER FOR THE PURPOSE OF GRANTING DEPRECIATION AT THE ENH ANCED RATE. THE ITEMS TAKEN NOTE OF BY THE ASSESSING OFFICER FOR NOT GRAN TING HIGHER RATE OF DEPRECIATION ARE PRINTERS, SCANNERS AND NT SERVERS. THESE ITEMS TOO DO NOT HAVE ANY STAND ALONE APPLICATION DE HORS COMPUTERS. GOING BY THE RATIO DECIDENDI OF THE ABOVE DECISIONS, WE HOLD THAT THESE ITEMS AR E ALSO ELIGIBLE FOR DEPRECIATION @ 60%. THE ADDITION THUS MADE IS HEREBY DELETED. 16. THE LAST ISSUE RAISED IN THIS APPEAL IS AGAINST THE ADDITION OF RS.67,52,517/- MADE BY THE ASSESSING OFFICER TOWARD S LICENCE EXPENSES. THE FACTUAL MATRIX OF THIS ISSUE IS THAT THE ASSESSEE DEBITED A SUM OF RS.90.03 LAC IN ITS PROFIT & LOSS ACCOUNT AS LICENCE EXPENSES. ON BEING REQUIRED TO FURNISH THE DETAILS OF SUCH EX PENSES, THE ASSESSEE ITA NO.5743/DEL/2011 20 SUBMITTED THAT AS PER THE AGREEMENT WITH ITS AE, TH E ITP CHARGES WERE TO BE PAID BY THE SUBSIDIARY TO THE PARENT COMPANY @ 4 5% OF THE TOTAL SALE VALUE OF SOFTWARE AND SUPPORT AND MAINTENANCE CHARG ES. TREATING THIS AMOUNT PAID BY THE ASSESSEE TO ITS AE AS AN INTANGI BLE ASSET, THE ASSESSING OFFICER ALLOWED DEPRECIATION @ 25% AND MA DE ADDITION FOR THE REMAINING SUM OF RS.67.52 LAC, AGAINST WHICH T HE ASSESSEE HAS COME UP IN APPEAL BEFORE US. 17. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL ON RECORD, IT IS NOTICED THAT AIRCOM, UK, OFFERS SOLUTION FOR NETWORK ENGINEERING REQUIREMENTS WITH ITS SOFTWARE, NAMELY, `ENTERPRISE SUITE, WHICH IS A SOLUTION FOR ALL ASP ECTS OF NETWORK ENGINEERING. APART FROM DIRECTLY LICENSING ENTERPR ISE SUITE BY AIRCOM, UK, THE ASSESSEE ALSO SELLS THE SOFTWARE IN THE DOMESTIC MARKET SINCE THE INTELLECTUAL PROPERTY RIGHTS RELATING TO ENTERPRISE SUITE VEST IN AIRCOM, UK, THE ASSESSEE ENTERED INTO CONTR ACT WITH AIRCOM, UK TO SELL THIS PRODUCT DIRECTLY IN THE DOMESTIC MARKE T. AS A QUID PRO QUO , THE ASSESSEE AGREED TO SHARE A PERCENTAGE OF SALE P RICE TO AIRCOM, UK. ITA NO.5743/DEL/2011 21 CLAUSE (1) OF THE AGREEMENT PROVIDES THAT: ITP CHA RGES TO BE PAID BY THE SUBSIDIARY TO THE PARENT COMPANY @ 45% OF THE T OTAL SALE VALUE OF SOFTWARE AND SUPPORT AND MAINTENANCE CHARGE. PURSU ANT TO THIS AGREEMENT, THE ASSESSEE RAISED INVOICES ON CERTAIN CUSTOMERS IN INDIA INCLUDING IDEA CELLULAR LTD. FOR UPGRADATION OF AIR COM TOOLS. COPIES OF SOME OF THE INVOICES HAVE BEEN PLACED ON PAGES 779 TO 783 OF THE PAPER BOOK. THE INVOICE VALUE HAS BEEN SHOWN AS ITS INCO ME AND THE AMOUNT PAID TO ITS AE HAS BEEN SHOWN AS LICENCE FEE IN ITS ANNUAL ACCOUNTS. WE ARE AT LOSS TO APPRECIATE AS TO HOW THE ASSESSEE CA N BE SAID TO HAVE CREATED AN `INTANGIBLE ASSET BY PAYING THE LICENC E FEE TO ITS AE IN RESPECT OF SALES MADE. SUCH PAYMENT @ 45% OF THE INVOICE VALUE WAS THE OBLIGATION OF THE ASSESSEE AB INITIO WITHOUT WHICH IT COULD NOT HAVE PROCURED THE LICNENCE OF ENTERPRISE SUITE FOR SALE IN INDIA. THIS AMOUNT CAN BE LOOSELY CHARACTERIZED AS COST OF GOOD S TRANSFERRED TO THE CUSTOMERS IN INDIA, WHICH HAS NECESSARILY TO BE AL LOWED AS A REVENUE EXPENDITURE. WE, THEREFORE, OVERTURN THE IMPUGNED ORDER ON THIS SCORE AND DIRECT THE DELETION OF ADDITION OF RS.67.52 LAC MADE BY THE ASSESSING OFFICER. ITA NO.5743/DEL/2011 22 18. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 27.07.201 7. SD/- SD/- [BEENA A. PILLAI] [R.S. SYAL] JUDICIAL MEMBER VICE PRESIDENT DATED, 27 TH JULY, 2017. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.