EGain Communications Pvt. Ltd., Pune V. ITO, Ward 1(4), Pune

ITA 599/PUN/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 93901 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 4 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-07-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 07-07-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 05-03-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3); 10B; 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A , PUNE , . . , BEFORE MS. SUSHMA CHOWLA , JM AND SHRI R.K. PANDA , AM ITA NO. 59 9/PN/201 3 ASSESSMENT YEAR : 200 7 - 08 EGAIN COMMUNICATIONS PVT. LTD., OFFICE NO.702, 7 TH FLOOR, B - 1, THE CEREBRUM IT PARK, VADGAON SHERI, KALYANI NAGAR, PUNE 411 014 . PAN: AAAC N9946R . APPELLANT VS. THE INCOME TAX OFFICER , WARD 1(4), PUNE . . RESPONDENT ITA NO. 813 /PN/201 3 ITA NO. 813 /PN/201 3 ASSESSMENT YEAR : 20 07 - 08 THE INCOME TAX OFFICER, WARD 1(4), PUNE. . APPELLANT VS. EGAIN COMMUNICATIONS PVT. LTD., OFFICE NO.702, 7 TH FLOOR, B - 1, THE CEREBRUM IT PARK, VADGAON SHERI, KALYANI NAGAR, PUNE 411 014. PAN: AAAC N9946R . RESPONDENT ASSESSEE BY : S/ SHRI VIJAY MEHTA & SHARAD JAIN DEPARTMENT BY : SHRI RAJESH DAMOR / DATE OF HEARING : 21 .0 4 .2015 / DATE OF PRONOUNCEMENT: 15 . 0 7 .2015 2 ITA NO. 599 /PN/201 3 ITA NO. 813 /PN/201 3 / ORDER PER SUSHMA CHOWLA, JM : THE CROSS - APPEALS FILED BY THE ASSESSEE AND THE REVENUE ARE AGAINST THE ORDER OF CIT(A) - IT/TP , PUNE, DATED 10.01.2013 RELATING TO ASSESSMENT YEAR 20 0 7 - 08 PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 . 2. THE CROSS - APPEALS FILED BY THE ASSESSEE AND THE REVENUE WERE HEARD TOGETHER AND ARE BEING DISPOSED - OFF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 3 . THE ASSESSEE IN ITS APPEAL HAS RAISED THE FOLLOWING GROUNDS OF APPEAL : - EACH OF THE GROUNDS (AND SUB - GROUNDS) OF APPEAL IS MUTUALLY EXCLUSIVE OF, INDEPENDENT AND WITHOUT PREJUDICE TO OTHER. 1. THE LD. CIT(A) GROSSLY ERRED, IN FACTS AND IN LAW, IN UPHOLDING THE REJECTION OF FOLLOWING FOUR (4) COMPANIES OUT OF TOTAL SET OF 11 C OMPARABLE COMPANIES SELECTED BY THE APPELLANT FOR ASCERTAINING OF ARMS LENGTH PRICE EVEN WHEN THEY WERE FUNCTIONALLY COMPARABLE COMPANIES; BIRLA TECHNOLOGIES LIMITED CG - VAK SOFTWARE & EXPORTS LIMITED INDIUM SOFTWARE (INDIA) LIMITED MELSTAR INFORMATION T ECHNOLOGIES LIMITED 2. THE LEARNED CIT(A) GROSSLY ERRED, IN FACTS AND IN LAW, IN UPHOLDING THE ACTION OF TRANSFER PRICING OFFICER ('TPO') ASSESSING OFFICER ('AO') OF NOT GRANTING APPELLANT'S CLAIM FOR ADJUSTMENT FOR MATERIAL DIFFERENCES IN THE RISK PROFILE OF THE APPELLANT VIS - A - VIS COMPANIES SELECTED AS COMPARABLE COMPANIES, THOUGH THE ACT READ WITH RULE 10B(1)(E)(III) AND 10B(3) PROVIDE FOR CARRYING OUT SUCH COMPARABILITY ADJUSTMENTS. 3. THE LEARNED CIT(A) GROSSLY ERRED, IN FACTS AND IN LAW, IN UPHOLDING TPO/AO'S ACTION OF N OT ALLOWING STANDARD DEDUCTION OF + - 5% AS PER PROVISO TO SECTION 92C(2) OF THE INCOME - TAX ACT. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR DELE TE ALL OR ANY OF THE GROUNDS OF APPEAL BEFORE OR DURING THE COURSE OF HEARING. 4. THE REVENUE IN ITS APPEAL HAS RAISED THE FOLLOWING GROUNDS OF APPEAL : - 3 ITA NO. 599 /PN/201 3 ITA NO. 813 /PN/201 3 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) IS CONTRARY TO LAW AND TO THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE LEARNED COMMISSIONER OF INCOME - TAX ( A PPEALS) GROSSLY ERRED IN DIRECTING HE ASSESSING OFFICER NOT TO MAKE DEPRECIATION ADJUSTMENT ON UNCOMMON ASSETS BETWEEN THE ASSESSEE AND THE COMPARABLE COMPANIES WHEN THE TRANSFER PRICING OFFICER / ASSESSING OFFICER HAD CORRECTLY MADE SUCH ADJUSTMENT AS PER RULE 10B(1)(E)(III) OF T HE INCOME - TAX RULES, 1692. 3. THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) GROSSLY ERRED IN FAILING TO APPRECIATE THAT AS PER THE ABOVE RULE ADJUSTMENT TO ELIMINATE THE DIFFERENCES HAS TO BE MADE IN THE CASE OF COMPARABLES. 4. THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) GROSSLY ERRED IN GIVING DIRECTION TO THE TRANSFER PRICING OFFICER / ASSESSING OFFICER NOT TO MAKE ADJUSTMENT ON UNCOMMON ASSET ON THE BASIS OF HYPOTHETICAL SUBMISSION MADE BY THE ASSESSEE. 5. FOR THESE AND SUCH OTHER GROUNDS AS MAY BE URGED AT THE TIME OF HEARING, THE ORDER OF THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) MAY BE VACATED AND THAT OF THE ASSESSING OFFICER BE RESTORED. 6. THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEND ANY OR ALL THE GROUNDS OF APPEAL. 5 . BOTH, THE ASSESSEE AND REVENUE HAVE RAISED COMMON GROUNDS OF APPEAL IN RELATION TO VARIOUS ASPECTS OF THE TRANSFER PRICING ADJUSTMENT CARRIED OUT BY THE TPO AND ADOPTED BY THE ASSESSING OFFICER, PART OF WHICH HAS BEEN UPHELD BY THE CIT(A) AND PARTLY ALLOWE D BY THE CIT(A). 6. BRIEFLY, IN THE FACTS OF THE PRESENT CASE, THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF SOFTWARE PRODUCT DEVELOPMENT AND WAS 100% EOU UNIT APPROVED BY THE SOFTWARE TECHNOLOGY PARKS OF INDIA UNDER THE SOFTWARE TECHNOLOGY PARKS SCHEME OF GOVERNMENT OF INDIA I.E. UNDER STPI SCHEME. THE ASSESSEE HAD FURNISHED E - RETURN OF INCOME ON 16.10.2007 DECLARING TOTAL INCOME OF RS.38,955/ - . THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND SINCE THE ASSESSEE HAD ENTERED INTO THE INTERNATIONAL T RANSACTION EXCEEDING RS.5 CRORES, THE CASE WAS REFERRED TO THE TPO ON 29.12.2009 FOR COMPUTATION OF ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTIONS. THE TPO ISSUED A SHOW - CAUSE NOTICE TO THE ASSESSEE AND THE ASSESSEE WAS ASKED TO FURNISH ITS SUBMISSION TO SUPPORT THE 4 ITA NO. 599 /PN/201 3 ITA NO. 813 /PN/201 3 ARM'S LENGTH PRICE COMPUTED BY IT IN THE FORM NO.3CEB. THE ASSESSEE WAS PROVIDING BUSINES S SUPPORT SERVICES TO ITS AES AND AS PER THE TPO BENCHMARKING DONE WAS NOT PROPER. CONSEQUENTLY, SHOW - CAUSE NOTICE WAS ISSUED TO THE AS SESSEE WHICH IS REPRODUCED UNDER PARA 5 AT PAGES 2 TO 12 OF THE ORDER OF THE TPO. THE TPO NOTED FROM THE TRANSFER PRICING REPORT THAT CERTAIN ADJUSTMENTS WERE MADE BY THE ASSESSEE TO ITS COMPUTATION OF PROFITABILITY TO ELIMINATE THE MATERIAL DIFFERENCE BE TWEEN THE ASSESSEE AND THE COMPARABLES. ONE SUCH ADJUSTMENT WAS MADE ON ACCOUNT OF DEPRECIATION ON FIXED ASSETS AT THE RATES HIGHER THAN THE DEPRECIATION RATES PROVIDED IN THE ( INDIAN ) COMPANIES ACT, 1956 WHEREAS THE SELECTED COMPARABLE COMPANIES GENERALLY FOLLOWED THE DEPRECIATION RATES AS PER THE ( INDIAN ) COMPANIES ACT, 1956. FURTHER, THE ASSE SSEE CLAIMED THAT IT WAS A CAPTIVE SOFTWARE SERVICE PROVIDER WHEREAS THE SELECTED COMPARABLE COMPANIES WERE ENTREPRENEUR SOFTWARE SERVICE PROVIDERS. THUS, THE RISK BORNE BY ASSESSEE WAS COMPARABILITY LOWER THAN THE RISK BORNE BY THE SELECTED COMPARABLE COMPANIES AND AS PER THE ASSESSEE THIS NECESSITATED THE APPROPRIATE ADJUSTMENTS FOR THESE MATE RIAL DIFFERENCES. THE TPO FURTHER N OTED THAT THE ASSESSEE HAD MADE AN ADJUSTMENT OF RS.27,77,983/ - ON ACCOUNT OF ACCELERATED DEPRECIATION AFTER WHICH ITS PLI WAS ARRIVED AT 12.90%. HOWEVER, THE UNADJUSTED PLI OF THE ASSESSEE WAS 10.33%. SINCE THE ASSESS EE HAD MADE THE ADJUSTMENT ON ACCOUNT OF ACCELERATED DEPRECIATION ON THE TESTED PARTY, WHICH AS PER THE TPO, WAS NOT PERMISSIBLE UNDER THE INCOME TAX ACT, ASSESSEE WAS ASKED TO MAKE THE ADJUSTMENT IN THE CASE OF THE COMPARABLES SO AS TO GET A CLEAR PICTURE OF THE EFFECT OF THE ADJUSTMENT ON THEIR PROFITABILITY. THE ASSESSEE FURNISHED THE DETAILS OF THE LIST OF COMPARABLES SELECTED BY THE ASSESSEE ALONG WITH THE PLIS BEFORE AND AFTER THE DEPRECIATION ADJUSTMENT , WHICH IS TABULATED AT PAGE 5 OF THE ORDER OF THE TPO. THE TPO THEREAFTER VIDE PARA 13 AND 14 SHOW - CAUSED THE ASSESSEE WITH REGARD TO THE ACCELERATED DEPRECIATION METHOD ADOPTED BY IT, WHICH READS AS UNDER : - 5 ITA NO. 599 /PN/201 3 ITA NO. 813 /PN/201 3 13. FURTHER THE PROFIT LEVEL INDICATOR TO BE ADOPTED, OP/ T C. SINCE, THE ASSESSEE IS FOLL OWING ACCELERATED DEPRECIATION METHOD, THE COMPARABLES MARGINS AFTER THE SAID ADJUSTMENT IS TAKEN FOR COMPARISON WHICH IS IN CONFORMITY WITH RULE 10B(3) OF THE INCOME TAX RULES, 1961. 14. THE ADJUSTMENT S TO ITS PLI MADE BY THE ASSESSEE ON ACCOUNT OF DEPRECIATION IS NOT FOUND TO BE IN CONFORMITY WITH RULE 10B(3) OF THE INCOME TAX RULES. DEPRECIATION IS A COST INCURRED IN GENERATION OF REVENUE AND ACCORDINGLY, NET MARGIN HAS TO BE COMPUTED ONLY AFTER ALLOW ING DEPRECIATION. SINCE TRANSFER PRICING PROVISIONS ARE PART OF INDIAN INCOME TAX ACT, 1961 THE COMPUTATION OF NET MARGIN CANNOT BE MADE IGNORING SECTION 32 OF THE ACT, WHICH DEALS WITH ALLOW ABILITY OF DEPRECIATION. HENCE THE PLI OF THE ASSESSEE WITHOUT THE ADJUSTMENT ON ACCOUNT OF DEPRECATION WHICH IS 10.33% IS PROPOSED TO BE TAKEN FOR COMPARISON WITH THAT OF THE SELECTED COMPANIES. BASED ON THE ABOVE PROPOSITIONS THE FINAL LIST OF COMPARABLES IS DRAWN AS UNDER : SR. NO. COMPARABLE COMPANIES PLI AFTER DEPRE. A DJUSTMENT 1. AKSHAY SOFTWARE TECHNOLOGIES LTD. 2.93% 2. APEX KNOWLEDGE SOLUTIONS PVT. LTD. 12.36% 3. FINENG SOLUTIONS PVT. LTD. 27.00% 4. IT PEOPLE (INDIA) LTD. 15.71% 5. LASER SOFT INFOSY S TEMS LTD. 17.89% 6. MAVERIC SYSTEMS LTD. 23.63% 6. MAVERIC SYSTEMS LTD. 23.63% 7. RAM INFORMATICS LTD. 10.75% 8. STERLING INTERNATIONAL ENTERPRISES LTD. 32.37% ARITHMETIC MEAN 17.83% 7 . THE TPO IN VIEW OF THE ABOVE - SAID PROPOSITION DREW A FINAL LIST OF COMPARABLES WHEREIN PLI OF THE COMPARABLES WAS AT 17.83% AS AGAINST PLI OF THE ASSESSEE WHICH WAS 10.33%. IN VIEW OF THE DIFFERENCE BETWEEN PROFIT LEVEL OF THE ASSESSEE AND THE MEAN PLI OF THE COMPARABLES, THE CORRESPONDING ADJUSTMENT OF DIFFERENCE OF 7.5% AMOUNTING TO RS.1,00,34,125/ - , AS PER THE TPO, WAS TO BE MADE TO T HE PROFITABILITY OF THE ASSESSEE, SO THAT ITS INTERNATIONAL TRANSACTIONS, RELATING TO PROVIDING BUSINESS SUPPORT SERVICES TO THE AE WERE AT ARM'S LENGTH PRICE. THE REPLY OF THE ASSESSEE TO THE SHOW - CAUSE NOTICE ISSUED BY THE TPO IS SUMMARIZED UNDER PARA 6 AT PAGES 12 TO 24 OF THE ORDER OF THE TPO. THE TPO AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE ELABORATING ON THE VARIOUS ASPECTS OF THE TRANSFER 6 ITA NO. 599 /PN/201 3 ITA NO. 813 /PN/201 3 PRIDING ADJUSTMENTS PROPOSED BY IT IN THE SHOW - CAUSE NOTICE I.E. IN RELATION TO REJECTION OF CERTAIN C OMPARABLES, RISK ADJUSTMENT AND ALSO THE ADJUSTMENT ON ACCOUNT OF ACCELERATED DEPRECIATION. THOUGH, VARIOUS ADJUSTMENTS WERE MADE BY THE TPO BUT IN THE FIRST INSTANCE WE ARE REFERRING TO THE ADJUSTMENT MADE ON ACCOUNT OF ACCELERATED DEPRECIATION, WHICH WA S NOT ALLOWED BY THE TPO OBSERVING AS UNDER : - 10. IT IS SEEN FROM THE TABLE THAT THE MEAN PLI OF THE COMPARABLES IS STANDING AT 16.61%, AS AGAINST THE PLI OF THE ASSESSEE WHICH IS AT 10.52%. THUS, THERE IS A DIFFERENCE OF 6.09% BETWEEN THE PROFIT LEVEL OF THE ASSESSEE AND THE MEAN PLI OF THE COMPARABLES AND THE SAME IS DUE TO THE PRICING OF THE SERVICES PROVIDED TO THE A.E.. THE CORRESPONDING ADJUSTMENT OF THE DIFFERENCE OF 6.09% AMOUNTING TO RS.81,47,709/ - IS TO BE MADE TO THE PROFITABILITY OF THE ASS ESSEE, SO THAT ITS INTERNATIONAL TRANSACTIONS AMOUNT OF ADJUSTMENT = 6.09% OF COST RELATING TO PROVIDING SERVICE S TO AE; = 6.09 X 13,37,88,338/100 = RS.81,47,709/ - 11. KEEPING IN VIEW THE F ACT OF THE CASE, THE SUBMISSION OF THE ASSESSEE AND DEL IBERATIONS AS ABOVE, ADJUSTMENT OF THE AMOUNT OF RS.81,47,709/ - IS MADE TO THE DEL IBERATIONS AS ABOVE, ADJUSTMENT OF THE AMOUNT OF RS.81,47,709/ - IS MADE TO THE INTERNATIONAL TRANSACTION RELATING TO PROVIDING BUSINESS SUPPORT SERVICES TO THE A.E.. 8 . BEFORE THE CIT(A), THE PLEA OF THE ASSESSEE WAS THAT THE ACTION OF THE TPO IN MAKING THE SELECTED DEPRECIATION ADJUSTMENT FOR UNCOMMON ASSETS BETWEEN THE ASSESSEE AND CERTAIN COMPARABLE COMPANIES WAS MISPLACED. THE FIRST PLEA OF THE ASSESSEE BEFORE THE CIT(A) WAS THAT THIS EXERCISE WAS DONE WITHOUT ISSUING SHOW - CAUSE NOTICE OR WITHOUT GIVING ANY OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. SECONDLY, THE ADJUSTMENT CARRIED OUT BY THE TPO WAS BOTH FANCIFUL AND IMAGINARY AND WAS NOT SUSTAINABLE IN LAW. IT WAS FURTHER PLEA D ED BY THE ASSESSEE THAT THE COMPANY MAY HAVE OWN ASSETS OR MAY USE ASSETS ON LEASE OR HIRE AND JUST BECAUSE THE ASSESSEE DOES NOT OWN CERTAIN ASSETS, IT DOES NOT CALL FOR AN ADJUSTMENT. THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE WAS OBSERVED THAT THE ADJUSTMENT MADE BY THE TPO WAS ON THE WEAKER GROUND . C ONCURRING WITH THE SUBMISSIONS OF THE ASSESSEE , T HE CIT(A) FURTHER OBSERVED THAT 7 ITA NO. 599 /PN/201 3 ITA NO. 813 /PN/201 3 THE DIFFERENCES IN ASSETS MAY MEAN DIFFERENCE IN THE MANNER OF CARRYING OUT BUSINESS. HOWEVER, SUCH DIFFERENCES WOULD GET EVENED OUT AT THE NET MARGIN LEVEL IN CASE OF THE COMPARABLES COMPANIES. THE CIT(A) THUS HELD THAT IF DEPRECIATION ON CERTAIN ASSETS WAS REMOVED IN THE HANDS OF THE COMPARABLE COMPANIES, THEN THE COST INCURRED BY THE ASSESSEE IN THE ABSENCE OF OWNERSHIP OF SUCH ASSET ALSO SHOULD BE REMOVED. THE CIT(A) F URTHER HELD THAT THERE COULD NOT BE ONE SIDED ADJUSTMENT AND PARITY SHOULD BE MAINTAINED FOR EFFECTIVE COMPARABILITY. ACCORDINGLY, THE ASSESSING OFFICER WAS DIRECTED NOT TO MAKE DEPRECIATION ADJUSTMENT ON UNCOMMON ASSETS BETWEEN THE ASSESSEE AND THE COMPA RABLE COMPANIES. 9 . THE REVE NUE IS IN APPEAL AGAINST THE AFORESAID DIRECTION OF THE CIT(A), IN TURN, RELYING ON THE RULE 10B(1)(E)(III) OF THE INCOME TAX RULES, 1962. 1 0 . THE LD. DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLACED RELIANCE ON 1 0 . THE LD. DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLACED RELIANCE ON THE ORDER OF THE TPO AND CONSEQUENT ORDER OF THE ASSESSING OFFICER IN THIS REGARD. 1 1 . THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE SHOW - CAUSE NOTICE WAS ISSUED TO THE ASSESSEE BY THE TPO ALLEGING THAT THE MARGIN OF THE ASSESSEE WAS 10.33% AS AGAINST THE CORRECT FIGURE OF 10.52%, WITHOUT ADJUSTMENT OF ACCELERATED D EPRECIATION. THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER POINTED OUT THAT THE TPO MADE ADJUSTMENT IN THE HANDS OF THE COMPARABLE COMPANIES ON ACCOUNT OF ASSETS NOT OWNED BY THE ASSESSEE. HE FURTHER PLEA D ED THAT SUCH ADJUSTMENT WAS NOT CORR ECT AS ALL ENTITIES WOULD INCLUDE THE RESPECTIVE COSTS. HE FURTHER PLEADED THAT WHERE THE FUNCTIONS OF ASSESSEE AND THE COMPANIES SELECTED AS COMPARABLES WERE SIMILAR, SUCH ADJUSTMENT COULD NOT BE MADE. WHERE ADJUSTMENT ON ACCOUNT OF ACCELERATED DEPRECIA TION IS NOT TO BE MADE IN THE HANDS OF THE TESTED PARTIES , THEN THE TPO PROCEEDED TO MAKE SUCH 8 ITA NO. 599 /PN/201 3 ITA NO. 813 /PN/201 3 ADJUSTMENT IN THE HANDS OF THE COMPARABLES BY ISSUING SHOW - CAUSE NOTICE, COPY OF WHICH IS PLACED IN THE PAPER BOOK. IT WAS FURTHER POINTED OUT BY THE LD. AUTHOR IZED REPRESENTATIVE FOR THE ASSESSEE THAT THE MARGIN OF THE COMPARABLES WAS REDUCED IN THE FINAL SHOW - CAUSE NOTICE BUT THEREAFTER LIST OF COMPARABLES WERE SHOW - CAUSED TO THE ASSESSEE , WHICH IS AT PAGE 12 OF THE SHOW - CAUSE NOTICE , WHEREIN THE MEAN OF THE MA RGIN WAS 17.83% BUT THE TPO IN THE FINAL ANALYSIS REMOVED . S TERLING AS NOT BEING COMPARABLE AND THEREAFTER ADJUSTMENT WAS MADE ON ACCOUNT OF ASSETS NOT OWNED BY THE ASSESSEE. IT WAS THE PLEA OF THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT IF N O SUCH ADJUSTMENT WAS MADE THEN THE MARGIN SHOWN BY THE ASSESSEE IN RESPECT OF ITS INTERNATIONAL TRANSACTIONS WITH ITS AE WAS WITHIN +/ - 5% MARGINS. RELIANCE IN THIS REGARD WAS PLACED ON THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN EXL SERVICE.COM ( INDIA) PVT. LTD. VS. ACIT IN ITA NO.1939/DEL/2008 AND IN DCIT VS. EXL SERVICES.COM(INDIA) PVT. LTD. IN ITA NO.1981/DEL/2008, RELATING TO ASSESSMENT YEAR 2003 - 04, ORDER DATED 22.12.2014 . 1 2 . THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER DREW OUR ATTENTION TO THE ORDER OF THE CIT(A) AND IT WAS POINTED OUT THAT AFTER GIVING EFFECT NO ADJUSTMENT ON ACCOUNT OF INTERNATIONAL TRANSACTION WAS MADE IN THE HANDS OF THE ASSESSEE. HENCE IT WAS PLEADED BY THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT IN CASE THE REVENUES APPEAL IS DISMISSED THEN THE APPEAL OF THE ASSESSEE BECOMES ACADEMIC. 1 3 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. FIRST WE SHALL TAKE UP TH E APPEAL OF THE REVENUE . THE ASSESSEE IS ENGAGED IN SOFTWARE DEVELOPMENT AND PRODUCT SUPPORT SERVICES FOR ITS ASSOCIATE ENTERPRISES I.E. E - GAIN, USA. THE ASSESSEE IS PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATE ENTERPRISES AND ALSO MAINTENANC E AND SUPPORT SERVICES TO THE CUSTOMERS. THE ASSESSEE IN ITS TP STUDY REPORT MADE CERTAIN ADJUSTMENTS TO ITS COMPUTATION OF 9 ITA NO. 599 /PN/201 3 ITA NO. 813 /PN/201 3 PROFITABILITY TO ELIMINATE THE MATERIAL DIFFERENCES BETWEEN THE ASSESSEE AND THE COMPARABLES. ONE SUCH ADJUSTMENT MADE BY THE ASSE SSEE WAS ON ACCOUNT OF DEPRECIATION, WHEREIN THE ASSESSEE CLAIMED THAT IT PROVIDED DEPRECIATION ON FIXED ASSETS AT RATES HIGHER THAN DEPRECIATION RATES PROVIDED IN THE (INDIAN) COMPANIES ACT, 1956, WHEREAS THE SELECTED COMPARABLE COMPANIES GENERALLY FOLLOW ED THE DEPRECIATION RATES AS PER (INDIAN) COMPANIES ACT, 1956. ANOTHER CHANGE WAS MADE ON ACCOUNT OF RISK ADJUSTMENT. 1 4 . THE ISSUE ARISING BEFORE US IS IN RELATION TO THE ADJUSTMENT MADE ON ACCOUNT OF ACCELERATED DEPRECIATION. AS PER THE TP STUDY REP ORT, THE ASSESSEE WAS FOLLOWING TNMM METHOD TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS AND THE UNADJUSTED PLI OF THE ASSESSEE WAS 10.33%. HOWEVER, BY ALLOWING ADJUSTMENT ON ACCOUNT OF ACCELERATED DEPRECIATION, THE PLI WAS WORKED AT 12.90% AND THE CLAIM O F THE ASSESSEE WAS THAT THE SAME WAS COMPARABLE WITH THE ARITHMETIC MEAN PLI OF THE COMPARABLE COMPANIES AND CONSEQUENTLY, NO ADJUSTMENT WAS REQUIRED TO BE MADE IN THE INTERNATIONAL TRANSACTION WITH THE ASSOCIATE ENTERPRISES. THE TPO WAS OF THE VIEW THAT IN LINE WITH THE PROVISIONS OF RULE 10B(3) OF INCOME - TAX RULES, 1962 (IN SHORT RULES), NO ADJUSTMENT TO THE PLI OF THE TESTED PARTY WAS ALLOWABLE AND ADJUSTMENT, IF ANY, IS TO BE MADE IN THE HANDS OF THE COMPARABLE COMPANIES IN ORDER TO BRING ITS MARGINS AT PAR WITH THE TESTED PARTY. THE TPO DREW FINAL LIST OF COMPARABLE COMPANIES WHOSE MEAN PLI WORKED TO 17.83% AS AGAINST PLI OF THE ASSESSEE SHOWN AT 10.33%. IN VIEW THEREOF, ADJUSTMENT OF RS.1,00,34,125/ - WAS PROPOSED BY THE TPO TO THE INTERNATIONAL TR ANSACTIONS TRANSACTED BY THE ASSESSEE WITH ITS ASSOCIATE ENTERPRISES. SINCE THE ASSESSEE WAS FOLLOWING DIFFERENTIAL RATE OF DEPRECIATION, THE PLI OF THE COMPARABLE COMPANIES WERE ADJUSTED TO BRING BOTH THE ASSESSEE AND THE COMPARABLE COMPANIES AT PAR. AN OTHER ADJUSTMENT PROPOSED BY THE TPO WAS ON ACCOUNT OF CERTAIN ITEMS, WHICH WERE NOT APPEARING IN THE SAID LIST OF THE ASSESSEE, ON WHICH DEPRECIATION WAS CLAIMED BY IT. HOWEVER, IN THE FINAL 10 ITA NO. 599 /PN/201 3 ITA NO. 813 /PN/201 3 ANALYSIS, T HE TPO REMOVED THOSE ITEMS IN THE COMPARABLES CHART AND THE PLIS WERE COMPUTED TO WORK OUT THE DIFFERENCES WHICH WERE THERE AT THE TIME OF MAKING THE DEPRECIATION ADJUSTMENT. AS PER THE REVISED WORKING, THE PLI OF THE COMPARABLES WORKED OUT TO 16.61% AS AGAINST THE PLI OF THE ASSESSEE AT 10.52% AND CONSEQU ENTLY, ADJUSTMENT OF THE DIFFERENCE AMOUNTING TO RS.81,47,709/ - WAS MADE TO THE PROFITABILITY OF THE ASSESSEE TO THE INTERNATIONAL TRANSACTIONS BEING NOT AT ARM'S LENGTH. THE CIT(A) DIRECTED THE ASSESSING OFFICER NOT TO MAKE THE DEPRECIATION ADJUSTMENT ON ACCOUNT OF UN - COMMON ASSETS BETWEEN THE ASSESSEE AND COMPARABLE COMPANIES. THE REVENUE BEFORE US IS IN APPEAL AGAINST THE SAID DIRECTIONS OF THE CIT(A). 1 5 . IN THE FIRST INSTANCE, IN VIEW OF THE PROVISIONS OF RULE 10B(1)(E) OF THE RULES, WHICH LAYS DOWN MODUS OPERANDI FOR DETERMINING THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS UNDER TNMM METHOD, NO ADJUSTMENT CAN BE MADE IN THE NET PROFIT MARGINS OF THE TESTED PARTY. HOWEVER, IF REQUIRED, THE NET PROFIT MARGINS OF THE COMPARABLE COMPANIES COULD BE ADJUSTED UNDER SUB - CLAUSE (III) TO RULE 10B(1)(E) OF THE RULES. FURTHER, SUB - RULE 2 TO RULE 10B OF THE RULES PROVIDES THAT COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UN - CONTROLLED TRANSACTION SHALL BE WITH REFERENCE TO CERTAIN FACTORS WHICH ARE ENUMERATED THEREIN UNDER RULE 10B(III) OF THE RULES. AN UN - CONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF EITHER THERE ARE NO DIFFERENCES BETWEEN THE TWO OR A REASONABLY ACCURATE ADJUSTMENT COULD BE MADE TO ELIMINATE TH E MATERIAL EFFECTS OF SUCH DIFFERENCE. IN OTHER WORDS, WHERE THERE ARE NO DIFFERENCES, THEN THE NET OPERATING PROFIT MARGINS OF THE COMPARABLE COMPANIES SHOULD BE CONSIDERED AS BENCHMARK, BUT IN CASE OF ANY DIFFERENCE, THEN SUCH DIFFERENCES COULD BE ADJUS TED BY MAKING SUITABLE ADJUSTMENTS TO THE OPERATING PROFIT MARGINS OF THE COMPARABLE COMPANIES. IN VIEW THEREOF, THE ISSUE ARISING BEFORE US IS WHETHER WHILE COMPUTING MARGINS OF THE COMPARABLE COMPANIES, IN THE FACTS OF THE PRESENT CASE , ANY 11 ITA NO. 599 /PN/201 3 ITA NO. 813 /PN/201 3 ADJUSTMENT C OULD BE MADE ON ACCOUNT OF SUCH ASSETS, WHICH ARE NOT OWNED BY THE ASSESSEE. MERELY BECAUSE, ONE COMPANY DOES NOT HAVE THE SAID ASSETS, IT CANNOT BE SAID THAT IT HAD NOT INCURRED CERTAIN EXPENDITURE RELATABLE TO THE SAME. 1 6 . WE FIND THAT SIMILAR PROPO SITION ON ACCOUNT OF DEPRECIATION AROSE BEFORE THE DELHI BENCH OF THE TRIBUNAL IN EXL SERVICE.COM (INDIA) PVT. LTD. VS. ACIT IN ITA NO.1939/DEL/2008 AND IN DCIT VS. EXL SERVICES.COM(INDIA) PVT. LTD. IN ITA NO.1981/DEL/2008, RELATING TO ASSESSMENT YEAR 2003 - 04, ORDER DATED 22.12.2014 , WHEREIN IT WAS HELD THAT NO ADJUSTMENT IS TO BE MADE ON ACCOUNT OF UNCO MMON ASSETS . IN VIEW THEREOF, WE UPHOLD THE ORDER OF CIT(A) IN HOLDING THAT NO ADJUSTMENT IS TO BE MADE IN THE HANDS OF THE COMPARABLE COMPANIES ON ACCOUNT OF ASSETS NOT OWNED BY THE ASSESSEE. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE HAS FURNISHED ON RECORD AN ORDER GIVING APPEAL EFFECT TO THE ORDER OF CIT(A) BY ASSESSING OFFICER, VIDE ORDER DATED 28.02.2013, IN WHICH THE MARGIN OF SET OF COMP ARABLE COMPANIES WAS ADOPTED AT 15.75% AS AGAINST THE PLI OF THE ASSESSEE AT 10.52% AND THE SAME HAS BEEN FOUND TO BE AT ARM'S LENGTH I.E. +/ - 5% RANGE PRESCRIBED UNDER THE PROVISO TO SECTION 92C(2) OF THE ACT. 1 7 . IT MAY BE CLARIFIED HERE THAT INITIALL Y, THE TPO HAD ADOPTED THE PLI OF THE ASSESSEE AT 10.33%, BUT WHILE COMPUTING ADJUSTMENT ON ACCOUNT OF INTERNATIONAL TRANSACTION, THE PLI WAS TAKEN AT 10.52% WHICH IS TO BE ADOPTED IN THE HANDS OF THE ASSESSEE. IN VIEW THEREOF, WE DISMISS THE GROUNDS OF A PPEAL RAISED BY THE REVENUE. 1 8 . IN VIEW OF THE CONCESSION OF THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT AFTER GIVING EFFECT TO THE ORDER OF CIT(A), NO FURTHER ADJUSTMENT IS TO BE MADE IN THE HANDS OF THE ASSESSEE ON ACCOUNT OF AN INTER NATIONAL TRANSACTION S . 12 ITA NO. 599 /PN/201 3 ITA NO. 813 /PN/201 3 19 . CONSEQUENTLY, WE DISMISS THE APPEAL FILED BY THE ASSESSEE BEING ACADEMIC. IN VIEW THEREOF, BOTH THE APPEALS OF THE ASSESSEE AND THE REVENUE ARE DISMISSED. 2 0 . IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE AND THE REVENUE ARE DISMISSED. ORDER PRONOUNCED ON THIS 15 TH DAY OF JULY , 2015. SD/ - SD/ - ( R.K. PANDA ) ( SUSHMA CHOW LA ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER PUNE ; DATED : 15 TH JULY , 2015. / GCVSR / COPY OF THE O RDER IS FORWARDED TO : 1 ) THE ASSESSEE; 1 ) THE ASSESSEE; 2 ) THE DEPARTMENT; 3 ) THE CIT(A) - IT/TP , PUNE ; 4 ) THE CIT - IT/TP, PUNE ; 5 ) THE DR A BENCH, I.T.A.T., PUNE; 6 ) GUARD FILE. / BY ORDER , //TRUE COPY// / SR. PRIVATE SECRETARY , / ITAT, PUNE