SIEMENS ENTERPRISE COMMUNICATIONS P.LTD, MUMBAI V. ASST CIT 7(2), MUMBAI

ITA 7399/MUM/2012

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 2818 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2015
• Appeal Filed By: Assessee
• Bench Allotted: K
• Next Hearing Date: 20-11-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 13-12-2012
• Court: TRIBUNAL
• Department Lawyers: K B SHUKLA
• Keywords: Depreciation; Transfer pricing; International transaction; Capital expenditure
• Section: 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER I.T.A. NO. 7399/M/2012 (AY: 2008 - 2009 ) M/S. PROGILITY TECHNOLOGIES PRIVATE LIMITED (FORMERLY UNIFY ENTERPRISE COMMUNICATIONS PRIVATE LIMITED), 601, 6 TH FLOOR, 247 PARK, TOWER B, LBS MARG, VIKHROLI (W), MUMBAI 400 083. / VS. ACIT 7(2), ROOM NO.624, AAYAKAR BHAVAN, M.K. MARG, MUMBAI - 20. ./ PAN : AAKCS5375F ( / APPELLANT) .. ( / RESPONDENT ) / APPELLANT BY : SHRI M.P. LOHIA AND MR. NIMESH VORA / RESPONDENT BY : SHRI K.B. SHUKLA, CIT - DR / DATE OF HEARING : 20 .10.2015 / DATE OF PRONOUNCEMENT : 28 .10.2015 / O R D E R PER D. KARUNAKARA RAO, AM: THIS APPEAL FILED BY THE ASSESSEE ON 13.12.2012 IS AGAINST THE ORDER OF THE DRP / TPO / AO FOR THE ASSESSMENT YEAR2008 - 2009. 2. BEFORE US, AT THE OUTSET, LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT GROUND NOS.1 AND 2 ARE GENERAL IN NATURE. CONSIDERING THE GENERAL NATURE OF THE SAID GROUND NOS.1 AND 2, THEY ARE DISMISSED. FURTHER, LD COUNSEL SUBMITTED THAT GROUND NOS.3 & 9 ARE NOT PRESSED AND GROUND NO.10 IS PREMATURE. THERE FORE, THE SAID GROUND NOS.3 AND 9 ARE DISMISSED AS NOT PRESSED AND GROUND NO.10 IS ALSO DISMISSED AS PREMATURE IN NATURE. THUS, THE REST OF THE GROUNDS LEFT FOR OUR ADJUDICATION ARE G ROUND NO.4, 5, 6, 7, AND 8, WHICH READ AS UNDER: 4. THE LD DRP / AO / TPO ERRED IN NOT CONSIDERING DEPRECIATION ON COMMERCIAL RIGHTS AS AN EXTRAORDINARY / NON - OPERATING EXPENSE AND THUS, ERRED IN NOT EXCLUDING THE SAME WHILE COMPUTING THE OPERATING PROFIT MARGIN OF THE APPELLANT. 2 5. THE LD DRP /AO / TPO ERRED IN NOT CONSIDER ING THE TOTAL DEPRECIATION WHILE CALCULATING THE OPERATING MARGIN OF ONE OF THE COMPARABLES IE ARRAYCOM (INDIA) LTD WHILE AT THE SAME TIME CONSIDERING DEPRECIATION ON COMMERCIAL RIGHTS AS AN OPERATING EXPENSE IN CASE OF AN APPELLANT. 6. THE LD DRP ERRED IN NOT CONSIDERING THE CORRECT PROFIT LEVEL INDICATOR OF PROFITS BEFORE DEPRECIATION INTEREST AND TAXES (PBDIT) / OPERATING REVENUE (OR) (PBDIT / OR) FOR MARGIN COMPARISON PURPOSES HAVING REGARD TO THE FACTS OF THE APPELLANT. 7. THE LD DRP / AO / TPO ERRED IN REJECTING SHYAM TELECOM LTD AS A COMPARABLE COMPANY MERELY BECAUSE IT INCURRED LOSSES IN THE YEAR UNDER CONSIDERATION. 8. WITHOUT PREJUDICE TO ABOVE GROUNDS, THE LEARNED DRP / AO / TPO ERRED IN CALCULATING THE TRANSFER PRICING ADJUSTMENT WITH REFERENCE TO TOTAL PURCHASES OF THE APPELLANT INSTEAD OF RESTRICTING THE ADJUSTMENT TO THE PURCHASES FROM AES ONLY. 3. FURTHER, LD COUNSEL FOR THE ASSESSEE ALSO FILED ADDITIONAL GROUNDS (GROUND NO.11 AND 12) AND THE SAME READ AS UNDER: 11. ON THE FACTS AND CIRCUM STANCES OF THE CASE AND IN LAW, THE LD AO ERRED IN NOT GRANTING DEPRECIATION UNDER SECTION 32 OF THE ACT ON GOODWILL BEING AN INTANGIBLE ASSET. 12. WITHOUT PREJUDICE TO GROUND NO.9, IN CASE SOFTWARE EXPENDITURE IS TREATED AS CAPITAL EXPENDITURE, THE LD AO SHALL BE DIRECTED TO GRANT DEPRECIATION ON THE SAME. 4. BRIEFLY STATED RELEVANT FACTS OF THE CASE ARE THAT THE ASSESSEE WAS ORIGINALLY NAMED AS M/S. SIEMENS ENTERPRISE COMMUNICATIONS PRIVATE LIMITED, WHICH WAS ALSO KNOWN AS UNIFY ENTERPRISE COMMUNICATIO NS PRIVATE LIMITED. ASSESSEE HAD INTERNATIONAL TRANSACTIONS INVOLVING PURCHASE AND SALE OF EPBAX ACCESSORIES AND OFFICE EQUIPMENT. ASSESSEE BENCHMARKED THESE TRANSACTIONS USING TNMM METHOD AT THE ENTITY LEVEL ADOPTING THE PLI OF OP/OR @ 8.07%. ASSESSEE CONDUCTED THE TP STUDY CONSIDERING THE 6 COMPARABLES, WHOSE AVERAGE ARITHMETIC MEAN OF PLI OF 8.55% , IS WITHIN THE RANGE OF (+) OR ( - ) 5%. A CCORDINGLY, ASSESSEE FILED THE RETURN OF INCOME. DURI NG THE PROCEEDINGS BEFORE THE TPO, ASSESSEE ATTEMPTED TO JUSTIFY THE 8.07% AS ALP . THE TPO REJECTED A COUPLE OF COMPARABLES IE SH Y AM TELECOM LTD AND SPANCO TELESYSTEMS OF THE ASSESSEE. FURTHER, TPO NOTICED THAT ARRAYCOM INDIA LTD, A COMPARABLE OF THE ASS ESSEE , WAS TO BE ADJUSTED TO EXCLUDE THE DEPRECIATION OF PLANT AND MACHINERY. AFTER ADJUSTMENTS, ARITHMETIC MEAN OF THE REST OF THE 4 COMPARABLES WITH THE SAID ADJUSTMENT TO ARRAYCOM INDIA LTD IS DETERMINED AT 11.06%. DURING THE PROCEEDINGS BEFORE THE DR P, ASSESSEE TRIED TO EXPLAIN THE REQUIREMENT OF CONSIDERING THE SAID ARRAYCOM LIMITED AFTER INCLUDING THE CLAIM OF DEPRECIATION. LD COUNSEL FOR THE ASSESSEE ARGUED THAT THE PROVISIONS OF DEPRECIATION 3 SHOULD BE CONSIDERED IN CONSIDERING THE SAID COMPARABLE . HOWEVER, DRP HELD THAT THE DEPRECIATION SHOULD NOT BE ALLOWED IT HAS UNTILIZED ASSETS IN THE BLOCK OF ASSETS AND THEREFORE, OPERATING PROFITS ARE REQUIRED TO BE ADJUSTED ACCORDINGLY. FURTHER, ON THE 2 ND COMPARABLE, IT IS ARGUED BEFORE THE DRP THAT M/S. SHYAM TELECOM LTD SHOULD BE INCLUDED AS IT IS NOT A CASE OF PERSISTENT LOSSES. EARLIER, TPO REJECTED THE SAME STATING THAT IT IS A CASE OF LOSSES AND THEREFORE, IT IS NOT A GOOD COMPARABLE. 5. BEFORE US, SHRI M.P. LOHIA AND SHRI NIMESH VORA, LD COUNSEL S FOR THE ASSESSEE SUBMITTED THAT ARRAYCOM LTD SHOULD BE CONSIDERED AS A GOOD COMPARABLE INCLUDING THE CLAIM OF DEPRECIATION IN THE FINANCIAL STATEMENTS. I F THE SAME IS CONSIDERED, THE AVERAGE PLI OF THE SAID COMPANY WORKS OUT TO ( - ) 16.06% AGAINST 4.49% . IN THIS REGARD, THEY BROUGHT OUR ATTENTION TO PAGE 545 OF THE PAPER BOOK AND SUBMITTED THAT FOR THE AY 2009 - 2010, IN THE ASSESSEES OWN CASE, SIMILAR ISSUE CAME UP FOR ADJUDICATION BEFORE THE DRP AND THE DRP DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE . A S STATED, THERE IS NO FURTHER APPEAL ON THIS ISSUE. IN THIS REGARD, LD COUNSEL FOR THE ASSESSEE BROUGHT OUR ATTENTION TO PARA 10 OF THE SAID DRPS ORDER FOR THE AY 2009 - 2010, DATED 27.12.2013. THE SAID ORDER OF THE DRP WAS NOT AVAILABLE BEFORE THE DRPS ORDER DATED 14.9.2012 FOR THE AY 2008 - 2009. IF THE SAME IS FOLLOWED, IN VIEW OF THE PRINCIPLES OF CONSISTENCY, THE ARRAYCOM LTD WITHOUT ADJUSTMENTS BY THE TPO SHOULD BE CONSIDERED AS A GOOD COMPARABLE IN FAVOUR OF THE ASSESSEE . 6. AFTER HEARING THE LD DR , WE HAVE PERUSED THE SAID PARA 10 OF THE DRPS ORDER FOR THE AY 2009 - 2010 (SUPRA) AND FIND MERIT IN THE ARGUMENT OF THE LD COUNSELS FOR THE ASSESSEE. FOR THE SAKE OF COMPLETENESS OF THIS ORDER, THE SAID PARA 10 OF THE DRPS ORDER FOR THE AY 2009 - 10 IS EX TRACTED AS UNDER: 10........ THIS GROUND OBJECTION RELATES TO THE TPOS ACTION IN NOT ADOPTING A CONSISTENT APPROACH REGARDING DEPRECIATION . IN THIS CONNECTION, THE ASSESSEE HAS POINTED OUT THAT IN THE CASE OF ARRAYCOM INDIA LTD , NO DEPRECIATION WAS PROVIDED AND THE TPO HAS FAILED TO CONSIDER THE DEPRECIATION IN THIS REGARD. THE ASSESSEES CONTENTION IS CONSIDERED AND THE TPO IS DIRECTED TO ADOPT THE CONSISTENT STAND REGARDING DEPRECIATION . AS THE TPO HAS HELD THAT THE DEPRECIAT ION IN THE ASSESSEES CASE IS AN OPERATING EXPENDITURE, SAME VIEW HAS TO BE ADOPTED IN THE CASE OF COMPARABLES INCLUDING ARRAYCOM. IF NO DEPRECIATION HAS BEEN PROVIDED IN THAT CASE, THE TPO IS DIRECTED TO TAKE THE DEPRECIATION INTO ACCOUNT FOR THE PURPOSE OF CALCULATION. 4 7. CONSIDERING THE ABOVE, WE ARE OF THE OPINION THAT THE AO SHOULD CONSIDER THE SAID COMPARABLE (ARRAYCOM LTD) WITHOUT ANY ADJUSTMENTS. ACCORDINGLY, THIS PART OF THE GROUND IS ALLOWED IN FAVOUR OF THE ASSESSEE. 8. FURTHER, LD COUNSELS F OR THE ASSESSEE DEMONSTRATED THAT IF THE ORDER OF THE DRP FOR THE AY 2009 - 2010 IS CONSIDERED ( IN CONNECTION WITH ARRAYCOM L T D ) , SHYAM TELECOM LIMITED SHOULD ALSO BE CONSIDERED IN FAVOUR OF THE ASSESSEE , THEN THE PLI OF THE ASSESSEE IS IN SAFE ZONE . T HEREFO RE, NO OTHER ADJUSTMENTS BY TPO ARE WARRANTED. ACCORDINGLY, WE PICKED UP THE ISSUES RELATING TO THE INCLUSION OF SHYAM TELECOM LIMITED FOR ADJUDICATION AS TO DECIDE IF THIS COMPARABLE CONSTITUTES GOOD COMPARABLE. IN THIS REGARD, LD COUNSEL FOR THE ASSESS EE BROUGHT OUR ATTENTION TO THE FINANCIAL STATEMENTS RELATING TO THE SHYAM TELECOM LIMITED. BRINGING OUR ATTENTION TO PAGE 281, 283 AND 285 OF THE PAPER BOOK, LD COUNSELS FOR THE ASSESSEE DEMONSTRATED THAT THE OP/OR FOR THE AYS 2006 - 07, 2007 - 08 AND 2008 - 09 OF THE SAID COMPANY ARE ( - ) 2.89% ; (+) 6.73% AND ( - ) 1.53% RESPECTIVELY . WITH THESE PARAMETERS, THE SAID COMPANY CANNOT BE CONSIDERED AS THE CASE OF PERSISTENT LOSSES. FOR EXCLUDING FROM THE LIST OF GOOD COMPARABLES, MERELY THE CONTEMPORANEOUS FIGURES ALONE SHOULD NOT BE CONSIDERED IN MATTERS OF BENCHMARKING THE LOSS CASES. IN THIS REG ARD, LD COUNSEL FOR THE ASSESSEE RELIED ON ONE OF THE ORDERS OF THE TRIBUNAL , WHEREIN ONE OF US (AM) IS A PARTY TO THE ORDER, IN THE CASE OF SUMITOMO CHEMICAL INDIA PRIVAT E LIMITED VS. DCIT IN APPEAL ITA NO.3077/M/2012 AND ITA NO.7461/M/2013 (AY 2007 - 2008), DATED 25.3.2015. HE ALSO RELIED ON ANOTHER ORDER OF THE TRIBUNAL IN THE CASE OF GOLDMAN SACHS (INDIA) SECURITIES PRIVATE LIMITED VS. ACIT IN ITA NO.7724/M/2011 (AY 2007 - 2008), DATED 23.1.2013 FOR THE ABOVE SAID PROPOSITION RELATING TO WHAT CONSTITUTES A CASE OF PERSISTENT LOSSES. ON PERUSAL OF THE RELEVANT PARAS OF THE SAID ORDERS OF THE TRIBUNAL (SUPRA), WE FIND, SHYAM TELECOM LIMITED CANNOT BE REJECTED FOR THE REASON THAT IT IS HAVING PERSISTENT LOSSES OR LOSS IN THE YEAR UNDER CONSIDERATION. FOR THE SAKE OF COMPLETENESS, RELEVANT EXTRACTS ON LOSSES FROM THE ORDER IN THE CASE OF SUMITOMO (SUPRA) ARE PLACED AS UNDER: - 14........... THE LOSS OF THE COMPANY IS DIFFERENT FROM THAT OF THE LOSS ON ACCOUNT OF OPERATING LOSS / PROFITS. IN THIS REGARD, LD COUNSEL BROUGHT OUR ATTENTION TO THE CONTENTS OF THE TPOS ORDER AND MENTIONED THAT THE PERSISTENT LOSS IS THE CRITERIA THE TPO CONSIDERED AND NOT THE OPERATING LOSS. CONSI DERING THE ABOVE, HE MENTIONED THAT THE COMPARABLE RECORDED THE LOSS ONLY FOR THE AY 2007 - 2008 AND FOR THE OTHER TWO YEARS I.E., 2005 - 06 AND 2006 - 07, THE COMPARABLES RECORDED THE PROFITS AND THEREFORE, THE COMPARABLE CONSTITUTES GOOD COMPARABLE. LD COUNSEL ALSO 5 MENTIONED THAT FOR CONSIDERING THE COMPARABLE AS A PERSISTENT LOSS MAKING COMPANY, MINIMUM 3 YEARS INCLUDING THE CURRENT YEAR SHOULD REGISTER LOSS IN SUCCESSION . FOR THIS, LD COUNSEL RELIED ON VARIOUS DECISIONS OF THE TRIBUNAL. ....... 9. WE HAVE A LSO PERUSED THE CALCULATIONS FURNISHED IN ANNEXURES 1A AND 2A FOR THE PROPOSITION THAT ASSESSEE IS WITHIN THE ALLOWED MARGIN OF (+)/( - ) 5% IF THE ABOVE ISSUES ARE DECIDED IN ASSESSEES FAVOUR. WE HAVE HELD THAT ARRAYCOM LIMITED SHOULD BE ALLOWED AS COMPAR ABLE WITHOUT ADJUSTMENTS AND THE CASE OF SHYAM TELECOM LIMITED SHOULD BE CONSIDERED IN FAVOUR OF THE ASSESSEE, THEREFORE, IN PRINCIPLE, BOTH THE ARGUMENTS OF THE ASSESSEE ARE APPROVED FOR THE REASONS GIVEN IN THE ABOVE PARAGRAPHS OF THIS ORDER. HOWEVER, T HE FIGURES GIVEN BY THE ASSESSEE IN THE SAID ANNEXURES 1A AND 2A ARE REQUIRED TO BE VERIFIED. FOR THIS PURPOSE, WE REMAND THIS ISSUE TO THE FILE OF THE AO FOR VERIFICATION CONSIDERING THE ABOVE DISCUSSION. 10. CONSIDERING THE RELIEF GRANTED BY US TO THE ASSESSEE , WE ARE OF THE OPINION THAT THE ADJUDICATION OF THE REST OF THE GROUNDS RELATING TO THE TP ADJUSTMENTS BECOMES ACADEMIC EXERCISE. ACCORDINGLY, THEY ARE DISMISSED AS ACADEMIC. C ORPORATE ISSUES 11. GROUND NOS.11 AND 12 RAISED BY THE ASSESSEE ARE RELATES TO THE CORPORATE ISSUES . GROUND NO.11 RELATES TO THE GRANTING OF THE DEPRECIATION U/S 32 OF THE ACT ON THE GOODWILL , BEING AN INTANGIBLE ASSET. IN THIS REGARD, AT THE OUTSET, LD REPRESENTATIVES OF BOTH THE PARTIES AGREE D TO THE PROPOSITION THAT THE SAID ADDITIONAL GROUND IS LEGAL IN NATURE AND THE SAME IS REQUIRED TO BE ADJUDICATED AS PER THE RATIO OF SUPREME COURT LAID DOWN IN THE CASE OF SMIFS SECURITIES LIMITED [348 ITR 302 (SC)] WHEREIN IT WAS HELD THAT THE GOODWILL CONSTITUTES AN ASSET UNDER EXPLANATION 3(B) TO SECTION 32(1) OF THE ACT. RELEVANT PORTION FROM THE SAID SUPREME COURT JUDGMENT READS AS UNDER: 8. THE ASSESSING OFFICER HELD THAT GOODWILL WAS NOT AN ASSET FALLING UNDER EXPLANATION 3 TO SECTION 32(1) OF THE INCOME TAX ACT, 1961 (THE ACT, FOR SHORT). 9. WE QUOTE HEREINBELOW EXPLANATION 3 TO SECTION 32(1) OF THE ACT: EXPLANATION 3 - FOR THE PURPOSES OF THIS SUB - SECTION, THE EXPRESSIONS ASSET AND BLOCK OF ASSETS SHALL MEAN - (A) TANGIBLE ASSETS, BEING BUILDINGS, MACHINERY, PLANT OR FURNITURE; (B) INTANGIBLE ASSETS, BEING KNOW - HOW PATENTS, COPYRIGHTS, TRADEMARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. 6 EXPLANATION 3 STATES THAT THE EXPRESSIO N ASSET SHALL MEAN AN INTANGIBLE ASSET, BEING KNOW - HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. A READING THE WORDS ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE I N CLAUSE (B) OF EXPLANATION 3 INDICATES THAT GOODWILL WOULD FALL UNDER THE EXPRESSION ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF A SIMILAR NATURE. THE PRINCIPLE OF EJUSDEM GENERIS WOULD STRICTLY APPLY WHILE INTERPRETING THE SAID EXPRESSION WHICH FINDS PL ACE IN EXPLANATION 3(B). IN THE CIRCUMSTANCES, WE ARE OF THE VIEW THAT GOODWILL IS AN ASSET UNDER EXPLANATION 3(B) TO SECTION 32(1) OF THE ACT. 12. CONSIDERING THE ABOVE SETTLED NATURE OF THE ISSUE, WE DIRECT THE AO TO APPLY THE SAID JUDGMENT OF THE AP EX COURT TO THE PRESENT CASE AND ALLOW THE ASSESSEES CLAIM AND DECIDED THE ISSUE ACCORDINGLY. THUS, THE ADDITIONAL GROUND NO.11 BEING LEGAL IN NATURE IS ADMITTED AND ALLOWED IN FAVOUR OF THE ASSESSEE . 13. GROUND NO.12 RELATES TO THE GRANTING OF DEPRECIA TION IN RESPECT OF THE CAPITALIZED SOFTWARE EXPENDITURE. IN THIS REGARD, LD COUNSEL FOR THE ASSESSEE BROUGHT OUR ATTENTION TO GROUND NO.9 OF THE INSTANT APPEAL, WHICH QUESTIONS THE DECISION OF THE REVENUE IN TREATING THE SOFTWARE EXPENDITURE AS CAPITAL EX PENDITURE. IN THIS REGARD, LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE SAID GROUND NO.9 IS NOT PRESSED IF THE DEPRECIATION IS ALLOWED ON THE SOFTWARE EXPENDITURE AS PER THE RULES. AFTER DISCUSSING WITH THE LD REPRESENTATIVES OF BOTH THE PARTIES, WE FI ND MERIT IN THE ARGUMENT OF THE LD COUNSEL FOR THE ASSESSEE AND THE SAME IS ALLOWED. AO IS DIRECTED TO GRANT DEPRECIATION AS PER THE RELEVANT RULES IN RESPECT OF THE SOFTWARE EXPENDITURE CAPITALIZED BY THE REVENUE WHICH IS THE SUBJECT MATTER OF DISPUTE RA ISED IN GROUND NO.9. ACCORDINGLY, GROUND NO.12 IS ALLOWED . 14. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH OCTOBER, 2015. SD/ - SD/ - (PAWAN SINGH) (D. KARUNAKARA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; 28 .10 .2015 . . ./ OKK , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 7 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . //TRUE COPY// / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI