RATILAL BECHARLAL & SONS, MUMBAI V. JT CIT RG 16(3), MUMBAI

ITA 7876/MUM/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8307 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-11-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 29-10-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 21-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: AJIT TOLANI AW MR ABHAY DITOLE
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Revenue expenditure
• Section: 92C; 92

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI . , , ! ! ! ! '# $% '# $% '# $% '# $% , ,, , & & & & ' ' ' ' BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER . / ITA NO. 7876/MUM./2011 ( &) * !+* / ASSESSMENT YEAR : 200708 ) M/S. RATILAL BECHARLAL & SONS 401/402, PRASAD CHAMBERS OPERA HOUSE, MUMBAI 400 004 .. ,- / APPELLANT ) V/S JT. COMMISSIONER OF INCOME TAX RANGE18(3), MATRU MANDIR, TARDEO MUMBAI 400 007 .... ./,- / RESPONDENT , . / PERMANENT ACCOUNT NUMBER AAAFR7913B &) *1# 2 3 / ASSESSEE BY : MR. AJIT TOLANI A/W MR. ABHAY DITOLE 4! 2 3 / REVENUE BY : MR. AJEET KUMAR JAIN MRS. SASMITA MISRA )! 2 # / DATE OF HEARING 29.10.2012 $ 5+ 2 # / DATE OF ORDER 07.11.2012 $ $ $ $ / ORDER ./ ./ ./ ./ PER BENCH THE PRESENT APPEAL PREFERRED BY THE ASSESSEE, IS DI RECTED AGAINST THE FINAL IMPUGNED ASSESSMENT ORDER DATED 21 ST OCTOBER 2011, WHICH HAS BEEN PASSED IN PURSUANCE OF THE DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANELII (FOR SHORT DRP ) UNDER SECTION 144C(5) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT ) FOR THE QUANTUM OF ASSESSMENT FOR A.Y. 2007 08. M/S. RATILAL BECHARLAL & SONS 2 2. IN GROUNDS NO.1 TO 6, THE ASSESSEE HAS CHALLENGED T HE ADDITION / ADJUSTMENT OF ` 3,70,87,177, TOWARDS ARMS LENGTH PRICE (FOR SHORT ALP ) IN RESPECT OF ITS TRANSACTIONS WITH ASSOCIATE ENTER PRISES (FOR SHORT A.E ) AMOUNTING TO ` 49,8100,499, DURING THE YEAR. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE O F CUT AND POLISHED DIAMONDS, WHICH ARE BEING EXPORTED. DURING THE YEAR , THE ASSESSEE HAD GROSS SALES OF ` 464,90,63,687, AS AGAINST THIS, THE SALES TO A.E. AMOUNTED TO ` 49,81,00,499. THE ASSESSEE HAD DISCLOSED ITS NET P ROFIT TO THE COST RATIO OF 4.86%. THE PROFIT LEVEL INDICATOR (FOR SHO RT PLI ) WAS WORKED OUT BY TAKING NET PROFIT BEFORE TAX AND EXCLUDING NONO PERATING EXPENDITURE LIKE DEBTORS WRITTENOFF, FINAL COST AND NONOPERAT ING INCOME. THE FINAL PROFILE OF THE ASSESSEE VISAVIS THE A.E. TRANSACT IONS AND NONA.E. TRANSACTION AND THE NET PROFIT DURING THE YEAR WERE AS UNDER: PARTICULARS A.ES ( ` ) NON A.ES ( ` ) TOTAL ( ` ) SALES (A) 49,81,00,499 4,15,09,63,188 4,6,490,63,687 OPERATING EXPENSES * (B) EXCLUDING NONOPERATING EXPENSES (DEBTORS WRITTENOFF) FINANCIAL COSTS (INTEREST AND FINANCE CHARGES) 47,50,24,604 3,95,86,58,237 4,43,36,82,841 NET PROFIT (C) (AB) 2,30,75,895 19,23,04,951 21,53,80,846 NET PROFIT AS A % OF EXPENSES (C/B) 4.86% 4.86% 4.86% 4. SINCE THE ASSESSEE HAD INTERNATIONAL TRANSACTIONS W ITH THE A.E. FOR MORE THAN ` 15 CRORES, THE MATTER WAS REFERRED TO THE TRANSFER PRICING OFFICER (FOR SHORT TPO ) UNDER SECTION 92CA(1) FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIONS. IN THE T.P STUDY RE PORT, THE ASSESSEE HAS ADOPTED TRANSACTIONAL NET MARGIN METHOD AS MOST APPROPRIATE METHOD FOR DETERMINING ITS ALP OF INTERNATIONAL TRANSACTIO N. IT HAD USED SIX COMPARABLE COMPANIES FOR BENCH MARKING ITS ALP ON I NTERNATIONAL TRANSACTIONS. HOWEVER, OUT OF SIX, THE TPO REJECTED THREE COMPARABLES ON THE GROUND THAT THEIR RELATED PARTY TRANSACTIONS WE RE EITHER MORE THAN 15% OR TURNOVER WAS MORE THAN ` 1,500 CRORES. THEREAFTER, THE TPO INTRODUCED HIS SET OF FRESH NINE COMPARABLES TO BEN CH MARK THE ALP OF INTERNATIONAL TRANSACTION OF THE ASSESSEE. THE ARIT HMETIC MEAN OF THE PLI M/S. RATILAL BECHARLAL & SONS 3 OF THE 12 COMPARABLE COMPANIES (THREE OF ASSESSEE A ND NINE OF TPO) WORKED OUT TO 5.34%. 5. BEFORE THE DRP, THE ASSESSEE HAD MADE DETAIL OBJECT IONS WHICH WERE REJECTED AND THE ORDER OF THE TPO FOR ADOPTING THE COMPARABLE COMPANIES AND THE MARGIN OF 5.34% SO ARRIVED AT WERE UPHELD. 6. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE, BY WAY OF PRELIMINARY GROUND, SUBMITTED THAT EVEN IF ARITHMET IC MEANS OF OPERATING PROFIT MARGIN OF 12 COMPARABLE COMPANIES ARRIVED AT 5.34% IS APPLIED ON ASSESSEES INTERNATIONAL TRANSACTION, THEN THE SAME FALLS WITHIN THE SAFE HARBOUR OF +/ 5% IN VIEW OF THE PROVISO TO SECTION 92C(2). HIS FURTEHR OBJECTION WAS THAT THE ADJUSTMENT ARISING OUT OF AL P SHOULD NOT HAVE BEEN MADE ON THE ENTIRE TURNOVER OF THE ASSESSEE, INSTEA D IT SHOULD HAVE BEEN RESTRICTED TO INTERNATIONAL TRANSACTIONS WITH THE A .E., BECAUSE SALES TO NONA.E. COMPRISED OF 89% OF THE ENTIRE SALES. TO D EMONSTRATE THAT THE ALP DETERMINED BY THE TPO AND AS SHOWN BY THE ASSES SEE FALLS WITHIN +/ 5%, THE LEARNED COUNSEL SUBMITTED THE FOLLOWING WOR KING WHICH FOR THE SAKE OF READY REFERENCE IS REPRODUCED HEREIN BELOW: PARTICULARS A.ES ( ` ) NON A.ES ( ` ) TOTAL ( ` ) SALES (A) 49,81,00,499 41,509,63,188 4,64,90,63,687 OPERATING EXPENSES * (B) 47,50,24,604 3,95,86,58,237 4,43,36,82,841 NET PROFIT (C) (AB) 23,075,895 19,23,04,951 21,53,80,846 NET PROFIT AS A % OF EXPENSES (C/B) 4.86% 4.86% 4.86% ARMS LENGTH PROFIT LEVEL INDICATOR (PLI) DETERMINED BY THE TAX AUTHORITIES 5.34% 5.34% 5.34% ARMS LENGTH PROFIT WITH PLI OF 5.34% 2,54,51,635 21,21,03,383 23,75,55,018 ARMS LENGTH SALES AS COMPUTED BY TAX AUTHORITIES 50,20,74,018 4,18,40,76,846 4,68,61,50,864 DIFFERENCE IN TRANSACTIONS PRICE AND ARMS LENGTH PRICE 39 73,519 3,31,13,658 3,70,87,177 RANGE OF ARMS LENGTH SALES CONSIDERING 5% VARIATION FROM ALP +5% 527,177,718.58 5% 476,970,316.81 M/S. RATILAL BECHARLAL & SONS 4 7. FURTHER, THE LEARNED COUNSEL, IN SUPPORT OF HIS CON TENTIONS THAT ADJUSTMENT OF ALP HAS TO BE MADE ON INTERNATIONAL T RANSACTION WITH A.ES ONLY AND NOT ON ENTIRE TURNOVER, REFERRED AND RELIE D UPON THE FOLLOWING CASE LAWS: PETRO ARALDITE P. LTD., ITA NO.3531/MUM./2009; T. TWO INTERNATIONAL P. LTD., ITA NO.5644/MUM./2008 , TERA JEWELS EXPORTS P. LTD. ITA NO.5646/MUM./2008 AND TARA ULTIMO P. LT D.; HUNTSMAN ADVANCED MATERIALS (I) P. LTD., ITA NO.823 7/M./2010; SMCC CONSTRUCTION INDIA LTD., ITA NO.4333/DEL./2009 . 8. BESIDES THIS, HE ALSO MADE DETAIL SUBMISSIONS ON TH E MERITS OF VARIOUS COMPARABLE COMPANIES ADOPTED BY THE TPOS AN D THE ADJUSTMENT MADE IN ALP. 9. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESE NTATIVE, RELYING UPON THE ORDER OF THE TPO AS WELL AS THE DIRECTIONS OF THE DRP SUBMITTED THAT THE INTERNATIONAL TRANSACTION OF THE ASSESSEE WERE ON INCOME SIDE AS WELL AS ON EXPENDITURE SIDE AND THE ASSESSEE HAS BE NCH MARKED ITS INTERNATIONAL TRANSACTION AT THE ENTITY LEVEL. HE S UBMITTED THAT THE ALP OF THE TRANSACTION WITH A.E. HAS TO BE COMPUTED AS PER THE PROVISIONS OF THE ACT AND THE LAW DOES NOT REQUIRED COMPUTING OF ALP OF THE TRANSACTION WITH INDEPENDENT PARTIES BECAUSE THERE IS AN INHERENT PR ESUMPTION THAT THE TRANSACTION WITH INDEPENDENT PARTIES SHOULD ALWAYS BE AT ALP. SO, THE TRANSACTIONS WITH THE INDEPENDENT PARTIES ARE AT AR MS LENGTH AND THE MARGIN OF THE ASSESSEES COMPANY IS DOWN BECAUSE OF THE TRANSACTION WITH THE A.E. THEREFORE, MARGIN FROM THE INDEPENDENT TRA NSACTION AND INTERNATIONAL TRANSACTION CANNOT BE COMPUTED SEPARA TELY UNLESS THE MARGIN IS APPLIED ON THE ENTITY LEVEL. HE SUBMITTED THAT T HE ADJUSTMENT MADE BY THE TPO IS JUSTIFIED. ON THE BASIS OF HIS ARGUMENT, HE ALSO GAVE HIS COMPUTATION OF ALP IN THE FOLLOWING MANNER: M/S. RATILAL BECHARLAL & SONS 5 FIGURES IN ` TOTAL A.E TRANSACTION NONA.E. TRANSACTION SALES OF THE ASSESSEE 4,64,90,63,687 A 49,81,00,499 4,15,09,63,188 SINCE NONA.E. TRANSACTIONS ARE AT ARMS LENGTH HENCE APPLY THE ARMS LENGTH MARGIN I.E., 5.34% TO ARRIVE AT THE COST COST 4,44,85,95,846 B 50,80,57,410 3,94,05,38,436 APPLY THE ARMS LENGTH MARGIN ON THE COST USED TO EARN THE A.E. SALES C 2,71,30,266 ARMS LENGTH PRICE OF SALES MADE TO THE A.ES D=B+C 53,51,87,676 DIFFERENCE OF ALP AND THE PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS TAKEN PLACE E=DA 3,70,87,177 95% OF ARMS LENGTH PRICE 50,84,28,292 10. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS OF THE PARTIES, PERUSED THE MATERIAL AVAILABLE ON RECORD WITH REGAR D TO THE PRELIMINARY OBJECTION RAISED BY THE LEARNED COUNSEL. ADMITTEDLY , THE ASSESSEES NET PROFIT TO THE COST RATIO WITH ITS A.E. TRANSACTIONS WAS AT 4.86% AND ALSO FOR THE ENTIRE TURNOVER. THE TPO, AFTER TAKING SET OF 1 2 COMPARABLES TO BENCH MARK THE ALP OF INTERNATIONAL TRANSACTIONS OF THE A SSESSEE, HAS TAKEN THE ARITHMETIC MEAN OF PLI OF 12 COMPARABLES AT 5.34%. WE HAVE TO BASICALLY EXAMINE AS TO WHETHER THE ADJUSTMENT IN ALP, FALLS WITHIN SAFE HARBOUR OF +/ 5% OR NOT. SECTION 92C PROVIDES THAT THE ASSESS EES ALP ALONG WITH PRICE IN RELATION TO INTERNATIONAL TRANSACTIONS SHA LL BE DETERMINED BY FOLLOWING ANY OF THE METHODS, BEING THE MOST APPROP RIATE METHOD HAVING REGARD TO THE NATURE OF TRANSACTION AND THE MOST AP PROPRIATE METHOD SHOULD BE APPLIED FOR DETERMINING OF ALP. THE PROVISO TO SECTION 92C(2) PROVIDES THAT WHERE MORE THAN ONE PRICE IS DETERMIN ED BY THE MOST APPROPRIATE METHOD, THE ALP SHALL BE TAKEN TO BE TH E ARITHMETICAL MEAN OF SUCH PRICE OR AT THE OPTION OF THE ASSESSEE A PRICE WHICH MAY VARY FROM ARITHMETIC MEAN BY AN AMOUNT NOT EXCEEDING 5% OF SU CH ARITHMETICAL MEAN. THE BASIC PHILOSOPHY AND CONCEPT BEHIND THE PROVISO IS THAT IN TRANSFER PRICING, THERE CANNOT BE EXACT DETERMINATI ON OF ALP AS THERE ARE M/S. RATILAL BECHARLAL & SONS 6 LOT OF FACTORS AND VARIABLES IN COMING TO A PROPER JUDGMENT. THE USE OF RANGE OF 5% IN THE RESULTS REDUCES THE EFFECT OF DI FFERENCE IN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS. THE CBDT, VIDE CIRC ULAR NO.12/2001 DATED 23 RD AUGUST 2001, LAYING DOWN THE GUIDELINES FOR APPLYI NG THE NEWLY INTRODUCED TRANSFER PRICING REGIME STATED AS UNDER: HOWEVER, THIS IS A NEW LEGISLATION. IN THE INITIAL YEARS OF ITS IMPLEMENTATION, THERE MAY BE ROOM FOR DIFFERENT INT ERPRETATIONS LEADING TO UNCERTAINTIES WITH REGARD TO DETERMINATION OF ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION. WHILE IT WOULD BE NECESS ARY TO PROTECT OUR TAX BASE, THERE IS A NEED TO ENSURE THAT THE TAXPAYERS ARE NOT PUT TO AVOIDABLE HARDSHIP IN THE IMPLEMENTATION OF THESE R EGULATIONS. IN THE BACKGROUND, THE BOARD HAS DECIDED THE FOLLOW ING: (I) THE ASSESSING OFFICER SHALL NOT MAKE ANY ADJU STMENT TO THE ARMS LENGTH PRICE DETERMINED BY THE TAXPAYER, IF SUCH PR ICE IS UP TO 5% LESS OR UP TO 5% MORE THAN THE PRICE DETERMINED BY THE ASSE SSING OFFICER. IN SUCH CASES THE PRICE DECLARED BY THE TAXPAYER MAY B E ACCEPTED. THIS CONCEPT WAS GIVEN STATUTORY FORM IN THE FINANC E ACT, 2002, BY PROVIDING THE PROVISO TO SECTION 92C(2). THUS, THE STATUTE ITSELF RECOGN ISES THAT IF THE VARIATION BETWEEN ALP SO DETERMINED AND THE PRICE AT WHICH INTERNATIONAL TRANSACTION HAS BEEN UNDERTAKEN VARIA TION OF ARITHMETIC MEAN SHOULD BE WITHIN TOLERABLE RANGE OF +/ 5%. 11. THE APPLICATION OF +/ 5% TO THE ALP CAN BE DEMONST RATED BY WAY OF FOLLOWING ILLUSTRATION: NON A.ES TOTAL OPERATING EXPENDITURE ATTRIBUTABLE TO A.E. SALES ` 100 NET PROFIT OF ASSESSEE FROM A.E. SALES ` 4.51 OPERATING PROFIT % OF THE ASSESSEE 4.51% A.E. SALES ` 104.51 IF AE PLI AS DETERMINED BY THE TPO IS TAKEN AT 5.34% THEN ARMS LENGTH SALES WOULD BE. ` 105.34 THUS, THE DIFFERENCE IN TRANSACTION PRICE AND ALP WOULD BE ` 105.34 () ` 104.51 = 0.83 RANGE OF AE SALES CONSIDERING 5% VARIATION FROM ALP +5% OF ` 105.34 ` 110.61 5% OF ` 105.34 ` 100.07 M/S. RATILAL BECHARLAL & SONS 7 THUS, +/ 5% RANGE FALLS BETWEEN ` 100.07 TO ` 110.61 AND ACCORDINGLY, ` 104.51 IS WITHIN THE RANGE . 12. NOW, GOING BY THE COMPUTATION AS SUBMITTED BY THE L EARNED COUNSEL, WE FIND THAT THE A.E. SALES AS COMPUTED BY THE TPO, AFTER APPLYING 5.34% COMES TO ` 50,20,74,018, WHEREAS ASSESSEES SALES TO A.E. IS ` 49,81,00,499. GOING BY SAFE HARBOUR OF 5% VARIATION , +5% COMES TO ` 52,71,77,719 AND 5% COMES TO ` 47,69,70,317. THUS, THE ASSESSEES ALP FALLS WITHIN SAFE HARBOUR OF +/5% OF THE ALP DETER MINED BY THE ASSESSING OFFICER. INSOFAR AS THE CALCULATION SUBMITTED BY TH E LEARNED DEPARTMENTAL REPRESENTATIVE IS CONCERNED, WE DO NOT FIND ANY MER ITS IN THE SAID CALCULATION IN VIEW OF OUR ANALYSIS GIVEN ABOVE. 13. FURTHER, WE ALSO REJECT THE LEARNED DEPARTMENTAL RE PRESENTATIVES CONTENTION THAT ADJUSTMENT ARISING OUR OF ALP HAS T O BE MADE ON THE ENTIRE TURNOVER INSTEAD OF RESTRICTING THE SAME TO THE INT ERNATIONAL TRANSACTION WITH THE A.E. THIS AGAIN IS AGAINST THE SPIRIT OF L AW AS ENVISAGED IN SECTION 92 WHICH PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ALP . THUS, THE ALP HAS TO BE ON INTERNATIONAL TRANSACTION AND NOT IN R ELATION TO ASSESSEES ENTIRE SALES / TURNOVER. THE SECOND PROVISO TO SECTION 92C, THOUGH BROUGHT IN STATUTE BY THE FINANCE ACT, 2009, W.E.F. 1 ST OCTOBER 2009, PROVIDES THAT IF THE VARIATION BETWEEN ALP SO DETERMINED AND THE PRICE AT WHICH INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTA KEN SHALL BE DEEMED TO BE THE ALP , HOWEVER, THE SAME IS INDICATIVE OF THE PREPOSITIO N THAT THE ALP IS TO BE DETERMINED ONLY ON INTERNATIONAL TRANS ACTION. THIS, INTERALIA, MEANS THAT THE STATUTE ITSELF PROVIDES THAT THE ADJ USTMENT ARISING OUT OF ALP SHOULD BE WITH REGARD TO INTERNATIONAL TRANSACT ION AND NOT ON THE ENTIRE TURNOVER OF THE ASSESSEE. THE TRANSFER PRICI NG MECHANISM REVOLVES AROUND INTERNATIONAL TRANSACTION WHERE IT HAS TO BE SEEN WHETHER SUCH TRANSACTIONS ARE AT ARMS LENGTH PRICE OR NOT. THE PRESUMPTION IS THAT TRANSACTIONS WITH THE INDEPENDENT PARTIES ARE ALWAY S AT ARMS LENGTH PRICE, HOWEVER, IT IS WITH REGARD TO RELATED PARTIES I.E., A.ES, ONLY ONE HAS TO SEE WHETHER SUCH A TRANSACTION IS AT ARMS LENGTH. THE PROFIT MARGIN FROM THE INTERNATIONAL TRANSACTION WITH THE A.E. HAS TO BE S EEN IN RELATION TO THE M/S. RATILAL BECHARLAL & SONS 8 UNCONTROLLED TRANSACTION WITH THE INDEPENDENT PARTI ES. WHAT IS TO BE COMPARED IS THE INTERNATIONAL TRANSACTIONS OF THE A SSESSEE WITH ITS RELATED PARTIES AND NOT FOR ITS ENTIRE TRANSACTION WITH NON RELATED PARTIES ALSO. THEREFORE, ALP HAS TO BE SEEN ONLY WITH REGARD TO I NTERNATIONAL TRANSACTION WITH A.ES AND NOT ON THE ENTIRE TURNOVER / SALES. 14. THUS, IN OUR CONCLUSION, WE HOLD THAT IN THE PRESEN T CASE, THE VALUE OF INTERNATIONAL TRANSACTION OF THE ASSESSEE FALLS WITHIN SAFE HARBOUR OF +/ 5% OF THE ALP DETERMINED BY THE TPO. ACCORDINGLY, O N THIS PRELIMINARY GROUND ALONE, THE ADJUSTMENT OF ` 3,70,87,177 MADE TOWARDS ALP BY THE ASSESSING OFFICER IS UNCALLED FOR AND THE SAME IS H EREBY DELETED. THUS, GROUNDS NO.1 TO 6, RAISED BY THE ASSESSEE ARE ALLOW ED. 15. IN GROUND NO.7, THE ASSESSEE HAS CHALLENGED DISALLO WANCE OF EXPENDITURE ON COMPUTER SOFTWARE. 16. THE DRP, ON ASSESSEES OBJECTION, HAS OBSERVED AND HELD AS UNDER: 3. OBJECTION NO.2: OBJECTION NUMBER 2 PERTAINS TO T HE A.O. HAVING ERRED IN MAKING A DISALLOWANCE OF LEGAL AND PROFESS IONAL CHARGES PAID FOR SOFTWARE CONSULTING BY ERRONEOUSLY HOLDING THAT THE SAME WAS TOWARDS DEVELOPMENT OF SOFTWARE. WITHOUT PREJUDICE, IT WAS ARGUED THAT IN NOT ALLOWING DEPRECIATION ON THE SAME, IF THE SAME WAS IN THE NATURE OF SOFTWARE. IT IS SUBMITTED BY THE ASSESSEE THAT A SU M OF RS.372361 WAS SHOWN AS LEGAL AND PROFESSIONAL FEE TOWARDS SOFTWAR E CONSULTANCY CHARGES PAID TO VARIOUS PARTIES. IN SO FAR AS THE PAYMENTS TO SYSTEMS AND SOFTWARE ENTERPRISES OF RUPEES 140000 WAS CONCERNED THIS WAS FOR AMC FOR EXISTING SOFTWARE AND THEREFORE ALLOWABLE REVEN UE EXPENSE. IN SO FAR AS THE PAYMENTS TO GUNVANTRAI KAKU AND NIRAV KAKU A RE CONCERNED THESE WERE FOR MAINTENANCE OF SOFTWARE AND THE OTHER RECH ARGES (IN 2 PARTY NAMES) WERE IN THE NATURE OF SOFTWARE MAINTENANCE A ND NOT FOR DEVELOPMENT OF ANY NEW SOFTWARE. ASSESSEE STATES TH AT THE AO HAS MISTAKENLY CONSTRUED THAT THE AMOUNT DEBITED WERE A RISING OUT OF AN AGREEMENT FOR DEVELOPMENT OF SOFTWARE AND ALSO ERRE D IN TREATING MONTHLY CONSULTATION FEE AS EXPENSES ON DEVELOPMENT OF SOFT WARE. 3.1 SUBMISSIONS MADE HAVE BEEN CONSIDERED. WE FIND THAT THE ASSESSEES ARGUMENT OF AMC FOR MAINTENANCE OF SOFTWARE IS REAS ONABLE. WE ACCORDINGLY, DIRECT THE AO TO VERIFY THE BILLS/PAYM ENT VOUCHERS IN RESPECT OF THE DISALLOWANCE UNDER THIS HEAD. IF IT IS FOUND THAT THE PAYMENT IS ROT FOR DEVELOPMENT OR UP GRADATION OF THE SOFTWARE BUT IN THE NATURE OF AMC/MAINTENANCE THEN SUCH EXPENDITURE WOULD BE CONS IDERED ALLOWABLE AS REVENUE EXPENDITURE. REMAINING EXPENDITURE, IF A NY, WOULD BE CAPITALIZED AND DEPRECIATION ALLOWED AS PER INCOME TAX RULES. M/S. RATILAL BECHARLAL & SONS 9 17. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUB MITTED THAT THE ASSESSEE HAD DEBITED A SUM OF ` 3,72,361 TO LEGAL AND PROFESSIONAL FEES TOWARDS SOFTWARE CONSULTANCY CHARGES PAID AS UNDER: SYSTEMS & SOFTWARE ENTERPRISES RS. 140,000 NIRAV KAKU RS. 150,040 GUNVANTRAI KAKU RS. 37,821 SUBODH CHOGLE RS. 37,500 KESHAVKANT DWIVEDI RS. 7,500 18. HE CLARIFIED THAT THE ASSESSEE USES VARIOUS SOFTWAR E FOR ITS OPERATIONS AND WAS ALSO IN THE PROCESS OF GETTING N EW SOFTWARE. THE PAYMENTS MADE TO SYSTEMS AND SOFTWARE (S&S) WERE TOWARDS MAINTENANCE OF EXISTING SOFTWARE. S&S WAS ALSO DEVE LOPING OTHER SOFTWARE AND THE PAYMENTS MADE FOR THAT PURPOSE WERE SHOWN A S ADVANCES GIVEN. THE PAYMENTS TO NIRAV AND GUNVANTRAI KAKU WERE ALSO MONTHLY CHARGES PAID FOR MAINTENANCE OF SOFTWARE. THE OTHER CHARGES WERE ALSO IN THE NATURE OF SOFTWARE MAINTENANCE AND WERE NOT FOR THE DEVELOPMENT OF ANY NEW SOFTWARE. THE EXPENSES HAVE TO BE LOOKED AT IN LINE WITH THE GENERAL DISTINCTION BETWEEN CAPITAL AND REVENUE TO DECIDE W HETHER THE EXPENSES WERE TOWARDS CREATION OF NEW SOFTWARE OR TOWARDS RE GULAR MAINTENANCE OF EXISTING SOFTWARE. THE ASSESSING OFFICER HAS MERELY TREATED THE ENTIRE SUM AS BEING IN THE NATURE OF EXPENSE INCURRED ON CREAT ING SOFTWARE. 19. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESE NTATIVE RELIED UPON THE DRPS DIRECTIONS. 20. AFTER HAVING CAREFULLY CONSIDERED THE RIVAL CONTENT IONS OF THE PARTIES, AND THE FINDINGS OF THE DRP, WE FIND THAT INSOFAR A S THE DIRECTIONS ON ACCOUNT OF AMC FOR MAINTENANCE OF SOFTWARE GIVEN BY THE DRP IS CONCERNED, THE SAME APPEARS TO BE VERY REASONABLE A ND NO INTERFERENCE IS CALLED FOR. HOWEVER, WITH REGARD TO THE OTHER EXPEN DITURE, THE ASSESSING OFFICER IS DIRECTED TO VERIFY THIS CONTENTION OF TH E ASSESSEE IN THE LIGHT OF THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL, DELHI, RENDERED IN AMWAY INDIA ENTERPRISES V/S DCIT, (2008) 111 ITD 11 2 (DEL.). THUS, THIS GROUND IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. M/S. RATILAL BECHARLAL & SONS 10 21. IN GROUND NO.8, THE ASSESSEE HAS CHALLENGED THE DIS ALLOWANCE OF DEPRECIATION ON LAPTOP PURCHASED. 22. AFTER HEARING BOTH THE PARTIES, WE FIND THAT THE AS SESSEE, BEFORE THE ASSESSING OFFICER AS WELL AS BEFORE THE DRP, SUBMIT TED THAT IT HAS PURCHASED A LAPTOP WORTH ` 98,696, THROUGH CREDIT CARD, HOWEVER, NO OTHER EVIDENCES WERE PRODUCED LIKE PURCHASE INVOICE, ETC. THE ASSESSEE WAS ALSO REQUIRED TO PRODUCE OTHER CIRCUMSTANTIAL EVIDENCES LIKE WARRANTY DETAILS, ETC. THE ASSESSEE, HOWEVER, COULD NOT FILE ANY SUCH EVIDENCE. IN VIEW OF THESE FACTS, THE DRP REJECTED THE ASSESSEES OBJECT ION. BEFORE US ALSO, THE LEARNED COUNSEL FOR THE ASSESSEE COULD NOT PRODUCE EVIDENCE FOR PURCHASE OF LAPTOP. THUS, IN VIEW OF THE REASONS GIVEN BY TH E ASSESSING OFFICER, WE DO NOT FIND ANY MERIT IN THE CONTENTION OF THE ASSE SSEE AND THE SAME IS DISMISSED. THUS, GROUND NO.8, IS DISMISSED. 23. 1 #8 &) *1# 2 92 :;< ' '$ !# = 2 4# >? @ 23. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED FOR STATISTICAL PURPOSES. $ 2 + A B)8 7 TH NOVEMBER 2012 2 C @ ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH NOVEMBER 2012 SD/- . .. . B. RAMAKOTAIAH ACCOUNTANT MEMBER SD/- '# '# '# '# $% $% $% $% & & & & AMIT SHUKLA JUDICIAL MEMBER MUMBAI, B) B) B) B) DATED: 7 TH NOVEMBER 2012 M/S. RATILAL BECHARLAL & SONS 11 $ 2 .&#'D ED+# / COPY OF THE ORDER FORWARDED TO : (1) &) *1# / THE ASSESSEE; (2) 4! / THE REVENUE; (3) F () / THE CIT(A); (4) F / THE CIT, MUMBAI CITY CONCERNED; (5) D!IC .&#&) , , / THE DR, ITAT, MUMBAI; (6) CJ* K / GUARD FILE. /D# .&# / TRUE COPY $) / BY ORDER . 4. LM / PRADEEP J. CHOWDHURY !1N &)4 L! / SR. PRIVATE SECRETARY : / > 4 / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI