DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 5,, PUNE vs. RENISHAW METROLOGY SYSTEMS LTD,, PUNE

Both the appeals relating to the same assessee were heard together and are being disposed of by this consolidated order for the sake of convenience.

The assessee in ITA No.376/PUN/2014 has raised the following grounds of appeal:- 1. General Grounds 1.1 On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer ('TPO') and the learned Assessing Officer ('AO') under directions issued by the Hon'ble Dispute Resolution Panel ('DRP'), erred in making an addition of Rs.2,51,30,818 to the Appellant's total income based on the provisions of Chapter X of the Income-tax Act, 1961 ('the Act'). 1.2 The AO/TPO have erred in fact and in law in not providing any reasons to show that the conditions mentioned in clauses (a) to (d) of Section 92C(3) of the Act were satisfied before making an adjustment to the income of the Appellant. 2. Transfer pricing adjustment in respect of software development services of Rs.32,63,569 On the facts and in circumstances of the case and in law, the Ld. TPO/AO has erred and the Hon'ble DRP has further erred in upholding/confirming the action of the Ld. TPO/AO in

The assessee has also filed an additional ground of appeal which reads as under:- 5. Minimum Alternate Tax (‘MAT’) Credit Carry Forward to Future Years: Without prejudice to the above, the Appellant has erroneously computed the MAT credit at Rs.8,224,958, as the difference between tax liability as per normal provisions of the Act and MAT, both liabilities calculated before applying surcharge and education cess in its return of income for AY 2009-10, instead of Rs.9,318,878 as a difference between tax liability as per normal provisions of the Act and as per MAT (inclusive of surcharge and education cess).

The Revenue in ITA No.2975/PUN/2017 has raised the following grounds of appeal:- 1. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred in allowing the deduction u/s 10A & 10B of the Income Tax, Act, 1961 before setting off brought forward business loss and depreciation loss in violation of Express provisions of Circular No.7/2013 issued by the CBDT as well as Hon'ble Supreme Court decision in the case of Himatsingka Seide Ltd (48 Taxman.com 357). 2. On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) has erred in allowing the provision of obsolete stock under the normal provisions of the Income Tax Act, 1961.

First, we take up the appeal of assessee, wherein though several grounds of appeal have been raised but the two issues have been raised; one against transfer pricing adjustment in respect of software development services amounting to ₹ 32,63,569/- and second against transfer pricing adjustment in respect of availment of management services totaling ₹ 2.18 crores. The assessee has also raised an additional ground of appeal, which is not pressed and hence, the same is dismissed as not pressed.

The Revenue is in appeal against order of CIT(A) in allowing deduction under section 10A and 10B of the Act before setting off of brought forward business losses and depreciation loss.

Briefly, in the facts of the case, the assessee for the year under consideration had originally furnished return of income declaring loss of about (-) ₹ 2 crores and book profit of ₹ 7.94 crores. The assessee then filed revised return declaring same loss under the Income Tax Act but book profit at ₹ 8.22 crores. The case of assessee was picked up for scrutiny. The assessee was engaged in the business of automated metrology and had Manufacturing Division, Software Division, Sourcing Division and Sales & Marketing Division. The assessee has entered into various international transactions with its associated enterprises. The Assessing Officer noted that the assessee had entered into several international transactions with its associated enterprises. The Assessing Officer made reference under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO) to benchmark arm's length price of international

First of all, we take up the issue of transfer pricing adjustment in the segment of provision of software development services by the assessee to its associated enterprises. The assessee had applied TNMM method and had taken net profit / total cost as its PLI and had selected certain concerns as comparables, which were objected to by the Assessing Officer. The TPO finally selected 9 concerns as comparables as accepted in earlier year and benchmarked the international transactions undertaken by assessee. The learned Authorized Representative for the assessee pointed out that before the Tribunal in assessment year 2008-09, similar issue arose and the Tribunal has decided inclusion / exclusion of some comparables. We proceed to decide the issue raised in this regard by referring to the arguments of assessee in respect of each of the comparables.

The assessee is aggrieved by inclusion of concern Bodhtree Consulting Ltd. The learned Authorized Representative for the assessee stressed that the said concern was not functionally comparable and it was following different business module and had fluctuating margins. In this regard, we find that the Tribunal vide para 14 in ITA No.271/PUN/2013 relating to assessment year 2008-09 vide order dated 16.11.2018 in assessee’s own case held that the concern Bodhtree Consulting Ltd. was not functionally comparable to the assessee and also it was following different business module. Following the same parity of reasoning since facts are same, we hold that the said concern is not comparable to the assessee.

The next concern was FCS Software Solutions Ltd., which was claimed to be functionally not comparable as it was rendering application services.

We find that similar issue arose in assessee’s own case in assessment year 2008-09 (supra) and vide para 15, the Tribunal had directed its exclusion. Following the same parity of reasoning as the factual aspects are same, we exclude the said concern from final list of comparables.

The next concern which the assessee wants to be included is SIP Technologies Ltd. The assessee pleads that the said concern was excluded on the ground that it was persistent loss making concern. However, in assessment year 2006-07, it had shown positive margins of 21.78%. Though in last year, it was shown negative margins of (-) 33.15%, but during the year under consideration, it had shown margins of negative (-) 19.33%. The learned

Now, coming to the next issue raised i.e. in respect of payment of managerial fees.

Brief facts relating to the issue are that the assessee had entered into Management Service Agreement with Renishaw Plc in 2006. Under the said agreement, the associated enterprise provided business support and management support services to the assessee, which the assessee claimed enhanced its operational efficiency and also standardized its internal processes. The assessee had furnished documentary evidence in this regard providing details of personnel rendering the services, number of man hours spent, total cost incurred in rendering such services and also explanation was given vis-à-vis work done. The invoices received from associated enterprise were also furnished before the authorities below. However, the TPO held that

The learned Authorized Representative for the assessee pointed out that last year the TPO had accepted the said transaction to be at arm's length price. The Assessing Officer had disallowed the said payment under section 37(1) of the Act. However, the DRP deleted the addition, against which no appeal has been filed by Revenue. Our attention was drawn to the order of Tribunal in this regard. He also pointed out that the assessee had filed detailed letter to the TPO explaining the need for availing management services dated 06.05.2011 along with several enclosures and also documents were filed evidencing the said provision of services. However, the TPO does not give any cogent reason in holding that no services were provided and in determining the arm's length price at Nil.

The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below.

We have heard the rival contentions and perused the record. The issue which arises vide ground of appeal No.3 is against arm's length price of transaction of payment for managerial services availed from associated enterprise. The agreement which has been entered into by assessee with its associated enterprise was w.e.f. 01.04.2006. The assessee is availing managerial services under the same agreement from year to year. In

We have in series of decisions already decided similar issue of payment on account of managerial services availed by assessee from its associated enterprises and have held that the TPO or the Assessing Officer cannot sit in judgment of the decision of businessman to avail services and to make payments for that. Further, the assessee has filed documents justifying not only the need of the services but also the availment of services. The TPO has failed to take into cognizance those documents / evidences and we find no merit in the same. In any case, the said agreement between the parties is in force w.e.f. 01.04.2006 and in none of the earlier years any addition has been made by the TPO/Assessing Officer. In the absence of same and following the rule of consistency we find no merit in the orders of TPO/Assessing Officer and the same is reversed. The ground of appeal No.3 raised by assessee is thus, allowed. The grounds of appeal raised by assessee are thus, allowed.

Now, coming to the appeal of Revenue, which is against separate order passed under section 143(3) r.w.s. 147 of the Act.

The first ground of appeal raised by Revenue is against deduction allowed under section 10A/10B of the Act in respect of two units operated by assessee. The question which arises is whether the said deduction is to be allowed before adjustment of brought forward losses / depreciation or after it. The CIT(A) vide para 7.3.2 has held the issue to be covered in favour of assessee by the decision of Hon’ble Bombay High Court in Hindustan Unilever Ltd. Vs. DCIT (2010) 191 Taxman 119 (Bom). The learned Departmental Representative for the Revenue has failed to controvert the said reliance placed upon by the CIT(A). Accordingly, we hold that the issue stands covered in favour of assessee by the decision of Hon’ble Bombay High Court in Hindustan Unilever Ltd. Vs. DCIT(supra). The ground of appeal No.1 raised by Revenue is thus, dismissed.

Now, coming to second issue raised by the Revenue which is against the order of CIT(A) in allowing the deduction on account of write off of obsolete stock.

The learned Departmental Representative for the Revenue pointed out that the assessee has failed to furnish any details before the Assessing Officer. However, the learned Authorized Representative for the assessee placed reliance on the order of CIT(A) and pointed out that the details are available at pages 329 to 333 of Paper Book. In the totality of the above said facts and circumstances, where the evidences are available and the assessee has written off the obsolete stock, then the claim of assessee merits to be allowed.

In the result, appeal of assessee is allowed and the appeal of Revenue is dismissed.