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Income Tax Appellate Tribunal, “A” BENCH, PUNE
आदेश / ORDER
PER SUSHMA CHOWLA, JM
The captioned appeal filed by the Assessee is against order of Deputy
Commissioner of Income Tax, Circle-1(2), Pune, dated 18.08.2017 relating to
assessment year 2013-14 passed under section 143(3) r.w.s.144C(13) of the Income-
tax Act, 1961 (in short 'the Act')
The assessee has raised following grounds of appeal:
“The grounds stated hereunder are independent of, and without prejudice to one another: 1. On the facts and in the circumstances of the case, and in law, the Learned Assessing Officer ('Ld. AO'), following the directions of Hon'ble Dispute Resolution Panel ('Hon. DRP'), erred in confirming the addition of Rs.10,02,15,186/- to the total income of the Appellant on account of the transfer pricing (TP) adjustment made under Section 92CA(3) of the Income-tax Act, 1961 (the Act) by rejecting the TP analysis conducted by the Appellant. The Appellant prays that the TP analysis conducted by the Appellant be accepted and consequently the TP adjustment of Rs.10,02,15,186/- be deleted. 2. On the facts and in the circumstances of the case, and in law, the Hon. DRP/Ld.AO/Learned Transfer Pricing Officer ('Ld.TPO') erred in determining the arm's length price of the international transaction pertaining to payment of fees for advisory and other services by the Appellant to its associated enterprises (AEs) as 'Nil' as against Rs.9,57,57,501/- determined by the Appellant and thereby making a TP adjustment of Rs.9,57,57,501/-.
The Appellant prays that the book value of the international transaction be accepted to be the arm's length price of the said transaction and the above TP adjustment be deleted.
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2.1 On the facts and in the circumstances of the case, and in law, the Hon. DRP/Ld. AO/Ld. TPO while making a TP adjustment on account of payment of fees for advisory and other services erred in: i. ignoring that the Appellant had supported the claims with appropriate evidences; ii ignoring that there was commercial rationale and expediency in availing the services from the AEs; iii. ignoring that the Appellant is not required to establish the benefits arising out of the said services; and iv. determining the arm's length price of the transaction under Comparable Uncontrolled Price(CUP) Method without identifying any valid comparable uncontrolled transaction The Appellant prays, that the benchmarking analysis conducted by the Appellant in the transfer pricing study ought to be accepted and the TP adjustment be deleted. 3. On the facts and in circumstances of the case, and in law, the Hon, DRP /Ld.AO/Ld.TPO, erred in determining the arm's length price of the international transaction pertaining to Oracle support services segment at Rs.3,86,97,685/- instead of Rs.3,42,40,000/- as determined by the Appellant and thereby making an adjustment of Rs.44,57,685/-. The Appellant prays that the book value of the international transaction be accepted to be the arm's length price of the said transaction and the above TP adjustment be deleted. 3.1 On the facts and in the circumstances of the case and in law, while making an adjustment pertaining to Oracle support services, the Ld. DRP/ Ld. AO/Ld. TPO erred in: i. rejecting the Transfer Pricing study which was maintained by the Appellant in good faith and with due diligence; ii. rejecting the search process followed by the Appellant; iii. rejecting multiple year data followed by the Appellant; iv. including certain comparable companies, which were not comparable to the business of the Appellant;
v. not including certain comparable companies selected by the Appellant in its TP Study/ submitted during the course of assessment proceedings which are comparable to the business of the Appellant; vi. applying export to total sales filter of 75%; vii. applying turnover filter of 1/10 to 10 times of the turnover of the Appellant i.e. Rs. 34 lakhs to Rs. 34 crores; and viii. not granting risk adjustment for the differences in level of risk between the Appellant and the comparable companies. The Appellant prays that the benchmarking analysis conducted by the Appellant in the transfer pricing study ought to be accepted and the TP adjustment be deleted.
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On the facts and in the circumstances of the case, the Hon. DRP 1 Ld. AO disallowing the provision for privileged leave encashment of Rs.52,58,033/- and provision for sick leave encashment of Rs.12,05,570/- under section 43B of the Act. The Appellant prays that a provision made for leave encashment ought to be allowed as deductable expenditure. 5. On the facts and in the circumstances of the case, the Hon'ble DRP/Ld.AO erred in disallowing the balance additional depreciation of 10% amounting to Rs.21,56,824/- claimed under section 32(1)(iia) of the Act on the assets which has been added to the block of Plant and Machinery during FY 2011-12 relevant to A.Y.2012-13. The Appellant prays that the claim of balance addition depreciation as claimed by the Appellant be allowed.”.
The appeal of the assessee along with stay application moved by assessee is
being decided by this consolidated order for the sake of convenience.
The Ld. AR for the assessee at the outset pointed out that the issue raised in
the present appeal is squarely covered by the earlier order of Tribunal on similar
issue. He relied on the orders of Tribunal in ITA No.2182/PUN/2013 relating to
assessment year 2009-10, ITA No.211/PUN/2015 relating to assessment year 2010-
11 decided by consolidated order dated 29.12.2017 & in ITA No.359/PUN/2016 and
2847/PUN/2016 along with SA No.45 & 46/PUN/2018 relating to assessment year
2011-12 and 2012-13 respectively vide order dated 25.04.2018.
The ground of appeal No.1 raised by assessee is general in nature and hence,
the same is dismissed.
The ground of appeal No. 2 raised by assessee is on account of transfer pricing
adjustment on international transaction of payment of fees for advisory and other
services to associated enterprises at Rs.9,57,57,501/-.
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The Ld. AR for the assessee referred to the earlier orders of Assessing Officer/
DRP/TPO and pointed out that TP adjustment were made in the hands of assessee
while determining arm’s length price of transactions pertaining to payment of fees for
advisory and other services to associated enterprises, wherein the Assessing Officer/
Dispute resolution Panel (DRP)/ Transfer Pricing Officer (TPO) had taken the said
transactions at Nil as against Rs.9,57,57,501/- determined by the assessee and
thereby making TP adjustment to that extent. He further pointed out that the issue
raised was whether any services were provided by associated enterprises to the
assessee in order to justify the payment of fees for advisory and other services by the
assessee to its associated enterprises. Further, the dispute was the application of
most appropriate method to bench mark transactions, wherein the TPO had applied
CUP method. The Ld. AR for the assessee pointed out that the assessee had applied
TNMM method while taking foreign entity as tested party and had compared the
margins of assessee with mean margins of selected comparables. The Ld. AR for the
assessee in this regard, further submitted that some comparables may be applied and
the matter may be verified by the Assessing Officer/TPO with respect to the margins
of finally selected comparables. The Ld. AR further submitted that in assessee’s own
case for assessment years 2011-12 and 2012-13 (supra.), the Tribunal also decided
the similar issue vide para 8 of order of Tribunal.
The Ld. DR for the Revenue on the other hand, placed reliance on the orders
of Assessing Officer/DRP.
We have heard the rival contentions and perused the record. The issue arising
in the present appeal before the Tribunal is against determination of arm's length price
of transactions pertaining to payment of fees for advisory and other services by the
assessee to its associated enterprises. The assessee had paid sum of Rs.
9,57,57,501 /- to its associated enterprises and had declared that no adjustments
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were warranted in its hands on account of said international transactions. However,
the TPO made an upward adjustment of Rs. 9,57,57,501/-, which was assessed in the
hands of assessee as the DRP dismissed the objections raised by the assessee
against draft assessment order made by the Assessing Officer.
We find that similar issue of adjustment, if any, on account of payment of fees
for advisory and other services by the assessee to its associated enterprises, arose
before the Tribunal in assessee’s own case in ITA No.2182/PUN/2013, relating to
assessment year 2009-10 and vide consolidated order with appeal in ITA
No.211/PUN/2015, relating to assessment year 2010-11, vide order dated 29.12.2017,
the issue was deliberated upon vide paras 17 to 30. The Tribunal held that TNMM
method was the most appropriate method to be applied to benchmark international
transactions undertaken by the assessee by taking foreign associated enterprises as
tested party and further, the Tribunal held that the said transaction of fees paid for
advisory and other services was to be benchmarked by comparing the margins of
tested party i.e. foreign associated enterprises with margins of external comparables
selected by the assessee, who were also engaged in providing similar advisory and
related services to its entities. However, for the limited purpose of verification that the
margins shown by tested party i.e. foreign associated enterprise was at arm's length
price of margins shown by comparables selected by the assessee, the matter was
remitted back to the file of Assessing Officer / TPO for verification.
The issue arising in the present appeal before us is similar to the issue which
arose in earlier year and since the international transactions undertaken by the
assessee were identical to the international transactions undertaken in earlier years,
hence following the same parity of reasoning, we hold that TNMM method was the
most appropriate method to be applied to benchmark arm's length price of
international transactions of fees paid for advisory and other services by taking foreign
7 ITA No. 2432/PUN/2017 SA No. 70/PUN/2018 A.Y.2013-14
associated enterprise as tested party. Further, the Assessing Officer is directed to
benchmark the transactions by taking margins of foreign comparables which were
selected by the assessee in earlier year and even in the year under consideration.
However, to verify the claim of assessee that the margins shown by assessee and the
mean margins shown by the comparables were within +/- 5% range, the Assessing
Officer is directed to comply with the directions of Tribunal as in earlier year and
compute arm's length price of international transactions. Reasonable opportunity of
hearing shall be provided to the assessee by the TPO / Assessing Officer in this
regard. We are referring to the observations of Tribunal in paras 17 to 30, however,
for the sake of brevity, the same are not being reproduced. Thus, the ground No. 2
raised in appeal by the assessee in assessment year 2013-14 is allowed.
The ground of appeal No. 3 is against transfer pricing adjustment of
Rs.44,57,685/- on account of provision of Oracle Support Services ( IT-enabled
services) to associated enterprises (‘AE’). Briefly in the facts of the case, the assessee
provides Oracle software support services to Emerson Climate Technologies
Incorporation, USA (AE). It is back office support activity in the nature of IT enabled
services (ITes). It has earned a mark-up of 10.20% on cost. The assessee
benchmarked the said transaction using Transactional Net Margin Method by
selecting 9 external comparable companies having a mean of 13.52%. Thus, the
transaction was considered at arm’s length by applying the proviso to section 92C(2)
of the Act. During transfer pricing proceedings, TPO carried out a fresh search for
appropriate comparable companies and also applied additional/modified filters for
selection of comparable companies. Accordingly, he rejected all the comparable
companies selected by the assessee in the TP study except 1. The TPO finally
selected four companies as comparables which read as under:
8 ITA No. 2432/PUN/2017 SA No. 70/PUN/2018 A.Y.2013-14
Sr. No. Name of Comparable Company OP/TC As per TPO 1. Microgenetic Systems Ltd. 16.25% 2 BNR Udyog Ltd. ( Seg.) 27.25% 3. e4e Healtcare Services Ltd. 18.15% 4. Ninestars Information Technologies 22.29% Ltd. Arithmatic Mean Margin (ALP) 20.99%
Thus, the TPO determined the ALP at 20.99% and made an adjustment of
Rs.33,51,593/- to the assessee’s transfer price.
The DRP in its Directions rejected, inter alia, the TPO’s filter of rejecting
exceptionally high/low margin which led to inclusion of 3 companies i.e. Excel
Infoways Limited, Ace BPO Services Pvt. Ltd. and Crystall Voxx Ltd. Further, the DRP
also modified the turnover filter applied by the TPO which led to exclusion of 2
companies selected by the TPO i.e. e4e Healtcare Services Ltd. and Ninestars
Information Technologies Ltd. Accordingly, the final set as per DRP Directions was as
under:
Sr. No. Name of Comparable Company OP/TC As per DRP
ACE BPO Services Pvt. Ltd. 2.50%
BNR Udyog Ltd. (Seg.) 27.25%
Crystal Voxx Ltd. 1.07%
Excel Infoways Ltd. 75.70%
Microgenetic Systems Ltd. 16.25%
Arithmatic Mean Margin (ALP) 24.55%
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Thus, the ALP was re-determined at 24.55%, thereby enhancing the
adjustment to Rs.44,57,685/-.
The Ld. AR for the assessee before us, pointed out that transfer pricing range
stands modified @ +/- 3% as against @ +/- 5% earlier to be shown. The year under
appeal is assessment year 2012-13. The Ld. AR for the assessee pointed out that in
case one comparable i.e. Excel Infoways Ltd. is removed then margin shown by
assessee and margin shown by comparable would be within +/- 3%. In respect of
Excel Infoways Ltd., assessee pointed out that it was showing fluctuating margins in
preceding years and the said concern was excluded in assessment year 2012-13 by
Tribunal in assessee’s own case in ITA No.358/PUN/2016 & 2847/PUN/2016 (supra.).
The Ld. DR for the revenue placed reliance on the orders of Authorities below.
We have heard rival contentions and perused the record. The limited issue
which arises is against benchmarking of ALP of the international transactions on
account of provisions of Oracle Support Services (IT-enables services) by assessee to
its associated enterprise and for benchmarking of ALP of the international transactions
to the said concern i.e. Excel Infoways Ltd. which has been finally selected by the
DRP, is to be excluded since it is showing fluctuating margins. It is further observed
that the operating margin of the company had shown drastic fluctuations ranging from
247.74% in F.Y. 2008-09 to 2% in FY 2014-15. The assessee has pointed out the
margins shown by the said concern were as under:
Financial Year OP/TC margin 2008-09 247.74%
2009-10 267.31%
2010-11 238.71%
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2011-12 41.48%
2012-13 75.70%
2013-14 30%
2014-15 2%
We find that the Tribunal in assessee’s own case in assessment years 2011-12
& 2012-13 vide Para 16 & 17 of the order of Tribunal has excluded Excel Infoways
Ltd. because of its fluctuating margins shown by the said concern. The Tribunal held
that the said concern i.e. Excel Infoways Limited which is in the process of closing
down its ITES segment and also because of the factum of fluctuating margins, could
not be selected as functionally comparable to the assessee. Following the same parity
of the reasons, we hold that the said concern i.e. Excel Infoways Limited, because of
different factors and also fluctuating margins is to be excluded from final set of
comparables. Accordingly, we hold so. The Assessing Officer is directed to re-
compute mean margin of the comparables and determine ALP of the international
transactions of provision of Oracle support services (ITes) by the assessee to its AEs
after affording reasonable opportunity of hearing to the assessee. Thus, ground No. 3
raised in appeal by assessee is allowed.
The ground of appeal No. 4 raised by assessee is not pressed and hence, the
same is dismissed as being not pressed.
The issue raised in ground of appeal No. 5 is against disallowance of balance
additional depreciation of 10% amounting to Rs.21,56,824/- claimed under section
32(1)(iia) of the Act on the assets which had been added to the block of Plant &
Machinery during financial year 2011-12 relevant to 2012-13.
11 ITA No. 2432/PUN/2017 SA No. 70/PUN/2018 A.Y.2013-14
Briefly in the facts relating to the issue, the assessee had purchased certain
asset of Plant & Machinery during assessment year 2012-13. The assessee was held
to be entitled to claim additional depreciation @ 20% under section 32(1)(iia) of the
Act. However, since the assets were added to the block of Plant and Machinery which
was put to use for less than 6 months, additional depreciation was allowed to the
extent of 50% of the total claim and balance 50% of the claim on additional
depreciation was made by assessee in subsequent year i.e. 2013-14. However, the
same was denied to the assessee.
The issue stands covered by the ratio laid down by Hon'ble Karnataka High
Court in the case of CIT Vs. Rittal India ( P.) Ltd, reported as 380 ITR 423 (Kar.). The
Hon'ble High Court held as under:
“10. It has been consistently held by this Court, as well as the Apex Court, that beneficial legislation, as in the present case, should be given liberal interpretation so as to benefit the assessee. In this case, the intention of the legislation is absolutely clear, that the assessee shall be allowed certain additional benefit, which was restricted by the proviso to only half of the same being granted in one assessment year, if certain condition was not fulfilled. But, that, in our considered view, would not restrain the assessee from claiming the balance of the benefit in the subsequent assessment year. The Tribunal, in our view, has rightly held, that additional depreciation allowed under Section32(1)(iia) of the Act is a one time benefit to encourage industrialization, and the provisions related to it have to be construed reasonably, liberally and purposively, to make the provision meaningful while granting additional allowance. We are in full agreement with such observations made by the Tribunal.”
Applying the ratio laid down by the Hon'ble Karnataka High Court in the case
of CIT Vs. Rittal India (P) Ltd. (supra.), we hold that the assessee is entitled to claim
balance additional depreciation @10% of the value of asset added to the block of
Plant and Machinery during Financial year 2011-12 on account of additional
depreciation under section 32(1)(iia) of the Act. Accordingly, ground No. 5 raised in
appeal by assessee is allowed.
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In view of our decision in the paras hereinabove, the Stay Application filed by assessee become infructuous and is dismissed.
In the result, appeal of the assessee is allowed and stay application moved by assessee is dismissed.
Order pronounced on this 06th day of June, 2018.
Sd/- Sd/- ( ANIL CHATURVEDI) (SUSHMA CHOWLA) लेखा सद�य/ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER
पुणे / Pune; �दनांक / Dated : 06th June, 2018 SB आदेश क� ��त�ल�प अ�े�षत / Copy of the Order forwarded to : अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT(Appeals)-13, Pune. 4. The CIT-IT/TP, Pune. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “ए” ब�च, 5. पुणे / DR, ITAT, “A” Bench, Pune. गाड� फ़ाइल / Guard File. 6.
// True Copy // आदेशानुसार / BY ORDER,
�नजी स�चव /Private Secretary आयकर अपील�य अ�धकरण, पुणे / ITAT, Pune.