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Income Tax Appellate Tribunal, BENGALURU BENCH A, BENGALURU
Before: SMT. ASHA VIJAYARAGHAVAN & SHRI. S. JAYARAMAN
O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER : These are cross appeals filed by the assessee and the Revenue respectively, against the order of DCIT, Circle -12(4), Bengaluru, dt.12.12.2008, for the A. Y. 2005-06.
2. The effective grounds taken up by the assessee before us are extracted herebelow, issuewise and dealt with therein :
IT(TP)A.497 & 518/Bang/2012 Page - 2
Non-TP issues :
Issue no.1 Disallowance of diminution in value of assets amounting to Rs.59,29,812/- :
In this regard, the relevant portion of the assessment order is extracted as under :
“8. Diminution in the Value of Assets
8.1. The Assessee Company has reflected an amount of Rs.50,29,812/- as Diminution in the Value of Asset. On Verification of Records, it was found that the Assessee Company has bought Communication Equipment for an amount of Rs.83,87,286/- from M/s Mistral Solutions Pvt Ltd over a period of time from 24th September, 2002 to 18th April 2003 on which the allowable depreciation is Rs.50,32,372/-.
The above equipment were leased to M/s Tayana Software Solutions Pvt Ltd on which an Income of Rs.35,00,00/- has been received and offered to Tax for AY 2005-06. However, the Assessee Company claims that the above Transaction is ‘Sale on Approval' basis to M/s Tayana Software Solutions FM Ltd arid not Leasing of Equipment. The Assessee Company further claims that M/s Tayana Software Solutions Pvt Ltd has subsequently returned the equipment. 8.3. The Assessee Company Revalued the above equipment at Rs.35,57,4741- (Actual Value Rs.83,87,286/-) through a Chartered Engineer, Mr. C E Bhaskar, dated 6th July 2005 and claimed a further Depreciation of Rs.20,14,484/- on the Revalued amount of Rs.35,57,474/-.
IT(TP)A.497 & 518/Bang/2012 Page - 3
8.4. From the above Transactions it can be Proved beyond Reasonable Doubts that the Assessee Company has Revalued the Communication Equipments with an Actual Value Rs.83,87,286/- to Rs.35,57,4741- thereby writing off a amount of Rs.50,29,812/- and additionally an excess Depreciation of Rs 20,14,484/- on the same.
8.5. When the above issue was brought to the notice of the Authorised Representative, the Authorised Representative could not substantiate the reason for the same.
8.6. Therefore, the Assessee Company's claim of Depreciation is limited to Rs 50,32,372/- which is allowed in accordance to Income Tax Act, 1961 and the additional Depreciation of Rs.20,14,484/claimed by revaluing the Asset (on which Depreciation has already been claimed) at Rs.35,57,4741- is disallowed and added back to the total income of the Assessee company
Thus, the Addition under this head is Rs.20,14,484/-“
On an appeal, the CIT (A) held as under :
“2.2.2 During the appellate proceedings the appellant submitted that the appellant sold a telecommunication equipment to M/s. Tayana Software Solutions Private Limited during FY 2002- 03 for a total sum Of Rs 99,00,000/-. This was on sale on approval basis. Against this transaction, the customer had paid a sum of Rs 35,00,000/- .which was shown as advance from customers. The customer used this equipment for a while and finally rejected the equipment and returned the same to the appellant. The advance of Rs 35,00,000/- collected earlier from this customer was shown as OTHER INCOME. Consequent to the return of this equipment, the appellant decided to use this equipment as capital goods for their business purpose and got a valuation of this equipment done at Rs 33,57,474/- (but it was wrongly mentioned as Rs35,57,474/- in the assessment order). Thus, as per the Accounting Standard, the appellant capitalized this asset at Rs 33,57,474/- and claimed depreciation @60.00%. The learned assessing officer has however came to the conclusion that depreciation on this equipment is allowable on the original cost of the asset and he has not disturbed the forfeiture of advance of Rs.35 lakhs accounted as other income. It is submitted that the learned AO ought to have reduced the advance forfeited from the cost of the asset and allowed the depreciation on such reduced value. Thus, he ought to have reduced the income by Rs.35 lakhs on account of inclusion of this amount in the other income and thereafter, he IT(TP)A.497 & 518/Bang/2012 Page - 4 ought to have reduced the original cost of the asset by this amount and allowed the depreciation. This is in line with even provisions of section 51 of the Income Tax Act where any advance forfeited can only be reduced from the cost of the asset. Even u/s 43 of the IT Act, the definition of 'actual asset' excludes any cost met by anybody else and therefore, the sum forfeited has to be excluded from the actual cost of the asset. There are several case laws holding that in the case of fixed assets, depreciation can be claimed only on the value of the asset after reducing the amount, if any, which is received towards the same. Thus, the learned AO ought to have proceeded as under: a. He ought to have excluded a sum of Rs.35 lakhs being the amount forfeited and credited to OTHER INCOME by the appellant; b. Thereafter, he ought to have reduced this amount from the original cost of the asset of Rs. 83,87,286 and thus, allowed the depreciation on such reduced amount.
2.2.3 Having heard the contention of the appellant, the undersigned obtained the Profit & Loss A/c and the statement of the total income from the Assessing Officer for the Assessment Year in respect of Hyderabad Unit, it is noticed from the Profit & Loss A/c that the appellant has shown the income under the head "other income" of Rs. 35 Iakhs from the customer and also the 'other income' which is interest received of Rs. 10,495/- against which the assessee debited an amount of Rs.50,29,812/- on diminishing value of the asset and also an amount of Rs. 22,72,741/- as loss on disposal of the fixed asset. As the above loss pertains to the Capital Asset, hence not allowable as deduction either under section 37(1) or under Section 57(3) of the Income Tax Act. However, the appellant even though added loss on sale of asset of Rs. 22,72,741/- but did not add Rs. 50,29,812/- to the total income and therefore, a notice u/s.251(2) of the Income Tax Act was issued to the appellant on 11.1.2012 in which the assessee was asked to explain as to why the income should not be enhanced by Rs. 50,29,812/-, in response to which the appellant admitted that the amount of Rs. 50,29,812/- on account of revaluation difference has been charged to the Profit & Loss A/c. further, it is evident from the record that the asset was put to use for the purpose of the business of the appellant from which the income of Rs.35 lakhs has been shown as 'other incomes. Once, Rs. 35,00,000/- is offered as income, the same has to be assessed by the Assessing Officer. Further, the appellant has claimed the depreciation as per the Provisions of the IT Act at Rs. 22,81,244/- in the computation of income according to the Audit Report filed in Form 3 CD on the above asset. Hence the question of allowance of any further depreciation does not arise. Accordingly, the addition made by the Assessing Officer at Rs.20,14,484/- is enhanced to Rs. 50,29,812/-. The Assessing Officer is accordingly directed to give effect to the enhancement of the income.”
IT(TP)A.497 & 518/Bang/2012 Page - 5
We heard the rival submissions. From the above, it is clear that the assessee used the communication equipment in its business from 24.09.2002 to 18.04.2003. Thereafter, it gave to M/s. Tayana Software Solutions P. Ltd, received back and then claimed to have used for its business. There is no clear finding as to whether the equipment was sold or leased to M/s. Tayana Software Solutions P. Ltd and its related financial aspects. Further the depreciation claim apparently falls within the scope of Section 43 of the Act. However, its scope has not been examined. In view of that, this issue is remitted back to the AO. The AO shall examine the above issues and after furnishing adequate opportunity to the assessee, pass appropriate order in accordance with law.
Issue no.2 : Set off of current year loss of non-STP unit from income of STP unit eligible before computation of deduction u/s.10A :
This issue is neither dealt with by the ACIT, Circle -12(4), Bengaluru, in his order dt.12.12.2008 nor by the CIT (A)-IV, Bengaluru, in his order dt.13.12.2012. In view of the same, it is not deliberated upon by us.
IT(TP)A.497 & 518/Bang/2012 Page - 6 Transfer Pricing Issues :
The assessee, Telsima Communications P. Ltd, is a subsidiary of Telsima Corporation, USA, which was incorporated on 17.5.2000. Assessee is a provider of software development services only to its AE – Telsima-US.
During the transfer pricing assessment proceedings, the TPO rejected the TP documentation of the assessee and applied TNMM as the most appropriate method while determining arm’s length price. Accordingly the TPO determined the arm‘s length adjusted margin at 22.98% and hence proposed the transfer pricing adjustment of Rs.70,82,720/-.
5.1. Aggrieved by the order of TPO, assessee filed an appeal before the CIT (A). The CIT (A) granted the following relief to the assessee : i) Turnover filter of Rs.1crore to Rs.200 crore was upheld ii) Related party transaction filter of 0% was upheld and iii) Directed that Exensys Software Solutions Ltd, should be rejected as a comparable on the ground that it has extraordinary profit of 70.67% during the F. Y. 2004-05.
5.2. The gist of reasons given by the CIT (A) for rejection of comparable is extracted as under :
Sl Company Name Reason for rejection/Acceptance No 1 Bodhtree Consulting Ltd Accept 2 Lanco Global Systems Ltd Accept 3 Exensys Software Solutions Ltd Reject – Presence of Extraordinary event IT(TP)A.497 & 518/Bang/2012 Page - 7
4 Sankhya Infotech Ltd Accept Reject – RPT ˃0% 5 Sasken Networks Systems Ltd Reject – RPT ˃0% 6 Four Soft Ltd Reject – RPT ˃0% 7 Thirdware Solutions Ltd 8 R S Software (India) Ltd Accept Reject – RPT ˃0% 9 Geometric Software Solutions Ltd Reject – RPT ˃0% 10 Tata Elxsi Ltd (seg) 11 Visualsoft Technologies Ltd (seg) Accept Reject – RPT ˃0% 12 Sasken Communications Ltd (seg) Reject – RPT ˃0% 13 iGate Global Solutions Ltd (seg) Turnover ˃200 crores Reject – RPT ˃0% 14 Flextronics Software Systems Ltd (seg) Turnover ˃200 crores Reject – RPT ˃0% 15 Larsin & Toubro Infotech Ltd Turnover ˃200 crores Reject – RPT ˃0% 16 Satyam Computer Services Ltd Turnover ˃200 crores Reject – RPT ˃0% 17 Infosys Technologies Ltd Turnover ˃200 crores 5.3. Based on the above reasons, the final list of comparable companies accepted by the CIT (A) are as under :
Sl Name of the company Margin on cost No (2006) 1 Bodhtree Consulting Ltd 24.86% 2 Lanco Global Systems Ltd 13.65% 3 Sankhya Infotech Ltd 27.39% 4 Visualsoft Technologies Ltd (seg) 23.52% Arithmetic Mean 22.35% Less : Working Capital Adjustment 4.95% Adjusted Arithmetic Mean 17.41% IT(TP)A.497 & 518/Bang/2012 Page - 8
Assessee’s effective grounds of appeal are extracted as under :
7. Assessee has also raised the following additional grounds numbered 9 to 11:
IT(TP)A.497 & 518/Bang/2012 Page - 9 IT(TP)A.497 & 518/Bang/2012 Page - 10 IT(TP)A.497 & 518/Bang/2012 Page - 11
The gist of Ld. AR’s submissions is extracted as under :
Sl Company Name Adjusted Gist of AR’s Reliance placed on No OP/TC plea (2005) 1 Bodhtree 21.56% i)Functionally Hyderabad ITAT order in Consulting Ltd not comparable Cordys Software India P. Ltd (ITA.1451/Hyd/2010) ii) Fails RPT filter 2 Lanco Global 8.48% Accepted by -- Systems Ltd both assessee and TPO 3 Exensys 62.84% Rejected by -- Software CIT (A) Solutions Ltd 4 Sankhya 20.32% i) Functionally Directors Report for F. Y. Infotech Ltd different – 2004-05 p.13 and Bengaluru development of ITAT order in M/s. McAfee software Software (India) P. products Ltd[IT(TP)A No.04/Bang/2012 ii) R & D Annual Report for FY 2004-05 activities p.32 iii) Fails employee cost Annual Report to sales filter – employee cost to sales less than 25% IT(TP)A.497 & 518/Bang/2012 Page - 12 iv) Selling and Annual Report for F. Y. 2004- marketing 05 & Bengaluru Tribunal order activities in DCIT v. Toshiba Embedded Software (I) P.Ltd [IT(TP)A.1/Bang/2012] 5 Sasken 13.07% Functionally Annual report for FY 2004-05 Networks different – Systems Ltd substantial selling and marketing expenses 6 R S Software 5.70% Fails Turnover -- (India) Ltd filter 7 Four Soft Ltd 20.54% i) Functionally Directors’report for FY.2004- different – 05 p.12 to 14 & Management development of decision for FY 2004-05 p.25, software 30 etc., products ii) Fails related Bengaluru Tribunal order in party DCIT v. Toshiba Embedded transactions to Software (I) P.Ltd sales filter – [IT(TP)A.1/Bang/2012] RPT to sales greater than 15% 8 Thirdware 63.99% Functionally Schedule 13 of Annual Report Solutions Ltd different – for FY 2004-05 purchase and sale of licenses 9 Geometric 16.87% i) Functionally Directors’ Report for FY 2004- Software different – 05 p.4 Solutions Ltd product development and engineering services ii) Fails RPT to -- sales filter – RPT to sales greater than 15% 10 Tata Elxsi Ltd 21.98% i) Functionally Annual report for F. Y. 2004- (seg) different – 05 – p.2 and 18. product engineering and design IT(TP)A.497 & 518/Bang/2012 Page - 13 services ii) Fails -- Turnover filter 11 Visualsoft 19.27% Accepted by -- Technologies both assessee Ltd (seg) and the TPO 12 Sasken 12.27% i) Fails turnover Annual report for F Y 2004-05 Communication filter p.12,38 & 79 s Ltd (seg) ii) Functionally -- different – development of software products iii) Owns -- intangibles in form of patents 13 Flextronics 28.77% i) Fails turnover Annual Report for F. Y. 2004- Software filter 05 p.42 Systems Ltd (seg) ii) Functionally -- different – software product (hardware and software solutions) for telecom industry 14 Larsen & 7.50% i) Fails turnover Annual Report for A. Y. 2004- Toubro Infotech filter 05 p.18 Ltd ii) Leverages -- on the brand name of Larsen & Toubro group iii)Functionally -- different 15 Satyam 26.24% i) Fails turnover Annual report for A. Y. 2004- Computer filter 05 p.16, 24,29,54 etc Services Ltd ii) Unreliable -- financial statements iii) Owns brand -- IT(TP)A.497 & 518/Bang/2012 Page - 14
16 Infosys 40.53% i) Fails turnover -- Technologies filter Ltd ii) Owns brand -- (Rs.14,153 crores) 17 Igate Global 0.71% i) Fails turnover Annual report for F Y 2004-05 Solutions Ltd filter p.40, 70 etc., (seg) ii) Functionally different
Thus, the Ld. AR submitted in his summary of arguments in 36 pages that the Ld. CIT (A), while excluding the eleven companies mentioned in para 5.3 (supra), on the ground of related party transactions filter, has failed to adjudicate on the functional dissimilarity and hence based on this Tribunal’s decisions reported in IT(TA)A No.1/Bang/2012 & IT(TP)A No.04/Bang/2012 etc., pleaded to reject them as they are functionally not comparable.
We find merit in the submissions of the Ld. AR. Since the Ld. CIT (A) has not considered the above issue, we remit the matter back to the TPO for examining them in the light of the material furnished by the Ld. AR and on the decisions relied upon by the Ld. AR and then decide the issue in accordance with law. Relying on the Special Bench decision of the ITAT Chandigarh Bench in DCIT v. Quark Systems P. Ltd., [(2010) 42 DTR 414], the additional grounds are also set aside to the TPO for adjudication.
IT(TP)A.497 & 518/Bang/2012 Page - 15 IT(TP)A No.518/Bang/2012 – Departmental appeal :
The grounds of appeal raised by the Department are extracted as under :
We heard the rival submissions. Since the issue is remitted back to the TPO / AO in the assessee’s appeal in IT(TP)A.497/Bang/2012, (supra), here also we hold accordingly.
In respect of ground no.4, we uphold that the decision of the CIT (A) in holding that the assessee is eligible for standard deduction of 5% from the ALP, under the proviso to Section 92C(2) of the Act.
IT(TP)A.497 & 518/Bang/2012 Page - 16
In the result the both the appeals are treated as allowed for statistical purpose.
Order pronounced in the open court on 30th day of September, 2016.