ACIT, NEW DELHI vs. M/S. B.T. (INDIA) PVT. LTD., NEW DELHI

Briefly stated the facts of this case are: assessee had filed original return of income on 27.01.2006 declaring income of Rs.72,60,680/- and subsequently filed revised return of income on 10.11.10.11.2006 declaring ‘nil’ income after setting off of B/F unabsorbed depreciation of Rs.2,06,63,235/- in the statement of taxable income. The assessee was subjected to scrutiny and notice u/s 143(2) dated 14.06.2006 was served along with notice u/s 142(1) and pursuant thereto Shri Punit Gupta and Shri Gaurag Gupta CA/ ARs of the assessee company attended the proceedings and filed necessary details.

During the year under assessment, the assessee has made addition to fixed assets under head ‘computer’ and claimed depreciation @ 60% on the ground that the assessee had made purchases of computer accessories and peripherals amounting to Rs.63,290/-. However, as per I. T. Rules, only computer and computer software are eligible for depreciation @ 60% and the same cannot be extended to computer accessories and peripherals and consequently, the assessee’s claim of Rs.22,150/- was disallowed. So, the assessee’s income for the year under consideration has been shown at Rs.55,47,340/-.

The assessee has challenged the order of A.O. before Ld. CIT(A) who has partly allowed the appeal vide impugned order. Feeling aggrieved, the Revenue has come up before the Tribunal by way of filing the present appeal.

We have heard Ld. Authorized Representatives of both the parties, have gone through the material on record in the light of facts and circumstances of the case.

Ld. D.R. challenging the impugned order, contended inter alia that since the assessee has failed to demonstrate the circumstances for claiming adjustment of ALP, Ld. CIT(A) has erred in deleing the addition without verification; that Ld. CIT(A) has also erred in deleting the addition of Rs.22,150/- on account of disallowance of extra depreciation claimed by the assessee on computer peripherals whereas depreciation is only available on computer and computer software and as such the case is required to be restored to Ld. CIT(A) for afresh orders.

On the other hand Ld. A.R. repelled the contentions raised by Ld. D.R. by contending inter alia that the assessee has never claimed the assessment on account of ALP whereas it has claimed the working capital adjustment (WCA); that the only dispute raised by the Revenue is regarding verification of the claim of assessee and since the Ld. CIT(A) has powers co-terminus to the A.O., he has passed a valid order and relied upon the judgement of Hon’ble Jurisdictional High Court in the case cited as CIT Vs BSES Yamuna Powers Ltd. in dated 31.08.2010 and orders of Delhi Bench ‘I’, New Delhi in the case cited as ITO Vs Heartland Delhi Transcription & Services Pvt. Ltd in I.T.A. No. 6043/Del/2012 dated 17.10.2014.

Undisputedly, the assessee being engaged in the international transactions with Associate Enterprises (AE) to the tune of Rs.27,62,69,637/- a reference u/s 92CA of the Act was made to the TPO for determining the ALP in relation to the international transactions. The TPO has passed the order u/s 92CA(iii) dated 25.09.2008 wherein ALP of international transaction with AE is computed at Rs.3,37,65,302/- as against the transaction value of Rs.2,01,91,248/- declared by the assessee, i.e. an upward adjustment of Rs.1,26,74,054/-. Finding the explanation made by the assessee unacceptable, addition of Rs.1,26,74054/- has been made on account of adjustment to ALP of international transaction with AE. 10. The first question arises for determination is, as to whether addition amounting to Rs.1,26,74,054/- on account of transfer pricing adjustment as made by the A.O. has been illegally and wrongly deleted by Ld. CIT(A) vide impugned order as contended by Ld. D.R. 10.1 Undisputedly, such working capital adjustments were not dmonstrated by the assessee before the A.O. who was to work out the same whether working capital adjustment on account of transfer pricing adjustment are admissible to the assessee. TPO has decided the issue as to the working capital adjustment in para 6.7 and 6.8 of his order dated 25.09.2008, which is reproduced below for ready reference:

Ld. A.R. of the assessee by relying on the order passed by ITAT Delhi Bench ‘I’, New Delhi in case entitled ITO Vs Heartland Delhi Transcription & Services Pvt. Ltd. in dated 17.10.2014 contended that the contention of Ld. D.R. that the assessee has not been able to demonstrate the significant circumstances and difference on the profit making of the comparable companies by deploying working capital is not sustainable. While examining reference u/s 92CA(1) TPO discussed the international transaction entertained by the assessee which are tabulated as under:

Then the TPO issued a show cause notice dated 30.08.2011 to the assessee seeking certain specific information extracted below: Type of International Transaction Method selected Total Value (INR) Provision of telecommunication and TNMM using 1548196287 related support services Operating profit as a PLI Operating cost Purchase of assets 215777093 Reimbursement of expenses to AEs 3065481 Payment of interest on External CUP 33211250 Commercial Borrowing (ECB) Sale of equipment TNMM using operating profit 31684509 as a PLI operating cost Purchase of Satellite services TNMM using Operating Profit as a PLI 43475178 Operating Revenue

The assessee has computed its margin @ 10% in the telecommunication and related support services and provisions for support service agreement. The assessee has selected 7 comparables and given average operating profit and taken the average of operating profit margin on these comparables computed @ 9.42%.

TPO after applying the filters of the correct area selected cases as comparable functionaries similar to that of the tested parties excluded the companies on the grounds inter alia that the companies whose data is not available for the financial year 2007-08 are excluded in view of the Rule 10B(4) of the I. T. Rules 1962, which says that the data for earlier two years can also be used if it is shown that such earlier year data had an influence in determining the transfer pricing; that companies whose business support services income at Rs. One crore have also been excluded on the ground that the analysis may not lead to a proper comparability; the companies whose revenue from business services is less than 75% and further operating revenue and the companies having more than 25% related parties transaction of income and the company having different year ending i.e. not march 31st, 2008 and data of company does not fall within 12 months period i.e. 01.04.2007 to 31.03.2008, have also been excluded; the companies that are functionally different from the taxpayer and that companies that are having exclusive economic circumstances have also been excluded 16. The TPO proposed to use last year data alone. He raised data pertaining to financial year 2007-08 and rejected the earlier year data on the ground that assessee has failed to show as to how the earlier year data has the influence on transfer pricing.

The comparables selected by the tax payer are inter alia that Access India Advisors Ltd. (accepted); Himachal Futuristic Communications Ltd. (rejected); Educational Consultants India Ltd. (rejected); ICRA Management Consulting Services Ltd. (accepted); IDC (India) Ltd. (accepted); In House Productions Ltd. (Rejected); India Tourism Development Corporation Ltd. (rejected); ORG Informatics Ltd. (rejected) and Telecommunications Consultation India Ltd. (accepted).

The TPO also rejected the documents by relying upon the provisions of Section 92C(3)(c) read with Section 92CA that on the basis of material information and documents in possession of the TPO, he is of the opinion that the information and data used in computation of ALP is not reliable and correct and TPO may proceed to determine ALP in relation to international transaction in accordance with Section 92C(1) and 92C(2) on the basis of such material information and documents available with him.

The TPO has highlighted the following defects in the transfer pricing analysis carried out by the tax payer: “1. As per Rule 10B(4), it is mandatory to the use the current financial year data i.e. the financial year in which the international transactions took place. (FY 2007-08). But the taxpayer excluded the current year’s data in most o the comparable cases.

The TPO has selected the final comparables based on the search of prowess capitaline database and examination of the following factors: “7.a. The Annual Reports of the company.

Consequently, the TPO concluded that the information as well as data used in the computation of ALP by the tax payer is not reliable and by invoking the provisions contained u/s 92C(3)(c), proposed to reject the TP documents and proceeded to determine the ALP of international transaction by using TNMM methodology as selected by the tax payer. The TPO discussed the comparables on the basis of search on the prowess of capital line data as under:

The TPO has disclosed off the objection filed by the tax payer for excluding the companies taken by it as comparable. TPO has also given the detailed reasons for selecting the comparables for transfer pricing study.

The assessee has claimed working capital adjustment reproduced by TPO in para 10.3A as under:

However, the TPO proceeded to dispose of the issue as to the working capital adjustment by making following observations:

So, the TPO vide order dated 25.09.2008 directed the A.O. to enhance the income of the assessee by Rs.1,26,79,054/-. However, a perusal of order dated 22.12.2008 passed by A.O. apparently goes to prove that he has acted as a post office without examining the issue as to the working capital adjustment sought by the assessee, rather A.O. has preferred to keep mum and proceeded to make the addition as per ALP u/s 92CA(3) as proposed by TPO in his order dated 25.09.2008.

The assessee being aggrieved, carried the matter to Ld. CIT(A) who has deleted the addition on account of working capital adjustment by making following observations: “5.10 The appellant had produced the full working of the working capital adjustment in its submission dated 19.01.2012 in annexure to the paper book. The working capital adjusted margin of the comparables are reproduced below:

Needless to say that when the A.O. has not examined the matter as to the working capital adjustment sought for by the assessee and rejected by TPO. The Ld. CIT(A) though having co terminus powers, was not authorized to proceed with deleting the addition without entertaining additional evidence during appellate proceedings and without calling the remand report from the A.O. When the working capital adjustment has been duly demonstrated by the assessee during proceedings before TPO, a quasi judicial authority, the A.O. as well as Ld. CIT(A) were legally bound to address the issue in accordance with law by applying the rule of natural justice. So, Ld. CIT(A) has erred in deleting the addition of Rs.12,67,405/-. So, we are of the considered opinion that the file is required to be restored to Ld. CIT(A) for fresh adjudication. Consequently, ground No.1 is decided in favour of the Revenue. Needless to say that Ld. CIT(A) shall pass the order afresh after providing proper opportunity of being heard to both the parties.

Ground No.2 raised by the appellant, ‘the Ld. CIT(A) has erred on facts and in deleting addition of Rs.22,150/- made by the A.O. on account of disallowance of extra depreciation claimed by assessee on computer peripherals.” 29. Undisputedly, during the year under assessment, the assessee has made addition to the fixed assets under the head ‘computer’ and claimed depreciation @ 60% and has filed the details of addition to fixed assets that the details filed by the assessee show the purchases of computer accessories amounting to Rs.63,290/-. However, the assessee claimed the depreciation @60% rather allowed the same @ 25% treating the same as normal plant and machinery and the excess depreciation claimed at Rs.22,150/- was disallowed.

During appellate proceedings, Ld. CIT(A) has discussed the issue threadbare in para 7 at page 14 of the impugned order and proceeded to delete the addition of Rs.22,150/-.

The Hon’ble Jurisdictional High Court in case cited as CIT Vs BSES Yamuna Power Limited (I.T.A. No. 1267/2010) upheld the view taken by the Tribunal that computer accessories and peripherals such as printers, scanners and server etc. form an integral part of the computer system and as such found the assessee entitl4ed to depreciation at the higher rate of 60%. So, relying upon the law laid down by Hon’ble jurisdictional High Court, Ld. CIT(A) has rightly deleted the addition of Rs.22,150/- made by the A.O. Hence, Ground No.2 is determined against the appellant.

In view of what has been discussed above, present appeal is partly allowed for statistical purposes and the case is ordered to be restored to Ld. CIT(A) for fresh decision in accordance with law without influenced by the findings returned by the TPO. Sd./- Sd./- ( INTURI RAMA RAO) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Date: 30.10. 2015 Sp Copy forwarded to:-