TMI Blog2017 (1) TMI 1626X X X X Extracts X X X X X X X X Extracts X X X X ..... g the principles laid down in the case of Commissioner of Income Tax Vs. JK Synthetics Ltd. [2008 (12) TMI 21 - DELHI HIGH COURT] and other decisions upheld the finding of the Tribunal that the expenditure in question was revenue in nature. We also find that special leave petition filed by the Department against the said decision of the Hon’ble jurisdictional High Court has also been dismissed by the Hon’ble Supreme Court. Thus amount for use of sublicense software package was revenue expenditure. Since the expenditure in question towards royalty for use of sublicense software package has already been allowed as revenue expenditure, the question of allowing depreciation does not arise - ITA No. 5493/Del/2010 (A. Y.2006-07) - - - Dated:- 6-1-2017 - SH. I.C. SUDHIR, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER Appellant by Sh. Himanshu Shekhar Sinha, Advocate Respondent by Sh. T.M. Shiva Kumar, CIT(DR) ORDER PER O.P. KANT, A.M.: This appeal filed by the assessee arises out of the order dated 30/09/2010 passed by the learned Assessing Officer ( AO') under section 143(3) read with section 144C of the Income- tax Act, 1961 (for short the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PLI chosen by the Appellant as Operating Profit/ Operating Income ( OP/OI ); and (iv) rejecting the characterization of the Appellant as IT enabled engineering service. 6. That on facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/Ld. DRP failed primarily due to idle capacity and accordingly an adjustment to arm s length margin was necessitated under Rule 10B(3)(ii) of the Rules. 7. That on facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO/ Ld. DRP failed to consider and appreciate the fact that an adjustment to the arm s length margin for differential working capital held by the Appellant as compared to external service providers used for arm s length analysis was warranted under Rule 10B(3)(ii) of the Rules. 8. That on facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO/Ld. DRP erred in denying the benefit of 5% margin allowed under the Proviso to Section 92 C(2) of the Act. 9. That on facts and circumstances of the case and in law, the Ld. AO/DRP erred in holding that the amount of ₹ 3,69,91,451, paid by the Appellant for use of sub licensed software packages, is capital expenditure and not revenue expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 28/11/2006 declaring income of ₹ 11,54,91,122/-. The return was processed under section 143(1) of the Act. The case was selected for scrutiny and notice under section 143(2) of the Act was issued by the Assessing Officer and complied with. The Assessing Officer made a reference to the Transfer Pricing Officer (TPO) for determining the arm s length price under section 92CA(3) of the Act of international transactions entered into by the assessee during the year under consideration. The assessee adopted Transactional Net Margin Method ( TNMM ) as the most appropriate method with the Profit Level Indicator (PLI) as Operating Profit/Operating Income (OP/OI) using multiple year data. The TPO after providing opportunity to the assessee examined the matter. He rejected the use of multiple year data and computed the margins of the assessee as well as comparable companies using single year data. He also rejected OP/OI as PLI and adopted operating profit/operating cost (OP/OC) as the most appropriate PLI. He determined the arm s length margin to be 27.48% vis- -vis 11.49% of the assessee and proposed an adjustment of ₹ 15,76,75,751/- which was further rectified to ₹ 9,17, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5-06 63.92 56.17 7.75 11.49% 6,15,914 2004-05 82.47 49.03 33.44 52.91% 8,66,070 2003-04 27.18 35.55 -8.37 -19.39% 2,86,348 2002-03 74.87 47.04 27.83 59.19% 5,99,643 4.1 The learned counsel further referring to Rule 10 B(4) of Income-tax Rules, 1962 (in short the Rules ) submitted that the Data relating to a period more than two years may be considered, if such data reveal facts which would have influence on the determination of transfer prices in relation to the transaction being compared. He submitted that in the case of the assessee, the operations are cyclic in nature and warrant the use of multiple year data for benchmarking. 4.2 In this connection, the learned counsel relied on the order of the Tribunal in the case of Innodata Isogen India Private Limited (ITA No. 1528/Del/2011) and submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luding the transfer pricing study of the assessee and paperbook submitted by the assessee. The rule 10B(4) has specified the use of single year and multiple year data as under: Determination of arm's length price under section 92C . 10B . (1) (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction 56a[or a specified domestic transaction] shall be the data relating to the financial year 56aa[(hereafter in this rule and in rule 10CA referred to as the 'current year')] in which the international transaction 56a[or the specified domestic transaction] has been entered into : Provided that data relating to a period not being more than two years prior to 57[the current year] may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared: 58 [Provided further that the first proviso shall not apply while analysing the comparability of an uncontrolled transaction with an international transaction or a specified domestic transaction, entered into on or after the 1st day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s will remain in all the years of execution of project by the assessee, except first few years of the operation of the assessee. On perusal of the hours spent available on page 155 to 156 of the paper book, we find that in a particular year there is no bifurcations as, how many hours were spent on initial phase of the project and how many hours were spent on the later stage of project. Thus in absence of any such details, we cannot hold that the different phases of the projects are having overall impact on the profitability from year to year. We find that there is no credible or cogent reasoning has been brought out to justify the use of multiple year data of prior years and the manner in which it could have influence the determination of transfer pricing in relation to the international transaction in the case of the assessee. In the case of M/s Innodata Isogen India private limited (supra) cited by the assessee, in preceding years, the revenue had adopted multiple year data for determination of margins of the comparables and no cogent reasons were given in the instant year to deviate from the view taken in earlier year and thus the Tribunal held that nature and business model of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition in 2D and 3D; Seismic data processing / reprocessing /special processing; Seismic data presentation; Generation, evaluation and ranking of prospects; Reservoir data acquisition; Reservoir analysis; Topographic surveys; Tape transcription; and Third party Quality Control for acquisition and processing. 5.2 Further, referring to the website of the comparable company, the learned counsel submitted that the comparable company was engaged in topographical surveys, drilling and laying cables, data acquisition and interpretation, which are more akin to research services related to oil exploration. The learned counsel further referring to the website of M/s Alphageo submitted that it was engaged in provision of 2-D and 3-D seismic services, which are used by oil exploration companies to understand the density and velocity changes between rock and soil layers before drilling and those services are more akin to research activities. In this connection, the learned counsel further referred to the following ruling of the Tribunal s where the Tribunal approved selection of M/s Alphageo as a comparable to companies engaged in provision of resea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii. Hon'ble HC in M/s.DE Shaw India Software Pvt. Ltd (I.T.T.A. No.433 OF 2014/HC/2014) iii. Hon'ble Hyderabad ITAT in Intoto Software India Private Ltd. (ITA.No.1196/Hyd/2010) iv. Hon'ble Bangalore ITAT in NTT DATA FA Insurance Systems (India) Private Limited (I.T(TP).A No. 131l/Bang/2010) v. Hon'ble Bangalore ITAT in M/s. Cypress Semiconductor Technology India Private Limited, (IT(TP)A No.ll67/Bang/2010) vi. Hon'ble Bangalore ITAT in M/s. Symbol Technologies India Pvt. Ltd., (IT(TP)A No.391/Bang/2012) vii. Hon'ble Delhi ITAT in Sony India (P.) Ltd. v. Dy. CIT [2008] 114 ITD 448 (Delhi) viii. Hon'ble Bangalore ITAT in M/s. 24/7 Customer .Com Pvt. Ltd (TS-708-ITAT- 2012(Bang)-TP) ix. Hon'ble Bangalore ITAT in M/s. 3DPLM Software Solutions Ltd. (TS-359-ITAT- 2013(Bang)-TP) 5.6 In view of above submissions, the learned counsel prayed that Alphageo having related party transactions as 16.80% of it sales, it should be rejected as a comparable entity. 5.7 Learned CIT(DR), on the other hand, submitted that Transaction Net Margin Method (TNMM) has been chosen in the case of the assessee as most appropriate method for computing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee and the comparable. Further, we also find that in view of the decision of the Tribunal in the case of Quark System Private Limited (supra), the assessee cannot be stopped from pointing out that M/s Alphageo had wrongly been taken as comparable. In view of above facts and circumstances, we are of the opinion that M/s Alphageo need to be excluded from the set of comparables being functionally dissimilar and difference in intensity of asset employed. Accordingly, we direct the Assessing Officer to exclude M/s Alphageo from the set of comparables chosen for computing arm s length of the international transaction and compute the transfer pricing adjustment accordingly. 6. In ground No. 7 the assessee has sought for allowing working capital adjustment under rule 10 B(3)(ii) of the Income tax Rules. 6.1 Before us, the learned counsel submitted that by allowing customers/creditors to defer payment for a certain period, any company foregoes the right to receive its revenue immediately and are no additional income by reinvesting the revenue over the deferral period. He further submitted that all companies have their own limits for deferring such payments and the limits de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which included a sum of ₹ 3,69,91,451/-on account of royalty payment for plant design software. The assessee explained that said expenses were towards royalty payment on account of usage of sublicense software package e.g. plant design software (PDS) paid to Fluor Intercontinental Inc., USA, computed on the basis of number of hours of usage of the software. The assessee further submitted that tax was withheld at the rate of 15% on such royalty payments in accordance with the provisions of Article 12 of the treaty between India and USA. However, the Assessing Officer following the order for assessment year 2003-04 and made the addition. The Assessing Officer also noted that the assessee got relief from the Tribunal in assessment year 2003-04 and the Department preferred appeal before the Hon ble High Court. 7.2 Before us, the learned counsel of the assessee submitted that Hon ble High Court has already decided the issue in dispute in favour of the assessee and the SLP filed by the Revenue before the Hon ble Supreme Court has been dismissed. He referred to the copy of order of the Hon ble High Court dismissing department s appeal for assessment year 2003-04 available on pag ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
