2012 (11) TMI 1343 - AT - Income Tax

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the Dispute Resolution Panel-II (DRP-II) erred in confirming the addition made by the Assessing Officer on account of adjustment in International Transaction of Research & Development Services amounting to Rs. 3,92,87,647/- for the assessment year 2006-07, given that the DRP's direction was non-speaking and lacked detailed reasoning.

(b) Whether the disallowance of depreciation on computers, specifically on Uninterruptible Power Supply (UPS) units amounting to Rs. 74,8800/-, confirmed by the DRP-II, was justified or whether depreciation should be allowed on UPS as part of the computer system.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of DRP-II's direction confirming addition on International Transaction adjustment

Relevant legal framework and precedents: The provisions under section 144C read with section 143(3) of the Income Tax Act, 1961, empower the DRP to issue directions to the Assessing Officer (AO) on disputed additions. The directions must be reasoned and based on relevant material, ensuring fair play and due opportunity to the assessee. The principle of a "speaking order" requires that the order or direction must disclose the reasoning and basis on which the decision is arrived at.

Court's interpretation and reasoning: The Tribunal noted that the DRP-II issued its direction dated 29.9.2010 in a non-speaking manner, lacking any detailed discussion, relevant material, or elaborate reasoning on the issue of adjustment in International Transaction of Research & Development Services. The AO's assessment order was passed pursuant to this direction, thereby inheriting the same infirmity.

Key evidence and findings: The assessee contended that the DRP-II's direction was a "short cut" and did not address the issues substantively or provide a basis for the addition. The Department's representative relied solely on the orders below without addressing the absence of reasoning.

Application of law to facts: The Tribunal emphasized that the absence of a speaking order from the DRP-II violates principles of natural justice and fair procedure. Since the DRP-II's direction lacked necessary details and reasoning, the consequential AO order could not be considered just or appropriate.

Treatment of competing arguments: The Tribunal rejected the Department's reliance on the orders below without substantive justification and accepted the assessee's plea for a reasoned order to ensure fair adjudication.

Conclusions: The Tribunal set aside both the AO's order and the DRP-II's direction and remanded the matter back to the DRP-II for de novo consideration. The DRP-II was directed to pass a fresh, speaking order after addressing all relevant issues and material, and after affording due opportunity to the assessee.

Issue 2: Allowability of depreciation on UPS as part of computer system

Relevant legal framework and precedents: Depreciation on computer assets is governed by the Income Tax Rules and judicial precedents. The Delhi High Court in CIT vs. BSES Rajdhani Power Ltd. held that computer accessories and peripherals such as printers, scanners, servers, and UPS units form an integral part of the computer system and are entitled to depreciation at the higher rate of 60% because they cannot be used independently.

Court's interpretation and reasoning: The Tribunal relied on the Delhi High Court's authoritative decision, which was followed by various ITAT benches in Delhi. It reasoned that since a UPS cannot be used without a computer, it qualifies as an accessory or peripheral forming part of the computer system, thereby entitling it to depreciation at the higher rate applicable to computers.

Key evidence and findings: The assessee relied on the precedent of BSES Rajdhani Power Ltd., while the Department merely supported the orders below without addressing the precedent.

Application of law to facts: Applying the legal principle from the Delhi High Court decision, the Tribunal found that the UPS units claimed by the assessee should be treated as part of the computer system and allowed depreciation accordingly.

Treatment of competing arguments: The Tribunal rejected the Department's insistence on confirmation of disallowance, favoring the well-established precedent and the assessee's claim.

Conclusions: The Tribunal directed the AO to allow depreciation on UPS units as claimed by the assessee.

3. SIGNIFICANT HOLDINGS

The Tribunal held that:

"The order of DRP-II is found to have not contained necessary details, discussion or elaborate reasoning etc., so it makes the order of DRP-II as nonspeaking one and the consequential order passed by the Assessing Officer cannot be held to be just and appropriate."

Accordingly, the Tribunal set aside the DRP-II's direction and the AO's assessment order and remanded the matter for fresh consideration with a direction to pass a speaking order after affording due opportunity to the assessee.

Regarding depreciation on UPS, the Tribunal quoted the Delhi High Court in CIT vs. BSES Rajdhani Power Ltd.:

"We are in agreement with the view of the Tribunal accessories and peripherals such as, printers, scanners and server etc. form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to depreciation at the higher rate of 60%."

The Tribunal applied this principle to UPS units and directed the AO to allow depreciation accordingly.

In conclusion, the Tribunal partly allowed the appeal for statistical purposes, setting aside the addition relating to international transactions for fresh adjudication and allowing depreciation on UPS units as part of the computer system.