TMI Blog2011 (5) TMI 499X X X X Extracts X X X X X X X X Extracts X X X X ..... apital expenditure - Thus AO's action in this regard is not sustainable - Moreover,note that similar disallowance were deleted by the Ld. Commissioner of Income-tax (Appeals) in the assessment year 2004-05 against which the department did not file appeal before the Tribunal - Decided in favour of assessee. - ITA NO. 5263/DEL/2010 - - - Dated:- 6-5-2011 - ORDER Shamim Yahya, Accountant Member ‑ This appeal by the assessee is directed against the order of the Assessing Officer dated 12-10-2010 and pertains to assessment year 2006-07. 2. The first issue raised is that Assessing Officer has erred in making addition of Rs. 14,79,00,000 on account alleged difference in arm's length price of the international transactions of software development services on the basis of the order passed under section 92CA(3) of the Act by the Transfer Pricing Officer. 3. The assessee in this case is a subsidiary of M/s. Sapient Corporation, USA. The company was incorporated on March 9, 2000 and was set up under the Software Technology Park Scheme of the Government of India. The assessee renders customized software development services to associated enterprises and also renders post s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 200603 0.95% 3. Maaars Software International Ltd. 200603 4.50% 4. Melstar Infotech International Ltd. 200503 1.79% 5. Prithvi Information Solutions Ltd. 200603 12.65% 6. Quintegra Solutions Ltd. 200603 13.71% 7. RS Software India Ltd. 200603 15.10% 8. Visualsoft Technologies Ltd. 200603 12.67% 9. Zenith Infotech Ltd. 200603 49.73% Mean 12.05% The TPO in his transfer pricing order has further rejected 5 comparable companies identified by the assessee on the following ground: S.No. Name of company Reasons for rejection 1. Birlasoft Ltd. Decreasing profitability trend and sales since 3 years. 2. Goldstone Technologies Ltd. Decreasing profitability trend and sales since 3 years. 3. Maars Software International Ltd. Not comparable as wages to cost ratio only 0.24% as against 65% of the assessee. 4. Melstar Information Technologies Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny) as opposed to 65% in the case of the appellant a software service company (refer page 852-855 of the supplementary paper book for brief product profile of Zenith taken from the website www.zenithinfotech.com) The DRP rejected the contention of the appellant of excluding the above company from the set of comparable companies on the ground that the said company was included in the list of comparable companies in the transfer pricing report. Reliance in this regard is placed on the ruling of the Hon'ble Chandigarh ITAT, [Special Bench in the case of Quark Systems (P.) Ltd. v. Dy. CIT [2010] 38 SOT 307 while reviewing the comparability analysis of super profit companies provides as under: " .. Even if the taxpayer or its counsel had taken Datamatics as comparable in its IP audit, the taxpayer is entitled to point out to the Tribunal that above enterprise has wrongly been taken as comparable. In fact there are vast differences between tested party and Datamatics. The case of Datamatics is like that of Imercius Technologies representing extreme positions. If Imercious Technologies has suffered heavy losses and, therefore, it is not treated as a comparable by the tax authoritie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of the profit margin, rather than functional or asset profile, would not meet the comparability standard required in application of the 'TNMM' method, which is selected by the appellant as the most appropriate method for benchmarking. It is a settled position that under the transfer pricing regulation, the comparability is to be judged with reference to functions performed, assets utilized and risk assumed (FAR) and the aforesaid functions parameters such as declining operating results and sales, etc., are not the relevant consideration. Reliance in this regard is placed on the following decisions: (a) Mentor Graphics (Noida) (P.) Ltd. 109 ITD 101 (b). E-Gain Communication (P.) Ltd. 118 ITD 234 (c) Aztec Software India (P.) Ltd. 107 ITD 141 (d). Sony India (P.) Ltd. 114 ITD 448 (e) Philips Software 26 SOT 226 (f) Quark Systems (P.) Ltd. v. Dy. CIT : ITA NO. 100 115/CHD/2009. (g) Dy. CIT v. Indo American Jewellery Ltd. 131 TTJ 163" 6. Alternatively the assessee had made fresh data base to identify comparables companies. According to which the average PLI is 12.60%. Assessee has claimed that since the operating profit ratio of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee that when loss making companies were taken out from the comparables by the TPO, the super profit earning company, Zenith Infotech Ltd. should also be removed from the comparables. Ld. counsel of the assessee further claimed that this company does not satisfy TPO's own additional filters. It has been submitted that Zenith Infotech Ltd. has shown abnormal high profit margin. It has been submitted that Zenith Infotech Ltd. is predominantly software product company, while the assessee is engaged in rendering software development services. It has been submitted that software product company ends up earning higher margin as they are engaged in the selling of software products owned by them. Upon careful consideration, we find ourselves in agreement with the assessee's contention that when the loss making companies have been taken out from the list of comparables by the TPO, Zenith Infotech Ltd. which showed super profits should also be excluded. The fact that assessee has himself included in the list of comparables, initially cannot act of estoppel particularly in light of the fact that Assessing Officer has only chosen the companies which are showing profits and has rejected the othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er sales and turnover and contribution to the profits of the business and hence benefit of which expenditure accrued to the assessee over the years. 10. On this issue the Assessing Officer noted that as per the profit and loss account the assessee company has claimed expenditure of Rs. 1,29,25,617 on account of recruitment and training expenditure and Rs. 28,49,794 on account of advertisement and sales promotion expenses. 11. Assessing Officer was of the opinion that these expenditures has given the assessee benefit spread over a certain number of years. In this regard, assessee has contended that Income-tax Law does not provide 'concept of deferred revenue expenditure'. Assessing Officer did not accept this proposition and he held that the above said expenditure leads to an enduring benefit to the assessee company. Accordingly, only 25% of the expenditure of Rs. 39,43,852 was allowed and the balance amount of Rs. 1,18,31,559 was disallowed and added to the total income of the assessee-company. 12. Against the above order the assessee is in appeal before us. 13. Assessee has submitted that the aforesaid expenditures are incurred on revenue account and did not result in any ..... X X X X Extracts X X X X X X X X Extracts X X X X
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