TMI Blog2015 (8) TMI 654X X X X Extracts X X X X X X X X Extracts X X X X ..... s otherwise not based on correct uncontrolled price. The international transaction in question should be considered as one and price received by the assessee in total has to be compared with the arm's length price. The assessee received the price for providing the service as per the agency agreement. Therefore, the service provided by the assessee to the associated enterprise are closely interlinked and price of one part is dependent on the price of the other part. Therefore, the entire services provided by the assessee has to be treated as one international transaction for the purpose of determining the arm's length price. Thus we set aside the issue to the record of the Transfer Pricing Officer/ Assessing Officer, to decide the same afresh, by considering in the light of the above observation as well as the decision of this Tribunal in the case of UCB India P. Ltd. v. Asst. CIT (2009 (2) TMI 237 - ITAT BOMBAY-L ) - Decided in favour of assessee for statistical purposes. Rate of depreciation on computer hardware - Held that:- Allowability of depreciation at 60% on the computer accessories and peripherals is no more res integr. We allow the claim of depreciation on printer, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l purposes. - I.T.A. No. 7771/Mum/2012, I.T.A. No. 1374/Mum/2014 - - - Dated:- 14-1-2015 - SHRI VIJAY PAL RAO AND SHRI N.K. BILLAIYA, JJ. For the Appellant : Shri Ajit Kumar jain, Shri Jitendra Jain, Ms. Astha Bhatia and, Ms. Radhika Thakkar For the Respondent : Shri K.C.P Patnayak ORDER Vijay Pal Rao (Judicial Member).- These two appeals by the assessee are directed against the assessment orders passed under section 144C(13) of the Income tax Act, 1961 (the Act) in pursuant to the directions of the Dispute Resolution Panel under section 144C(5) for the assessment years 2008-09 and 2009-10 respectively. 2. For the assessment year 2008-09 the assessee has raised various grounds. However, the only issue arising for our consideration and adjudication is whether in the facts and circumstances of the case the Assessing Officer/Transfer Pricing Officer/Dispute Resolution Panel has erred in making the adjustment of ₹ 18.37 crores in respect of the international transaction pertaining to the transaction of business support services. 2.1. The assessee is a 100 per cent. subsidiary of Hapag Lloyd AG (HLAG) and is a captive unit engaged in providing bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... territory of India and after sub-agent agreement, the sub-agent was performing exactly the same services to AG for the territory including India and Nepal but excluding the territory of the assessee. Accordingly the Transfer Pricing Officer proposed the adjustment of ₹ 18,37,36,236 on the basis of the arm's length price determined at ₹ 38,28,51,634 by applying comparable uncontrolled price as the most appropriate method. 3. The assessee filed objections before the Dispute Resolution Panel and contended that comparable uncontrolled price is not the most appropriate method as stringent comparability is required under this method. The agency agreement between GESA and HLAG is not an appropriate comparable uncontrolled price as it was already terminated on December 31, 2006. Similarly sub-agency agreement between GESA and the assessee is not an appropriate comparable uncontrolled price. It was contended that business decision cannot be questioned by the income tax authorities. The Dispute Resolution Panel did not accept the contention of the assessee and confirmed the action of the Assessing Officer/Transfer Pricing Officer. 4. Before us, the learned authorised re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... associated enterprise of the assessee do not receive the same services from any unrelated party in India, then the transaction between the assessee and GESA cannot be applied as comparable uncontrolled price for comparison of the transaction between the assessee and the associated enterprise. He has referred the United Nations Practical Manual on Transfer Pricing for Developing Countries and submitted that only in the given instances a price can be considered as comparable uncontrolled price but the transaction between the assessee and GESA does not fall under the internal or external comparables as discussed in the United Nations Practical Manual on transfer pricing. GESA acts as sub-agent to the assessee and the assessee remunerates GESA on commission basis. The price paid to GESA is operating cost to the assessee on which the assessee charges 10 per cent. from the associated enterprises. The basis and model of remuneration between the assessee and GESA is entirely different from the remuneration of the assessee received from the associated enterprises. Thus, the learned authorised representative submitted that transaction between the assessee and GESA cannot be applied as compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gency agreement is internal comparable uncontrolled price. The learned Departmental representative has further contended that the assessee did not co-operate in the proceedings before the Transfer Pricing Officer and the relevant information and documents were not furnished by the assessee. The Transfer Pricing Officer obtained the agreement between GESA and HLAG as well as copy of sub-agency agreement between the assessee and GESA by issuing notice under section 131 to GESA. When internal comparable uncontrolled price was available which is primary method for benchmarking the transaction, the Transfer Pricing Officer was right in rejecting the transfer pricing documents of the assessee. He has further submitted that even as per the provisions of transfer pricing, two years data can be used for the purposes of determining the arm's length price. The agreement between GESA and HLAG falls within the two years prior to the assessment year under consideration. He has relied upon the orders of the authorities below and submitted that by new arrangements the assessee has substituted third party for providing services to the associated enterprise. The assessee entered into the shoes o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to associated enterprise during the financial year 2007-08 onwards. The Transfer Pricing Officer supported his action by referring to rule 10B(4) and took the old price to compare with the current year's price. It appears that the Transfer Pricing Officer misunderstood the proviso to rule 10B(4) of the Income-tax Rules. In ordinary situation only current year/contemporaneous data can be used for comparing uncontrolled price with the controlled price. Only in the case of exceptional circumstances, the data relating to the earlier years but not more than two years prior to the current year, can be used, if, such data reveals facts which can have an influence on the determination of the arm's length price in relation to the international transaction. Therefore, the two years prior data can be used along with the current year data. The situation under which the older data can be used is illustrated under proviso to rule 10D(4) as under : 10D(4). The information and documents specified under sub-rules (1) and (2), should, as far as possible, be contemporaneous and should exist latest by the specified date referred to in clause (iv) of section 92F : Provided that where an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GESA does not provide services to HLAG. Therefore, it cannot be considered as internal comparable uncontrolled price. Moreover, the assessee is providing the services to the associated enterprise and receiving the remuneration and in turn getting part of the job done through sub-agent GESA and remunerating it by paying the commission as per sub-agency agreement. Out of the total services provided by the assessee a part is performed through sub-agent and the remaining is performed by the assessee itself. It is like export of goods partly manufactured by the assessee and partly purchased from third party. However, purchase price of the goods exported cannot be applied as comparable uncontrolled price for sale price charged to the associated enterprise. Accordingly considering the price received by GESA as comparable uncontrolled price is contrary to the transfer pricing regulation. We do not rule out the comparable uncontrolled price as the most appropriate method for determination of the arm's length price of international transaction in question. However, the comparable uncontrolled price must be a proper uncontrolled price in compliance of provisions of transfer pricing. 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er ('AO'), giving effect to the order under section 92CA(3) of the Income-tax Act, 1961 ('the Act') passed by the learned Transfer Pricing Officer (TPO), in pursuance to the directions of the hon'ble Dispute Resolution Panel ('the hon'ble DRP'), under section 143(3) read with section 144C(13) of the Act dated December 19, 2013 ('the assessment order'), the appellant respectfully submits that the learned Assessing Officer, the learned Transfer Pricing Officer and the hon'ble Dispute Resolution Panel have erred on the following grounds each of which are without prejudice to each other : Transfer pricing grounds 1. General 1.1 The learned Assessing Officer erred in assessing the income of the appellant under the normal provisions of the Act at INR 35,36,29,790 based on the directions received from the hon'ble Dispute Resolution Panel upholding the transfer pricing adjustment proposed by the learned Transfer Pricing Officer. 1.2 The learned Assessing Officer/Transfer Pricing Officer erred in proposing and the hon'ble Dispute Resolution Panel further erred in upholding an adjustment of INR 29,55,30,462 in respect of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loyd AG ('HLAG') as comparable uncontrolled price, even though the subject agreement was not in existence during the assessment year 2009-10. 3.2 Using powers under section 131 in a selective manner and not providing annual accounts of GESA to the appellant. 3.3 Without prejudice, whilst considering comparable uncontrolled price as the most appropriate method, the learned Assessing Officer/ Transfer Pricing Officer has erred in computation of the arm's length price as the learned Transfer Pricing Officer has added the reimbursement received from HLAG for payment made to GESA with a mark-up of 10 per cent. to the commission receivable. Corporate tax grounds 4. Rate of depreciation on computer hardware : ₹ 14,65,292 That on the facts and circumstances of the case and in law, the learned Assessing Officer erred in proposing and the hon'ble Dispute Resolution Panel erred in granting depreciation on printers, scanners and electronic token display system at the rate of 15 per cent. being the rate applicable to other machinery and plant instead of 60 per cent. being the specific rate applicable to 'computers including computer software' as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds and reasons which may be submitted during the course of hearing of this appeal, the appellant requests that the appeal be allowed as prayed. 7.1. Grounds Nos. 1 to 3 regarding transfer pricing adjustment. 7.1.1. The issue involved in these grounds is identical and common to the issue involved in the assessment year 2008-09. In view of our finding on this issue for the assessment year 2008-09 this issue is set aside to the record of the Assessing Officer/Transfer Pricing Officer for fresh consideration on the same terms. 8. Ground No. 4 is regarding rate of depreciation on computer hardware. 8.1. The assessee claimed depreciation at 60 per cent. on computer including printer, scanner and electronic token display system all part of block of asset of computer. The Assessing Officer held that the peripherals item do not fall under the definition of computer and allowed depreciation only at 15 per cent. The Dispute Resolution Panel confirmed the action of the Assessing Officer without any discussion. 8.1.2. Before us, the learned authorised representative has submitted that this issue is now covered by various decisions of the hon'ble High Courts as well as this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eaching the conclusion that router is not eligible for depreciation at the rate applicable to computer, the Bench noticed that the router at its own does not perform any logical, arithmetical or memory functions by manipulations of electronic, magnetic or optical impulse. 33. We prefer the view taken in the case of Samiran Majumdar (supra) over that in the case of Routermania Technologies P. Ltd. (supra). With utmost respect, the Mumbai Bench had taken a narrow view on this issue, by holding that only a device which can perform logical, arithmetical or memory functions by manipulations of electronic impulses, etc., is computer. It has restricted the meaning of computer only to the central processing unit of the computer and pulled out the input and output devices from the ambit of computer. No doubt the function of the computer, as one composite unit, is to perform logical, arithmetical or memory functions etc., but it is not only the equipment which performs such functions that can be called as computer. All the input and output devices, as discussed above, which support in the receipt of input and outflow of the output are also part of computer. The central processing unit alo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pute that software is an intangible asset. Hardware, commonly called as computer, is a tangible asset which by itself cannot function. The computer can function only with the help of software. Software is akin to know-how as held by the hon'ble Rajas than High Court in the case of CIT v. Arawali Constructions Co. P. Ltd. [2003] 259 ITR 30 (Raj). In this judgment, it has been clearly held that expenditure on purchase of software is a capital expenditure. There is no contrary judgment on this aspect of issue. Hence, it has to be held that software is an asset. Admittedly, the assessee is not in the business of software. Hence, we are further of the view that software was a capital asset as far as the present assessee is concerned. The Income-tax Rules, 1962, as amended with effect from April 1, 2003, rather helps the Revenue and not the assessee inasmuch as it provides for depreciation on software at the rate of 60 per cent. By providing higher depreciation, it cannot be said that prior to April 1, 2003, it was revenue expenditure. It was always a capital asset. Prior to April 1, 2003, the assessee was entitled to normal rate of depreciation which was enhanced to 60 per cent. by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d software, based on the number of employees of the assessee. The Dispute Resolution Panel noticed that the cost of software purchased by the associated enterprise was allocated on the basis of number of personal computers, but the employees of the assessee are less than the number of personal computers. Accordingly, the Assessing Officer was directed not to allow proportionate depreciation on 18 software licences out of total 169 licences, cost of which was allocated to the assessee by HLAG. 10.1. Before us the learned authorised representative has submitted that the condition for allowing depreciation is use of asset for business purpose, and, not the number of employees. He has further contended that while giving effect to the directions of the Dispute Resolution Panel, the Assessing Officer has disallowed the depreciation not only of 18 software licences but on the hardware and other peripherals, which were purchased by the assessee from third parties. He has referred to para 6 of the Dispute Resolution Panel whereby the Assessing Officer was directed not to allow proportionate depreciation on 18 software licences out of 169 licences, cost of which was allocated by HLAG to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impugned order whereby he disallowed the proportionate depreciation on the entire computer block of asset. 10.4. As regards proportionate disallowance based on the number of employees is concerned, we are of the view that the personal computers in any establishment/organisation are not restricted to the number of employees at any given point of time. The strength of the employees may vary depending upon the capacity at which the company is working. Further, keeping extra computer for meeting any emergent situation of non-functional computer or under repair computer is not an unusual practice. Therefore, when the number of computer is not disputed then software installed on the existing computer cannot be treated as excess or not for business use of the assessee. Hence, we do not find any logic or substance in the directions of the Dispute Resolution Panel in restricting the depreciation of software licence to the extent of number of employees working with the assessee. Accordingly, the orders of the authorities below qua this issue are set aside and claim of the assessee is allowed in full. 11. Ground No. 7 is regarding interest under section 234D. 11.1. The learned author ..... X X X X Extracts X X X X X X X X Extracts X X X X
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