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Asstt. Commissioner of Income Tax, Circle 3 (1) , New Delhi Versus M/s Citi Financial Consumer Finance India Ltd

2015 (9) TMI 138 - ITAT DELHI

Addition on account of advertisement & publicity expenses - CIT(A) deleted the addition - Held that:- As decided in assessee's own case for the assessment years 2001-02 and 2002-03 the expenditure on publicity and advertisement is to be treated as revenue in nature allowable fully in the year in which it was incurred. Concededly, there is no advantage which has accrued to the assessee in the capital field. The expenditure was incurred to facilitate the assessee’s trading operations. No fixed cap .....

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that the learned Commissioner of Income Tax (Appeals) has given a categorical finding that the assessee has duly produced all the necessary details and that the assessee has duly identified the capital portion of the expenditure incurred and the amount of the improvements expenses which were of revenue in nature. We also find that it is a settled law that powers and duties of the Commissioner of Income Tax (Appeals) are coterminus with that the Assessing Officer. Hence, in our considered opinion .....

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assignments and it is not dependent upon the working out of the agreements ultimately entered into between the assessee and the customers. Since the commission is paid to the direct selling agents, for their services in sourcing hire in the year in which the loan is disbursed, it is to be allowed as business expenditure. The Tribunal, to arrive at this finding took into consideration the clauses of the agreement relating to mode of payment of consideration as well as termination clause in the ag .....

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assessee in the course of normal business operations and such repossessed assets were sold and loss incurred in this process is a normal business loss allowable to the assessee. The same is allowable u/s 36(1)(vii) of the Act also as write off of bad debts because when there is loss on sale of repossessed assets, such deficiency is realizable from the customer but since the assessee has written off the same in the P&L A/c instead of debiting it to the customer account, it is equal to write off .....

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assessment year 2006-07 wherein held it should not be disputed by the learned counsel for the revenue that this issue is now settled by the judgment of this Court in the case of CIT Vs BSES Yamuna Powers Ltd. (2010 (8) TMI 58 - DELHI HIGH COURT) holding that on computers and peripherals, depreciation at the rate of 60% is allowable.- Decided in favour of assessee

Addition on NCD and Commercial paper issue expense - CIT(A) deleted the addition - Held that:- Similar issue having ident .....

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ition on account of loan acquisition costs - CIT(A) deleted the addition - Held that:- As decided in PY The relevant provisions of the act recognize only capital or revenue expenditure. Indisputably, the amount claimed by the assessee in these three assessment years is revenue in nature. Deferred revenue expenditure denotes expenditure for which a payment has been made or a liability incurred, which is essentially revenue in nature but which for various reasons like quantum and period of expecte .....

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ievance of the department only relates to the exclusion of Mega Soft Ltd. and inclusion of Orient Information Technology Ltd. in the set of comparables - Held that:- As regards to the inclusion of Orient Information Technology Ltd. is concerned, the TPO had not given any particular reason for its exclusion. The said company also designs, develops and deploys customized software solution and application so its functionality was comparable with the assessee. The said company was not considered by .....

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As regards to the exclusion of Mega Soft Ltd. is concerned as directed by the ld. CIT(A), it is noticed that the said company had gone restructuring during the financial year under consideration, its total sales was ₹ 104.17 crores as compared to the fees received by the assessee at ₹ 20.97 crores. It has a strong R&D background alongwith product development expertise which the assessee did not have. The said company also acquired US based Boston Communications Group Inc .....

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Decided against revenue. - ITA No. 2848/Del/2012, ITA No. 6305/Del/2012 - Dated:- 17-8-2015 - Sh. N. K. Saini and Sh. I. C. Sudhir, JJ. For The Assessee : Sh C. S. Aggarwal, Sr. Adv. & Sh. Ravi Pratap Mall, Adv. For The Revenue : Sh. Vivek R. Wadekar, CIT DR & Sh. Rahul Garg, Sr. DR ORDER PER N.K. SAINI, A.M. These two appeals by the department are directed against the separate .....

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of Advertisement and publicity expenses. 2. The Ld. CIT(A) has erred on facts and in law in deleting addition of ₹ 21,16,50,310/- on account of lease hold improvements expenses. 3. The Ld. CIT(A) has erred on facts and in law in deleting addition of ₹ 1,00,55,42,364/- on account of direct selling agent commission expenses. 4. The Ld. CIT(A) has erred on facts and in law in deleting addition of ₹ 5,28,33,372/- on account of loss on sale of repossessed assets. 5. The Ld. CIT(A) h .....

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- on account of adjustment Arm s length price of the international transaction. 9. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any grounds of appeal at any time before or during the hearing of this appeal. 3. Vide Ground No. 1 the grievance of the Department relates to the deletion of addition of ₹ 24,40,36,690/-made by the AO on account of advertisement & publicity expenses. Facts of the case in brief are that the assessee company is engag .....

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The assessee thereafter chose to file an appeal before the ld. CIT(A) instead of filing objections against the proposed additions before the DRP and communicated the same to the AO vide letter dated 24.01.2011. Thereafter the AO completed the assessment u/s 143(3) r. W. S. 144C of the Act and assessed the income at ₹ 4,98,17,52,701/- vide order dated 22.02.2011 by making following additions/disallowances: S. No. Particulars of disallowances Amount (Rs.) Treatment by AO 1. Addition on accou .....

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assets 5,28,33,372 Held to be a capital loss 7. Club expenditure 59,849 Held to be non business expenditure 8. Depreciation on computer peripherals 3,61,02,215 Depreciation @ 15% allowed as against 60% claimed by the appellant 9. NCD and Commercial paper issue expenses 5,74,05,698 Deferred over a period of 5 years Total 2,13,24,42,311 4. Being aggrieved the assessee carried the matter to the ld. CIT(A) who deleted the addition of ₹ 24,40,36,690/-made by the AO on account of advertisement .....

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ition made by the AO by following the judgment of the Hon ble Delhi High Court and moreover, this issue is also squarely covered vide order dated 20.02.2015 in assessee s own case in ITA No. 4776/Del/2010 for the assessment year 2006-07 passed by this Bench of the Tribunal wherein relevant findings has been given as under: 13. Applying the aforesaid principle to the facts of this case, it clearly emerges that the expenditure on publicity and advertisement is to be treated as revenue in nature al .....

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expenditure fulfills the test laid down u/s 37 of the Act, it has to be allowed. Only in exceptional cases, the nature mentioned in Madras Industrial Corporation (supra), the expenditure can be allowed to be spread over, that too, when the assessee chooses to do so. 8. Respectfully following the decision of Hon ble Delhi High Court, this ground is allowed. 6. In view of the above we do not see any merit in the departmental appeal on this issue. 7. The next issue vide Ground No. 2 relates to the .....

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noticed that an identical issue was a subject matter of adjudication in the preceding year in assessee s own case wherein vide order dated 20.02.2015, the issue has been decided in favour of the assessee and relevant discussion is made in paras 9 to 14 which read as under: 9. The second ground relates to disallowance of leasehold improvement expenditure as capital expenditure and allowing only depreciation @ 10%. 10. Brief facts apropos this issue are that during the year the assessee company h .....

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eptacles, glazing on ventilators etc. It was further explained that the capital expenditure was duly bifurcated from the bills and the balance amount of ₹ 6.46 crores was claimed as leasehold improvements. The Assessing Officer treated the entire expenditure being in capital field and allowed depreciation @ 10%. Learned Counsel submitted that this issue is covered by the decision of ITAT dated 18th December, 2009 for assessment years 2001-02 and 2002-03 contained at page no. 861 of paper b .....

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works, brickworks, flowing etc. would clearly show that this expenditure could be capital in nature. Her grievance was that the Commissioner of Income Tax (Appeals) or the Tribunal did not go into this question at all and simply accepted the bifurcation given by the assessee in capitalizing the portion of the expenditure and treating the part of the expenditure as revenue. Her plea, therefore, was that the matter be remitted back to the Assessing Officer. She conceded, at the same time, that eve .....

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r as expenditure to the extent of ₹ 1.52 crores is concerned, the same is treated as revenue in nature. 21. Mrs. Bansal may not be correct in her submission that the Commissioner of Income Tax (Appeals) simply accepted the assertion of the assessee. The order of the CIT reveals that the plethora of documents in respect of expenditure incurred on leasehold improvements to the extent of ₹ 1.52 crores was filed at pages 282 to 336 of the paper book. The order of the Commissioner of Inco .....

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categorical finding based thereupon. This would, thus, be a mere question of fact and no question of law arises thereupon. 11. Learned Counsel further pointed out that SLP filed against the judgment of Hon ble Delhi High Court has been dismissed. 12. We have considered the submissions of both the parties and have perused the record of the case. In assessment years 2001-02 and 2002-03 Tribunal had observed in para 39 as under: 39. We have carefully considered the submissions, we find that the lea .....

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o need to interfere with the finding of the learned Commissioner of Income Tax (Appeals). Accordingly, we uphold the same. 13. Further in assessment years 2003-04 to 2005-06 Tribunal in para no. 9.2, after taking note of the decision of Hon ble Delhi High Court for assessment years 2001-02 and 2002-03 (supra), observed as under: 9.2 In the light of aforesaid view taken by the Hon ble Jurisdictional High Court, especially when the Revenue have not placed before us any material controverting the a .....

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essment years 2001-02 to 2005-06, respectfully following the decision of Hon ble Jurisdictional High Court, this ground of assessee is allowed. 9. So, respectfully following the earlier order of the Tribunal dated 20.02.2015 in assessee s own case, we do not see any merit in this ground of the departmental appeal. 10. The next issue vide Ground No. 3 relates to the deletion of addition of ₹ 1,00,55,42,364/- made by the AO on account of direct selling agent commission expenses. As regards t .....

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the relevant findings therein read as under: 21. We have considered the submissions of both the parties and have perused the record of the case. It is not disputed that the facts are identical to assessment years 2001-02 to 2005-06. We find that Tribunal in para No. 13 has observed as under: 13. We have heard both the parties and gone through the facts of the indisputably and as pointed out by the ld. Commissioner of Income Tax (Appeals) in the impugned orders and the Assessing Officer in his a .....

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less than one year upto 5 years. On such transactions, direct selling expenses, stamping fee and commission paid to the selling agents could not be treated as expense relating to the year in which the transaction took place as the period of financing was normally more than one year. On this premise, the Assessing Officer took the view that these expenses could not be termed as having the chargeability in which they were incurred. He took average of three years for such agreements and spread the .....

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y the assessee is debited to agreement stamping fee under the major head of rates and taxes and is claimed as revenue expenditure. This entire process of getting stamped the agreements had been outsourced by the assessee to the Contract Processing Associates (CPA) and who are paid remuneration as well. Therefore, the expense towards stamping as well as commission paid to the agents is debited in whole in the year in which it is incurred and could not be treated as advertisement expense. 16. The .....

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o any period, the entire expenditure was allowable in the year in which it was incurred. The Tribunal has further held that the expenditure is incurred once for all in the form of stamping duty as well as commission paid to the direct selling agents for procuring the loan assignments and it is not dependent upon the working out of the agreements ultimately entered into between the assessee and the customers. Since the commission is paid to the direct selling agents, for their services in sourcin .....

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e judgment of Supreme Court in the cases of Calcutta Company Ltd. Vs CIT, 37 ITR 1, CIT Vs Associated Cement Companies Ltd., 172 ITR 257, Empire Jute Company Ltd. Vs CIT, 124 ITR 01 and judgment of this Court in CIT Vs Salora International Ltd., 308 ITR 199. 30.2 It will also be apt to refer to the decision of the Hon ble Apex Court in the case of CIT Vs Associated Cement Companies Ltd. in 172 ITR 257 wherein the facts are as under: The respondent company, a manufacturer of cement, was running a .....

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actory to the railway station. In return, the respondent was not liable to pay municipal rates and taxes for a period of 15 years. During the previous year relevant to the assessment year 1959-60, the respondent spent a sum of ₹ 2,09,459/- towards installing water pipelines and accessories outside the factory premises which were to belong to and be maintained by the municipality. Since it was not disputed that the entire expenditure concerned installations and accessories which came to the .....

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of absolution or immunity from liability to pay municipal rates and taxes under normal conditions for a period of fifteen years. If these liabilities had to be paid, the payments would have been on revenue account and hence the advantage secured was in the field of revenue and not capital. As a result of the expenditure incurred there was no addition to the capital assets of the assessee-company and no change in its capital structure. The pipelines, etc., which might have been regarded as capit .....

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g the aforesaid findings of the ld. Commissioner of Income Tax (Appeals) so as to enable us to take a different view in the matter nor brought to our notice any contrary decision, we have no hesitation in upholding the findings of the ld. Commissioner of Income Tax (Appeals). Therefore, ground No. 5 in the appeal of the Revenue for the assessment year 2003-04 and ground No. 5 in their appeals for assessment years 2003-04 and 2005-06 are dismissed. 12. So, respectfully following the aforesaid ref .....

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supported the order of the AO but could not controvert the aforesaid contention of the ld. Counsel for the assessee. 14. After considering the submissions of both the parties, it is noticed that an identical issue having similar facts was a subject matter of the assessee s appeal in ITA No. 4776/Del/2010 for the assessment year 2006-07 and the issue was decided in favour of the assessee by observing in para 24 of the impugned order as under: 24. Brief facts apropos this issue are that during the .....

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d not constitute the assessee s stock in trade. Hence, the loss on repossessed assets could not be held as revenue s loss for the assessee company. Learned counsel pointed out that this issue has already been decided by Tribunal as well as by Hon ble High Court in earlier years. We find that Tribunal in assessment years 2003-04 to 2005-06 has allowed this ground observing in para 17 page 1072 of paper book as under: 17. We have heard both the parties and gone through the facts of the case. In di .....

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ble on record. We find that it has been noted by the learned Commissioner of Income Tax (Appeals) in para no. 3.3 of his order that it was submitted before him that the assessee has claimed an amount of ₹ 56,926,000/- on account of loss on sale of repossessed assets as revenue expenditure. It is also noted that it is the claim of the assessee that the claim of the assessee is nothing but bad debts incurred by the assessee during the course of its normal business operations. Learned Commiss .....

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iness operations and such repossessed assets were sold and loss incurred in this process is a normal business loss allowable to the assessee. The same is allowable u/s 36(1)(vii) of the Act also as write off of bad debts because when there is loss on sale of repossessed assets, such deficiency is realizable from the customer but since the assessee has written off the same in the P&L A/c instead of debiting it to the customer account, it is equal to write off of bad debt and by now, it is a s .....

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Act has been amended w. E. F. 01.04.1989. We, therefore, decide this issue also in favour of the assessee. 17.1 Subsequently, Hon ble High Court in their order 04.03.2011 in ITA No. 451/2011 upheld the aforesaid decision of the ITAT in the light of view taken by the Hon ble High Court in their decision dated 09.11.2010 in CIT Vs Citicorp Maruti Finance Ltd. in ITA No. S 1712 & 1714/2010, holding that the assessee was entitled to loss on sale of repossessed assets u/s 36(1)(vii) read with sec .....

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e appeal of the revenue for the assessment year 2003-04 and ground No. 5 in their appeals for the assessment years 2004-05 and 2005-06 are dismissed. 15. So, respectfully following the order dated 20.02.2015 in the aforesaid referred to order in assessee s own case, we do not see any merit in this ground of the departmental appeal. 16. Next issue Ground No. 5 relates to the deletion of addition of ₹ 3,61,02,215/- made by the AO on account of depreciation on computer peripherals. 17. After .....

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the case of Citicorp Maruti Finance Ltd. (supra) has held as under: The assessee had also claimed depreciation at the rate of 60% on computers accessories and peripherals purchased by the assessee during this year. The Assessing Officer, however, allowed the depreciation at the rate of 25%. The Commissioner of Income Tax (Appeals) reversed this part of the order of the Assessing Officer holding that on computer accessories 60% depreciation was allowable under the Act. This order is also upheld .....

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do not see any valid ground to interfere with the findings given by the ld. CIT(A) on this issue and accordingly do not see any merit in the appeal of the department on this issue. 19. Next issue vide Ground No. 6 relates to the grievance of the department to the deletion of addition of ₹ 5,74,05,698/- made by the AO on account of NCD and Commercial paper issue expense. As regards to this issue the ld. Counsel for the assessee submitted that it is also covered in favour of the assessee vid .....

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n given in para 39 which read as under: 39. Having heard both the parties, we find that Tribunal in para nos. 25 to 25.7 in assessment years 2003-04 to 2005-06 observed as under: 25. We have heard both the parties and gone through the facts of the case. Indisputably, the aforesaid amount relates to expenditure in connection with the issue of non convertible debentures and commercial paper. The Assessing Officer treated the same as deferred expenditure while the ld. Commissioner of Income Tax (Ap .....

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pected future benefit etc., is written off over a period of time e. G. expenditure on advertisement, sales promotion etc. Though the nature of such expenditure is revenue, keeping in view the fact that the benefit arising there from are expected to be derived over a period of time, stretching sometimes over several accounting years, the taxpayers have been amortizing the same over the expected time period over which the benefits are likely to accrue there from. Accordingly, only a proportion of .....

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in order to generate and increase the brand recall and sustain it in the minds of customers. Whether or not expenditure is of enduring nature, the Hon ble Supreme Court in the case of Alembic Chemical Works Co. Ltd. Vs CIT (1989) 177 ITR 377 has itself observed that The idea of once for all payment and enduring benefit are not to be treated as something akin to statutory conditions; nor are the notions of capital or revenue a judicial fetish. What is capital expenditure and what is revenue are .....

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lved. For the purpose of allowability of any expenditure under the Act, what is material is the classification between the capital and revenue and the same does not recognize of any concept of deferred revenue expenditure. That is why Assessing Offficer himself allowed the 1/5th of the amount. In a number of judgments viz. Amar Raja Batteries Ltd. Vs ACIT (2004) 91 ITD 280 (Hyd.), JCIT Vs Modi Olivetti Ltd. (2005) 4 SOT 859 (Del.), ACIT Vs Medicamen Biotech Ltd. (2005) 1 SOT 347 (Del.), Hero Hon .....

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to be treated distinctly from capital expenditure. However, where any identifiable capital asset, tangible or intangible comes into existence as a result of the amount expended, the same will have to be treated as a capital expenditure and depreciation allowable thereon as per the prescribed rules and procedures under the Income Tax Act. 25.2 In the instant case, there is no material before us to infer that the aforesaid expenditure resulted in creation of any capital asset, tangible or intangi .....

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of years even if the assessee has written it of in his books over a period of years. 25.3 Another argument by the ld. DR is the variation and dichotomy between the accounting treatment of such expenditure in the books of account and its claim under the Act. As far as the entries in the books of account are concerned, it is well settled that they do not clinch the issue either way, and are not determinative of the allowability or otherwise of the expenditure. The decisions of the Hon ble Supreme .....

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in the case of Kedarnath Jute Manufacturing Co. Ltd. Vs CIT (1971) 82 ITR 363 (SC) also affirmed the above view by observing that Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. 25.4 Subsequently the Hon ble Court re-affirmed the said view in Sutlej Cotton .....

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ed is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. 25.5 Likewise, in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs CIT 227 ITR 172 (SC), Hon ble Supreme Court held that It is true that this court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deducti .....

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2009) TIOL 93, Hon ble Apex Court taking note of their earlier decision in India Cements ltd. (supra) held that expenditure on loan was allowable as revenue expenditure. The Revenue in this case contended that since the debentures were convertible and on conversion, it would add to the capital of the company, the expenditure should also be construed as capital expenditure. The Hon ble Supreme Court rejected this contention and held that the debentures were loans and the object of a loan was not .....

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eal of the Revenue for the AY 2003-04 and ground no. 7 in their appeal for the AY 2005-06 are dismissed. 21. So, respectfully following the earlier orders of the Tribunal, we are of the view that the ld. CIT(A) rightly deleted the impugned addition made by the AO. 22. The next issue vide Ground No. 7 relates to the deletion of addition of ₹ 51,34,55,174/- made by the AO on account of loan acquisition costs. 23. Regarding this issue the ld. Counsel for the assessee submitted that it has bee .....

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essment years 2003-04 to 2005-06, the relevant findings have given in para 17 & 18 of the order dated 20.02.2015 in ITA No. 4776/Del/2010 which read as under: 17. We have considered the submissions of both the parties and have perused the record of the case. We find that the Tribunal in assessment years 2003-04 to 2005-06 after considering the findings of learned Commissioner of Income Tax (Appeals) for both the years, observed in paras 29 & 29.1 as under: 29. We have heard both the part .....

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Limited (supra). On perusal, the learned Commissioner of Income Tax (Appeals) allowed the claim on the ground that the Assessing Officer could not take a different stand relating to income and expenditure on the same issue and the treatment in books of accounts does not govern the tax treatment, which is governed by the provisions of the Act. As already observed by us in paras 25 to 25.7 while adjudicating ground No. 3 in the appeal of the revenue for the assessment year 2003-04 and ground No. .....

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various reasons like quantum and period of expected future benefit etc., is written off over a period of time e. G. expenditure on advertisement, sales promotion etc. There is no material before us to infer that the aforesaid expenditure resulted in creation of any capital asset, tangible or intangible, and thus, the question of treating the same as capital expenditure does not arise. In fact, the Hon ble Supreme Court itself in Madras Industrial Investment Corporation Limited (supra) while disc .....

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our notice any contrary decision nor any other material so as to enable us to take a different view in the matter, we have no hesitation in upholding the findings of the learned Commissioner of Income Tax (Appeals). Therefore, ground No. 4 in the appeal of the Revenue for the assessment year 2003-04 and ground No. 3 in their appeals for the assessment years 2004-05 and 2005-06, are dismissed. 18. The revenue have not brought any distinguishing feature in this year which may persuaded us to take .....

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international transactions in this case were direct selling agent commission payment, original data service charges, interest charges, expenses reimbursement within the group and fees received for software development and sport services. The AO referred the matter to the TPO u/s 92CA of the Act and the TPO held that all the international transaction except software development and sport services were at Arm s length based on TP documentation submitted by the assessee. For the transfer pricing an .....

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un to its associate enterprises amounting to ₹ 20,97,13,000/- was considered to be at Arm s length. During the transfer pricing proceedings, the TPO asked the assessee to submit transfer pricing study report and other necessary information on the basis of which comparables were debited by the assessee. The TPO rejected 16 comparables used by the assessee out of the total 18 comparables and then proceeded to search for his own comparables. The TPO used 24 new comparables and also included t .....

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) and submitted that the assessee has used multiple years data whereas the TPO has used single year data for analysis. The ld. CIT(A) observed that the TPO gave reasons to the fresh search conducted by him in Prowess and Capitaline databases by using different set of filters and justified the different filters used by him. The ld. CIT(A) pointed out in para 10.4 of the impugned order that the assessee as well as the TPO used the final set of following comparables: Comparables used by assessee in .....

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rmation Technology Ltd. Sonata Software Ltd. IGate Global Solutions Ltd. Synetarios Technologies Ltd. Infosys Technologies Ltd. Trident Infotech Corpn. Ltd. Ishir Infotech Ld. VJIL Consulting Ltd. KALS Information Systems Ltd. (Seg.) Akshay Software Technologies Ltd. LGS Global Ltd. (Lanco Global Solutions Ltd.) Camrbidge Technology Enterprises Ltd. Lucid Software Ltd. ICRA Techno Analytics Ltd. Mediasoft Solutions Ltd. Mindtree Consulting Ltd. Megasoft Ltd. Computech International Ltd. (Softwar .....

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rder which read as under: Filter Assessee s arguments TPO arguments 1) Companies with related party transactions more than 25% of the operating revenues have been rejected AS 18 on related parties does not prescribe any percentage 15% to be considered in place of 25% relying on Sony India ITAT RPT data is not available on public domain Assessee does not have powers like TPO to use 133(6) This filter is appropriate to eliminate the Companies which have controlled transactions and thereby have a s .....

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outside India will charge return from its customers and application of this filter will eliminate companies having domestic service transactions thereby ignoring functional similarity Uncontrolled transaction as per rule 10A(a) includes transaction with resident or nonresident. It is nowhere provided that the transaction should necessarily have a cross border element TPO has highlighted the difference in geographical location of customers without demonstrating the effect of such difference on n .....

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that price charges in export sector varies from price charged in domestic sector because of cost arbitrage available in export sector which is not available in domestic sector Reliance on judicial rulings 3) Companies with employee cost less than 25% of sales rejected Transfer pricing analysis should be base on FAR wherein actual functions performed by the Company should be evaluated rather than be based on financial ratios Companies can have different business models which may not be reflected .....

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liar economic circumstances Low employees cost means that the co is functionally different Revenue earned by a software development company is generally directly proportional to number of employees Power u/s 133(6) was used to where complete info was not available No comparable has been accepted/rejected merely on this ground 4) Companies with Diminishing revenue filter (revenue less than 30% over last 10 years or at least 3 years) rejected Neither the Act nor the OECD provides that the revenue .....

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n line with the growth in software industry Diminishing revenues also indicate that company may be on the verge of closure, underutilization of assets or human resources. Reasonable adjustments cannot be made There is a difference b/w use of earlier year data for analyzing economic circumstances and for computation of mean ALP Reliance on Sony India 5) Companies with different year ending rejected The fact that company has a statutory year end on 31 Dec 2006 as against Financial year ending Marc .....

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ar ending 31 March have been taken as comparables in contrast to year ending June or any other month taken by the assessee Different accounting year of a comparable means that transaction taking place in different period are being compared Companies with same accounting period are available for comparison so there is no need to take into account companies with different accounting years and then adjust their margins There will be ambiguity regarding which year data is to be used in case of overl .....

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s only from offshore software development services Offshore margins are more than onshore margins Pricing for the tow is different since in case of offshore projects most of the costs are incurred in India whereas employee costs significantly increases in case of onsite project Onsite companies do not have significant assets since most of the work is carried outside India on customer site Co s generating more than 75% of export revenues from onsite companies working outside India having their ow .....

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in house developed software that enables the appellant to evaluate its loan portfolio & process these transactions. The same also provides a platform for management reporting. Since the infrastructure (assets, manpower etc.) which is used to upgrade the software on continuous basis for the purposes of appellant s operations, remains underutilized, it was decided to do similar activities for its Associated Enterprises (AEs) so that the appellant is able to utilize its resources optimally. Hen .....

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nd software customization to make it adaptable for use by associated enterprises; • Sourcing additional modules from third party vendors if required; • Making available Data Centre Hardware (server, etc.) to the Associated enterprises; • On-going personnel support as required by the associated enterprise for ensuring smooth functioning of IT applications; and • Upgradation and implementation of on-going enhancements to the software. In respect of the above, the appellant reco .....

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are the same as submitted during the appellate proceedings. I have considered the submissions and find that TPO has effectively dealt with each of the issues raised by the appellant. TPO has also pointed out that till last assessment year the appellant itself was using Infosys as a comparable company in its set. Therefore, I hold that there is no merit in the argument of the appellant and this company should be chosen as a comparable. Megasoft Ltd. ( Megasoft ): Appellant had made the following .....

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rvices through its two divisions namely Xius-bcqi division and BlueAlly Division. Please find below the extract of the reply submitted by Megasoft (page no 702 of the paper book): Xius-bcgi division 1. The Xius-bcgi division is a total telecom division whose main focus would be to invent, market and manage cutting edge telecom products, applications & services. Xius-bcgi division has been inventing and implementing industry transforming technologies for the wireless and convergent telecom in .....

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d Map Plan. Once the road map plan is defined, development team goes about implementing this roadmap. Products that are resultant of this software development are defined and sold as packaged products to customers. While implementing these standardized products at customer location or in their business environment, customers may request us to customize our product or reconfigure our products to fit into their business workflow, environment, IT/ Telecom infrastructure. In order to make it hassle .....

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nction with the packaged product. 3. The billing for sale of products is done on number of licenses being sold to the client. The value of the invoice depends upon period of license, area covered, roaming facility, revenue sharing in call hits and any hardware is embedded with software etc. For instance, the company sold to BPL Cellular Ltd 3 lakhs licenses at a price of ₹ 2.40 crores. We have enclosed invoices for sale of licenses for the FY 2005-06 and FY 2006-07. The company does not ch .....

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ed from this division. Each invoice varies from customer to customer, strictly prices are not comparable and not attributed to particular head of revenue. (copies of invoices are included) 5. BlueAlly Division BlueAlly services portfolio comprises of application development and application management services and concept - to - market partnerships. Application Development Services: BlueAlly helps customers optimize their IT investments by advising on how best to rationalize their application por .....

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celerate their products time-to-market, through BlueAlly s comprehensive IP-CP3 framework (IP creation, procurement, protection and propagation) and industryleading product partnership models. Copy of annual report of Megasoft for year ended 31 December 2007 is enclosed as Annexure 2. However as submitted above, the appellant is neither into any product development nor is its software saleable in the market. The appellant only provides limited software service to its AEs. Accordingly, the TPO ha .....

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the annual report, Megasoft has a strong R&D background along with product development expertise. In order to protect its intellectual property, the Company has applied for eleven patents and registration of various trademarks. The Company has also capitalized patents in its books of account (refer page no 838, 839 of the paper book) Your Honours will appreciate that such an investment in R&D will fructify in future and offer advantage in leveraging new technology for offering higher val .....

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Your Honours will appreciate that creation of marketing intangibles contribute to overall return of the Company. Accordingly, Megasoft cannot be considered as a comparable to a company like the appellant who does not incur any marketing expenditure or perform any brand building exercise. Restructuring/ Extra-ordinary business circumstances: As per the page no 3 of the annual report of Megasoft, the Company has undergone restructuring during the relevant FY. Following extract from company s annua .....

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be considered as comparable to the appellant due to presence of peculiar economic circumstances. Incorrect computation of PLI - Without prejudice to the above arguments, it is submitted that PLI computed by the TPO is incorrect on account of the following reasons: • As per the TPO s order (page no 705 of the paper book), revenue of both XIUS- bcgi division and BlueALLY division has been taken for computing operating profits. • The TPO has not considered depreciation and miscellaneous e .....

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abnormal profits and having high advertisement spending. These issues were raised before the TPO. From the order of the TPO, I am of the opinion that the TPO has effectively countered all doubts raised by the taxpayers. On the issue of products, the company has categorically stated that it has no income from the sale of products to third parties. More than 96% of the revenues are from the software development activity of this company. The TPO has also gone to the draft Red Hearing Prospectus fi .....

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ned in the set of comparables. 32. The submissions of the assessee on the comparables which were included by it and rejected by the TPO were as under: Orient Information Technologies Ltd. (OITL): The ld. TPO has not given any particular reason in its order as to why OITL has been excluded from the set of comparables. As per the transfer pricing study report of the appellant, OITL designs, develops and deploys customized software solutions and applications (Custom Application Development Services .....

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ent decision of Delhi Tribunal in the case of Yum Restaurants India Private Limited (ITA No. 5122/Del/2010) (enclosed as Annexure 5) wherein it has been held that loss making companies cannot be rejected as comparables simply on the ground of losses. Following observation has been made by ITAT: We have no hesitation in observing that merely a company is showing losses would not loose its status of comparable if other criteria depicted status of comparables. Declaration of loss is an incidental o .....

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ss Account of OITL for the year ended 31 March 2007 (refer Annexure 3). Upon going through the enclosed information, Your Honours will find that although the Company has incurred a loss of ₹ 3.85 crores in the relevant financial year, net worth of the Company is positive (65.98 crores). Further, losses of the Company have reduced significantly from 18 crores in the previous year ended 31 March 2006 to 3.85 crores in the previous year ended 31 March 2007. This shows that the Company is in t .....

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ellant and find that there is merit in the argument. In fact the TPO has not given any reason for rejecting this comparable in his order. This company also does not qualify to be called as diminishing revenue company since its losses are reducing compared to the earlier years. In view of the above, I hold that this is a comparable company. The decision of the Hon ble ITAT Delhi in the case of Yum Restaurants India Pvt. Ltd. (supra) is also applicable in this case. Just because the company is mak .....

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rejected. 35. Now the department is in appeal against the action of the ld. CIT(A) directed the TPO/AO to exclude Mega Soft Ltd. from the set of comparables and include Orient Information Technologies as a comparable and rest of the comparables as selected by the TPO should be retained in the set, with this observation the working capital adjustment as given by the TPO was upheld. The ld. CIT(A) also held that if the mean margin of the 26 comparables so calculated falls within ±5% of the .....

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the ld. CIT(A) was also not justified in including the Orient Information Technology Ltd. particularly when this company was making loss and was a diminishing revenue company. The reliance was placed on the following case laws: Ø Sony India Pvt. Ltd. Vs DCIT 114 ITD 448 (Del.) 37. In his rival submissions the ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the assessee had entered into international transaction of provi .....

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he decision in the case of Yum Restaurants India Pvt. Ltd. in ITA No. 5122/Del/2010 decided by the ITAT Delhi Bench. It was further stated that Mega Soft Ltd. was rightly directed by the ld. CIT(A) to be excluded from the comparables because the said company was functionally different. 38. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it appears that the grievance of the department only relates to the .....

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t be a reason to exclude it from the set of comparable, in view of the decision of the ITAT Delhi Bench in the case of Yum Restaurants India Ltd. in ITA No. 5122/Del/2010 wherein it has been held that merely a company showing loss would not lose its status of comparable if other criteria depicted status of comparable. Same view has been taken by the ITAT Delhi Bench in the case of Sony India Ltd. reported at 114 ITD 448. 39. As regards to the exclusion of Mega Soft Ltd. is concerned as directed .....

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Therefore, the ld. CIT(A) rightly held that Mega Soft Ltd. to be excluded from the set of comparables. We, therefore, considering the totality of the facts as discussed hereinabove are of the view that the ld. CIT(A) rightly directed the AO to exclude the Mega Soft Ltd. and include the Orient Information Technology Ltd. in the comparables and worked out the Arm s lengh price and if it falls within the range of ±5% of the range then no addition is to be made. We do not see any infirmity i .....

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e in the next two years. 2. The ld. CIT(A) has erred on facts and in law in deleting the addition of ₹ 9,60,08,845/- on account of NCD & Commercial Paper issue expenses ignoring the fact that the same expenditure has been spread over the period of five years and accordingly 1/5th is allowed in the current years and rest being will be allowed in the next four years. 3. The ld. CIT(A) has erred on facts and in law in deleting the addition on account of depreciation on computer software a .....

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012 for the assessment year 2007-08, which we have already adjudicated in the former part of this order. Therefore, our findings given in the former part of this order in respect of these issues shall apply mutatis mutandis for this assessment year 2008-09. In that view of the matter, we do not see any merit in this appeal of the department. 42. In the result, appeals of the department are dismissed. (Order Pronounced in the Court on 17/08/2015). .....

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