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2015 (10) TMI 942 - ITAT PUNE

2015 (10) TMI 942 - ITAT PUNE - TMI - Transfer Pricing adjustment - adjustment made on account of accelerated depreciation - whether while computing margins of the comparable companies, in the facts of the present case, any adjustment could be made on account of such assets, which are not owned by the assessee - CIT(A) directed the Assessing Officer not to make the depreciation adjustment on account of un-common assets between the assessee and comparable companies

Held that:- Merely .....

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be made in the hands of the comparable companies on account of assets not owned by the assessee. The learned Authorized Representative for the assessee has furnished on record an order giving appeal effect to the order of CIT(A) by Assessing Officer, vide order dated 28.02.2013, in which the margin of set of comparable companies was adopted at 15.75% as against the PLI of the assessee at 10.52% and the same has been found to be at arm's length i.e. +/- 5% range prescribed under the proviso to s .....

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), no further adjustment is to be made in the hands of the assessee on account of an international transactions. Consequently, we dismiss the appeal filed by the assessee being academic. In view thereof, both the appeals of the assessee and the Revenue are dismissed. - ITA No.599/PN/2013, ITA No.813/PN/2013 - Dated:- 15-7-2015 - MS. SUSHMA CHOWLA, JM AND SHRI R.K. PANDA, AM For The Assessee : S/Shri Vijay Mehta & Sharad Jain For The Department : Shri Rajesh Damor ORDER PER SUSHMA CHOWLA .....

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peal is mutually exclusive of, independent and without prejudice to other. 1. The Ld. CIT(A) grossly erred, in facts and in law, in upholding the rejection of following four (4) companies out of total set of 11 comparable companies selected by the appellant for ascertaining of arms length price even when they were functionally comparable companies; • Birla Technologies Limited • CG-VAK Software & Exports Limited • Indium Software (India) Limited • Melstar Information Tech .....

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cts and in law, in upholding TPO/AO's action of not allowing standard deduction of +-5% as per proviso to Section 92C(2) of the Income-tax Act. The appellant craves leave to add, alter, amend or delete all or any of the grounds of appeal before or during the course of hearing. 4. The Revenue in its appeal has raised the following grounds of appeal :- 1. The order of the learned Commissioner of Income-tax (Appeals) is contrary to law and to the facts and circumstances of the case. 2. The lear .....

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as to be made in the case of comparables. 4. The learned Commissioner of Income-tax (Appeals) grossly erred in giving direction to the Transfer Pricing Officer / Assessing Officer not to make adjustment on uncommon asset on the basis of hypothetical submission made by the assessee. 5. For these and such other grounds as may be urged at the time of hearing, the order of the learned Commissioner of Income-tax (Appeals) may be vacated and that of the Assessing Officer be restored. 6. The appellant .....

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he Software Technology Parks of India under the Software Technology Parks Scheme of Government of India i.e. under STPI Scheme. The assessee had furnished e-return of income on 16.10.2007 declaring total income of ₹ 38,955/-. The case of the assessee was selected for scrutiny and since the assessee had entered into the international transaction exceeding ₹ 5 crores, the case was referred to the TPO on 29.12.2009 for computation of arm's length price in relation to the internation .....

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rtain adjustments were made by the assessee to its computation of profitability to eliminate the material difference between the assessee and the comparables. One such adjustment was made on account of depreciation on fixed assets at the rates higher than the depreciation rates provided in the (Indian) Companies Act, 1956 whereas the selected comparable companies generally followed the depreciation rates as per the (Indian) Companies Act, 1956. Further, the asse ssee claimed that it was a captiv .....

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However, the unadjusted PLI of the assessee was 10.33%. Since the assessee had made the adjustment on account of accelerated depreciation on the tested party, which as per the TPO, was not permissible under the Income Tax Act, assessee was asked to make the adjustment in the case of the comparables so as to get a clear picture of the effect of the adjustment on their profitability. The assessee furnished the details of the list of comparables selected by the assessee along with the PLI s before .....

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me Tax Rules, 1961. 14. The adjustments to its PLI made by the assessee on account of depreciation is not found to be in conformity with Rule 10B(3) of the Income Tax Rules. Depreciation is a cost incurred in generation of revenue and accordingly, net margin has to be computed only after allowing depreciation. Since transfer pricing provisions are part of Indian Income Tax Act, 1961 the computation of net margin cannot be made ignoring section 32 of the Act, which deals with allow ability of dep .....

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ems Ltd. 17.89% 6. Maveric Systems Ltd. 23.63% 7. Ram Informatics Ltd. 10.75% 8. Sterling International Enterprises Ltd. 32.37% Arithmetic Mean 17.83% 7. The TPO in view of the above-said proposition drew a final list of comparables wherein PLI of the comparables was at 17.83% as against PLI of the assessee which was 10.33%. In view of the difference between profit level of the assessee and the mean PLI of the comparables, the corresponding adjustment of difference of 7.5% amounting to ₹ 1 .....

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he show-cause notice i.e. in relation to rejection of certain comparables, risk adjustment and also the adjustment on account of accelerated depreciation. Though, various adjustments were made by the TPO but in the first instance we are referring to the adjustment made on account of accelerated depreciation, which was not allowed by the TPO observing as under :- 10. It is seen from the table that the mean PLI of the comparables is standing at 16.61%, as against the PLI of the assessee which is a .....

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11. Keeping in view the fact of the case, the submission of the assessee and deliberations as above, adjustment of the amount of ₹ 81,47,709/- is made to the international transaction relating to providing business support services to the A.E.. 8. Before the CIT(A), the plea of the assessee was that the action of the TPO in making the selected depreciation adjustment for uncommon assets between the assessee and certain comparable companies was misplaced. The first plea of the assessee befo .....

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issions of the assessee was observed that the adjustment made by the TPO was on the weaker ground. Concurring with the submissions of the assessee, the CIT(A) further observed that the differences in assets may mean difference in the manner of carrying out business. However, such differences would get evened out at the net margin level in case of the comparables companies. The CIT(A) thus held that if depreciation on certain assets was removed in the hands of the comparable companies, then the c .....

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the Income Tax Rules, 1962. 10. The Ld. Departmental Representative for the Revenue placed reliance on the order of the TPO and consequent order of the Assessing Officer in this regard. 11. The Ld. Authorized Representative for the assessee pointed out that the show-cause notice was issued to the assessee by the TPO alleging that the margin of the assessee was 10.33% as against the correct figure of 10.52%, without adjustment of accelerated depreciation. The Ld. Authorized Representative for th .....

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sted parties, then the TPO proceeded to make such adjustment in the hands of the comparables by issuing show-cause notice, copy of which is placed in the Paper Book. It was further pointed out by the Ld. Authorized Representative for the assessee that the margin of the comparables was reduced in the final show-cause notice but thereafter list of comparables were show-caused to the assessee, which is at page 12 of the show-cause notice, wherein the mean of the margin was 17.83% but the TPO in the .....

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in ITA No.1939/Del/2008 and in DCIT Vs. EXL Services.Com(India) Pvt. Ltd. in ITA No.1981/Del/2008, relating to assessment year 2003-04, order dated 22.12.2014. 12. The Ld. Authorized Representative for the assessee further drew our attention to the order of the CIT(A) and it was pointed out that after giving effect no adjustment on account of international transaction was made in the hands of the assessee. Hence it was pleaded by the Ld. Authorized Representative for the assessee that in case t .....

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rt made certain adjustments to its computation of profitability to eliminate the material differences between the assessee and the comparables. One such adjustment made by the assessee was on account of depreciation, wherein the assessee claimed that it provided depreciation on fixed assets at rates higher than depreciation rates provided in the (Indian) Companies Act, 1956, whereas the selected comparable companies generally followed the depreciation rates as per (Indian) Companies Act, 1956. A .....

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rithmetic mean PLI of the comparable companies and consequently, no adjustment was required to be made in the international transaction with the associate enterprises. The TPO was of the view that in line with the provisions of Rule 10B(3) of Income-tax Rules, 1962 (in short Rules ), no adjustment to the PLI of the tested party was allowable and adjustment, if any, is to be made in the hands of the comparable companies in order to bring its margins at par with the tested party. The TPO drew fina .....

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PO was on account of certain items, which were not appearing in the said list of the assessee, on which depreciation was claimed by it. However, in the final analysis, the TPO removed those items in the comparables chart and the PLIs were computed to work out the differences which were there at the time of making the depreciation adjustment. As per the revised working, the PLI of the comparables worked out to 16.61% as against the PLI of the assessee at 10.52% and consequently, adjustment of the .....

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operandi for determining the arm's length price of international transactions under TNMM method, no adjustment can be made in the net profit margins of the tested party. However, if required, the net profit margins of the comparable companies could be adjusted under sub-clause (iii) to Rule 10B(1)(e) of the Rules. Further, sub-rule 2 to Rule 10B of the Rules provides that comparability of an international transaction with an un-controlled transaction shall be with reference to certain facto .....

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ces could be adjusted by making suitable adjustments to the operating profit margins of the comparable companies. In view thereof, the issue arising before us is whether while computing margins of the comparable companies, in the facts of the present case, any adjustment could be made on account of such assets, which are not owned by the assessee. Merely because, one company does not have the said assets, it cannot be said that it had not incurred certain expenditure relatable to the same. 16. W .....

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