TMI Blog2016 (11) TMI 1362X X X X Extracts X X X X X X X X Extracts X X X X ..... ed judgment. The Hon'ble Karnataka High Court vide its order dated 16.02.2009 has stayed the operation of the judgment on which the first appellate authority has relied upon. Though the Hon'ble High Court admitted the several questions of the law but stayed the whole of the judgment of the coordinate bench. Hence, we reject the contention the ld. AR that the decision of the coordinate bench is stayed to the limited extent. In view of above facts it is apparent that ld. first appellate authority vide his decision dated 25.03.2010 relying on the decision of the coordinate bench which was stayed by Hon'ble Karnataka High Court vide order dated 16.02.2009 deserves to be set aside. Hence, we set aside all the four grounds of the appeal to the file of the ld. TPO to determine ALP of international Transactions after giving assessee a proper opportunity of hearing. Addition on account of depreciation on rental assets - Held that:- infirmity in the order of the ld CIT(A) in allowing the claim of deduction of the depreciation to the assessee as assessee owns the assets and also uses it for the purposes of its business. The revenue's another aspect of this ground is that ld CIT(A) has adm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No. 2384/Del/2010 A Y 2002-03 2. We first take the appeal for AY 2002-03 wherein revenue has raised the following grounds of appeal in ITA No. 2384/Del/2010 as under:- 1.Whether on the facts and circumstances of the case, the Ld. CIT(A) has failed to examine that there was no analysis including the mandatory comparability analysis carried out by the assessee so as to establish the application of the profit split method. 2. Whether in the facts and circumstances of the case, the Ld. CIT(A) has erred in applying the judgment of M/s Philips Software, M/s Sony India and the premises of circular 12 and 14 of 2001 in this. 3. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in making subjective observations without examining the issues proving to the contrary relating to selection of comparables, usage of contemporaneous data and the application of the mean margin of the comparables. 3. The brief facts of the case are that the 99.99% of the shares of the appellant company are held by Bio Rad USA and is engaged in the trading activity of diagnostic products, reagents and equipments manufactured by Bio Rad USA. It has two business divisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer the transaction is benchmarked comparing the profit of AE with the receipt of commission without looking at the real profit of the life science segment of the assessee. Therefore, he rejected the bench marking analysis of the assessee of commission income. According the ld. Transfer Pricing Officer the assessee has incurred loss of ₹ 4059069/- in life science segment on its gross receipt of commission income of ₹ 145089450/- therefore cost incurred by the assessee is ₹ 18148519/- which is (-) 22.33% loss over the cost. He compared this PLI by selecting 7 comparables and worked out arithmetic mean of the comparables at 7.99% and held that arm's length commission income should be ₹ 18054213/- in place of ₹ 12545078/-. Consequently an adjustment of ₹ 5509135/- was proposed. Based on this the ld. Assessing Officer incorporated the same in his final assessment order. Over and above this ld. Assessing Officer disallowed depreciation on computers claimed by the assessee @ 60% which is allowable to the assessee according to the ld. Assessing Officer @ 25% only and therefore, addition on account of depreciation was computed at ₹ 49053/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer Pricing Officer has not given any reason for the rejection of PSM applied by the assessee. It was further submitted issues admitted by Hon'ble Karnataka High Court are not on the satisfaction of ld AO which has been accepted by the revenue. For the purpose of justifying the PSM he submitted a chart which was placed at page No. 75 of the PB submitting that the approach adopted by the assessee is correct. He further referred to page No. 73 of the PB to show the FAR analysis between parent and subsidiary and submitted that the assessee assumes no commercial risk and also do not undertake any responsibility of development, manufacturing distribution warranty and storage and financing operation. The 30% of the residual profit has been rightly allocated. It was further contended that the ld. Transfer Pricing Officer has not given the FAR analysis of comparable companies and without that he has computed their margin. He further referred to the FAR analysis of the company to show that in the absence of the FAR analysis of comparables the order of the ld. TPO is erroneous. It was further submitted that the ld. TPO has never confronted the comparables selected to the appellant an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where an international transaction has been put to scrutiny, the Assessing Officer can have recourse to sub-section (3) of section 92C only under the circumstances enumerated in clauses (a) to (d) of that sub-section and in the event of material information or document in his possession on the basis of which an opinion can be formed that any such circumstance exists. In all other cases, the value of the international transaction should be accepted without further scrutiny, In the instant case it has not been mentioned in either the order of the AO or the TPO the clause of sub-section (3) of section 92C that has been invoked by them to reject the ALP, thereby rendering their calculations bad in law. (iii) Transfer Pricing Officer in his order in his discussion under the head commission received- Life Sciences division has wrongly mentioned that: the assessee has admitted that similar products are being sold under both the segments and the same have been compared under CUP method followed by the assessee, it will be incorrect to assume that the entire general administration, marketing and selling expenses pertained only to the distribution segment. In fact in its lette ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctional analysis), had profiled the risk undertaken and also the assets employed in the business and TPO while going through had ignored this aspect. The TPO broadly classified the appellant as market support activity and searched to chose comparables from the prowess database. The appellant has argued that FAR analysis is very important keystone of any transfer pricing and proper comparable cannot be chosen without going in to the FAR analysis. In any FAR analysis the inputs are the study of organization, its functions, extent (value) and use of its assets, business plans, products, intergroup entities and the risk profile and correspondingly the output of the FAR study is characterization of the entity, understanding of business, risk and opportunity assessment. The appellant contented that typically an enterprise with low function and low risk will not be expected to earn a high margin. 5.12 Similarly the appellant contented that the TPO did not see the amount of assets employed in the respective business. All business work on the concept of return of investments and therefore a business employing large capital will invariably have higher return and vice a versa. In the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and distributed. This does not mean that a company dealing in marketing and distribution of medical equipment should be compared with a company in the field of printing of yellow pages or alike. Like should be compared with like. 5.17 The TPO has classified the services of the company as that of market research without further going into the exact nature of business being conducted by the appellant. Market research and marketing are terms of such wide implication that they have to be further analyzed. Similarly market research is further classified in to many more sub-functions like customer analysis, choice modeling, competition analysis, risk analysis, product research, advertising research, market mix modeling etc. Comparables performing different sub-functions will have different financial performance indicators. Similarly it can not be assumed that the two entities in similar business shall earn similar margins since margins are also a derivate to the functionality preformed, the assets employed. Therefore I hold that a simplistic classification like market research will lead to incorrect comparables as has done in this case and therefore erroneous conclusion. 5.18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns in this order which are applicable in the instant case and have been discussed in detail below: (i) Circular No. 14/2001 issued by the CBDT which is binding on the TPO states that The AO/TPO have to satisfy and communicate to the taxpayer which one of the four conditions prescribed in s. 92C (3) are satisfied before applying the transfer pricing provisions and the failure to demonstrate this to the assessee renders the transfer pricing order void. It was held by the ITAT that since the Learned TPO has not mentioned . any where as to which of the four conditions prescribed in s. 92C(3) are being satisfied therefore rendering his order void. In the present case also the TPO fails to adhere to this circular. (ii) It has also been held in the above mentioned case that For purposes of making a comparability analysis it is essential that (a) the data should relate to the financial year and (b) be contemporaneous i.e. exist on the specified date. If one of the conditions is not fulfilled, the data should not be included for comparison. 5.22 In the present case the Learned TPO has not shown whether the data of the companies selected by him are contemporaneous or not. In f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 27.37% is considered as profits for various costs assumed by the manufacturer, thereby determining the residual profit attributable to sales and marketing activity of 29.05%. This residual profit is required to be apportioned amongst the transacting parties based on the FAR analysis with respect to the services. As per para No. 8.1 of the Transfer Pricing study report there are no contractual agreements between the parties and all the terms and conditions are verbal. The commission being paid by the associated enterprises to the assessee is 10% on concluded sales in India. Based on this a FAR analysis was conducted and it was stated that no commercial risk with respect to the trading operation are assumed by the assessee and therefore, 30% of the residual profit is allocated to the assessee and balance 70% was allocated to the associates enterprises. On the residual profit of 29.05% assessee applied 30% which is 8.71% and as the commission income is less than 10%, hence it was submitted that commission income is at arm's length. In this methodology the ld. Transfer Pricing Officer found defect for the reason that the segmental allocation of the expenses shows that the net pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16.02.2009 has stayed the operation of the judgment on which the first appellate authority has relied upon. Though the Hon'ble High Court admitted the several questions of the law but stayed the whole of the judgment of the coordinate bench. Hence, we reject the contention the ld. AR that the decision of the coordinate bench is stayed to the limited extent. In view of above facts it is apparent that ld. first appellate authority vide his decision dated 25.03.2010 relying on the decision of the coordinate bench which was stayed by Hon'ble Karnataka High Court vide order dated 16.02.2009 deserves to be set aside. Hence, we set aside all the four grounds of the appeal to the file of the ld. TPO to determine ALP of international Transactions after giving assessee a proper opportunity of hearing. In view of this the appeal of the revenue is allowed with above direction. 11. In the result the appeal of the revenue in ITA No. 2384/Del/2013 for AY 2002-03 is allowed for statistical purposes. ITA No. 3330/Del/2010 Assessment Year 2003-04 12. The revenue has raised the following grounds of appeal for the Assessment Year 2003-04 in ITA No. 3330/Del/2010 as under:- 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ownership of the assets are with the appellant and further these assets are used for the purposes of the business and hence assessee claims depreciation on these assets. The ld. Assessing Officer disallowed the depreciation for the reason that the assessee is not using those assets for the purposes of the business as self use and at the end of the agreement the title of the assets passes to the hirer. Therefore, the depreciation was disallowed. On appeal before the ld. CIT(A) the claim of the assessee was allowed. The ld. CIT(A) noted the fact that as per the agreement which was valid for four years and at the end of the period the client has a right to purchase the above equipment for a token amount. At the time of placing this equipment at the place of the client there is minimum guarantee of quantity of reagents etc. to be purchased by the client from the assessee. 17. The ld. Departmental Representative relied upon the order of the AO whereas the ld. Authorised Representative relied upon the order of the ld. CIT(A) and also placing reliance on the decision of Hon'ble Supreme Court in case of ICDS Ltd. v. CIT 350 ITR 527. The ld. Authorised Representative further rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the assessee and the Dynamix clearly shows that it manufactures the fruit juices as per the requirement of the assessee and as agreed between the assessee and Dynamix in the Product Supply Agreement, the Dynamix required the assessee to provide the equipments and wanted to place a responsibility on the assessee so that the assessee does not end or terminate the agreement with Dynamix after Dynamix invests substantial amount in the machinery which would remain the liability in the hands of Dynamix if the assessee back out the agreement. It is noticed that the assessee as per the request of Dynamix has provided the machinery for the purpose of manufacturing the products under the Product Supply Agreement. A perusal of the agreement also shows that it is clearly understood that the machinery would belong to the assessee and not the Dynamix and Dynamix had no charge or claim over the machinery. Even the servicing, maintenance and spare parts of the machinery was to be in done in the presence of the representative of the assessee even though the cost for the same was to be borne by Dynamix. Its has also been clearly understood between the parties that the Dynamix cannot use the machi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allment on account of these machines. We reject the argument of the revenue as the information in the form audited financial statement is available on record as assessee has not shown any rental income in its profit and loss account and further in its fixed assets schedule it has shown the rental assets. In view of this ground No. 2 of the appeal of the revenue is dismissed. 20. In the result appeal of the revenue is partly allowed for statistical purposes. ITA No. 4712/Del/2011 AY 2004-05 21. The revenue has raised the following grounds of appeal for Assessment Year 2004-05 in ITA No. 4712/Del/2011 as under:- 1. The order of the Ld. CIT(A) is erroneous contrary to facts law. 2. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) has erred in deleting the addition of ₹ 6488,415/- made on account of depreciation on rented assets. 3. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) has erred in deleting the addition of ₹ 3,03,209/- made by disallowing the excess depreciation claimed on computer peripherals. 4. On the facts and in the circumstances of the case and in law, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd ld Authorised Representative relied on the order of the ld CIT(A). 29. We have carefully considered the rival contentions. The ld CIT(A) has held that these are the expenses for the marketing of new products launched by the assessee in the same line of business. They are routine in nature and further the decision of Hon'ble Supreme Court in case of Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802 does not apply to the facts of the case. We do not find any infirmity in the order of the ld. CIT(A) and therefore, we dismiss ground No. 4 of the appeal of the revenue. 30. Ground No. 5 of the appeal of the revenue is on account of expenditure on display stand. During the year the above sum was incurred for display stand in seminar. The ld. Assessing Officer held this expenditure as capital in nature instead of revenue expenditure and consequently allowed depreciation @ 25%. On appeal before the ld. CIT(A) the expenditure were held to be revenue in nature. Before us the ld. DR relied upon the order of the ld. AO and ld. Authorised Representative relied on the order of the ld. CIT(A). 31. We have carefully considered the rival contentions. The ld. CIT(A) h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so submitted that their arguments on this ground remain the same which were advanced by them in appeal of the revenue for AY 2003- 04. 39. We have carefully considered the rival contentions and perused the ground of appeal and are convinced that it is identical to ground No. 2 of the appeal of the revenue for the AY 2003-04. We while deciding that ground has dismissed the ground of the revenue holding that the assessee is eligible for the claim of depreciation on rented assets. Similarly, we also dismiss the ground No. 1 of the appeal of the revenue. 40. The ground No. 2 of the appeal of the revenue is against depreciation on computer peripherals @ 60% instead of 25%. 41. The assessee has claimed depreciation on computer peripherals like printers, scanner and UPS @ 60% whereas the ld AO allowed it @25%. Ld CIT(A) has allowed the claim of the assessee of depreciation @ 60% on such assets following the decision of the Hon'ble Delhi High Court in BSES Rajdhani Power Ltd. (supra) and therefore we do not find any infirmity in the order of the ld. CIT(A). Ground No. 2 of the appeal of the revenue is dismissed. 42. Ground No. 3 of the appeal is against deletion of disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries ignoring that as per the IT Rules 60% depreciation is allowable only on computer and computer software and not on computer peripherals and accessories. 51. The ground No. 1 of the appeal of the revenue is on depreciation of rental assets of ₹ 8006721/-. 52. The parties before us submitted that this ground is identical to ground No. 2 of the appeal of the revenue for AY 2003-04. They also submitted that their arguments on this ground remain the same which were advanced by them in appeal of the revenue for AY 2003- 04. 53. We have carefully considered the rival contentions and perused the ground of appeal and are convinced that it is identical to ground No. 2 of the appeal of the revenue for the AY 2003-04. We while deciding that ground has dismissed the ground of the revenue holding that the assessee is eligible for the claim of depreciation on rented assets. Similarly, we also dismiss the ground No. 1 of the appeal of the revenue. 54. Ground No. 2 of the appeal is against the depreciation on computer peripherals @ 60% instead @ 25% allowed by the AO. 55. The assessee has claimed depreciation on computer peripherals like printers, scanner and UPS @ 60% whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f appeal for Assessment Year 2008-09 in ITA No. 1266/Del/2013 as under:- 1. Whether the Ld. CIT(A) has erred on facts and in law in deleting the addition of ₹ 1,21,33,5427- on account of disallowance of depreciation on rental assets ignoring the fact that the assessee company is not the actual user of the machinery/equipments which were hired out. depreciation cannot be allowed to the assessee company. 2. Whether the Ld. CIT(A) has erred on facts and in law in deleting the addition of ₹ 18,024 on account of extra depreciation claimed on computer peripherals ignoring the fact that the computer and computer software are eligible for depreciation of 60% and the same cannot be extended to computer accessories and peripherals. 65. The ground No. 1 of the appeal of the revenue is on depreciation of rental assets of ₹ 12133542/-. 66. The parties before us submitted that this ground is identical to ground No. 2 of the appeal of the revenue for AY 2003-04. They also submitted that their arguments on this ground remain the same which were advanced by them in appeal of the revenue for AY 2003- 04. 67. We have carefully considered the rival contentions and pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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