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DCIT, Circle-13 (1) , New Delhi. Versus Nortel Networks India Pvt. Ltd.

2016 (1) TMI 1299 - ITAT DELHI

TPA - comparability of the assessee with HFCL - Held that:- On a careful reading of the impugned order, we find that in the absence of any infirmity in the reasoning adopted by the First Appellate Authority, the arguments of the Ld. Sr.DR cannot be accepted. The Revenue has not assailed the finding of the CIT(A) that functional comparability of the assessee with HFCL stands established. Thus where on FAR analysis the conclusion that it is correctly chosen as a comparable remains is unassailed, t .....

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d peculiar factual position, we find that there is no merit in the departmental appeal. - Disallowance of excess depreciation on UPS - Held that:- A perusal of the order shows that relying upon the decision of the Delhi High Court in the case of CIT vs BSES Rajdhani Power Ltd. [2010 (8) TMI 58 - DELHI HIGH COURT ] depreciation @ 60% for UPS, printers and scanners on the ground that they formed integral part of the computer system is allowed and held to be applicable to block of computer. The .....

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CIT(A)-29, New Delhi pertaining to 2005-06 assessment year on the following grounds:- 1. The Ld. CIT(A) has erred in law and on facts in deleting the addition on account of difference in ALP determined by the TPO & the assessee amounting to ₹ 2,60,42,622/- ignoring the fact that the as per the transfer pricing issues, an entity is held to be making persistent losses if it makes losses in 2 out of 3 financial years' including the financial year under consideration. The HFCL has mad .....

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e assessee has not at all crystallized the amount of warranty while creating the provision; 3. The Ld. CIT(A) has erred in law and on facts in allowing depreciation on UPS (Uninterrupted Power Supply) @ 60% by not considering the fact that UPS is merely a part which is used to regulate the electric supply to computer and by no means as per Section 32 of the Act be termed as 'computer including computer software' as computer can work without UPS also; 4. The Ld. CIT(A) has erred in law an .....

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by the department but he has been instructed by his client to state that since the assessee in the process of winding up its activities and is liquidating its business thus he is under instruction to take certain position in the appeal in order to facilitate and ensure that the litigation ends. It was his submission that this fact has been brought to the notice of the Hon ble High Court in various litigations pending before it also. 2.1. It was his submission that these facts may be kept in min .....

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sting and commissioning services in relation to telecom equipment/I.T/other products and technical services, including repair and maintenance services in relation to the telecom equipment/IT products supplied by Nortel group of companies in India. 3.1. The assessee in the year under consideration returned an income of ₹ 33,34,44,830/- wherein the assessment was concluded at a figure of ₹ 74,27,57,980/-. The assessee in the year under consideration disclosed the following internationa .....

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Revenue vide Ground No.1 pertains to the transactions disclosed at Sl. No.3 in the above chart. The facts as appreciated by the CIT(A) show that the assessee had entered into a contract with Reliance Infocomm Ltd. for provision of services in relation to installation, commissioning, operation, management and maintenance of its optical network. On consideration of the said agreement it was seen that it required the assessee to provide training to RIL personnel in relation to optical software netw .....

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rofit/operating revenue as PLI. The following ten comparable companies were selected by the assessee for working out the arm s length price:- S.No. Comparable Companies Adjusted operating profit on adjusted operating revenue % Weighted Average Adjusted operating profit on adjusted operating revenue % 2003-05 2005 2004 2003 1. Engineers India Limited 20.75 20.23 17.26 20.71 2. Esquire Engineers and Consultants Limited NA NA -14.36 -14.36 3. F L Smidth Limited 5.01 NC NC 5.01 4. Powerplant Perform .....

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this segment 7% and since it was higher than the mean margin of the comparable companies, the transaction was concluded to be at arm s length. 4.3. The TPO considering the comparables chosen by the assessee excluded 3 of the above on the ground that their financials for F.Y. 2004-05 were not available. He further excluded two loss making comparables, namely Hartron Communication and Himachal Futuristic Communication Ltd. Accordingly after retaining 5 comparables of the originally offered compar .....

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d. 13.01 Arithmetic Mean 13.52 5. Aggrieved the assessee in appeal before the CIT(A) objected to the exclusion of HFCL based on the negative financial result of FY 2003-04 and 2004-05 and argued that simply because the company shown loss in 01-02 years it cannot be concluded that it is consistently a loss making company as it has earned an operating margin of 10.18% for FY 2002-03; 0.04% in FY 2005-06; and 17.82% in FY 2006-07 thus the loss incurred in 2003-04 and 2004-05 cannot make the said co .....

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s, TNMM as MAM and operating profit/operating revenue as PLI. However, TPO has rejected two companies as comparable, being loss making companies. 9.2 The appellant has contended that a loss making company can not be discarded from the list of comparables just because it has incurred loss when its FAR is comparable with the tested party. The appellant has relied upon Indian TP regulations, judicial decisions and OECD guidelines for this proposition. I find force in contention of the appellant tha .....

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aking company as under:- S.No. Particulars FY 2002- 03 FY 2003- 04 FY 2004-05 FY 2005- 06 FY 2006- 07 1. Revenue 302.05 184.24 73.44 89.27 564.2 2. Profit 64.16 -23.57 -19.83 0.03 100.58 3. OP/OR % 21.24 -12.79 -27.01 0.04 17.82 The TPO has not disputed FAR of Himachal Futuristic Communication Ltd. so far as its comparability with the appellant is concerned. In view of above, it cannot be said that HFCL is a consistently loss making company and hence can be treated as comparable. Therefore, I ho .....

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ry and hence its business profile is substantially different from that of the appellant. Even if the appellant has used its job work segment, it can not be said that repairing and servicing of electronic cards are comparable with business activities of the appellant. Hence, I hold that FAR analysis of Hartron Communication does not permit it to be taken as comparable. 9.4 In view of discussion supra, there shall be 6 comparables and their profit margin after taking current year data only is work .....

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the Appellant from its associated enterprises is considered to be at arm s length. Therefore, AO is directed to delete the addition of ₹ 2,60,42,622 made on this account. 6. Aggrieved by this, the Revenue is in appeal. Ld. Sr.DR submitted that no doubt HFCL has shown some profits in subsequent years and is managing to keep alive but the loss in the year under consideration cannot be stated to be against the trend and thus the said comparable was correctly excluded by the TPO. 7. The Ld. A .....

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urviving and the law is well-settled as the criteria for exclusion on the grounds of loss making or profit making companies cannot be accepted. The nonacceptance of such reasoning is well settled by jurisprudence which is clear that either functional similarity needs to be assailed or the party praying for exclusion or inclusion needs to establish that there was something inherently wrong with the company. Some facts and circumstances as an event of amalgamation liquidation etc. needs to be esta .....

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The Revenue has not assailed the finding of the CIT(A) that functional comparability of the assessee with HFCL stands established. Thus where on FAR analysis the conclusion that it is correctly chosen as a comparable remains is unassailed, then it is necessary for the Revenue at that stage to bring some cogent reason, argument or fact justifying that still the comparable needs to be excluded. Merely re-iterating the TPO s stand at this stage that it was consistently a loss making company does n .....

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and the finding of the CIT(A), Ground no.1 of the Revenue is dismissed. 9. The facts relatable to Ground No.2 are found discussed in pages 3-5 of para 4 of the assessment order. In view of the stand taken by the assessee qua the same reference thereto is not necessary. 10. The issue has been considered by the CIT(A) at pages 19 to 20 in paras 21 to para 21.4 and again for similar reason there is no need to bring out the facts. 11. The reason for so holding is that the Ld.AR submitted that actua .....

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7.1. The same is reproduced hereunder for ready-reference:- 7. Disallowance of excess depreciation: On perusal of depreciation chart as per I. Tax Act, it is noticed that the assessee has purchased ARC Symmetra UPS and Symmetra battery module " on various dates in July 2004 for a total of ₹ 4,96,365/- and claimed depreciation on the same @ 60% amounting to ₹ 2,97,819/-under the head "Computer" . Further , the assessee has purchased ARC Symmetra UPS on in March 2005 for .....

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omputer" as provided in Section 32 of the income tax Act. 7.1. The submission of the assessee that UPS is also a part of computer were considered but the same were not found convincing. The only function of the UPS is to ensure regular supply of power and by no means as per Section 32 of the I.Tax Act 1961 it can be termed as "computers including computer software" and be a part of the block of asset i.e. "computer". Therefore, the rate of depreciation charged @ 60% is r .....

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im of depreciation amounting to ₹ 2,51,264/- (Rs.2,23,364/-+ ₹ 27,900/-) is hereby disallowed u/s 32 of the I.Tax Act and added back to the total income of the assessee. I am satisfied that the assessee company has furnished inaccurate particulars of its income and has suppressed its income on this issue, therefore, penalty proceedings u/s 271(1)(c) of I. Tax Act have been initiated separately. (Addition ₹ 2,51,264/- ) 13. The facts qua the issue are not in dispute and have bee .....

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l rate of depreciation permissible on computers under the Act). • The UPS has been installed by the appellant in its server room and forms an integral part of the computer system. Accordingly, the appellant claimed depreciation on the same at the rate of 60 per cent (applicable to computers ) in its return of income for subject assessment year. • The term "computer system has been defined under Explanation (a) to Section 36l(1)(xi) of the Act as follows: "computer system" .....

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as - 'a device connected to a computer to provide communication (as input and output) or auxiliary functions (as additional storage) ". • The appellant placed reliance on following case laws: CIT v. BSES Rajdham Powers (Del); ITO vs Samiran Majumdar (98 ITD 119) Kol; ACIT vs Continental Carriers (P) Ltd (ITA No. 2137/Del/2008) (1TAT, Delhi); Mumbai DCIT vs Datacraft India Ltd (ITA Nos.7462 & 754/Mum/2007) (Special Bench, ITAT, Mumbai) 27.0 Finding: • In view of jurisdictio .....

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ent order and the Ld. AR on the impugned order. A perusal of the order shows that relying upon the decision of the Delhi High Court in the case of CIT vs BSES Rajdhani Power Ltd., depreciation @ 60% for UPS, printers and scanners on the ground that they formed integral part of the computer system is allowed and held to be applicable to block of computer. The position of law is well-settled thereon by consistent orders of the Delhi High Court and Coordinate Benches of the ITAT. In the absence of .....

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issue may be restored to the AO directing him to allow necessary relief as permissible on facts and law, keeping the concept of matching principle in mind where the Revenue is recognized and the necessary expenses to the extent incurred duly certified by the auditors sought to be placed on record by way of additional evidence may be considered and verified and if satisfied on facts may be directed to be allowed. 16. Ld. Sr. DR considering the fresh evidences sought to be filed by the assessee st .....

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d. 18. We have heard the rival submission and gone through the material on record. We find that though in terms of the additional evidence sought to be placed on record which has not been objected to by the Revenue the issue needs to be restored. However, we find on a reading of the order under challenge that the departmental stand that the impugned order has been passed dehors facts is not correct. It is seen that the conclusion is drawn by the CIT(A) on facts where the contract entered into by .....

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