TMI Blog2017 (8) TMI 281X X X X Extracts X X X X X X X X Extracts X X X X ..... d of 60% claimed by the assessee - Held that:- The items of computer peripherals, which work in tandem with computers, can be rightly classified as computer for the purpose of granting depreciation at the enhanced rate. The items taken note of by the Assessing Officer for not granting higher rate of depreciation are Printers, Scanners and NT servers. These items too do not have any stand alone application de hors computers. Going by the ratio decidendi in in CIT vs. BSES Yamuna Powers Ltd. [2010 (8) TMI 58 - DELHI HIGH COURT] we hold that these items are also eligible for depreciation @ 60%. Addition towards Licence expenses - Held that:- Since the intellectual property rights relating to ENTERPRISE suite vest in Aircom, UK, the assessee entered into contract with Aircom, UK to sell this Product directly in the domestic market. As a quid pro quo, the assessee agreed to share a percentage of sale price to Aircom, UK. Clause (1) of the Agreement provides that: “ITP charges to be paid by the subsidiary to the parent company @ 45% of the total sale value of software and support and maintenance charge.” Pursuant to this Agreement, the assessee raised invoices on certain customers in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appropriate method with Profit Level Indicator (PLI) of Operating Profit to Total Cost (OP/TC). The assessee computed its own PLI at 10.16% as against that of comparables at 12.13% and claimed that the international transaction of Provision of software development services , transacted at ₹ 4,20,56,439/-, was at arm s length price (ALP). The Assessing Officer (AO) made reference to the Transfer Pricing Officer (TPO) for the determination of the arm s length price of the international transactions. The TPO did not dispute the categorywise accounts drawn up by the assessee in the above referred three segments and went on to analyze the same. As regards the international transactions relating to Software Development Services , the TPO observed that the assessee developed some software to be used as input for the product ENTERPRISE suite sold/licensed by the Aircom Group worldwide. The assessee was being remunerated on cost plus 10% mark-up. As against the assessee s selection of 24 companies as comparable, the TPO, applying certain filters, restricted the number of comparable companies to five. Their average OP/TC was computed at 28.33% which, after carrying out working cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Aircom group provides solutions for three key areas viz., Consulting, Software and Training. Aircom ENTERPRISE suite is a PC based solution for all aspects of network engineering. It includes tools for radio planning, backhaul/core planning and performance engineering and configuration management. ENTERPRISE suite offers the advantage of seamless working management between disciplines throughout the organization and avoids the data transfer problems. Aircom has a total of almost 150 software customers of which nearly 75 are leading network operators coming from 50 countries around the world. The assessee develops software as per the requirements of Aircom, UK, which is done on the server of Aircom, UK. Software developed by the assessee act as inputs for the ENTERPRISE suite of products which are sold/licensed by the Aircom group world-wide. The functions performed by the assessee include design of the software and its development. With the above backdrop of the nature of activities carried out by the assessee under the Provisions of software development services segment, let us see the comparability or otherwise of the two companies assailed before us. 6. At this junctur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not comparable. The Special Bench of the Tribunal in DCIT vs . Quark Systems Pvt . Ltd . ( 2010 ) 132 TTJ ( Chd ) ( SB ) 1 has held that a case which was included by the assessee and also by the TPO in the list of comparables at the time of computing ALP, can be excluded by the Tribunal, if the assessee proves that the same was wrongly included. Similar view has been upheld by the Hon'ble Delhi High Court in Xchanging Technology Services India Pvt Ltd [ TS - 446 - HC - 2016 ( DEL )- TP ]. The Hon ble Bombay High Court in Tata Power Solar Systems Ltd [ TS - 1007 - HC - 2016 ( BOM )- TP ] and the Hon ble Punjab Haryana High Court in CIT VS . Mercer Consulting ( India ) P . Ltd . ( 2017 ) 390 ITR 615 ( P H ) have also approved similar view. In view of the foregoing discussion, we do not find any substance in the preliminary objection taken by the ld. DR. 8. Now we espouse both the companies in seriatim for consideration as to their comparability or otherwise. (i) Kals Information Systems Ltd. (Seg.) 9.1. Based on the current year data then available in public domain at the stage of proceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Annual report of this company, which is available in the paper book, it can be seen that there is no such mention of software products revenue limited to 3%. On the contrary, it has been mentioned in the Notes to the financial statement that: the company is engaged in development of software and software products since its inception. The company consisting of STPI unit is engaged in software products and development of software and is also undertaking training activity of software professionals on online projects. Not only the revenues of the segment considered by the TPO also include the revenue from software products, but also from training imparted on commercial basis. It is clear that the assessee is not providing any training under this segment, which has been rather included by the assessee in the second category of the assessee s business, namely, Software Deployment, Training, Consultancy and Equipment Rental. Since the assessee s activity under this segment does not include any revenue from training, but the revenue of Kals Information Systems Ltd., for the purpose of comparison includes income from training, this company ceases to be comparable with the assessee s s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year, thereby making such financial results as incomparable. 10.3. The Mumbai Bench of the Tribunal in Petro Araldite ( P ) Ltd . Vs . DCIT ( 2013 ) 154 TTJ ( Mum ) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been bolstered by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt . Ltd . Vs . DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015. In view of the fact that there were mergers during the year, we hold that this company cannot be considered as comparable due to these extra-ordinary financial events. Accordingly, the same is directed to be excluded from the final list of comparables. 11. The next issue raised in this appeal is against the transfer pricing adjustment in relation to intra-group services. The assessee paid a sum of ₹ 67 lac and odd as Management fees, which was claimed as payment to AEs on cost to cost basis. On being called upon to furnish the details of such expenses, the assessee submitted that this include IT charges; General management, Finance, Legal Consulting Support; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectors, etc., were in the nature of computer peripherals not having a stand-alone application. He held such items as eligible for depreciation @ 60%. However, as regards Printers, Scanners and NT servers, the Assessing Officer held them as not Computer peripherals. Bifurcation was made of the total amount of depreciation claimed by the assessee on computers. The first part treated by him as computer peripherals, was subjected to depreciation @ 60% and the other part consisting of Printers, Scanners and NT servers was allowed depreciation @ 15%. This led to an addition of ₹ 16,92,047/-. The assessee is in appeal against this addition. 15. We have heard the rival submissions and perused the relevant material on record. It can be seen that the Assessing Officer himself allowed depreciation @ 60% on certain items by treating them as Computer peripherals. The test for the higher depreciation seems to have been the non stand-alone application of the items. The Hon'ble Delhi High Court in CIT vs . BSES Yamuna Powers Ltd . ( 2010 ) TIOL - 636 - HCDEL - IT , has held that routers and switches can be classified as computers and, hence, entitled to higher deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software and support and maintenance charge. Pursuant to this Agreement, the assessee raised invoices on certain customers in India including Idea Cellular Ltd. for upgradation of Aircom Tools. Copies of some of the invoices have been placed on pages 779 to 783 of the paper book. The invoice value has been shown as its income and the amount paid to its AE has been shown as Licence fee in its Annual accounts. We are at loss to appreciate as to how the assessee can be said to have created an Intangible asset by paying the Licence fee to its AE in respect of sales made. Such payment @ 45% of the invoice value was the obligation of the assessee ab initio without which it could not have procured the licnence of ENTERPRISE suite for sale in India. This amount can be loosely characterized as cost of goods transferred to the customers in India, which has necessarily to be allowed as a revenue expenditure. We, therefore, overturn the impugned order on this score and direct the deletion of addition of ₹ 67.52 lac made by the Assessing Officer. 18. In the result, the appeal is partly allowed. The order pronounced in the open court on 27.07.2017. - - TaxTMI - TMITax - Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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