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TMI Blog2015 (1) TMI 1430X X X X Extracts X X X X X X X X Extracts X X X X ..... it engaged in providing business support services to its parent company. The assessee company assisted in booking shipments requirements required to be moved from one location to another. The assessee has entered into a shipping agency agreement with HLAG, according to which it was appointed as the agent for HLAG. The assessee was also authorized to appoint sub-agents with prior written approval of HLAG. As per the agreement the assessee is entitled to receive cost plus(+) 10%. The assessee has reported the international transactions, interalia, provision of business support services of Rs. 39,63,61,566/-. The assessee selected TNMM as the most appropriate method and used OP/TC as PLI and work out the margin of the comparables at 8.78% in comparison to 10% of the assessee. Accordingly, the assessee claimed the price charged from the AE as arms-length. The TPO noted that the assessee had paid commission of Rs. 17.93 crores. The assessee was asked to give the name of earlier agent who was managing the business of HLAG in India. The agents name was searched by the TPO from the internet being German Express Shipping Agency Pvt. Ltd. (GESA). The assessee was asked to file copy of agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21/02/2007 w.e.f. 01/01/2007. GESA has performed the services for territories including all of Inidia and Nepal but, excluded territory of the assessee as demarcated in the sub agency agreement. The assessee remunerated GESA on the basis of the rate provided in the sub-agency agreement . The assessee is entitled to receive cost + 10% from AE. The assessee received the same mark-up from AE on the charges paid to GESA. The ld. AR has submitted that the assessee selected 7 comparable companies and arrived at arithmetic mean of 8.7 %. He has referred to Rule 10B(1)(a) of the Income tax Rules, 1962 and submitted that the CUP is the most direct method made to be applied only when an appropriate internal or external comparable is available. A minor change in the properties of product, circumstances of trade may have a significant effect on the price. Thus, CUP method requires a high degree of comparability in respect of quality of product or services, contractual terms, level of market (whole sale/retail), geographical market in which the transaction takes place, date of transaction, intangible properties associated with the sale, foreign currency received, alternatives realistically ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee and commercial expediency cannot be questioned by the TPO when the assessee is receiving a mark up of cost + 10% from the AE. In support of his contentions the ld. AR has relied on the decision of this Tribunal in the case of UCB India Pvt. Ltd. vs. ACIT dated February 06, 2009 (2009-TII-02-ITAT-MUM-TP) ITA No.428 & 429/Mum/2007 for assessment years 2002- 03 and 2003-04 5.1 On the other hand the ld. DR has submitted that HLAG has entered into an agreement with GESA w.e.f. 01/05/1993. The said agreement was continued till 31.12.2006 and GESA was the sole shipping agent of the HLAG. The assessee was appointed as shipping agent w.e.f. 01/01/2007 under which the assessee has appointed GESA as sub-agent w.e.f. 01/01/2007. GESA as sub agent was performing the same services as it was performing as the agent of HLAG. Therefore, the price between GESA and the assessee which is same as paid by HLAG to GESA under the agency agreement is internal CUP. The ld. DR has further contended that the assessee did not co-operate in the proceedings before the TPO and the relevant information and documents were not furnished by the assessee . The TPO obtained the agreement between GESA and HLAG as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not providing services to HLAG, but under the sub agency agreement, the services are being provided to the assessee. The question arises whether the price charged for services by GESA to HLAG upto 31.12.2006 can be considered as internal CUP for the purpose of determination of ALP for the services provided by the assessee to AE during the FY 2007-08 onwards. The TPO supported his action by referring Rule 10B(4) and took the old price to compare with the current years price. It appears that the TPO misunderstood the proviso to Rule 10B(4) of the Income tax Rules. In ordinary situation only current year/contemporaneous data can be used for comparing uncontrolled price with the controlled price. Only in the case of exceptional circumstances, the data relating to earlier years but not more than two years prior to the current year, can be used, if, such data reveals facts which can have an influence on the determination of armslength- price in relation to the international transaction. Therefore, the two years prior data can be used along with the current year data. The situation under which the older data can be used is illustrated under proviso to Rule 10D(4) as under :- " 10D(4) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Price Method 6.2.1 In the case of the assessee, GESA does not provide services to HLAG . Therefore, it cannot be considered as internal CUP. Moreover, the assessee is providing the services to the AE and receiving the remuneration and in turn getting part of the job done through sub agent GESA and remunerating it by paying the commission as per sub agency agreement. Out of the total services provided by the assessee a part is performed through sub-agent and the remaining is performed by the assessee itself. It is like export of goods partly manufactured by the assessee and partly purchased from third party. However, purchase price of the goods exported cannot be applied as CUP for sale price charged to the AE. Accordingly considering the price received by GESA as CUP is contrary to the transfer pricing regulation. We do not rule out the CUP as most appropriate method for determination of ALP of international transaction in question. However, the comparable uncontrolled price must be a proper uncontrolled price in compliance of provisions of transfer pricing. 6.2.2 There is one more fallacy in the TPO's order regarding bifurcating the international transactions into two segments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er: TRANSFER PRICING GROUNDS 1. GENERAL 1.1 The Learned AO erred in assessing the income of the Appellant under the normal provisions of the Act at INR 35,36,29,790 based on the directions received from Hon'ble DRP upholding the transfer pricing adjustment proposed by the Learned TPO. 1.2 The Learned AO/ TPO erred in proposing and the Hon'ble DRP further erred in upholding an adjustment of INR 29,55,30,462 in respect of the international transaction pertaining to provision of business support services, alleging that the same to be not at arm's length in terms of the provisions of Sections 92C(1) and 92C(2) of the Act read with Rule 10D of the Income-tax Rules,1962 ('the Rules'). 1.3 That Learned DRP erred in law and on facts, by not adhering to the principles of natural justice by summarily rejecting the Appellant's objections and disregarding the material placed on records, thereby erred in not following the procedure laid down in section 144C(5), 144C(6) and 144C(7) of the Act.. 1.4 The Learned AO/DRP/TPO has erred in making several observations and findings which are based on surmises and incorrect understanding/interpretation of facts and law. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant. 5.RATE OF DEPRECIATION ON COMPUTER SOFTWARE: Rs. 6,80,185 That on the facts and circumstances of the case and in law, the learned AO erred in proposing and the Hon'ble DRP erred in granting depreciation on computer software at the rate of 25 percent being the rate applicable to Intangibles instead of 60 percent being the rate applicable to Computers including computer software' as claimed by the Appellant. 6. PROPORTIONATE DISALLOWANCE OF DEPRECIATION BASED ON NUMBER OF EMPLOYEES: Rs. 6,21,539 6.1 That on the facts and circumstances of the case and in law, the Hon'ble DRP erred in proposing disallowance of depreciation on allocated cost proportionate to excess of number of employees over the number of software licenses obtained. 6.2 That on the facts and circumstances of the case and in law, the Hon'ble DRP further erred in directing disallowance of depreciation on computer hardware (ie printers, scanners and Electronic Token Display System) in above proportion without appreciating that the same is not related in any manner with the number of employees employed by the Appellant. 6.3 That on the facts and circumstances of the case and in law, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elow. 8.2 We have considered the rival submissions as well as relevant material on record. The issue of allowability of depreciation @ 60% on the computer accessories and peripherals is no more res-integra. In the case of BSES Yamuna Powers Ltd. (supra), the Hon'ble Delhi High Court, while dealing with the identical question has held in para- 6 as under :- "We are in agreement with the view of the Tribunal that computer accessories and peripherals such as, printers, scanners and server etc., form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to depreciation at the higher rate of 60 percent." 8.2.1 Further, the Special Bench of this Tribunal in case of Data Craft India Ltd.(supra), has held in para-32 and 33 as under :- 32. Now we wi ll advert to the decisions rel ied on by the rival part ies. We have set out above the cases decided by various Benches of the Tribunal in favour of the assessee. The lead order is in the case of Sami ran Majumdar (supra) which has been followed, directly or indirectly, in most of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r only to processing unit, as has been held in the case of Routermania Technologies (P.) Ltd (supra), then even the keyboard and mouse etc., will not qualify to be called as computer because these equipments also do not perform logical, arithmetical or memory functions. In the light of the meaning of 'computer' discussed in earlier paras, we are inclined to agree with the view taken by the Kolkata Bench in Samiran Majumdar's case (supra)." 8.2.2 Following the above, judgment of Hon'ble High Court as well as the Special Bench of this Tribunal, we allow the claim of depreciation on printer, scanner, electronic token display system @ 60%. 9. Ground No.5 regarding depreciation on software. 9.1 The assessee claimed depreciation on software @ 60%. However, the AO allowed the depreciation at 25% on software. The DRP confirmed the action of the AO. 9.2 Before us, the ld. AR submitted that this issue is covered in favour of the assessee by the various decisions of this Tribunal. He has relied upon the following decisions :- i) Hindustan Construction Company Ltd. vs. Dy. Commissioner of Income-tax - 140 ITD 642 (Mum); ii) Maruti Udyog Ltd. vs. Dy. Commissioner of Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n view of the above discussion, it is held that expenditure was incurred on acquisition of capital assets and thus, it was a capital expenditure. Resultantly, the same could not be allowed as revenue expenditure." 9.4 While deciding the question of revenue or capital nature of expenditure in respect of acquisition of software, the Tribunal has held that depreciation @ 60% is allowable on software. In the case of Hindustan Construction Co. vs. DCIT (supra), the Tribunal while dealing with an identical issue has held in para 39 as under :- "The assessee incurred the expenses for purchase of software development of E-Construct suit. The nature of the programme purchased by the assessee clearly shows that these programme were specifically and exclusively designed for the purpose of the business of the assessee and not a general software. Accordingly, the expenditure has been laid out for acquiring the intangible assets to be used by the assessee for a number of years and therefore, the same will have an enduring benefit. However, since this intangible asset is part and parcel of computation; therefore, the assessee is entitled for depreciation for the year under consideration at 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allocation is not evidenced by invoices before us though seems to have been found acceptable by the TPO as there is no adjustment made in this regard in the TPO's order. Therefore, cost allocation per se is not being disturbed. In so far as depreciation thereon is concerned, we find that the assessee has not established use of these assets in so far as the difference of 18 (between user and number of employees) is concerned. Therefore, the AO is directed to not allow the proportionate depreciation on the difference of 18 in number on the rate s as calculated by him in the draft order. We also find the AO's order regarding rates of depreciation acceptable, therefore, there is no change in the rates of depreciation. The objection is disposed of accordingly." 10.3.1 Thus, it is clear from the directions of the DRP that the proportionate disallowance of depreciation was directed only in respect of software cost allocated by AE and not on any other asset. Therefore, the AO has not followed the directions correctly while passing the impugned order whereby he disallowed the proportionate depreciation on the entire computer block of asset. 10.4 As regards proportionate disallowance base ..... X X X X Extracts X X X X X X X X Extracts X X X X
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