Punjab & Haryana H.C : Directing the Assessing Officer (AO) to re-compute Arm’s Length Price (ALP) at 21.97% even when the Transfer Pricing Officer (TPO) had arrived at 35.26% after due consideration of all the relevant factors.

High Court Of Punjab & Haryana

CIT, Patiala vs. Rakhra Technologies (P.) Ltd.

Assessment Year : 2005-06

Section : 92C

Adarsh Kumar Goel, Actg. C.J. And Ajay Kumar Mittal, J.

IT Appeal No. 169 Of 2011

July 7, 2011

JUDGMENT

Ajay Kumar Mittal, J. – This is revenue’s appeal filed under Section 260A of the Income-Tax Act, 1961 (for short “the Act”) against the order dated 27.8.2010, passed by the Income Tax Appellate Tribunal Chandigarh Bench ‘A’, Chandigarh (in short “the Tribunal”) in ITA No. 171/CHANDI/2010, relating to the assessment year 2005-06.

2. The following substantial questions of law have been claimed for determination of this Court:

“(i) Whether in the facts and circumstances of the case, the Tribunal was legally correct in directing the Assessing Officer (AO) to re-compute Arm’s Length Price (ALP) at 21.97% even when the Transfer Pricing Officer (TPO) had arrived at 35.26% after due consideration of all the relevant factors.

(ii) Whether in the facts and circumstances of the case, the ITAT was justified in issuing direction to the AO to recompute ALP after adopting total cost at Rs. 1,70,84,964/- instead of Rs. 2,02,67,550/- and whether the adjustment for the depreciation on administrative assets, as directed by the ITAT, is sustainable in the eyes of law.

(iii) Whether in the facts and circumstances of the case, the Tribunal was legally correct in deleting the addition of Rs. 1,00,000/- on account of disallowance of Advertisement expenses, even when the same were inadmissible, being capital in nature.”

3. The facts, in brief, necessary for adjudication as narrated in the appeal, are that the assessee is engaged in the business of research and development of software/IT enabled services. For the assessment year 2005-06, the assessee filed its return on 31.10.2005, declaring loss of Rs. 25,28,901/-. The return was processed under Section 143(1) of the Act. Assessment under Section 143(3) was completed vide order dated 26.12.008 at an income of Rs. 61,29,390/- whereby the assessing officer made certain additions, i.e. Rs. 79,84,438/- on account of difference in Arm’s Length Price; Rs. 1,00,000/- on account of disallowance of advertisement and three more amounts of Rs. 4,80,000/-, 52,416/-, and 41,434/- on account of disallowance of Diwali expenses, Refreshment expenses and Printing and Stationery expenses, respectively.

4. The assessee filed appeal before the Commissioner of Income Tax (Appeals) [for short “the CIT(A)”]. The CIT(A) partly accepted the appeal vide order dated 8.12.2009, deleting the addition of Rs. 41,06,206/- out of the total amount of Rs. 79,84,438/- on account of difference in Arm’s Length Price and all other remaining additions noticed above but sustaining the addition on account of disallowance of Advertisement expenses amounting to Rs. 1,00,000/-.

5. Both the sides felt aggrieved by the order of the CIT(A) and preferred their separate appeals before the Tribunal. The Tribunal, by order dated 27.8.2010, dismissed the appeal of the Revenue and partly allowed the appeal of the assessee in respect of the addition of Rs. 1,00,000/- on account of disallowance of Advertisement expenses holding that expending of money on signboard enables conduct of assessee’s business more profitably and facilitated the assessee’s trading operations even if the advantage was of enduring nature.

6. The Tribunal further set aside the order of the CIT(A) on the issue of addition made on account of Arm’s Length Price and while doing so, a direction was given to the assessing officer to recompute the same by taking the operating profit/total cost at the rate of 21.97% as against 35.26% and further, adopting the total cost at Rs. 1,70,84,964/- as against Rs. 2,02,67,550/-, after making adjustment for the depreciation on administrative assets of Rs. 31,82,586/-.

7. It is how the Revenue is in appeal before us.

8. Adverting to the first question regarding Arm’s Length Price to be applied by the Transfer Pricing Officer for determination of correct profits of the assessee, the revenue had relied upon the instances of the following three Companies. The data of the said Companies is reproduced here-in-below:

Sr. No. Comparable Companies S To. OP/TC (%) Wages/TC (%) Depr/TC (%)
1. Allsee Technologies Ltd. 57.58 30.49 48.73 8.74
2. Wipro BPO Solutions Ltd. 647.72 27.50 44.36 9.57
3. Cepha Imaging Pvt. Ltd. 10.04 47.70 32.97 13.98
Average 35.26%

9. By relying upon the above, the Revenue had tried to convince the Tribunal that average of 35.26% should have been adopted. On the other hand, the assessee had placed reliance on the same kind of data of different Companies to persuade the authorities for applying the average of 16.83% by drawing inference there from. The said data is noticed hereunder:

Sr. No Comparable Companies S To. OP/TC% Wages/TC (%) Depr/TC (%)
1. Tulsyan Technologies Ltd. (Cosmic Global) 1.90 19.08 21.25 6.87
2. Ace Software Exports Ltd. 5.91 15.46 10.46 5.94
3. Goldstone Teleservices 5.96 15.95
Average 16.83

10. The Tribunal, however, on appreciation of the material on record concluded that 21.97% was the appropriate percentage to be applied for adopting the Arm’s Length Price. For doing so, the Tribunal took into consideration the data of the following comparable Companies:

Sr. No Comparable Companies S To. OP/TC% Wages/TC (%) Depr/TC (%)
1. Tulsyan Technologies Ltd. (Cosmic Global) 1.90 19.08 21.25 6.87
2. Ace Software Exports Ltd. 5.91 15.46 10.65 5.94
3. Goldstone Teleservices 5.96 15.95
4. Asian Cerc Information Technology Ltd. (Seg) 2.32 37.40
Average 21.97

11. The findings recorded by the Tribunal in that behalf are as under:

“We have examined the aforesaid aspect carefully. The selection of three Comparables made by the assessee, in our view, is also skewed because it leaves out the case of Asian Cerc Technologies Limited wherein the turnover is almost near-about the turnover of the assessee-company. Of course, the three cases selected by the assessee do merit consideration as comparable cases. Apart from the three cases adopted by the assessee and the case of Asian Cerc Technologies Limited, the other seven cases enumerated in para 7.4.2 of the T.P.O’s order are not strictly comparable having regard to their level of operation and turnover. Therefore, we are not inclined to accept the plea of the learned DR that all the eleven cases be considered for the purposes of comparability analysis. At this point, we may also notice that though the assessee assailed the selection of comparable cases before the CIT(A) but there is no specific finding on this aspect, and instead he has adopted an ad hoc Operating cost/Total cost ratio of 15% for the purposes of computing the ultimate ALP. We find no justification to approve the action of the CIT(A) in this regard. Considering the entirety of circumstances, in our considered opinion, the following four companies out of the list searched by the TPO and contained in para 7.4.2 of his order, deserve to be selected for the purpose of comparability analysis:

12. The Tribunal found the four comparable companies for adopting the Arm’s Length Price. No perversity could be pointed out by the learned counsel for the appellant that may warrant interference in the finding recorded by the Tribunal in the above context.

13. Adverting to question No.2, the Tribunal held that the claim for depreciation on administrative assets amounting to Rs. 31,82,586/- was liable to be accepted for determining the profits of the assessee. The findings recorded by the Tribunal in this regard are noticed here:

“Having identified the Comparables companies, we may now proceed to determine the ALP. The arithmetic mean of the Operating Profit/Total Cost ratios work out to 21.97%. At this stage we may now adjudicate the second objection raised by the assessee. The assessee had explained before the lower authorities that for the Comparability analysis two adjustments are required to be made to the profit disclosed by the assessee. Such adjustments were on account of two expenses of extra-ordinary nature, namely, Charity & Donation, amounting to Rs. 1,09,49,785/- and Depreciation on administrative assets amounting to Rs. 31,82,586/-. It has been explained that such expenses are generally not found incurred in other similarly placed concerns. The TPO has accepted the plea of the assessee regarding charity & donation as is evident from the working done in para 9 of his order, and accordingly there is no dispute on this aspect. The dispute surviving before us pertains to the plea of the assessee for adjustment of depreciation amounting to Rs. 31,82,586/- which has been denied while computing the ALP as per para 9 of the TPO’s order. In this connection the TPO has observed as under in para 8.2 of the order:

“8.2 As may be observed from above, Depreciation / cost ratio in the case of assessee is 26.16% and is far higher as compared to all the comparables listed in the table below para No. 7.4.2. Considering the submission of assessee on extraordinary expenditure on administrative assets (cars purchased), Wages/ Total cost and Depreciation/ Total cost ratios are taken at 40% and 12% respectively (as submitted by the assessee vide its letter dated 14.10.2008)” [Emphasis supplied]

Ostensibly, TPO accepted the Depreciation/Total cost ratio computed at 12% by the assessee, which working is placed at page 95 of the Paper-book filed by the assessee. Pertinently, the Depreciation/Total cost ratio computed and accepted by the TPO at 12% was calculated after making adjustment for the said extraordinary item of depreciation amounting to Rs. 31,82,586/-. Having accepted the working, the TPO in para 9 of the order while determining the ALP has failed to make adjustment for extraordinary items of depreciation amounting to Rs. 31,82,586/- . Perhaps, non-adjustment of such depreciation in the course of determination of ALP in para 9 of the TPO is a case of an oversight. Because, in principle the TPO accepted the plea of the assessee as reflected by the discussion in para 8.2 of his order but inexplicably he has not considered it while determining the ALP in para 9 of the order. Notwithstanding the aforesaid, on merits also, we find enough merit in the plea of the assessee for adjustment of such depreciation in order to compare the profit disclosed by the assessee. The assessee has to succeed on this plea.”

14. No illegality could be pointed out by the learned counsel for the appellant in the above findings of the Tribunal so as to persuade this Court to warrant inference therewith. Thus, no substantial question of law, as claimed on this issue, arises for consideration by this Court.

15. The last question is, whether the advertisement expenses would form part of capital expenses. The assessee had debited a sum of Rs. 1,00,000/- on account of advertisement expenses which it had spent on purchase of sign-boards and had, thus, treated the same as revenue expenses. The case of the revenue on this point, however, was that it was capital in nature. The Tribunal recorded the following findings on this issue, which are:

“We have considered the rival submissions carefully. In our considered opinion, cost of a signboard cannot be contemplated as a capital expenditure because the benefit accruing to the assessee cannot be said to be in the capital field. Quite clearly, expending of money on signboard may result in a benefit of an enduring nature, yet such benefit is in the revenue field inasmuch as it merely facilitates the assessee’s trading operations. In commercial sense, it enables conduct of assessee’s business more profitably even if the advantage by way of the usage more profitably even if the advantage by way of the usage of signboard, endures over a longer period. Following the ratio of the decision of Hon’ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT 124 ITR 1 (SC), the impugned expenditure is held to be a revenue expenditure and accordingly the addition sustained by the CIT(A) is hereby ordered to be deleted.”

16. The aforesaid finding being a finding of fact which has not been shown to be erroneous in any manner and being based on appreciation of material on record, the same calls for no interference by this Court. No substantial question of law, thus, arises in this appeal for consideration of this Court.

17. In view of the above, the appeal is dismissed.

[Citation : 347 ITR 484]

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