9911796707
TMI Blog2011 (5) TMI 499X X X X Extracts X X X X X X X X Extracts X X X X ..... ent and training expenses and advertisement and sales promotion expenses cannot be said to be capital expenditure - Thus AO's action in this regard is not sustainable - Moreover,note that similar disallowance were deleted by the Ld. Commissioner of Income-tax (Appeals) in the assessment year 2004-05 against which the department did not file appeal before the Tribunal - Decided in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... h Ltd. 200603 49.73% Mean 12.05% The TPO in his transfer pricing order has further rejected 5 comparable companies identified by the assessee on the following ground: S.No. Name of company Reasons for rejection 1. Birlasoft Ltd. Decreasing profitability trend and sales since 3 years. 2. Goldstone Technologies Ltd. Decreasing profitability trend and sales since 3 years. 3. Maars Software International Ltd. Not comparable as wages to cost ratio only 0.24% as against 65% of the assessee. 4. Melstar Information Technologies Ltd. Segmental data not available, FOREX earring only 30%. 5. RS Software (India) Ltd. Negative net worth. The TPO benchmarked the operating profit margin (OP/TC%) of the appellant company with the margin of the following 4 high profit making companies: S.No. Name of the company FY OP/TC 1. Prithvi Information Solutions Ltd. 200603 12.65% 2. Visualsoft Technologies Ltd. 200603 12.67% 3. Zenith Infotech Ltd. 200603 49.73% 4. Quintegra Solutions Ltd. 200603 13.71% Arithmetic Mean 22.19% Accordingly, the Transfer Pricing Officer in the order passed under section 92CA(3) of the Act computed an adjustment of Rs. 14,79,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enting extreme positions. If Imercious Technologies has suffered heavy losses and, therefore, it is not treated as a comparable by the tax authorities, they also have to consider that Datamatics has earned extraordinary profit and has a huge turnover." (emphasis supplied) Reliance in this regard is also placed on the following decisions wherein a super profit margin company has been directed to be excluded: Adobe Systems India (P.) Ltd. v. Asstt. CIT : LT.A. No. 5043/Delhi/2010. Mentor Graphics (Noida) (P.) Ltd : 109 ITD 101. E-Gain Communication (P.) Ltd. v. Dy. CIT : 118 ITD 243. Philips Software Centre (P.) Ltd. v. Asstt. CIT : 119 TTJ 721. ITO v. Sunay Jewels (P.) Ltd. : ITA No. 5758/Mum./2007. Further, Zenith Infotech cannot be taken as comparable also for the reason that, (i) the wages to cost ratio of Zenith Infotech is 37.50% as against the wage to cost ratio of the applicant at 65% and (ii) forex earning of said company is only 39% of the total revenue. It may be noted that the TPO has himself had rejected Melstar Information Technologies, inter alia, on the basis of low forex earnings without applying the same selection criteria while considering Zenith Infotech Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harbour of (+/-) 5% provided in section 92(2) of the Act with respect to the average of operating profit margin of the above comparable companies, i.e. 12.49%, the international transaction entered into by the assessee with associated enterprises, are, therefore, considered being at arms length price on the applying TNMM. The DRP however, did not deal with the aforesaid fresh set of comparable placed on record by the assessee. 7. Ld. Departmental Representative on the other hand has submitted that Zenith Infotech was chosen by assessee itself in the list of comparables. Hence, the assessee cannot agitate against its inclusion. The Ld. Departmental Representative further claimed that assessee has raised perfunctory objection before the authorities below regarding exclusion of Zenith Infotech in the comparable. Hence the matter was not dealt with in detail by the TPO or the DRP. In the rejoinder, ld. counsel of the assessee has submitted that all the necessary documentation in this regard were before the TPO and the DRP. Ld. counsel of the claimed that if loss making companies were taken out by the TPO from the comparables, Zenith Infotech Ltd. which had shown super normal profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... removal of Zenith Infotech from comparables, as it showed super profits. Furthermore, it is noted that Zenith Infotech is predominately software product company, while the assessee is engaged in rendering software development services. It is found that software product company shows higher margin. This is also corroborated by the fact that wages to cost ratio of Zenith Infotech is only 37.5% as opposed to 65% of assessee-company. Hence, we are of the considered opinion that when loss making companies have been removed from comparables by the TPO, assessee is right in contending that Zenith Infotech should also be removed as it showed super profits. As submitted in the chart in preceding paragraph the average of operating profit over cost of the remaining three companies after eliminating Zenith Infotech Software is as follows: S. No. Name of the company FY OP/TC 1. Prithvi Information Solutions Ltd. 200603 12.67% 2. Visualsoft Technologies Ltd. 200603 12.67% 3 Quintegra Solutions Ltd. 200603 13.71% Arithmetic Mean 13.01 % Since the OP/TC of the appellant at 12.49% is within the safe harbour range of (+/-)5% as per the proviso to section 92C(2) of OP/TC margin of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax (Appeals) in assessee case for A.Y. 04-05 vide order dated 8-11-2007, deleted the similar disallowance made by the Assessing Officer in that year. It has been claimed that department has accepted the findings of the Ld. Commissioner of Income-tax (Appeals) with respect to disallowance of recruitment and training expenses and advertisement expenses and did not appeal to the Tribunal on this account. 14. Ld. Departmental Representative relied upon the orders of the Assessing Officer . 15. We have heard the rival contentions in light of the material produced and precedents relied upon. We find that it is not the case here that the expenses are bogus and not incurred. It has also not the case that the entire expenses falls under the realm of capital expenses. The Assessing Officer is of the opinion that only 25% of the expenditure should be allowed during the year and the rest has to be added to the income of the assessee. We find ourselves in agreement with the contention of the ld. counsel of the assessee that there is no concept of deferred revenue expenditure under the IT law. The expenditure of account of recruitment and training expenses and advertisement and sales promotio ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
