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TMI Blog2012 (5) TMI 314X X X X Extracts X X X X X X X X Extracts X X X X ..... advertisement and other incidental expenses as revenue expenditure. We agree that the aforesaid expenditure are essentially on revenue account and did not result in either an enduring benefit in capital filed or creation of capital assets - Decided in favor of assessee. - IT APPEAL NO. 6083 (DELHI) OF 2010 - - - Dated:- 30-3-2012 - A.D. JAIN, SHAMIM YAHYA, JJ. Ajay Vohra, Neeraj Jain, Ms. Archana Gupta, Abhishek Aggarwal and R. Katyal for the Appellant. Dr. B.R.R. Kumar for the Department. ORDER Shamim Yahya, Accountant Member This appeal by the assessee is directed against the order of the Assessing Officer dated 15.10.2010 passed u/s. 143(3) read with section 144C of the IT Act, 1961. 2. The assessee has submitted the modified grounds which read as under:- "1. That on the facts and circumstances of the case the impugned assessment dated 15.10.2010 completed under section 143(3) read with section 144C of the Income-tax Act, 1961 ('the Act') on the basis of directions issued by the Dispute Resolution Panel ("DRP"), is illegal and bad in law. 2. That the assessing officer erred on facts and in law in completing the assessment under section 143(3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n law in selecting Vishesh Infotechnics Ltd. and Helios Matheson Information Technology Ltd. ignoring the fact that these company had carried out extensive restructuring activity during the year. 8. Without prejudice that the learned TPO erred on facts and in law in not making appropriate adjustment to the extent of 15% (as per decision of the Hon'ble ITAT Delhi in the case of Rolls Royce Plc v. DDIT ) to the profit margin of ICSA India Limited and Vishesh Infotechnics Ltd. on account of such companies having been engaged in research and development activities. 9. That the Learned TPO erred on facts and in law In including the following new companies in the list of com parables by expanding the sales filter from Rs. 200 crores to Rs. 500 crores: ( i ) Mphasis B F L Ltd. ( ii ) Sasken Communication Tech Ltd. 10. That the Learned TPO erred on facts and in law in not allowing an adjustment of Rs. 1,11,73,078 while determining ALP in case of the appellant on account of extraordinary expense (loss) comprising of ( i ) relocation expense (including brokerage) for new premise - Rs. 3,288,224 ( ii ) Additional rent paid fro 2 months - Rs. 3,972,626 ( iii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies Act, 1956, is a wholly owned subsidiary of Transwitch Corporation, USA. The appellant operates a design centre for its parent company for design and development of software and related services. The appellant is a captive unit of its parent company and has no business transactions with any outside entity." During the financial year under consideration, the appellant had undertaken the international transactions of provision of software development services amounting to Rs. 15,95,61,82!-with its associated enterprise. The appellant has applied Transactional Net Margin Method (TNMM) as the most appropriate method with OP/TC as the Profit Level Indicator (PU) for benchmarking the international transaction of provision of software development service. The appellant had considered three years weighted average profit margin of (OP/OC) of 34 comparable companies. The result of TNMM analysis is as under: Weighted average OP/ OC % of 34 comparable) companies - 7.93% OP/OC % of the appellant - 8.39% The operating profit margin (OP/OC) earned by the appellant at 8.39% was higher than the weighted average of operating profit margin of comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Systems Ltd. - No service income, only trading income during the year. 13. SQL Star Intl. Ltd. Persistently loss making. The appellant objected the inclusion of 13 comparable companies identified by the TPO on various grounds. However, the TPO has considered 9 companies as comparables out of his own list of 13 companies along with 11 com parables out of 23 comparables identified by the appellant and arrived at a set of 20 comparable companies, as under: S. No. Name OP/TC (200603) 1. Computech Intl. Ltd. 04.59 2. Goldstone Technologies Ltd. 04.78 3. IKF Tech Ltd. 11.57 4. IT People India Ltd. 07.77 5. Maars Software International Ltd. 12.51 6. Megasoft Ltd. 24.67 7. R S Software Ltd. 14.36 8. Shri Tulsi Online Com Ltd. 03.32 9. Visual Soft Technologies Ltd. 13.05 10. VMF Softech Limited 06.50 11. Helios Matheson Information technologies ltd. 25.08 12. ICS (India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od. The costs mentioned above were unproductive costs and were not billed to the parent company. As per the service agreement between the assessee and its parent company, the remuneration for software development services rendered by the assessee was fixed at $35 per man our. The unproductive hours during the period 1-March-06 to 25-March-06 were not billed to the parent company. This resulted in reduced revenue during the financial year under consideration. The adjusted NCPM of the assessee, after excluding the above mentioned abnormal cost is 17.23%." 4.2 The TPO was not in agreement with the assessee's submissions and rejected the same by holding as under:- - "The newspaper article refers to an office in GK-I whereas in the submission quoted above and the Customs License the office of the assessee was in Safdarjung Enclave. The newspaper clipping is clearly unreliable. - As per the newspaper article it is dear that MCD had not sealed the premises in GK-l as on 1st March, 2006 and the assessee's argument that no work was done during the month of March, 2006 i.e. the last month of the relevant FY is not acceptable. - The assessee has not given a copy of the MC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he sealing drive undertaken by the Municipal Corporation of Delhi ('MCD'), the appellant had to shift its office premises from Safdarjung Enclave (a residential area) to Mohan Cooperative Industrial Estate (a commercial area) on a very short notice. As a result of the aforesaid shifting of office premises, the appellant had to incur following abnormal costs: Particulars Amount (Rs) Relocation expense (including brokerage) for new premise 32,88,224 Additional rent paid for 2 months 39,72,626 Salary paid for unproductive/Idle hours 45,78,633 Total 1,18,39,483 After making adjustment for the aforesaid abnormal expenses, the operating margin ('OP/OC') of the appellant increases to 17.80%, as computed below: Particulars Amount Cost of provision of software service 14,81,29,154 Less: Abnormal expenses a. Office relocation expense 32,88,224 b. Additional rent paid 39,72,626 c. salary paid for unproductive/Idle hours 45,78,633 Adjusted Cost of provision of service 13,62,89,671 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is responsible for conducting and managing its business. Further, this is an irrelevant consideration and does not have any bearing on the allowability of comparability adjustments on account of abnormal expenses incurred by the appellant. ( c ) TPO's Contention: Custom license indicating change of address with effect from 22.03.2006 also does not indicate that the earlier license had lapsed and no business could be affected. In fact the license had already been renewed up to 31.12.2006 on 08.03.2006 at the old address. Appellant's Response: It is respectfully submitted that the appellant had placed on record approval from the Software Technology Park of India ('STPI') authorizing change in the address from Safdarjung Enclave to Mohan Co-operative Industrial Estate. The custom license was initially granted to the appellant in respect of its premises at A-2/9 and A -218, Safdarjung Enclave, New Delhi - 110029. The appellant had also placed on record copy of custom license approving the change of address w.e.f. March 22, 2006 to Mohan Co-operative Industrial Estate. However, the fact that the appellant was entitled to carry on its operation under the same custom license fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at the new premises. It is respectfully submitted that the aforesaid activities also require considerable time and the appellant therefore, had to pay rent for the period during which the aforesaid infrastructure was established at the new premises. ( f ) TPO's Contention: the claim of the appellant that the sealing drive reduced its revenue is unsubstantiated Appellant's Response: It is respectfully submitted that the appellant had placed on record its quarterly capacity utilization statement demonstrating the fall in its capacity utilization during the quarter January to March 2006. The capacity utilization of the appellant during the quarter January to March 2006 fell to 72% as against the normal capacity utilization of 87% to 94% during the financial year ending December 31, 2005. Further, the fact that the appellant had to shift its office premises at a very short notice, sufficiently substantiates the low capacity utilization of the appellant during the last quarter of financial year 2005-06. ( g ) TPO's Contention: No claim for such comparability adjustment was made by the assessee in the TP documentation Appellant's response: It is respectfully submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght take of its rights, and consequently, if the whole of the commission is under the law liable to be deducted against the Indian profits, the respondent cannot he estopped from claiming the benefit of such deduction, by reason of the fact that it erroneously allocated a part of it towards the profits earned in Karachi. What has therefore to be determined is whether, notwithstanding the apportionment made by the respondent in the profit and loss statements, the deduction is admissible under the law." Reliance is also placed on the following decisions of the Benches of the Tribunal, wherein it is held that the fact that the assessee did not make a claim in the Transfer Pricing documentation, the same would not act as an estoppels and the said claim could even be made before the appellate authority: - Quark Systems (P.) Ltd. (IT Appeal No. 115/Chd/2009) - Honeywell Automation India Pvt. Ltd. v. DCIT (IT Appeal No. 4/PN/08) - Sapient Corpn. (P.) Ltd. v. Dy. CIT [2011] 46 SOT 56/11 taxmann.com 69 (Delhi) (URO) - Dy. CIT v. B.P. India Services (P.) Ltd. [2011] 133 ITD 255/15 taxmann.com 125 (Mum.) - Dy. CIT v. Quark Systems (P.) Ltd. [2010] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee's submission that the rejection of assessee's claim towards comparability adjustment on the ground that its premises was not actually sealed is unjustified and unfounded. 4.7 As regards TPO's contention that no communication with its parent showing assessee's inability to carry out work during March, 2006 has been submitted in the course of the hearings. Assessee has rightly contended that the assessee is responsible for conducting and managing its business. This reservation of the TPO was irrelevant consideration and we agree with the same. 4.8 Another TPO's contention was that Custom license indicating change of address with effect from 22.3.2006 also does not indicate that the earlier license had lapsed and no business could be affected. In fact the license had already been renewed upto 31.3.2006 on 8.3.2006 at the old address. In this regard assessee has contended that assessee has placed on record approval from the Software Technology Park of India (STPI) authorizing change in the address from Safdarjung Enclave to Mohan Cooperative Industrial Estate. The custom licnese was initially granted to the assessee in respect of its premises at A-2/9 and A-2/8, Saf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.11 Another TPO's contention is that claim of the assessee that the sealing drive reduced its revenue is unsubstantiated. In this regard, assessee has submitted that the assessee had placed on record its quarterly capacity utilization statement demonstrating the fall in its capacity utilization during the quarter January to March, 2006. The capacity utilization of the assessee during the quarter January to March, 2006 fell to 72% as against the normal capacity utilization of 87% to 94% during the financial year ending December, 31, 2005. Further, the fact that the assessee had to shift its office premises at a very short notice, sufficiently substantiates the low capacity utilization of the assessee during the last quarter of financial year 2005-06. We find our ourselves in agreement with the assessee's submission in this regard. 4.12 Another TPO's contention is that no claim for such comparability adjustment was made by the assessee in the TP documentation. In this regard assessee has submitted that the TPO required to compute arms length price after considering all the facts and material placed before him by the assessee. It has been pleaded that it would be inappropriate t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational transactions undertaken by the assessee satisfies the arm's length criteria. In such scenario, as agreed by both the counsel, adjudication of another Transfer Pricing issue in this regard is infructuous. Accordingly, we are not dealing with the other issues of transfer pricing raised by the assessee in the ground of appeal. 6. Now we take up the ground no. 13 which reads as under:- "That the Learned assessing officer erred on facts and in law in treating the office relocation expense incurred amounting to Rs. 32,88,224 for shifting of office by the appellant in order to avoid the drive undertaken by MCD for sealing the office premises of commercial establishments located in residential areas as capital expenditure and disallowing the claim of the appellant for revenue expense made u/s 37(1)." 7. It has further been submitted that Assessing Officer is wrong in considering the activity of the shifting of office at par with the re-establishment of business. On this issue Assessing Officer found that assessee has claimed office relocation expenses of Rs. 32,88,224/-. Justification for claiming the office relocation expenses as revenue expenditure was submitted as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Associated Cement Companies Ltd. [1988] 172 ITR 257/38 Taxman 110A, and again in the case of Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377/43 Taxman 312 (SC). Further, in the case of CIT v. Brakes India Ltd. [2007] 161 Taxman 47 (Mad.), Hon'ble' Chennai High Court held that "expenses incurred by the assessee on relocating its plant by way of readjustment within the some factory shed to achieve better productivity were deductible as business expenditure." (Copy enclosed as Annexure- II). Hence, in view of the above, it is submitted that relocation expenses are in the nature of revenue expenditure and shall be allowed as allowable deduction under section37 of the Act." 8. Assessing Officer was not convinced by the assessee's arguments. He held that this expenditure is capital in nature. In this regard, Assessing Officer also placed reliance upon the Hon'ble Patna High Court decision in the case of CIT v. Jamshedpur Engg. Machine Mfg. Co. Ltd. [1986] 157 ITR 730/27 Taxman 527 in which it has been specifically observed that the expense incurred in connection with the shifting including the expenses in the form of payments made to the lawyers could n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred by the company on salaries and allowances paid to the employees. Hence, company was necessarily required to incur the expenditure on recruitment of employees. Hon'ble Delhi ITAT decision in the case of DCIT v. Bechtel India P Ltd. (ITA Nos. 4278/Del/2005) and 1803/Del/2006) had noted that recruitment and training expenses incurred by the assessee company was not related to the capital filed and having regard to the nature of its business, the same was clearly of revenue nature being incurred for the purpose of increasing the efficiency of its business. Accordingly, Tribunal had allowed the deduction to the assessee on account of expenditure incurred on recruitment and training expenses. (copy enclosed as Annexure -IV). Further, in the case of Bhel-GE Gas Turbine Services (P) Ltd. v. JCIT (ITA No. 490/Del/2005), Hon'ble Delhi ITAT has also allowed the deduction on account of recruitment expenses being revenue in nature. (Copy enclosed as Annexure V). Hence, in view of the above, it is submitted that recruitment expenses are in the nature of revenue expenditure and shall be allowed as allowable deduction under section 37 of the Act." 13.1 The Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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