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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 ..... nses, being expenses incurred in relation to hiring of employees, which were paid to consultants and for 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... s & 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) Salary paid for unproductive/idle hours - Rs. 4,578,633 11. That the assessing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 comparable companies at 7.93%. Accordingly, the international transaction of provision of software design and development services was considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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) Limited 30.44 13. Kals Info System 45.09 14. Mphasis B F I Ltd. 26.24 15. MYM Tech Ltd. 33.72 16. Sasken Communication Tech Ltd. 07.28 17. Synergy Login Systems Ltd. 30.42 18. Syntairos Technologies Ltd. 20.21 19. Vishesh Infotechnics Ltd. 20.76 20. Astra Bio Systems Ltd. -0.52 Arithmatic Mean 17.09% The TPO accordingly, in the order passed under section 92CA(3) of the Act, computed an adjustment of Rs. 1,38,85,561/- to the arm's length price of the 'international transactions' applying TNMM as under: Total cost of provision of services by the assessee (a) - Rs. 148129154 OP/OC 17.09 Margin @ 17.09% as discussed above ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ises 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 MCD notice whereby its office premises were ordered to be shut down. - No communication with its parent showing the assessee's inability to carry out any work during March 2006 has been submitted in the course of hearings. - Further, Customs License indicating change of address with effect form 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 31.12.2006 on 8.3.2006 at the old address. - Even if for the sake of argument it is accepted that the assessee's office premises were sealed the nature of assessee's business is such that shifting of business from one premise to the other can be effected over a weekend with out causing any disruption. Hence, the assessee's argument that unproductive hours during the period 01.03.06 to 25.3.2006 were not billed to the parent company has no merit - The assessee has shown additional rent paid to MGF Developments Ltd amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,62,89,671 Operating Revenue of the appellant 16,05,59,393 Adjusted profit of the appellant 2,42,69,722 Adjusted OP/OC% 17.80% Since, the adjusted operating margin of the appellant at 17.80% is higher than the operating margin of 17.09% earned by the comparable companies selected by the TPO, it is respectfully submitted that the international transactions undertaken by the appellant satisfies the arm's length criteria. The TPO, however, rejected the aforesaid claim of comparability adjustment on account of abnormal expenses incurred by the appellant. The contentions of the TPO for rejecting the appellant's claim towards comparability adjustments and the appellant's response to such contentions are summarized below: (a) TPO's Contention: The appellant has not provided the copy of MCD notices whereby its office premises were ordered to be shut down and that the office premises of the appellant was not sealed by the MCD Appellant's Response: It is respectfully submitted that the appellant had placed on record a newspaper clipping wherein the fact that the appellant was at the relevant time operating from a residential area was clearly stated. Therefore, it was probable that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Estate is evident from the noting made by the custom officials on the license, acknowledging the change of address from Safdarjung Enclave to Mohan Co-operative Industrial Estate. It is therefore, submitted that the rejection of appellant's claim towards comparability adjustments by the TPO on the aforesaid ground is not tenable. (d) TPO's Contention: The nature of appellant's business is such that shifting of business from one premises to another can be effected over a weekend, without causing disruption to the business of the appellant. Appellant's Response: It is respectfully submitted that before the operations of the appellant could be shifted from one premises to another, the necessary equipments & devices such computers systems, servers, storage devises, power backup devices etc. had to be dismantled from the existing premises and re-installed at the new premises. A detailed list of equipments which were shifted from the old premises at Safdarjung Enclave to new premises at Mohan Co-operative Industrial Estate was also placed on record before the TPO. The dismantling and re-installation of such equipments requires considerable time and technical skills. It is respectfull ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l the facts and material placed before him by the assessee. It would be inappropriate to reject the claim of the assessee towards comparability adjustment merely on the ground that the same was not included in the TP study. Section 92CA(3) of the Act specifically requires the TPO to take into consideration all the evidence which the assessee may produce during the course of hearing. The relevant extract of section 92CA(3) is reproduced below: "(3) On the date specified in the notice under sub-section (2), or as soon thereafter as may be after hearing such evidence as the assessee may produce including any information or documents referred to in sub-section (3) of section 92D and after considering such evidence as the Transfer Pricing Officer may require on any specified points and after taking into account all relevant materials which he has gathered, the Transfer Pricing Officer shall, by order in writing, determine the arm's length price in relation to the international transaction in accordance with sub-section (3) of section 92C and send a copy of his order to the Assessing Officer and to the assessee. " It is further respectfully submitted that the fact that the aforesaid cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim of the appellant made vide letter dated 22.10.2009 towards adjustment for abnormal expenses irrespective of the fact that such claim was not made by the appellant in the Transfer pricing documentation. It is respectfully submitted that the transfer pricing regulations clearly provide for adjustments in margins of the enterprise entering into international transactions for any differences between such international transactions and the transaction of the comparables or between the enterprise entering into international transactions and comparable companies. Reliance is also placed on the following decisions of the Benches of the Tribunal, wherein undertaking economic adjustment for improved comparability of the entities being compared for benchmarking experience has been emphasized. - Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT [2007] 109 ITD 101 (Delhi), - Sony India (P) Ltd. v. Dy. CIT [2008] 114 ITD 448 (Delhi) - Skoda Auto India (P) Ltd. v. Asstt. CIT [2009] 38 SOT 319 (Pune) - Schefenacker Motherson Ltd. v. ITO [2009] 123 TTJ 509 (Delhi) - Honeywell Automation India (P.) Ltd. (supra) - Egain Communication (P.) Ltd. v. ITO [2009] 118 ITD 243 (Pune) In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dustrial Estate. However, the fact that the assessee was entitled to carry on its operation under the same custom license from its new premises at Mohan Cooperative Industrial Estate is evident from the noting made by the custom officials on the licenses, acknowledging the change of address from Safdarjung Enclave to Mohan Cooperative Industrial Estate. Thus, we find that assessee has cogently rebutted TPO reservation in this regard. 4.9 Another TPO's contention is the nature of assessee's business is such that shifting of business from one premises to another can be effected over a weekend, without causing disruption to the business of the assessee. In this regard we agree with the contention of the assessee that before the operations of the assessee could be shifted from one premises to another, the necessary equipments and devices computers systems, servers, storage devices, power backup devices etc. had to be dismantled from the existing premises and re-installed at the new premises. The dismantling and re-installation of such equipments requires considerable time and technical skills. As such, we do not agree with the TPO's contention that the shifting could have been done ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to take into consideration all the evidence which the assessee may produce during the course of hearing. Thus, the assessee's contention has considerable cogency that the aforesaid claim for a comparability adjustment on account of abnormal cost aggregating to Rs. 1,18,39,483/- was not made in the Transfer Pricing documentation, would not act as an estoppels against the assessee and the TPO was required to consider the claim made by the assessee in the course of assessment proceedings before him. The assessee reliance in this regard upon the Hon'ble Supreme Court decision in the case of C. Parakh & Co. (India) Ltd. (supra) which is also germane. In this regard assessee has also placed reliance upon the catena of decisions of the Tribunal wherein it has been held that the fact that the assessee did not make a claim in the Transfer Pricing Documentation, the same would not act as an estoppel and the said claim could even be made before the appellate authority. 5. In the background of the aforesaid discussions and precedents relied upon, we find that TPO's reservation on the assessee's clam is not cogent one and the assessee has quite convincing rebutted TPO's reservation. Under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Details of office relocation expenses alongwith copies of invoice and supporting documents ore enclosed as Annexure I. It is submitted that relocation expenses consists of brokerage charges paid to broker for new premises, packing and forwarding charges, shifting charges of UPS, STP; circuit and loading unloading charges. It is further submitted that appropriate TDS was also deducted and deposited by the Company on the above payments. In this connection, it is submitted that above expenditure has been merely incurred to guard against various security/other concerns which may arise on the assessee by virtue of the presence of a commercial establishment in a residential area. The said expenditure has been incurred to facilitate efficient conduct of the business by shifting the office premises to a commercial area. No enduring benefit or an advantage in the capital field has been derived by the assessee on account of the aforesaid expenditure. It is submitted that the same has been incurred in the normal course of business and are allowable as revenue deduction. In this regard, kind attention is invited to the decision of the Hon'ble Supreme Court in the case of Empire Jute Co. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een submitted that the relocation expenses were incurred by the assessee on shifting of its office from Safdarjung Enclave to Mohan Cooperative Industrial Estate due to drive of MCD for sealing of premises. By shifting the operations to a new premises situated in a commercial area, the assessee was able to ward off the impending risk of sealing of MCD and save its business from discontinuance. The said expenses incurred on relocation of the office are essentially revenue expenses in as much as it did not result in enduring benefit in the capital field, as per the test laid down by the Hon'ble Supreme court in the case of Empire Jute Company (supra) and reiterated in CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468/99 Taxman 575 (SC). Therefore, we hold that the claim of the assessee for relocation expenses of Rs. 32,88,224/- ought to be allowed in full under the provisions of section 37(1) of the IT Act. 12. Now we take up the ground no. 15 which reads as under:- "That the Ld. assessing officer has erred on facts and in law by treating recruitment expense amounting to Rs. 20,70,000 incurred for fee paid to consultants and recruitment agencies, advertisement etc. as capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lding blocks of the company i.e. human resource power will give the enduring benefits to the assessee, therefore, the expenses incurred in relation to the same can not be allowed to the assessee by considering the same as revenue in nature. Therefore, the Assessing Officer held that expenses incurred in relation to the recruitment of main staff of the assessee company, which is a software developer is considered to be capital in nature and the same was therefore disallowed. 14. Upon the assessee's appeal the DRP upheld the Assessing Officer's action. 15. We have heard the rival contentions in light of the material produced and precedent relied upon. Ld. counsel of the assessee submitted that during the year consideration, the assessee incurred an aggregate amount of Rs. 20,70,000/- as recruitment expenses, being expenses incurred in relation to hiring of employees, which were paid to consultants and for 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 as per the test laid down by the Hon'ble S ..... X X X X Extracts X X X X X X X X Extracts X X X X
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