9911796707
TMI Blog2013 (9) TMI 444X X X X Extracts X X X X X X X X Extracts X X X X ..... affording a reasonable opportunity of being heard to the assessee - Decided in favour of assessee. - IT Appeal Nos. 420 & 465 (Hyd.) of 2007 - - - Dated:- 28-6-2013 - CHANDRA POOJARI AND SAKTIJIT DEY , JJ. For the Appellant : K.R. Pradeep. For the Respondent : D. Sudhakara Rao. ORDER:- PER : Saktijit Dey These cross appeals and the cross objection of the assessee are directed against the order dated 23-1-2007 of the CIT (A)-III, Hyderabad pertaining to the asst. year 2003-04. Since facts are identical, issues are common and the assessee is same, for sake of convenience the appeals and cross objection are clubbed together and disposed off in this combined order. 2. Briefly the facts emanating from record are, the assessee a private limited company is a wholly owned subsidiary of HSBC PLC (HSBC group) one of the leading banking and financial services companies in the world. The assessee provides back office and call centre services involving data capture, data conversion, data processing and customer interaction to its Associated Enterprise (AE)within the HSBC group spread over many parts of the world such as UK,USA, Middle East etc. The assessee being a ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tics Technologies Ltd. 12 IT enabled Services 52.46 35.15 17.31 32.99 49.24 Average (mean) 34.5% Average Rounded to 35% 5. By taking the average arithmetic mean of the aforesaid companies selected at 35% and allowing a further adjustment of 2% on account of various differences between international transaction and the comparable uncontrolled transaction and 1% on account of evacuation expenses determined ALP at Rs.152,28,73,032. As the assessee's price of Rs.120,93,71,928 was not within +/- 5% range of the ALP determined by TPO, the shortfall of Rs.31,35,01,104 was treated as transfer pricing adjustment. After receiving the report of the TPO, the Assessing Officer accordingly completed the assessment u/s 143(3) by adding the amount of Rs.31,35,01,204/- towards ALP difference. The Assessing Officer also made the following other additions: Club entrance fee - Rs.4,10,368 Loss on disposal of Fixed assets - Rs.17,83,341 Excess depreciation On computer peripherals Electrical fittings - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the learned authorised representative of the assessee submitted that, data pertaining to the company was not available in the public domain as the said company has filed its return with the ROC only on 3-6-2008. In this context the learned authorised representative of the assessee drew our attention to page 630 of the paper book. He submitted that since the data was not available in public domain within the time prescribed u/s 92F read with rule 10D(4) the said company cannot be selected as comparable. It was further submitted that the company is also functionally dissimilar as it was engaged in outsourcing its activity and does not develop or has not established a facility for providing the service by employing requisite employees. He submitted that the financial statements of the aforesaid company shows that the employee cost of Rs.19,45,603 on a turnover of Rs.13,71,56,009/- is very low working out to only 1.42% whereas assessee's employee cost as a percentage on turnover works out to 43.76%. It is the contention of the learned authorised representative of the assessee that Vishal is not functionally comparable and therefore has to be excluded. In support of his contention the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rability has concluded that it does not have substantial related party transaction. The learned authorised representative of the assessee submitted that comparison of net profit between companies does not bring out the correct picture. The element of depreciation actually distorts the comparability. Therefore, profit before depreciation and IT(PBDIT) is a better method for comparison as against comparison of net profit. In this context, the learned authorised representative of the assessee relied upon the decision in case of Schefenacker Motherson Ltd. 123 TTJ 509) and Qual Core Logie Ltd (52 SOT 574). It was further submitted that employee cost as a percentage of sales or total cost is also a factor which requires to be adjusted as the percentage of employee cost as to sales in Wipro BPO is 31.36% compared to assessee's 43.76%. It was further submitted that Wipro and Wipro BPO cannot be taken as functionally comparable in view of decisions of the Tribunal in case of Adaptec (India) (P.) Ltd. ITA No.1801/Hyd/09,Deloitte Consulting India (P) Ltd. (61 DTR 101), M/s Patni Telecom Solutions- ITA No.1846/Hyd/2012 and Brigade Global Services Pvt. Ltd. (ITA No.1494/Hyd/2010). 13. The le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wrong in disregarding the context and purpose for which the "net profit" was to be computed. Depreciation, which can have varied basis and is allowed at different rates, is not such an expenditure which must be deducted in all situations. It has no direct connection or bearing on price, cost or profit margin of the international transactions. Object and purpose of the transfer pricing to compare like with the like, and to eliminate differences, if any, by suitable adjustment is to be seen. Therefore, there was justification on the part of the assessee in pleading that profits be taken without deduction of depreciation as depreciation was leading to large differences in margins for various reasons. Contention that depreciation would depend upon type of technology employed, age and nature of machinery used, is quite well-founded. Above, along with size of enterprise and investment in plant/machinery were important factors to be taken into account for comparison and for computing profit. There is considerable support for the contention raised on behalf of the assessee in the OECD Guidelines on Transfer Pricing. The claim of depreciation can lead to great difference in computing profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has selected the company as a comparable after conducting detailed analysis, industry general averages cannot be adopted for arriving at transfer pricing adjustment. In support of such contention the learned authorised representative of the assessee relied upon the Income-tax Appellate Tribunal, Special Bench decision in Aztec Software Technology Services Ltd. (109 ITR 892). 16. The learned departmental representative, on the other hand, supported the order of CIT (A) 17. We have heard submissions of the parties and perused the material on record. It is a fact that in the TP order this company has been selected as a comparable by the TPO as it fulfilled all the search criteria. The assessee has also accepted it as a comparable. As can be seen from the order of the CIT (A), he has rejected this company holding it to be a low margin company only on the basis of the RSM study. When the TPO has selected this company as a comparable after detailed analysis on functionality and other aspects in spite of availability of the RSM study before him, the CIT (A) was not justified in rejecting the comparable by solely relying upon the RSM study which only represents a generalised view. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of proceeding before the TPO, the assessee requested for allowing adjustment on account of cost of idle capacity and facilities while determining the ALP. The assessee also submitted a calculation in this regard. The TPO while considering this issue observed that there was excess capacity utilisation in the Hitech Centre, Madhapur Unit of the assessee and the overall capacity utilisation of assessee has to be measured on the basis of volume to be realised, and not realisable output. He therefore came to a conclusion that real and notional profit margins cannot be compared on the basis of idle cost and no deduction on account of idle cost can be allowed. The TPO further observed that allowing deduction towards idle capacity from the actual expenses will artificially reduce the cost and increase the margins on hypothetical basis. The TPO accordingly rejected the assessee's claim on this account. The CIT (A) though in principle agreed with the conclusion of the TPO but however he allowed a deduction of 1% by observing that the assessee might have faced certain specific utilisation problems in its new unit which was started at Bangalore during the year. He further observed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s adopted such margin. When it is accepted that assessee's overall profit is adversely affected due to idle capacities and idle facilities then the entire issue requires to be considered properly and in an objective manner taking into account all the datas available in this regard. Therefore, considering the facts and the circumstances of this case, we remit this issue to the file of the Assessing Officer who shall consider the assessee's claim with regard to idle capacities after due consideration of all materials available on record and affording a reasonable opportunity of being heard to the assessee. 25. In the result, the assessee's appeal is partly allowed. ITA No.465/Hyd/07 (departmental appeal):- 26. At the outset, learned departmental representative requested for admission of additional ground Nos. 1 to 6 submitted vide its letter dt. 23-11-2010 received in the registry on 24-11-2010. 27. The learned authorised representative of the assessee seriously objecting to the admission of additional grounds submitted that the grounds are not legal grounds but, are on factual issues which requires going into fresh facts. He therefore submits that the department cannot be al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble for lower rate of depreciation whereas items like air conditioners, poles etc., which are not in the nature of fittings as provided in Note-5 of appendix-I of IT Rules are eligible for depreciation at the rate of 25%. So far as computer peripherals like printers, scanners, modems, etc., are concerned, the CIT (A) following an order of the Income-tax Appellate Tribunal Kolkata Bench in case of ITO vs. S. Majaumdar (98 ITD 119) held that these items being integral part of computer systems are eligible for depreciation at the same rate as is available to computers i.e., at the rate of 60%. However, the CIT (A) held that the other items like racks, switches, fans etc., cannot be treated to be parts of computer and therefore they are to be allowed normal depreciation as available to furniture and fittings at the rate of 15%. 31. We have heard rival submissions on this issue. On a perusal of the order of the CIT (A), we do not find any infirmity in it. Air conditioners and other items which do not come within Note-5 of Appendix-I of IT Rules cannot be considered as electrical fittings and depreciation be restricted to 15%. Similarly, printers, scanners and modems are integral parts ..... X X X X Extracts X X X X X X X X Extracts X X X X
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