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TMI Blog2015 (8) TMI 654X X X X Extracts X X X X X X X X Extracts X X X X ..... g to the transaction of business support services. 2.1. The assessee is a 100 per cent. subsidiary of Hapag Lloyd AG (HLAG) and is a captive unit engaged in providing business support services to its parent company. The assessee-company assisted in booking shipments requirements required to be moved from one location to another. The assessee has entered into a shipping agency agreement with HLAG, according to which it was appointed as the agent for HLAG. The assessee was also authorised to appoint sub-agents with prior written approval of HLAG. As per the agreement the assessee is entitled to receive cost plus 10 per cent. The assessee has reported the international transactions, inter alia, the provision of business support services of Rs. 39,63,61,566. The assessee selected transactional net margin method as the most appropriate method and used operating profit/total cost as profit level indicator and work out the margin of the comparables at 8.78 per cent. in comparison to 10 per cent. of the assessee. Accordingly, the assessee claimed the price charged from the associated enterprise as arm's length. The Transfer Pricing Officer noted that the assessee had paid commission o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ept the contention of the assessee and confirmed the action of the Assessing Officer/Transfer Pricing Officer. 4. Before us, the learned authorised representative has submitted that the Transfer Pricing Officer is not justified in adopting the commission paid to sub-agent as comparable uncontrolled price for determining the arm's length price in respect of support services provided by the assessee to the associated enterprise. The agreement between HLAG and GESA was terminated on December 31, 2006. Therefore, the said agreement is not a contemporary price for the year under consideration. The assessee was appointed as shipping agent by HLAG vide agreement dated January 1, 2007. As per article 5 of the agreement, the assessee was authorised to appoint a sub-agent with prior approval of HLAG. Accordingly, the assessee appointed GESA as the sub-agent vide agreement dated February 21, 2007 with effect from January 1, 2007. GESA has performed the services for territories including all of India and Nepal but, excluded territory of the assessee as demarcated in the sub-agency agreement. The assessee remunerated GESA on the basis of the rate provided in the sub-agency agreement. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociated enterprises. Thus, the learned authorised representative submitted that transaction between the assessee and GESA cannot be applied as comparable uncontrolled price. Even otherwise when the agreement between HLAG was terminated on December 31, 2006 and was not in existence during the financial year under consideration, the same cannot be applied as a comparable transaction. When there was no agreement and no service was rendered by GESA to HLAG during the year under consideration then, in the absence of current year data, the non-existing agreement cannot be considered as comparable uncontrolled price. The learned authorised representative has also contended that there is a difference between services rendered by the GESA to the assessee and services by the assessee to HLAG. He has pointed out that GESA refers to customer service booking and documentation service to the assessee under sub-agency agreement, whereas the assessee does not provide such services to HLAG under agency agreement. The assessee is a long-term service provider for associated enterprise as compared to GESA. Further, the GESA is required to furnish bank guarantee which is not required by the assessee. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew arrangements the assessee has substituted third party for providing services to the associated enterprise. The assessee entered into the shoes of the third party, therefore, internal comparable uncontrolled price is available. The terms and conditions of the agreement between HLAG and GESA as well as agreement between the assessee and GESA are identical. The assessee and GESA are otherwise doing the identical business and providing identical support service to HLAG. Thus, the learned Departmental representative has submitted the internal comparable uncontrolled price available in this case which is the most appropriate method of arm's length price. 6. We have considered the rival submissions as well as the relevant material on record. Up to December 31, 2006 GESA was providing the services for booking shipments to HLAG under agency agreement of 1993. GESA was charging a certain percentage on the freight turnover as commission apart from fixed charges at US $ 10 per inland box. Other fee is as per the Reserve Bank of India guidelines as well as fee for consignment delivery and bill of lading. 6.1. On the other hand the assessee was appointed as agent with effect from Januar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible, be contemporaneous and should exist latest by the specified date referred to in clause (iv) of section 92F : Provided that where an international transaction continue to have effect over more than one previous year, fresh documentation need not be maintained separately in respect of each previous year, unless there is any significant change in the nature of terms of the international transaction, in the assumptions made, or in any other factor which could influence the transfer price, and in the case of such significant change, fresh documentation as may be necessary under sub-rules (1) and (2) shall be maintained bringing out the impact of the change on the pricing of the international transaction." 6.1.1. Therefore, the use of earlier data is an exception and cannot be applied in exclusion of current year data. In other words, in the case of existence of exceptional circumstances the prior two years data along with current year data can be used. Once the GESA ceases to be agent of HLAG with effect from December 31, 2006, then in the absence of current/contemporary data/uncontrolled price, the price of prior year cannot be considered for determination of the arm's le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, the comparable uncontrolled price must be a proper uncontrolled price in compliance of provisions of transfer pricing. 6.2.2. There is one more fallacy in the Transfer Pricing Officer's order regarding bifurcating the international transactions into two segments for determining the arm's length price. The Transfer Pricing Officer accepted the price charged by the assessee in respect of services provided through sub-agency, but while computing the arm's length price it had ignored the comparable uncontrolled price and took the price charged by the assessee as the arm's length price. Further, the services provided by the assessee on its own were compared with comparable uncontrolled price. Therefore, two separate arm's length price were determined by the Transfer Pricing Officer for the same service provided by the assessee to the associated enterprise. Even if the comparable uncontrolled price is adopted as the most appropriate method, the arm's length price cannot be more than the price received by GESA. Whereas the Transfer Pricing Officer has taken into consideration the price charged by the assessee with 10 per cent. mark-up. Hence, the computation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;ble Dispute Resolution Panel further erred in upholding an adjustment of INR 29,55,30,462 in respect of the international transaction pertaining to the provision of business support services, alleging that the same to be not at arm's length in terms of the provisions of section 92C(1) and 92C(2) of the Act read with rule 10D of the Income-tax Rules,1962 ('the Rules'). 1.3 That the learned Dispute Resolution Panel erred in law and on facts, by not adhering to the principles of natural justice by summarily rejecting the appellant's objections and disregarding the material placed on record, thereby erred in not following the procedure laid down in section 144C(5), 144C(6) and 144C(7) of the Act. 1.4 The learned Assessing Officer/Dispute Resolution Panel/Transfer Pricing Officer has erred in making several observations and findings which are based on surmises and incorrect understanding/ interpretation of facts and law. 1.5 That on the facts and circumstances of the case and in law, The learned Assessing Officer/Dispute Resolution Panel/Transfer Pricing Officer has erred in rejecting the business model adopted by the appellant without any cogent reason. 2. Mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the specific rate applicable to 'computers including computer software' as claimed by the appellant. 5. Rate of depreciation on computer software : Rs. 6,80,185 That on the facts and circumstances of the case and in law, the learned Assessing Officer erred in proposing and the hon'ble Dispute Resolution Panel erred in granting depreciation on computer software at the rate of 25 per cent. being the rate applicable to intangibles instead of 60 per cent. being the rate applicable to computers including computer software as claimed by the appellant. 6. Proportionate disallowance of depreciation based on number of employees : Rs. 6,21,539 6.1 That on the facts and circumstances of the case and in law, the hon'ble Dispute Resolution Panel erred in proposing disallowance of depreciation on allocated cost proportionate to excess of number of employees over the number of software licences obtained. 6.2 That on the facts and circumstances of the case and in law, the hon'ble Dispute Resolution Panel further erred in directing disallowance of depreciation on computer hardware (i.e., printers, scanners and electronic token display system) in above proportion witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he hon'ble High Courts as well as this Tribunal. He has relied upon the judgment of the hon'ble Delhi High Court in the case of CIT v. BSES Yamuna Powers Ltd. [2013] 358 ITR 47 (Delhi). He has also relied upon the decision of the Special Bench of this Tribunal in the case of Deputy CIT v. Datacraft India Ltd. (40 SOT 295)(Mum)(SB)/[2010].. On the other hand the learned Departmental representative has relied upon the orders of the authorities below. 8.2. We have considered the rival submissions as well as relevant material on record. The issue of allowability of depreciation at 60% on the computer accessories and peripherals is no more res integra. In the case of CIT v. BSES Yamuna Powers Ltd. [2013] 358 ITR 47 (Delhi), the hon'ble Delhi High Court, while dealing with the identical question has held in para 6 as under (page 49) : "We are in agreement with the view of the Tribunal that computer accessories and peripherals such as, printers, scanners and server etc., form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. The central processing unit alone, in our opinion, cannot be considered as synonymous to the expression 'computer'. The function of central processing unit is akin to the brain playing a pivotal role in the conduct of the body. As we do not call the brain alone as the body, similarly the central processing unit alone cannot be described as computer. Thus the computer has to necessarily include the input and output devices within its scope, subject to their exclusive user with the computer, as discussed above. If we constrict the definition of computer only to processing unit, as has been held in the case of Routermania Technologies P. Ltd. (supra), then even the keyboard and mouse, etc., will not qualify to be called as computer because these equipment also do not perform logical, arithmetical or memory functions. In the light of the meaning of 'computer' discussed in earlier paras, we are inclined to agree with the view taken by the Kolkata Bench in Samiran Majumdar's case (supra)." 8.2.2. Following the above judgment of the hon'ble High Court as well as the Special Bench of this Tribunal, we allow the claim of depreciation on printer, scanner, electro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 60 per cent. by the amendment considering the rapid wear and tear. The judgment of the Supreme Court in the case of Scientific Engineering House P. Ltd. v. CIT [1986] 157 ITR 86 (SC) also supports the view taken by us inasmuch as their Lordships held that know-how is part of plant and machinery and, the assessee is entitled to depreciation thereon. Before conclud ing this issue, we would like to refer to one more judgment of the Supreme Court in the case of Arvind Mills Ltd. v. CIT [1992] 197 ITR 422 (SC) for the proposition 'the expenditure incurred on capital asset does not lose the character of capital expenditure and does not become a revenue expenditure on the score that the said capital expenditure also ultimately enures to the effective running of the business'. In view of the above discussion, it is held that expenditure was incurred on acquisition of capital assets and thus, it was a capital expenditure. Resultantly, the same could not be allowed as revenue expenditure." 9.4. While deciding the question of revenue or capital nature of expenditure in respect of acquisition of software, the Tribunal has held that depreciation at 60 per cent. is allowable on soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y HLAG to the assessee. Whereas while giving effect to the said directions of the Dispute Resolution Panel, the Assessing Officer disallowed the proportionate cost of additions to computer hardware assets including scanner, printer and electronic token display as well as computer software asset purchased by the assessee from third party. The learned authorised representative has submitted that even as per the directions of the Dispute Resolution Panel the amount for disallowance of proportionate depreciation on software licence would be Rs. 49,513 whereas the Assessing Officer has disallowed depreciation of Rs. 1,03,769. 10.2. On the other hand the learned Departmental representative has submitted that the assessee failed to produce the invoices of purchase of computer accessories and licences. Therefore, the Assessing Officer is justified in disallowing the depreciation. 10.3. We have considered the rival submissions as well as relevant material on record. The Dispute Resolution Panel while dealing with the issue of depreciation on computer accessories and software directed the Assessing Officer as under : "On the facts and circumstances as are available on record, it is evide ..... X X X X Extracts X X X X X X X X Extracts X X X X
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