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TMI Blog2015 (9) TMI 138X X X X Extracts X X X X X X X X Extracts X X X X ..... account of lease hold improvements expenses. 3. The Ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 1,00,55,42,364/- on account of direct selling agent commission expenses. 4. The Ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 5,28,33,372/- on account of loss on sale of repossessed assets. 5. The Ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 3,61,02,215/- on account of depreciation on computer peripherals. 6. The Ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 5,74,05,698/- on account of NCD and Commercial paper issue expense. 7. The Ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 51,34,55,174/- on account of loan acquisition costs. 8. The Ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 1,13,56,639/- on account of adjustment Arm's length price of the international transaction. 9. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any grounds of appeal at any time before or during the hearing of this appeal." 3. Vide Ground No. 1 the grievance of the Department relates to the deletion of addition of Rs. 24,40 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed the earlier decision in assessee's own case for the assessment years 2001-02 and 2002-03 which had been upheld by the Hon'ble Jurisdictional High Court vide order dated 30.03.2011. 5. We have considered the submissions of both the parties on this issue and are of the view that since the ld. CIT(A) deleted the addition made by the AO by following the judgment of the Hon'ble Delhi High Court and moreover, this issue is also squarely covered vide order dated 20.02.2015 in assessee's own case in ITA No. 4776/Del/2010 for the assessment year 2006-07 passed by this Bench of the Tribunal wherein relevant findings has been given as under: "13. Applying the aforesaid principle to the facts of this case, it clearly emerges that the expenditure on publicity and advertisement is to be treated as revenue in nature allowable fully in the year in which it was incurred. Concededly, there is no advantage which has accrued to the assessee in the capital field. The expenditure was incurred to facilitate the assessee's trading operations. No fixed capital was created by this expenditure. We may also add here that in the Income Tax laws, there is no concept of deferred revenue expenditure. Once ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al field and allowed depreciation @ 10%. Learned Counsel submitted that this issue is covered by the decision of ITAT dated 18th December, 2009 for assessment years 2001-02 and 2002-03 contained at page no. 861 of paper book-II(A) and also by the decision of ITAT for assessment years 2003-04 to 2005-06 contained at page no. 1061 of paper book-II(A). Learned Counsel pointed out that the Tribunal's decision for assessment years 2001-02 and 2002-03 was assailed by revenue before Hon'ble High Court. Vide its judgment dated 30.03.2011 Hon'ble High Court dismissed the revenue's appeal observing as under: "20. The argument of Mrs. Bansal was that the nomenclature of times of expenditure namely sanitary, fittings, civil works, brickworks, flowing etc. would clearly show that this expenditure could be capital in nature. Her grievance was that the Commissioner of Income Tax (Appeals) or the Tribunal did not go into this question at all and simply accepted the bifurcation given by the assessee in capitalizing the portion of the expenditure and treating the part of the expenditure as revenue. Her plea, therefore, was that the matter be remitted back to the Assessing Officer. She conceded, at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner of Income Tax (Appeals) are coterminus with that the Assessing Officer. Hence, in our considered opinion, there is no need to interfere with the finding of the learned Commissioner of Income Tax (Appeals). Accordingly, we uphold the same." 13. Further in assessment years 2003-04 to 2005-06 Tribunal in para no. 9.2, after taking note of the decision of Hon'ble Delhi High Court for assessment years 2001-02 and 2002-03 (supra), observed as under: "9.2 In the light of aforesaid view taken by the Hon'ble Jurisdictional High Court, especially when the Revenue have not placed before us any material controverting the aforesaid findings of the learned Commission of Income Tax (Appeals) so as to enable us to take a different view in the matter nor brought to our notice any contrary decision, we have no hesitation in upholding the findings of the learned Commissioner of Income Tax (Appeals). Therefore, ground No. 2 in the appeals of the Revenue for these three assessment years is dismissed." 14. Since the facts and circumstances in the year under consideration are similar to the facts and circumstances in the assessment years 2001-02 to 2005-06, respectfully following the decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such agreements and spread the expense over a period of three years thereby allowing 1/3rd expenditure incurred in that particular year. The matter was taken up in appeal and before the ld. Commissioner of Income Tax (Appeals), the assessee questioned the aforesaid approach of the Assessing Officer by contending that in the course of its business, the assessee enters in the loan agreements of hire purchase which agreements are required to be stamped in accordance with the provisions of Indian Stamps Act. The stamp duty paid by the assessee is debited to agreement stamping fee under the major head of "rates and taxes" and is claimed as revenue expenditure. This entire process of getting stamped the agreements had been outsourced by the assessee to the Contract Processing Associates (CPA) and who are paid remuneration as well. Therefore, the expense towards stamping as well as commission paid to the agents is debited in whole in the year in which it is incurred and could not be treated as advertisement expense. "16. The Commissioner of Income Tax (Appeals) was unimpressed with this argument and found that the assessee was spreading over the income during the number of years that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not liable to pay municipal rates and taxes for a period of 15 years. During the previous year relevant to the assessment year 1959-60, the respondent spent a sum of Rs. 2,09,459/- towards installing water pipelines and accessories outside the factory premises which were to belong to and be maintained by the municipality. Since it was not disputed that the entire expenditure concerned installations and accessories which came to the ownership of the municipality, the High Court, on a reference held that the expenditure was revenue in nature" and deductible in computing the profits of the company." The Hon'ble Apex Court upon consideration referred to the decision at the Apex Court in the Empire Jute Co. Ltd. Vs CIT 124 ITR 1 and held that "if this principles is applied to the facts of the case before us, what we find is that the advantage which was secured by the assessee by making the expenditure in question was the securing of absolution or immunity from liability to pay municipal rates and taxes under normal conditions for a period of fifteen years. If these liabilities had to be paid, the payments would have been on revenue account and hence the advantage secured was in the fie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the difference between the amount still to be recovered from such customer and the amount received on sale of re-possessed assets. Following the decision of Hon'ble Allahabad High Court in the case of Motor and General Sales (Private) Limited Vs CIT (226 ITR 137), disallowed the assessee's claim observing that the assets did not constitute the assessee's stock in trade. Hence, the loss on repossessed assets could not be held as revenue's loss for the assessee company. Learned counsel pointed out that this issue has already been decided by Tribunal as well as by Hon'ble High Court in earlier years. We find that Tribunal in assessment years 2003-04 to 2005-06 has allowed this ground observing in para 17 page 1072 of paper book as under: "17. We have heard both the parties and gone through the facts of the case. In disputably and as pointed out by the learned Commissioner of Income Tax (Appeals) in the impugned orders and the AO in his assessment orders, facts and circumstances in the years under consideration are similar to the facts and circumstances in the assessment year 2002-03. We find that a coordinate bench in their decision dated 9th October, 2009 in ITA No. 1966/D/09 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble High Court in their decision dated 09.11.2010 in CIT Vs Citicorp Maruti Finance Ltd. in ITA No. S 1712 & 1714/2010, holding that the assessee was entitled to loss on sale of repossessed assets u/s 36(1)(vii) read with section 36(2) of the Act. 17.2 In the light of aforesaid view taken by the Hon'ble Jurisdictional High Court, especially when the revenue have not placed before us any material, controverting the aforesaid findings of the learned Commissioner of Income Tax (Appeals)so as to enable us to take a different view in the matter nor brought to our notice any contrary decision, we have no hesitation in upholding the findings of the learned Commissioner of Income Tax (Appeals). Therefore, ground No. 6 in the appeal of the revenue for the assessment year 2003-04 and ground No. 5 in their appeals for the assessment years 2004-05 and 2005-06 are dismissed." 15. So, respectfully following the order dated 20.02.2015 in the aforesaid referred to order in assessee's own case, we do not see any merit in this ground of the departmental appeal. 16. Next issue Ground No. 5 relates to the deletion of addition of Rs. 3,61,02,215/- made by the AO on account of depreciation on compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2015 by following the earlier orders of the Tribunal for the assessment years 20003-04 to 2005-06 and the relevant findings have been given in para 39 which read as under: "39. Having heard both the parties, we find that Tribunal in para nos. 25 to 25.7 in assessment years 2003-04 to 2005-06 observed as under: "25. We have heard both the parties and gone through the facts of the case. Indisputably, the aforesaid amount relates to expenditure in connection with the issue of non convertible debentures and commercial paper. The Assessing Officer treated the same as deferred expenditure while the ld. Commissioner of Income Tax (Appeals) allowed the claim in the light of decision of India Cements Ltd. (supra). It is well established that the concept of deferred revenue expenditure is essentially an accounting concept and alien to the Act. The relevant provisions of the Act recognize only capital or revenue expenditure. Deferred revenue expenditure denotes expenditure for which a payment has been made or a liability incurred, which is essentially revenue in nature but which for various reasons like quantum and period of expected future benefit etc., is written off over a period of time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amen Biotech Ltd. (2005) 1 SOT 347 (Del.), Hero Honda Motors Ltd. Vs JCIT (2005) 4 SOT 393 (Mum) and ACIT VS Ashima Syntex Ltd. 117 ITO 1 (Ahd.) (SB) it has been affirmed that where any expenditure is treated as a deferred revenue expenditure, it presupposes that the concerned expenditure, creating benefit is in the revenue filed and is a revenue expenditure, but considering its enduring benefits as well as the fact that it does not result in the creation of any new asset or advantage of enduring nature in the capital field, the same is required to be treated distinctly from capital expenditure. However, where any identifiable capital asset, tangible or intangible comes into existence as a result of the amount expended, the same will have to be treated as a capital expenditure and depreciation allowable thereon as per the prescribed rules and procedures under the Income Tax Act. 25.2 In the instant case, there is no material before us to infer that the aforesaid expenditure resulted in creation of any capital asset, tangible or intangible, and thus, the question of treating the same as capital expenditure does not arise. In fact, the Hon'ble Supreme Court itself in Madras Industri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and whether in fact it has resulted in profit or loss to the assessee." 25.5 Likewise, in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs CIT 227 ITR 172 (SC), Hon'ble Supreme Court held that "It is true that this court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not the question has to be decided according to the principle of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act as was pointed out by Lord Russell in the case of B. S. C. Footwear Ltd. (1970) 77 ITR 857, 860 (CA), the Income Tax Law does not march step by step in the footprints of the accountancy profession." 25.6 In a later decision in CIT Vs Secure Meters Ltd. (2009) TIOL 93, Hon'ble Apex Court taking note of their earlier decision in India Cements ltd. (supra) held that expenditure on loan was allowable as revenue expenditure. The Revenue in this case contended that since the debenture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquisition costs as expense in the year of accrual in accordance with, a practice being consistently followed by the assessee over the years and never questioned by the Revenue. However, the Assessing Officer did not accept the submissions of the assessee in the light of decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Limited (supra). On perusal, the learned Commissioner of Income Tax (Appeals) allowed the claim on the ground that the Assessing Officer could not take a different stand relating to income and expenditure on the same issue and the treatment in books of accounts does not govern the tax treatment, which is governed by the provisions of the Act. As already observed by us in paras 25 to 25.7 while adjudicating ground No. 3 in the appeal of the revenue for the assessment year 2003-04 and ground No. 7 in their appeal for the assessment year 2005-06, the concept of deferred revenue expenditure is essentially an accounting concept and alien to the Act. The relevant provisions of the act recognize only capital or revenue expenditure. Indisputably, the amount claimed by the assessee in these three assessment years is revenue in n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt services. The AO referred the matter to the TPO u/s 92CA of the Act and the TPO held that all the international transaction except software development and sport services were at Arm's length based on TP documentation submitted by the assessee. For the transfer pricing analysis of the above said international transaction, the assessee selected Transactional Net Margin Method (TNMM) as most appropriate method and operating profit as a percentage of total cost as Profit Level Indicator (PLI). The assessee selected 18 comparables and the average PLI of the comparables worked out to 13.43%. The assessee had a return on total cost of 18% during the year ended on 31.03.2007. Accordingly, the fees received by the assessee for software customization and sport services run to its associate enterprises amounting to Rs. 20,97,13,000/- was considered to be at Arm's length. During the transfer pricing proceedings, the TPO asked the assessee to submit transfer pricing study report and other necessary information on the basis of which comparables were debited by the assessee. The TPO rejected 16 comparables used by the assessee out of the total 18 comparables and then proceeded to search for h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Seg.) Thirdware Solutions Ltd. Wipro Ltd. (Seg.) SIP Technologies & Exports Ltd. Mindtree Consulting Ltd. 29. The assessee raised several objections to the use of fresh filters which the ld. CIT(A) summarized in para 10.5 of the impugned order which read as under: Filter Assessee's arguments TPO arguments 1) Companies with related party transactions more than 25% of the operating revenues have been rejected AS 18 on related parties does not prescribe any percentage 15% to be considered in place of 25% relying on Sony India ITAT RPT data is not available on public domain Assessee does not have powers like TPO to use 133(6) This filter is appropriate to eliminate the Companies which have controlled transactions and thereby have a significant influence on the margins earned. Definition in AS 18 is principally same as sec. 92A Guidance can be taken from Sec. 92A(2)(a) (pg 33) Ruling of Sony did not fix the limit of 15% Limit or 25% is correct since on one hand it will help in excluding companies with significant controlled transactions and on the other hand it will help in obtaining adequately large sample size 2) Companies with export earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely on this ground 4) Companies with Diminishing revenue filter (revenue less than 30% over last 10 years or at least 3 years) rejected Neither the Act nor the OECD provides that the revenue trend is a determinant of comparability Company that has diminishing revenues need not necessarily be a consistent loss maker On one hand companies which demonstrate a positive growth trend in Revenues are being considered and on the other hand companies which have losses are being discarded. This shall result in selecting only high margin companies If a certain software company is under diminishing revenues for 3 years it implies that the company has some peculiar problems and the same is not in line with the growth in software industry Diminishing revenues also indicate that company may be on the verge of closure, underutilization of assets or human resources. Reasonable adjustments cannot be made There is a difference b/w use of earlier year data for analyzing economic circumstances and for computation of mean ALP Reliance on Sony India 5) Companies with different year ending rejected The fact that company has a statutory year end on 31 Dec 2006 as against Financial year ending March 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The appellant has been using a software called "I-Loan" for its financing business since 2002. I-loan is in house developed software that enables the appellant to evaluate its loan portfolio & process these transactions. The same also provides a platform for management reporting. Since the infrastructure (assets, manpower etc.) which is used to upgrade the software on continuous basis for the purposes of appellant's operations, remains underutilized, it was decided to do similar activities for its Associated Enterprises (AEs) so that the appellant is able to utilize its resources optimally. Hence, the software was implemented in other locations within the group to make optimal use of the bench strength. Accordingly, the appellant renders software customization, implementation and support services to its AEs which is limited to the I-Loan software being used by it for its own business operations. Functions performed by the appellant can be broadly classified into the following: * Assessing the needs and requirements of the associated enterprises. * Implementation of modules and software customization to make it adaptable for use by associated enterprises; * Sourcing additional mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s carriers to maximize the value of their wireless network through its applications, products and technologies platform integration and support. The division performs different levels of activities throughout the process of software development. The details of activities performed with respect to software development are detailed in Annexure-l. 2. Xius-bcgi performs market analysis, technology evolution assessment and then builds a product roll out and or Product Enhancement Road Map Plan. Once the road map plan is defined, development team goes about implementing this roadmap. Products that are resultant of this software development are defined and sold as packaged products to customers. While implementing these standardized products at customer location or in their business environment, customers may request us to customize our product or reconfigure our products to fit into their business workflow, environment, IT/ Telecom infrastructure. In order to make it hassle free implementation and usage for customers, Xius-bcgi also engages in customising our packaged product to meet the expectations and needs of the customers. Thus at the time of engaging with customers, Xius-bcgi work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement, protection and propagation) and industryleading product partnership models. " Copy of annual report of Megasoft for year ended 31 December 2007 is enclosed as Annexure 2. However as submitted above, the appellant is neither into any product development nor is its software saleable in the market. The appellant only provides limited software service to its AEs. Accordingly, the TPO has erred in holding that Megasoft is functionally comparable to the appellant. Scale of operations: According to the standalone financials of Megasoft for the year ended 31 December 2007, total sales of Megasoft is INR 104.17 crores as against fees of INR 20.97 crores (approx) received by the appellant for software customization. As explained above (refer page no. 3 above), the two cannot be compared on account of difference in scale of operations. R&D expenses: As mentioned at page no 27 of the annual report, Megasoft has a strong R&D background along with product development expertise. In order to protect its intellectual property, the Company has applied for eleven patents and registration of various trademarks. The Company has also capitalized patents in its books of account (refer page no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The company is in multiple areas of software technology having different lines of business. Therefore, I hold that this company should not be taken as a comparable. Celestial Labs Ltd. ('Celestial Labs'): Appellant has submitted that this company is engaged in software products, has abnormal profits and having high advertisement spending. These issues were raised before the TPO. From the order of the TPO, I am of the opinion that the TPO has effectively countered all doubts raised by the taxpayers. On the issue of products, the company has categorically stated that it has no income from the sale of products to third parties. More than 96% of the revenues are from the software development activity of this company. The TPO has also gone to the draft "Red Hearing Prospectus" filed by the company before SEBI. I am of the opinion that this company should be retained in the set of comparables. Avani Cimcon Technologies Ltd. ('Avani Technologies'): Appellant has stated that this is a company in the software product segment. This argument was given before the TPO but TPO has categorically stated in his order that this company is in the software development and does not have any revenues ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , losses of the Company have reduced significantly from 18 crores in the previous year ended 31 March 2006 to 3.85 crores in the previous year ended 31 March 2007. This shows that the Company is in the process of recovering from losses contrary to the allegation made by the TPO that the Company is incurring significant losses of the past three years and might be on the verge of closure. Accordingly, it is prayed that the Company be included as a comparable for working out the Arm's length price." 33. The ld. CIT(A) after considering the submissions of the assessee held that the said company cannot be excluded by observing as under: "I have carefully gone through the submission made by the appellant and find that there is merit in the argument. In fact the TPO has not given any reason for rejecting this comparable in his order. This company also does not qualify to be called as diminishing revenue company since its losses are reducing compared to the earlier years. In view of the above, I hold that this is a comparable company. The decision of the Hon'ble ITAT Delhi in the case of Yum Restaurants India Pvt. Ltd. (supra) is also applicable in this case. Just because the company is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning any result. The said comparable i. E. Orient Information Technology Ltd. was to be accepted, in view of the decision in the case of Yum Restaurants India Pvt. Ltd. in ITA No. 5122/Del/2010 decided by the ITAT Delhi Bench. It was further stated that Mega Soft Ltd. was rightly directed by the ld. CIT(A) to be excluded from the comparables because the said company was functionally different. 38. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it appears that the grievance of the department only relates to the exclusion of Mega Soft Ltd. and inclusion of Orient Information Technology Ltd. in the set of comparables. As regards to the inclusion of Orient Information Technology Ltd. is concerned, the TPO had not given any particular reason for its exclusion. The said company also designs, develops and deploys customized software solution and application so its functionality was comparable with the assessee. The said company was not considered by the TPO because it was a loss making company but that cannot be a reason to exclude it from the set of comparable, in view of the decision of the IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for depreciation and same cannot be extended to computer accessories and peripherals. 4. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any grounds of appeal at any time before or during the hearing of this appeal." 41. As regards to this appeal, it was the common contention of both the parties that the issues raised vide Ground Nos. 1, 2 & 3 of this appeal are similar to the issues raised in Ground Nos. 7, 6 & 5 in ITA No. 2848/Del/2012 for the assessment year 2007-08, which we have already adjudicated in the former part of this order. Therefore, our findings given in the former part of this order in respect of these issues shall apply mutatis mutandis for this assessment year 2008-09. In that view of the matter, we do not see any merit in this appeal of the department. 42. In the result, appeals of the department are dismissed. (Order Pronounced in the Court on 17/08/2015). Normal 0 false false false EN-US X-NONE /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-parent:""; mso-pa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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