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TMI Blog2015 (10) TMI 942X X X X Extracts X X X X X X X X Extracts X X X X ..... rms length price even when they were functionally comparable companies; * Birla Technologies Limited * CG-VAK Software & Exports Limited * Indium Software (India) Limited * Melstar Information Technologies Limited 2. The learned CIT(A) grossly erred, in facts and in law, in upholding the action of Transfer Pricing Officer ('TPO') Assessing Officer ('AO') of not granting appellant's claim for adjustment for material differences in the risk profile of the appellant vis-a-vis companies selected as comparable companies, though the Act read with Rule 10B(1)(e)(iii) and 10B(3) provide for carrying out such comparability adjustments. 3. The learned CIT(A) grossly erred, in facts and in law, in upholding TPO/AO's action of not allowing standard deduction of +-5% as per proviso to Section 92C(2) of the Income-tax Act. The appellant craves leave to add, alter, amend or delete all or any of the grounds of appeal before or during the course of hearing." 4. The Revenue in its appeal has raised the following grounds of appeal :- "1. The order of the learned Commissioner of Income-tax (Appeals) is contrary to law and to the facts and circumstances of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is reproduced under para 5 at pages 2 to 12 of the order of the TPO. The TPO noted from the Transfer Pricing report that certain adjustments were made by the assessee to its computation of profitability to eliminate the material difference between the assessee and the comparables. One such adjustment was made on account of depreciation on fixed assets at the rates higher than the depreciation rates provided in the (Indian) Companies Act, 1956 whereas the selected comparable companies generally followed the depreciation rates as per the (Indian) Companies Act, 1956. Further, the asse ssee claimed that it was a captive software service provider whereas the selected comparable companies were entrepreneur software service providers. Thus, the risk borne by assessee was comparability lower than the risk borne by the selected comparable companies and as per the assessee this necessitated the appropriate adjustments for these material differences. The TPO further noted that the assessee had made an adjustment of Rs. 27,77,983/- on account of accelerated depreciation after which its PLI was arrived at 12.90%. However, the unadjusted PLI of the assessee was 10.33%. Since the assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he corresponding adjustment of difference of 7.5% amounting to Rs. 1,00,34,125/-, as per the TPO, was to be made to the profitability of the assessee, so that its international transactions, relating to providing business support services to the AE were at arm's length price. The reply of the assessee to the show-cause notice issued by the TPO is summarized under para 6 at pages 12 to 24 of the order of the TPO. The TPO after considering the submissions of the assessee elaborating on the various aspects of the Transfer Priding adjustments proposed by it in the show-cause notice i.e. in relation to rejection of certain comparables, risk adjustment and also the adjustment on account of accelerated depreciation. Though, various adjustments were made by the TPO but in the first instance we are referring to the adjustment made on account of accelerated depreciation, which was not allowed by the TPO observing as under :- "10. It is seen from the table that the mean PLI of the comparables is standing at 16.61%, as against the PLI of the assessee which is at 10.52%. Thus, there is a difference of 6.09% between the profit level of the assessee and the mean PLI of the comparables and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Ld. Departmental Representative for the Revenue placed reliance on the order of the TPO and consequent order of the Assessing Officer in this regard. 11. The Ld. Authorized Representative for the assessee pointed out that the show-cause notice was issued to the assessee by the TPO alleging that the margin of the assessee was 10.33% as against the correct figure of 10.52%, without adjustment of accelerated depreciation. The Ld. Authorized Representative for the assessee further pointed out that the TPO made adjustment in the hands of the comparable companies on account of assets not owned by the assessee. He further pleaded that such adjustment was not correct as all entities would include the respective costs. He further pleaded that where the functions of assessee and the companies selected as comparables were similar, such adjustment could not be made. Where adjustment on account of accelerated depreciation is not to be made in the hands of the tested parties, then the TPO proceeded to make such adjustment in the hands of the comparables by issuing show-cause notice, copy of which is placed in the Paper Book. It was further pointed out by the Ld. Authorized Representative fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of accelerated depreciation. As per the TP study report, the assessee was following TNMM method to benchmark its international transactions and the unadjusted PLI of the assessee was 10.33%. However, by allowing adjustment on account of accelerated depreciation, the PLI was worked at 12.90% and the claim of the assessee was that the same was comparable with the arithmetic mean PLI of the comparable companies and consequently, no adjustment was required to be made in the international transaction with the associate enterprises. The TPO was of the view that in line with the provisions of Rule 10B(3) of Income-tax Rules, 1962 (in short 'Rules'), no adjustment to the PLI of the tested party was allowable and adjustment, if any, is to be made in the hands of the comparable companies in order to bring its margins at par with the tested party. The TPO drew final list of comparable companies whose mean PLI worked to 17.83% as against PLI of the assessee shown at 10.33%. In view thereof, adjustment of Rs. 1,00,34,125/- was proposed by the TPO to the international transactions transacted by the assessee with its associate enterprises. Since the assessee was following differential rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the present case, any adjustment could be made on account of such assets, which are not owned by the assessee. Merely because, one company does not have the said assets, it cannot be said that it had not incurred certain expenditure relatable to the same. 16. We find that similar proposition on account of depreciation arose before the Delhi Bench of the Tribunal in EXL Service.Com (India) Pvt. Ltd. Vs. ACIT in ITA No.1939/Del/2008 and in DCIT Vs. EXL Services.Com(India) Pvt. Ltd. in ITA No.1981/Del/2008, relating to assessment year 2003-04, order dated 22.12.2014, wherein it was held that no adjustment is to be made on account of uncommon assets. In view thereof, we uphold the order of CIT(A) in holding that no adjustment is to be made in the hands of the comparable companies on account of assets not owned by the assessee. The learned Authorized Representative for the assessee has furnished on record an order giving appeal effect to the order of CIT(A) by Assessing Officer, vide order dated 28.02.2013, in which the margin of set of comparable companies was adopted at 15.75% as against the PLI of the assessee at 10.52% and the same has been found to be at arm's length i.e. + ..... X X X X Extracts X X X X X X X X Extracts X X X X
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