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TMI Blog2016 (8) TMI 1243X X X X Extracts X X X X X X X X Extracts X X X X ..... no strong reasons have been given by the assessee as to why same was included in the comparability list in the assessment year 2007-08 and why it has been excluded in this year. Since the Ld. Counsel has submitted that, if the three comparables are excluded then the arithmetic mean of the final comparable would be 20.82% and in that case, the resultant arithmetic mean will fall ± 5% range, therefore, we direct the TPO/AO to examine the working of ± 5% margin range, after excluding the three comparables from the final list of comparables. Disallowance of ‘Microsoft License fee’ - revenue v/s capital expenditure - Held that:- Without these software, it is difficult to carry out the functioning of the business properly and efficiently, specifically in the case of the assessee whose entire operation of business is carried out through computers. The test of enduring benefit cannot be conclusive test which should be applied in each and every case. What is required to be examined or seen is the real intent and purpose of expenditure and whether such expenditure results in creation of a fixed capital for the assessee. Before us, the Ld. Counsel had brought out that, the computers we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the appellant. Ld. TPO has erred in making an incorrect comparison of the appellant's activities vis-a-vis those performed by the comparables; 6. the learned AO be directed to grant (+1-) 5% benefit as available under proviso to Section 92C(2) of the Act. 7. disregarding the claim of the appellant of ₹ 33,22,798/- towards software license fees as revenue expenditure and capitalizing the same under the head Computers (and granting depreciation thereon). 8. consequently, making addition of ₹ 13,29,119/- to the total income due to the above. It is prayed that the learned AO be directed to consider the international transaction of the Appellant as arm's length and accordingly the transfer pricing adjustment of ₹ 3,30,68,622 should be deleted and it is also prayed that the AO be directed to consider the software license fees of ₹ 33,22,798 as revenue expenditure and the addition of ₹ 13,29,119 should be deleted . 2. At the outset, the Ld. Counsel for the assessee, Mr. Dhanesh Bafna submitted that, ground Nos. 2, 3 4 are not pressed and accordingly, these grounds are dismissed as not pressed. 3. Ground No.1 5 relates to Transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 387 CUP 1,80,36,874 Total 49,79,94,477 47,16,46,510 The assessee, in its Transfer Pricing Study Report, had benchmarked the second nature of transactions, that is, provision of contract research and testing services by adopting TNMM as Most Appropriate Method (MAM) and PLI as operating profit to total cost. For benchmarking the transaction, the assessee has carried out detailed search process and had identified 9 comparable companies with the following PLI of the financial year 2007-08:- S. No. Name of the Comparable Company Updated PLI for FY 2007-08 % 1 Alphageo (India) Ltd. 40.27 2 Choksi Laboratories Ltd. 29.95 3 Dolphin Medical Services Ltd. 9.24 4 Medinova Diagnostic Services Ltd. 4.47 5 N G Industries Ltd. 21.56 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee 16.22 Accordingly, upward adjustment of ₹ 33,30,68,622/- was made on the contract research and testing services . The Ld. DRP has confirmed the adjustment made by the TPO. 7. Before us, the Ld. Counsel submitted that in the AY 2007-08 similar adjustments on account of provision of contract research and testing were made based on by and large same set of comparable companies by the TPO. The Tribunal in AY 2007-08 vide its order dated 23.12.2011 has rejected these comparables selected by TPO namely, Celestial Labs Ltd., IDC (India) Ltd and Mindtree Ltd. (Seg.). He also informed that in the subsequent year, that is, in the AY 2009-10, the DRP itself has excluded these comparables following the order of the ITAT. Thus, so far as these three comparables are concerned, following the earlier precedence, same should be excluded. As regards Transegene Biotek Ltd. Diagnostic segment he submitted that, this comparable has IPR worth ₹ 99.6 crores whereas, the assessee is operating as a cost plus company and, therefore same cannot be taken as a comparable. 8. On the othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rusal of the impugned orders, we find that neither the TPO nor the DRP has given any finding on FAR analysis of the 4 comparables chosen by the TPO. The only reason given by the TPO is that these comparables are also under the R D services and since, under the TNMM broad similarity has to be seen, therefore, it has to be included in the comparability list. It is true that under the TNMM broad parameters of transactions and functions are to be seen, but the scrutiny on FAR analysis has to be done vis- -vis the comparable companies. We find that the Tribunal in assessee s own case in the AY 2007-08, so far as three comparables are concerned which are subject matter of dispute before us, viz., Celestial Labs Ltd., IDC (India) Ltd. and Mindtree Ltd. (Segmental), has threadbare analyzed the functions and other comparability parameters of the assessee vis-a-vis the comparable companies and has given a concrete conclusion for exclusion. The Tribunal first of all has analyzed the services and functions carried out by the assessee and, thereafter have analyzed the various comparables for accepting and rejecting the same. The relevant findings of the Tribunal with regard to these comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ni' which is a portal for live ayurvedic consultation. The company is also engaged in the distribution of herbal ayurvedic products. SAP Services: Celestial delivers SAP consulting, SAP implementation and post-SAP implementation services for its customers. Celestial is engaged in implementing SAP for customers from initial planning, design and implementation to maintenance and ongoing optimization. Celestial helps the company align IT Solutions with business strategies. CelSanjivani Products: CelSanjivani is a part of Celestial Labs Ltd, an ISO 9001-2000 company working in this space of Bio-informatics and Gio11 Technology. The goal is to become a primary market place for the herbal products providing quality products to the customers and industrial community. This is an Ayurvedic portal dedicated to B28 C market with online live consulting with our Ayurvedic consultants. It provides excellent platform for trading of herbal products, with identification of raw herbs, scientific data, market trade data, monographs, policy, laws, good manufacturing practices, DNA finger printing etc. It facilitates contacts with suppliers, manufacturers and dealers of herbal Pharma industry. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be considered as comparable functionally with that of the Assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustment, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the Assessee in this regard . 6. Mind tree Limited - R D Segment (mind tree): Mindtree's R D segment is engaged in providing domain-specific end-to-end R D Services to help organizations meet their engineering needs. As per page 11 of the annual report, the segment is engaged in providing R D Services for various industries like Communication, Industrial Automation, Automotive and Avionics, Storage and Systems etc. The relevant extract has been provided below for ready reference: The diversified focus in the R D Services Business into various verticals, such as Communication, Industrial Automation, Automotive and Avionics. Storage and Systems, Semi Conductor, Wireless and Consumer Electronics had shown results in 2006-07 as well As per the website of the company, the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Transgene Biotek Limited, we are not entering into merits of the said comparable because no strong reasons have been given by the assessee as to why same was included in the comparability list in the assessment year 2007-08 and why it has been excluded in this year. Since the Ld. Counsel has submitted that, if the three comparables are excluded then the arithmetic mean of the final comparable would be 20.82% and in that case, the resultant arithmetic mean will fall 5% range, therefore, we direct the TPO/AO to examine the working of 5% margin range, after excluding the three comparables from the final list of comparables. Thus, with this direction ground no.1 5 is partly allowed and ground No.6 is treated as allowed. 13. In ground No. 7 and 8, the assessee has challenged the disallowance of Microsoft License fee by treating it as capital expenditure. 14. Brief facts qua the issue are that, the assessee has debited an amount of ₹ 41.95 lakhs under the head Annual Software License Fees . During the course of the assessment proceedings, the assessee was required to furnish the details of the said expenditure along with copies of bills/invoices. In response, the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut the assets were used for the existing desktop computers, lab-tops servers etc. which were procured and installed in earlier years; and secondly, these licenses merely help to run the business properly and efficiently. In the age of fast changing technology and in the working of day-today computer systems, these software are required and are required to be upgraded from time to time, hence same cannot be reckoned as giving enduring benefit . In support, he relied upon the following decisions:- i) CIT vs Varinder Agro Chemicals Ltd, reported in [2009] 309 ITR 272 (P H); ii) CIT v Southern Roadways, reported in [2008] 304 ITR 84 (Mad) iii) CIT vs Ashahi India Safety Glasses [2011] 61 DTR 63 (DEL). 17. On the other hand, Ld. DR submitted that assessee was using unofficial software earlier and whenever A computer is bought there is already preloaded software. The software license fee is not an annual payment, it is a onetime payment and the advantage runs into number of years. Therefore, it is enduring in nature. If the computer is bought along with software for the first time then how software which has been purchased onetime can be treated as revenue expenditure. If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to work more efficiently. It does not have any impact on the sources of the business. If certain expenses are incurred which may have enduring benefit of 2 to 3 years, for smooth running of the business operation leaving the fixed assets untouched then, same has to be reckoned as revenue expenditure. The Hon ble Delhi High Court in the case of State of Asahi Safety Glass Ltd. (supra) on the issue of expenditure on licensed software has concluded as under:- Expenditure incurred by the assessee on software is allowable as revenue expenditure, more so as the software acquired by the assessee was an application software which enabled it to execute tasks in the field of accounting, purchases and inventory maintenance; and expenditure cannot be treated as capital expenditure merely for the reason that the assessee has not written off the impugned expenses in its books of account in the first year and has written off only a part of the expenses in the succeeding year . Thus, on the facts of the case we hold that the expenditure incurred by the assessee for procurement of software is to be treated as revenue expenditure. Accordingly, the same is directed to be allowed. 19. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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