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TMI Blog2017 (1) TMI 1626X X X X Extracts X X X X X X X X Extracts X X X X ..... - sub-license software package - revenue or capital - Held that:- The Hon’ble High Court after considering the principles laid down in the case of Commissioner of Income Tax Vs. JK Synthetics Ltd. [2008 (12) TMI 21 - DELHI HIGH COURT] and other decisions upheld the finding of the Tribunal that the expenditure in question was revenue in nature. We also find that special leave petition filed by the Department against the said decision of the Hon’ble jurisdictional High Court has also been dismissed by the Hon’ble Supreme Court. Thus amount for use of sublicense software package was revenue expenditure. Since the expenditure in question towards royalty for use of sublicense software package has already been allowed as revenue expenditure, the question of allowing depreciation does not arise X X X X Extracts X X X X X X X X Extracts X X X X ..... OP/OC') as against the PLI chosen by the Appellant as Operating Profit/ Operating Income ('OP/OI'); and (iv) rejecting the characterization of the Appellant as 'IT enabled engineering service. 6. That on facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/Ld. DRP failed primarily due to idle capacity and accordingly an adjustment to arm's length margin was necessitated under Rule 10B(3)(ii) of the Rules. 7. That on facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO/ Ld. DRP failed to consider and appreciate the fact that an adjustment to the arm's length margin for differential working capital held by the Appellant as compared to external service providers used for arm's length analysis was warranted under Rule 10B(3)(ii) of the Rules. 8. That on facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO/Ld. DRP erred in denying the benefit of 5% margin allowed under the Proviso to Section 92 C(2) of the Act. 9. That on facts and circumstances of the case and in law, the Ld. AO/DRP erred in holding that the amount of ₹ 3,69,91,451, paid by the Appellant for use of sub licensed software packages, is capital expenditure and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee on 28/11/2006 declaring income of ₹ 11,54,91,122/-. The return was processed under section 143(1) of the Act. The case was selected for scrutiny and notice under section 143(2) of the Act was issued by the Assessing Officer and complied with. The Assessing Officer made a reference to the Transfer Pricing Officer (TPO) for determining the arm's length price under section 92CA(3) of the Act of international transactions entered into by the assessee during the year under consideration. The assessee adopted Transactional Net Margin Method ('TNMM') as the most appropriate method with the Profit Level Indicator (PLI) as Operating Profit/Operating Income (OP/OI) using multiple year data. The TPO after providing opportunity to the assessee examined the matter. He rejected the use of multiple year data and computed the margins of the assessee as well as comparable companies using single year data. He also rejected OP/OI as PLI and adopted operating profit/operating cost (OP/OC) as the most appropriate PLI. He determined the arm's length margin to be 27.48% vis-à-vis 11.49% of the assessee and proposed an adjustment of ₹ 15,76,75,751/- which was further rectifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -04 27.18 35.55 -8.37 -19.39% 2,86,348 2002-03 74.87 47.04 27.83 59.19% 5,99,643 4.1 The learned counsel further referring to Rule 10 B(4) of Income-tax Rules, 1962 (in short "the Rules") submitted that the Data relating to a period more than two years may be considered, if such data reveal facts which would have influence on the determination of transfer prices in relation to the transaction being compared. He submitted that in the case of the assessee, the operations are cyclic in nature and warrant the use of multiple year data for benchmarking. 4.2 In this connection, the learned counsel relied on the order of the Tribunal in the case of Innodata Isogen India Private Limited (ITA No. 1528/Del/2011) and submitted that the Tribunal has upheld the use of multiple year data for a company having fluctuating profits and having different business models. The learned counsel further submitted that in assessment year 2004-05 the Commissioner of Income Tax (Appeals) has upheld the use of multiple year data, based on the same facts. 4.3 In view of the above, the learned counsel submitted that multiple year data should be used in the case of the assessee for computing arm's l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ……… (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction 56a[or a specified domestic transaction] shall be the data relating to the financial year 56aa[(hereafter in this rule and in rule 10CA referred to as the 'current year')] in which the international transaction 56a[or the specified domestic transaction] has been entered into : Provided that data relating to a period not being more than two years prior to 57[the current year] may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared: 58 [Provided further that the first proviso shall not apply while analysing the comparability of an uncontrolled transaction with an international transaction or a specified domestic transaction, entered into on or after the 1st day of April, 2014. ] 59 [ (5) In a case where the most appropriate method for determination of the arm's length price of an international transaction or a specified domestic transaction, entered into on or after the 1stday of April, 2014, is the method specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow many hours were spent on initial phase of the project and how many hours were spent on the later stage of project. Thus in absence of any such details, we cannot hold that the different phases of the projects are having overall impact on the profitability from year to year. We find that there is no credible or cogent reasoning has been brought out to justify the use of multiple year data of prior years and the manner in which it could have influence the determination of transfer pricing in relation to the international transaction in the case of the assessee. In the case of M/s Innodata Isogen India private limited (supra) cited by the assessee, in preceding years, the revenue had adopted multiple year data for determination of margins of the comparables and no cogent reasons were given in the instant year to deviate from the view taken in earlier year and thus the Tribunal held that nature and business model of the assessee remaining the same, the use of current year data ignoring the multiple year data was arbitrary and unreasonable . But in present case, in AY 2004-05 , the revenue chosen to use current year data only, but the learned Commissioner of Incometax (Appeals) direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rveys; • Tape transcription; and • Third party Quality Control for acquisition and processing. 5.2 Further, referring to the website of the comparable company, the learned counsel submitted that the comparable company was engaged in topographical surveys, drilling and laying cables, data acquisition and interpretation, which are more akin to research services related to oil exploration. The learned counsel further referring to the website of 'M/s Alphageo' submitted that it was engaged in provision of 2-D and 3-D seismic services, which are used by oil exploration companies to understand the density and velocity changes between rock and soil layers before drilling and those services are more akin to research activities. In this connection, the learned counsel further referred to the following ruling of the Tribunal's where the Tribunal approved selection of M/s 'Alphageo' as a comparable to companies engaged in provision of research and development services # Particulars ITA No. 1. Bosch Ltd. IT(TP)A No. 670/Bang/2011 2. GE India Technology Centre Pvt. Ltd ITA No.789/Bang/2010 & ITA Nos.487 & 925/Bang/2011 3 Apotex Research Private Ltd. ITA No.918/Bang/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are Solutions Ltd. (TS-359-ITAT- 2013(Bang)-TP) 5.6 In view of above submissions, the learned counsel prayed that 'Alphageo' having related party transactions as 16.80% of it sales, it should be rejected as a comparable entity. 5.7 Learned CIT(DR), on the other hand, submitted that Transaction Net Margin Method (TNMM) has been chosen in the case of the assessee as most appropriate method for computing arm's length price where there should be broad similarity of functions. He submitted that M/s Alphageo was engaged in seismic study during the year under consideration which also involved in preparing of drawings and designs. He further submitted that the higher asset base of M/s Alphageo was not having any impact on the profitability of the company as it get compensated by way of hire depreciation on the assets. He further submitted that the comparable M/s Alphageo was selected by the assessee himself in its transfer pricing study and thus should not be allowed to reject the same. 5.8 In the rejoinder, the learned counsel submitted that selection of m/s Alphageo in its transfer pricing documentation is one of the comparable, did not preclude the assessee from pointing out errors a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income tax Rules. 6.1 Before us, the learned counsel submitted that by allowing customers/creditors to defer payment for a certain period, any company foregoes the right to receive its revenue immediately and are no additional income by reinvesting the revenue over the deferral period. He further submitted that all companies have their own limits for deferring such payments and the limits determine the working capital cycles and accordingly for due economic analysis, it becomes important to make an adjustment for different working capital position so as to eliminate the impact of such factors from an arm's length comparison. In this connection he relied on the decision of the Tribunal Delhi bench in the case of M/s Mentor Graphics (Noida) Private Limited in ITA No. 1969/Del/2006 wherein it is held that in final set of comparables, to eliminate the differences adjustment for working capital and risk and growth may be made. The learned counsel accordingly prayed that the learned AO/ learned TPO should be directed to grant an appropriate adjustment to the assessee on account of differential working capital. 6.2 On the other hand, learned CIT(DR) submitted that the assessee has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court. 7.2 Before us, the learned counsel of the assessee submitted that Hon'ble High Court has already decided the issue in dispute in favour of the assessee and the SLP filed by the Revenue before the Hon'ble Supreme Court has been dismissed. He referred to the copy of order of the Hon'ble High Court dismissing department's appeal for assessment year 2003-04 available on page 587 to 600 and the copy of order of the Hon'ble Supreme Court dismissing the department's Special Leave Petion, available on page 585 to 586 of the paper book. 7.3 On the other hand, learned CIT(DR) relied on the order of the lower authorities. 7.4 We have heard the rival submissions and perused the relevant material on record including the judgment of the Hon'ble High Court and Supreme Court on the issue in dispute. The Hon'ble High Court after considering the principles laid down in the case of Commissioner of Income Tax Vs. JK Synthetics Ltd., 309 ITR 371 and other decisions upheld the finding of the Tribunal that the expenditure in question was revenue in nature. We also find that special leave petition filed by the Department against the said decision of the Hon'ble jurisdictional High Court has a ..... 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