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TMI Blog2020 (7) TMI 645X X X X Extracts X X X X X X X X Extracts X X X X ..... oned that the objection of the assessee regarding related party transactions were not substantiated with any account details, however, from the details furnished by the assessee in we find the assessee had categorically mentioned before the TPO regarding substantial RPT. It has been held in the case of Agilant Technologies International (P) Ltd [ 2013 (7) TMI 843 - ITAT DELHI ] that a potential comparable having more than 25% of the related party transactions is to be ignored. The Delhi Bench of the Tribunal in the case of Nokia India Pvt. Ltd. vs. DCIT [ 2014 (11) TMI 101 - ITAT DELHI ] has also taken a similar view. Under these circumstances, we do not find any infirmity in the order of the CIT(A) in directing the TPO/AO to exclude the above two comparables on account of huge related party transactions. Exclude Satyam Computer Services Ltd., from the list of comparables as the financial results of the said company is the result of admitted financial irregularities and conspiracy hatched and committed by the directors and cannot be relied upon. Depreciation on computer peripherals @ 60% - Hon ble Delhi High Court in the case of CIT vs. BSES Yamuna Power Ltd, [ 2010 (8) TMI 58 - DE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction entered into by the assessee. The TPO, during the course of TP assessment proceedings noted that Cadence India is a 100% direct subsidiary of Cadence Design Systems, Inc. (CDS), US. The assessee Company is operating as a 100% Export Oriented Unit (EOU) from the Noida Export Processing Zone and primarily engaged in developing and exporting software to Cadence, USA. The company also provides technical support services to customers of Cadence, Ireland and technical training services from its Bangalore Office. He noted that the assessee, during the impugned assessment year has undertaken the following international transactions:- S.No. Description of transaction Method Value (in Rs.) 1. Provision of research and development services by the company TNMM 559,962,681.00 2. Provision of IT back office support service by the company TNMM 67,890,148.00 3. Marketing and Technical Support Service TNMM 73,135,288.00 3. The TPO further noted that for the provision of Research Development services Cadence, India is compensated with a fee that is equal to actual expenses incurred plus an amount equal to 8% of actual expenses. For the financial year 2002-03, Cadence, India, received a sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also directed the AO to allow depreciation @ 60% for computer peripherals. 5. Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal by raising the following grounds:- 1. The ld.CIT(A) has erred on facts and in law in deleting addition of ₹ 877,68,916/- made by the TPO on account of Arm s length price u/s 92CA(3) of the IT Act as : a) The ld.CIT(A) has erred in directing to apply working capital adjustment to account for differences between the tested party vis-avis comparables for the working capital adjustment employed by them. b) Ld.CIT (A) has erred in holding that M/s HCL Technologies Ltd. and M/s HP Global Soft Ltd. cannot be considered as comparables and that M/s Satyam Computer Services Ltd. cannot be considered as comparables to the assessee due to falsification in financial accounts. c) the findings of Ld.CIT(A) that the transaction between the assessee and its AEs in respect of provisions for software development services are considered to be treated at Arm s Length Price is not acceptable. The assessee failed to substantiate that the value of the international transaction has been computed in accordance with the provisions of sub-se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that this issue also should be restored to the file of the AO/TPO with a direction to verify RPT of HCL Technologies Ltd. and HP Globalsoft Ltd. So far as the exclusion of Satyam Computer Services Ltd. is concerned, the ld. DR relied on the order of the AO/TPO. Similarly, he also relied on the order of the TPO/AO on account of depreciation on computer peripherals @ 25% as against 60% allowed by the ld.CIT(A). 8. The ld. Counsel for the assesseee, on the other hand, heavily relied on the order of the CIT(A). So far as granting of working capital adjustment by the CIT(A) is concerned, the ld. Counsel for the assessee, referring to paper book pages 106 to 140, submitted that vide submissions dated 08.08.2006, the assesseee had given the full details which were filed before the TPO. The ld.CIT(A), after considering various case laws, has allowed the working capital adjustment. Even in assessment year 2002-03 also, the TPO himself had granted working capital adjustment to the assessee. Referring to the order of the Tribunal in assessee s own case for A.Y. 2005-06, copy of which is placed in the paper book, he submitted that the Tribunal, in assessee s own case, vide ITAs No.1632/De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of the CIT(A) being in accordance with law should be upheld and the grounds raised by the Revenue should be dismissed. 10. We have considered the rival arguments made by both the sides and perused the orders of the AO/TPO/CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the original ground No.1 and additional ground No.3 relates to the grievance of the Revenue against the order of the CIT(A) for granting working capital adjustment to the assessee. From the various details filed by the assessee, we find the TPO himself had allowed working capital adjustment for A.Y. 2002-03. We find, the Tribunal, in assessee s own case for A.Y. 2005-06, vide ITAs No.1632/Del/2012 and 1619/Del/2012 has restored the issue to the file of the AO/TPO with the following direction while allowing working capital adjustment:- 14. We have gone thorough page Nos. 141, 142, 151, 233, 234 and 247 of the TPO'S order in the case of assessee for assessment year 2007-08. We find that learned TPO has granted working capital adjustment to the assessee. Thus, in principles, we do not have any hesitation in concurring with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee in the paper book, we find the assessee had categorically mentioned before the TPO regarding substantial RPT. It has been held by the Delhi Bench of the Tribunal in the case of Agilant Technologies International (P) Ltd. vs. ACIT, reported in (2013) 36 CCH 187 (Delhi-Trib.) that a potential comparable having more than 25% of the related party transactions is to be ignored. The Delhi Bench of the Tribunal in the case of Nokia India Pvt. Ltd. vs. DCIT, reported in (2013) TIL-224-ITAT-DEL-TP has also taken a similar view. Under these circumstances, we do not find any infirmity in the order of the CIT(A) in directing the TPO/AO to exclude the above two comparables on account of huge related party transactions. Accordingly, the ground raised by the Revenue on this issue is dismissed. 13. So far as Satyam Computer Services Ltd. is concerned, we find that this issue had come up before the Delhi Bench of the Tribunal in the case of ACIT vs. Motherson Sumi Infotech Design Ltd. (supra) wherein the Tribunal, after thoroughly discussing the issue has directed for exclusion of Satyam Computer Services Ltd. by observing as under:- 12.4 It is common knowledge that M/s. Satyam C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concur with his decision to exclude M/s. Satyam from the list of comparables, so the Revenue's ground is dismissed. 14. The various other decisions relied on by the assessee in the case law compilation also support its case that Satyam Computer Services Ltd., cannot be considered as a comparable on account of unreliable financials. Under these circumstances, we do not find any infirmity in the order of the CIT(A) in directing the AO/TPO to exclude Satyam Computer Services Ltd., from the list of comparables. The ground raised by the Revenue on this issue is accordingly dismissed. 15. So far as depreciation on computer peripherals @ 60% is concerned, we find the Tribunal, in assessee s own case for A.Y. 2005-06, has allowed depreciation @ 60% on computer peripherals. The Hon ble Delhi High Court in the case of CIT vs. BSES Yamuna Power Ltd, reported in 358 ITR 47, has held that computer accessories and peripherals being an integral part of computer system are eligible for depreciation at a higher rate of 60%. The various other decisions placed in the paper book filed by the assessee also support the case that computer peripherals being an integral part of computer systems are el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant was not customized software giving enduring benefit to the assessee. Therefore, the facts of the case are similar to the case of GIT vs. GE Capital Services Ltd. decided by the Hon ble High Court of Delhi (supra). The relevant portion of this judgment is reproduced below: 3. The only question that has arisen in this case pertaining to the assessment year 1997-98 is that expenditure incurred by the assessee on software was treated by the Assessing Officer as capital expenditure. The Tribunal was of the view that due to technological changes and the need to upgrade the software on a regular basis it cannot be said that the software was of an enduring nature. 4. We are informed that the software for which the expenditure was incurred was MS Office, which is not a custom built software for the assessee and it is common knowledge that this software requires regular upgradation. 5. We can understand that where customized software is prepared, then it could be of an enduring nature, but in this case MS Office is not customized software and it cannot be said that the software does not require frequent upgradation. 6. We are of the view that there is no error committed by the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue (in Rs.) Difference 1. Provision of software research and development services 663,167,962 62,74,67,890 35,700,072 2. Provision of IT back office support services 19,32,55,609 17,70,33,264 1,62,22,345 3. Provision of pre-sales marketing and post-sales technical support services 81,955,706 7,52,97,150 66,58,556 Total Difference 5,85,80,973 26. We find, the ld.CIT(A) directed the AO/TPO to allow working capital adjustment although he upheld the various objections of the TPO. The grievance of the Revenue is only against granting of working capital adjustment. 27. After hearing both the sides, we find the issue stands decided in favour of the assessee in the earlier paragraphs while deciding the original ground of appeal No.1(a) and Addl. Ground of appeal No.3 of the appeal filed by the Revenue in ITA No.2393/Del/2011. While we have in principle upheld the order of the CIT(A) in granting working capital adjustment, however, we have restored the issue to the file of the AO/TPO for verification of the computation of the same. Following similar reasonings we uphold the order of the CIT(A) in granting working capital adjustment. However, we restore the issue to the file of the AO/TPO wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmine arm s length price. 7. The Hon ble CIT(A) has erred in application of the turnover filter. The Hon ble CIT(A) rejected companies by applying only one sided turnover filter of 1 crore to reject companies and failed to apply an appropriate upper turnover filter as also laid down in various judicial pronouncements. 8. The Hon ble CIT(A) has erred in following the learned TPO s approach of rejecting comparable companies identified by the Respondent from the NASSCOM (National Association of Software and Services Companies) website, as a part of its transfer pricing study. 9. The Hon ble CIT(A) has erred in wrongly rejecting comparable companies by application of incorrect reasoning and unreasonable filters. The following criteria were used to reject companies: a) Companies pertaining to software R D segment of the Respondent: - Companies that had turnover less than INR 1 crore on the assumption that these companies may be starting up operations - Companies that have negative net worth during the said financial year under consideration b) Companies pertaining to IT back office services segment of the Respondent: - Rejection of Compudyne Winfosystems Limited on account of erosion of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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