9911796707
Advanced Search 
TMI Blog2020 (11) TMI 563X X X X Extracts X X X X X X X X Extracts X X X X ..... axim group. It undertakes design and development of integrated circuits and software as per business plans of Maxim group. Following are the tasks involved in projects:- * Requirement Gathering & Market Definition * Develop user & design specifications of a product based upon market definition * Circuit design (involves analog, logic, RTL, architecture level design, DFT etc.) * Verification of circuit design * Design Layout and its verification * Testing and characterization of IC product samples * Customer support - Macro models of IC products, reference design boards for application development * Software development & testing * Project Management * Project documentation * Product support (for better production 4. We shall first take up the transfer pricing adjustment issue. The assessee has two segments, viz., Design/development of software and ITES services. Besides the above, the assessee has also entered into some other international transactions, viz., interest paid on borrowings, purchase of tangible property, reimbursements receivable from AE and reimbursements payable to AE. 5. The TPO has made transfer pricing adjustment in respect of income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (pg 46 of Appeal papers) 5. Accordingly, TP additions were enhanced to Rs. 3,23,60,679/-. The effect of directions so given by Ld DRP resulted in enhancement of transfer pricing adjustment to Rs. 3,23,60,679/-. The assessing officer, accordingly, passed final assessment order making transfer pricing adjustment of Rs. 3,23,60,679/-. The AO also made certain additions in the assessment order, besides the addition relating to Transfer pricing adjustment. 8. The Ld A.R submitted that the assessee seeks exclusion of following four comparable companies selected by the TPO:- Name of company Turnover (a) Larsen & Toubro Infotech Ltd - 3630.15 crores (b) Mindtree Limited (seg.) - 1640.81 crores (c) Persistent systems Ltd - 996.75 crores (d) Tech Mahindra Ltd (seg.) - 5595.70 crores He submitted that the turnover of the assessee company during the year was Rs. 40.28 crores and hence it falls under the category of companies having turnover in the range of One crore to 200 crores. However the turnover of above said companies is more than 200 crores and hence they cannot be considered as good comparable companies. In support of this proposition, the Ld A.R placed his rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt. Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for consideration." 11. Admittedly, the above cited four companies fail under Turnover filter. Accordingly, following the above said decision of co-ordinate bench, we direct exclusion of above said four companies applying Turnover filter. 12. Though the assessee has sought inclusion of certain companies as comparable companies, yet the Ld A.R did not press the same at the time of hearing. Hence the grounds relating to inclusion of companies do not require adjudication. 13. The next contention of the assessee is that the TPO has not considered Provision for bad and doubtful debts as an operating expenditure. The Ld A.R submitted that the co-ordinate bench has held this expenditure as operational in nature in the case of Brocade Communications Systems (P) Ltd vs. DCIT (2020)(117 taxmann.com 439)(Bang.). On the contrary, the Ld D.R submitted that the provision for bad and doubtful debts is not an ascertained liability and hence it cannot be considered to be operational in nature. He placed his reliance on the decision rendered by Mumbai bench of Tribunal in the case of Telcordia Technologies India P Ltd (22 taxmann.com 96/137 ITO 1) and Thyssen Krupp Industries Pvt Ltd (2013)(33 ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and statutorily required, it cannot be said that such provisions are of non-operating nature. Such provisions are made to comply with the requirements of statute. 53. The learned TPO treated provision for doubtful debts as non-operating referring to the Safe Harbour Rules notified by CBDT, which are not applicable for the year under consideration as mentioned above. 54. Ld. CIT(DR) relied on the order of TPO. 55. As regards the treatment of provision of doubtful debts also, we find that the reasoning given by ld. TPO cannot be accepted because he has primarily relied on safe harbor rule for treating this as non-operating expenditure. We find considerable force in the submission of ld. counsel for the assessee, considered earlier, that provision for doubtful debts is a provision which is to be made as a part of the operating activities of business governed by the principles of prudence. We, accordingly, direct that this provision be treated as part of operating expenditure and treatment be made accordingly, because, in any view of the matter, the safe harbor rule is not applicable for the current year under consideration. In the result, this ground is allowed." 15. Before us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s own calculations. However, the Ld DRP directed the TPO to disallow the working capital adjustment allowed by him, mainly on the reasoning that the average working capital will not show actual working capital employed during the year. 18. The Ld A.R submitted that the working capital adjustment was rightly allowed by TPO. He submitted that the co-ordinate bench has held in the case of Nagravision India P Ltd vs. ACIT (IT(TP)A No.1536/Bang/2017dated 03-07-2020 that working capital adjustment is permissible. On the contrary, the Ld D.R submitted that the relevant data was not furnished by the assessee and the data furnished by the assessee related to the figures as on the Balance Sheet date. He submitted that, based on balance sheet date figures, working capital adjustment should not be worked out. He further submitted that, if a reasonable accurate adjustment is not possible, then the assessee should not be allowed working capital adjustment. 19. We notice that the Tribunal has held in the case of Nagravision India P Ltd (supra) that working capital adjustment should be allowed. For holding so, the Tribunal has followed the decision rendered by another bench in the case of Huaw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:-- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction]if- (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT (A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [2013] 38 taxmann.com 231/[2014] 61 SOT 40. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT (A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further detai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 & 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT (A). We may also further add that in terms of Rule 10B(1)(e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT (A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT (A) working capital adjustment cannot be allowed to the profit margins, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of any article or thing or in the business of generation or generation and distribution of power. The AO took the view that the assessee is developing computer software and it cannot be taken as an article or thing. He took the view that the computers are office equipment and separate rate of depreciation is allowed under the depreciation schedule. Accordingly he took the view that the computers cannot be classified as "Plant & Machinery". Accordingly, he rejected the claim of additional depreciation. 24. The Ld DRP confirmed the disallowance by following its decision rendered in AY 2012-13, which reads as under:- "4.2 The objection of the assessee has duly been considered. The issue has been discussed in detail by the AO in para 6 of his order. This is important to note that the benefit of Section 32(iia) is available to those assessees who are engaged in the business of manufacture or production of any article or thing or in the business of generation or generation and distribution of power. The assessee is not carrying out any of these activities and it is in the business of computer software, which is different from article or thing. The words "computer software" have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t allowance in respect of computers installed for such purposes. The above said decision of the Tribunal was challenged by the revenue by filing appeal before the Hon'ble High Court of Gujarat. The Hon'ble High Court held in the very same case reported in (2007)(165 Taxman 153)(Guj) that the assessee company engaged in the business of data processing, system designing and software development and supply would be eligible for investment allowance in respect of computers installed in its office premises. In the very same decision, the Hon'ble Gujarat High Court held that the computers used for data processing and software development purposes is eligible for additional depreciation u/s 32(1)(iia) of the Act, as per the provisions then existing. The relevant discussions made and decision rendered by Hon'ble Gujarat High Court are extracted below:- 5. In view of the judgment reported in CIT v. Professional Information Systems & Management , we must hold that the computers and the data processing machines would be the plant and machinery and the investment allowance would be available. 6. Placing reliance upon Section 32(1)(iia) of the Act, it is submitted that if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestment allowance. In a given case, a computer kept in the office of a manager for his personal use or for some other purpose, then, such computer would not be entitled to investment allowance and/or additional depreciation. In the present case, the words "office premises" though would be covering office but, industrial premises would not come within office premises if the said premises are used for data processing. In the present case, undisputedly, the office premises are used as industrial premises for production of the data processors. The submission of the learned Counsel is based on a narrow interpretation of the words "office premises", which we are unable to concede. 10. In view of the above referred discussion, question No. 1 deserves to be answered against the interest of the Revenue. Consequently, question Nos. 2 and 3 will also have to be answered against the interest of the Revenue. The reference stands disposed of. No costs." 28. We have heard rival contentions and perused the record. The additional depreciation is allowable as per the provisions of sec.32(1)(iia) of the Act and it reads as under:- (iia) in the case of any new machinery or plant (other than sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an be characterised as production, every production need not amount to manufacture. The meaning of the expression 'manufacture' was considered by this Court in Dy. CST v. Pio Food Packers [1980] 46 STC 63 among other decisions. In the said decision, the test evolved for determining whether manufacture can be said to have taken place is, whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognised in the trade as a new and distinct commodity. Pathak, J., as he then was, stated the test in the following words : ". . . Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opment" activity from its ambit. 31. The Ld A.R placed his reliance on the decision rendered by Ahmedabad bench of Tribunal and Hon'ble Gujarat High Court in the case of Startronics & Enterprises (P) Ltd (supra). We notice that the above said decision was rendered in the context of sec.32A of the Act. Under the said section a deduction by way of investment allowance was allowed at prescribed rate in respect of new machinery or plant installed in any industrial undertaking, small scale undertaking etc., for the purpose of business of construction, manufacture or production of any article or thing... The Tribunal and the Hon'ble Gujarat High Court accepted the contentions of the assessee that data processing and print out would be a "thing" produced by the assessee. In that context, it was further held that the assessee would be eligible to claim additional depreciation as per the provisions then existing. 32. We notice that the above said decisions have been rendered without considering the decision rendered by Hon'ble Supreme Court in the case of N C Budharaj & Co (supra). Further, the Income tax Act did not have definition of the term "manufacture" at that point of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
