Transwitch India Pvt. Ltd., New Delhi v. DCIT, New Delhi

ITA 6083/DEL/2010 | 2006-2007
Pronouncement Date: 30-03-2012 | Result: Allowed

Appeal Details

RSA Number 608320114 RSA 2010
Assessee PAN AAACT4902H
Bench Delhi
Appeal Number ITA 6083/DEL/2010
Duration Of Justice 1 year(s) 2 month(s) 29 day(s)
Appellant Transwitch India Pvt. Ltd., New Delhi
Respondent DCIT, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 30-03-2012
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted H
Tribunal Order Date 30-03-2012
Date Of Final Hearing 05-10-2011
Next Hearing Date 05-10-2011
Assessment Year 2006-2007
Appeal Filed On 31-12-2010
Judgment Text
ITA NO. 6083/DEL/2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH H NEW DELHI BEFORE SHRI A.D. JAIN JUDICIAL MEMBER AND SHRI SHAMIM YAHYA ACCOUNTANT MEMBER I.T.A. NO. 6083/DEL/2010 A.Y. : 2006-07 TRANSWITCH INDIA PVT. LTD. A-27 MOHAN COOPERATIVE INDL. ESTATE NEW DELHI 110 044 (PAN : AAACT4902H) VS. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 16 NEW DELHI (APPELLANT ) (APPELLANT ) (APPELLANT ) (APPELLANT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) ASSESSEE BY : SH. AJAY VOHRA SH. NEERAJ JAIN ADVOCATES MS. ARCHANA GUPTA SH. ABHISHEK AGGARWAL AND SH. R. KATYAL CAS DEPARTMENT BY : DR. B.R.R. KUMAR SR. D.R. ORDER ORDER ORDER ORDER PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST T HE ORDER OF THE ASSESSING OFFICER DATED 15.10.2010 PASSED U/S. 143 (3) READ WITH SECTION 144C OF THE IT ACT 1961. 2. THE ASSESSEE HAS SUBMITTED THE MODIFIED GROUNDS W HICH READ AS UNDER:- 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE IMPUGNED ASSESSMENT DATED 15.10.2010 COMPLETED UNDER ITA NO. 6083/DEL/2010 2 SECTION 143(3) READ WITH SECTION 144C OF THE INCOME -TAX ACT 1961 ('THE ACT') ON THE BASIS OF DIRECTIONS IS SUED BY THE DISPUTE RESOLUTION PANEL ('DRP') IS ILLEGAL AND BAD IN LAW. 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPLETING THE ASSESSMENT UNDER SECTION 143(3) READ W ITH SECTION 144C OF THE INCOME TAX ACT. 1961 ('THE ACT') AT INCOME OF RS. 3 65 27 090 AGAINST RETURNED INCOME O F RS. 1 72 83 305. 3. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING AN ADDITION OF RS.1 38 85 561/- ON ACCOUNT OF ALLEGED DIFFERENCE IN THE ARM'S LENGTH PRICE OF THE 'INTERNATIONAL TRANSACTION' OF PROVISION OF SOFTWAR E DESIGN AND DEVELOPMENT SERVICES TO ITS HOLDING COMPANY ON T HE BASIS OF THE ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT BY THE TRANSFER PRICING OFFICER (TPO). 3.1 THAT THE LEARNED TPO ERRED ON FACTS AND IN LAW I N REJECTING THE FOLLOWING COMPARABLE COMPANIES ALLEGEDLY FOR THE REASON THAT RELATED PARTY TRANSACTIONS THEREIN EXCE EDED 15% OF THEIR TOTAL SALES WITHOUT APPRECIATING THE F ACT THAT BY ITA NO. 6083/DEL/2010 3 CONSIDERING CONSOLIDATED FINANCIAL STATEMENT THE R ELATED PARTY TRANSACTIONS GET EVENED OUT. (I) ASM TECHNOLOGIES LTD. (II) BLUE STAR INFOTECH LTD. (III) ONTRACK SYSTEMS LTD. (IV) PENTASOFT TECH. LTD. (V) PSI DATA SYSTEMS LTD. (VI) SUBEX SYSTEMS LTD. 4. THAT THE LEARNED TPO ERRED ON FACTS AND IN LAW IN REJECTION THE FOLLOWING COMPARABLE COMPANIES ON THE GROUND THA T THE SAME WERE PERSISTENT LOSS MAKING COMPANIES: (I) CRESSANDA SOLUTIONS LTD. (II) CYBERSPACE MULTIMEDIA LTD. (III) ESSEL SOFTWARE & SERVICES LIMITED (IV) MELSTAR INFORMATION TECHNOLOGIES LIMITED (V) SQL STAR INTERNATIONAL LIMITED ITA NO. 6083/DEL/2010 4 5. THAT THE LEARNED TPO HAS ERRED ON FACTS AND IN LAW IN CONSIDERING THE FOLLOWING COMPANIES AS COMPARABLE COMPANIES NOT APPRECIATING THAT THE SAME WERE FUNCTIO NALLY NOT COMPARABLE TO THE APPELLANT: 1. ICSA INDIA LTD. 2. MYM LIMITED 3. KALS INFO SYSTEMS INDIA LTD. 4. VISHESH INFOTECHNICS LTD. 5. SYNERGY TECHNOLOGIES LTD. 6. WITHOUT PREJUDICE THAT THE LEARNED TPO ERRED ON FA CTS AND IN LAW IN NOT CONSIDERING OPERATING PROFIT MARGIN OF SYNERGY LOGIN SYSTEMS AT 5.84% COMPUTED ON THE BASIS OF STAND ALONE FINANCIAL STATEMENT INSTEAD OF 30.42% COMPUTED ON THE BASIS OF CONSOLIDATED FINANCIAL STATEMENT. 6.1 THAT THE LEARNED TPO ERRED ON FACTS AND IN LA W IN SELECTING MYM LIMITED AS A COMPARABLE IGNORING THE FACT THAT THE COMPANY HAD ABNORMALLY HIGH DEPRECIATION OF 22% OF IT S REVENUE AND AT THE SAME TIME REJECTING ORIENT INFO TECHNOLOGY ON THE GROUND THAT IT HAD EXTRA-ORDINARY HIGH DEPRECIATION. ITA NO. 6083/DEL/2010 5 7. THAT THE LEARNED TPO ERRED ON FACT AND IN LAW I N SELECTING VISHESH INFOTECHNICS LTD. AND HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. IGNORING THE FACT THAT THESE COMPANY HAD CARRIED OUT EXTENSIVE RESTRUCTURING ACTIVITY DURING THE YEAR. 8. WITHOUT PREJUDICE THAT THE LEARNED TPO ERRED ON FACTS AND IN LAW IN NOT MAKING APPROPRIATE ADJUSTMENT TO THE EXTENT OF 15% (AS PER DECISION OF THE HON'BLE I TAT DELHI IN THE CASE OF ROLLS ROYCE PLC VS DDIT) TO THE PROFIT MARGIN OF ICSA INDIA LIMITED AND VISHESH INFOTECHNICS LTD. ON ACCOUNT OF SUCH COMPANIES HAVIN G BEEN ENGAGED IN RESEARCH AND DEVELOPMENT ACTIVITIES. 9. THAT THE LEARNED TPO ERRED ON FACTS AND IN LAW IN INCLUDING THE FOLLOWING NEW COMPANIES IN THE LIST OF COM PARABLES BY EXPANDING THE SALES FILTER FROM RS. 200 CRORES TO RS. 500 CRORES: (I) MPHASIS B F L LTD. (II) SASKEN COMMUNICATION TECH LTD. ITA NO. 6083/DEL/2010 6 10. THAT THE LEARNED TPO ERRED ON FACTS AND IN LAW IN NOT ALLOWING AN ADJUSTMENT OF RS. 1 11 73 078 WHILE DETERMINING ALP IN CASE OF THE APPELLANT ON ACCOUNT O F EXTRAORDINARY EXPENSE (LOSS) COMPRISING OF (I) RELOCATION EXPENSE (INCLUDING BROKERAGE) FOR N EW PREMISE - RS. 3 288 224 (II) ADDITIONAL RENT PAID FRO 2 MONTHS - RS. 3 97 2 626 (III) SALARY PAID FOR UNPRODUCTIVE/IDLE HOURS - RS. 4 578 633 11. THAT THE ASSESSING OFFICER/THE TPO ERRED ON FACT S AND IN LAW IN NOT ALLOWING RISK ADJUSTMENT OUT OF THE ALP DETERMI NED FOR VARIOUS RISKS ASSUMED BY THE APPELLANT DURING T HE COURSE OF BUSINESS WHICH WERE DIFFERENT FROM THOSE ASSUMED BY COMPANIES INCLUDED BY THE TPO. 12. WITHOUT PREJUDICE THE ASSESSING OFFICER / THE T PO ERRED ON FACTS AND IN LAW .IN NOT ALLOWING BENEFIT OF VARIAT ION BETWEEN THE ALP DETERMINED BY TPO AND THE PRICE SHOWN BY THE APPELLANT TO THE EXTENT OF (+) / (-) 5% IN TERMS OF PROVISO TO SECTION 92C(2) OF THE INCOME TAX ACT. ITA NO. 6083/DEL/2010 7 13. THAT THE LEARNED ASSESSING OFFICER ERRED ON F ACTS AND IN LAW IN TREATING THE OFFICE RELOCATION EXPENSE INCURRED AMOUNTING TO RS.32 88 224 FOR SHIFTING OF OFFICE BY THE APPEL LANT IN ORDER TO AVOID THE DRIVE UNDERTAKEN BY MCD FOR SEALIN G THE OFFICE PREMISES OF COMMERCIAL ESTABLISHMENTS LOCATED IN RESIDENTIAL AREAS AS CAPITAL EXPENDITURE AND DISALL OWING THE CLAIM OF THE APPELLANT FOR REVENUE EXPENSE MADE U/S 37(1). 14. THAT THE LEARNED ASSESSING OFFICER CONSIDERING THE ACTIVITY OF SHIFTING OF OFFICE PREMISES AT PAR WITH THAT OF ' RE- ESTABLISHMENT OF BUSINESS' THEREBY INDICATING THAT T HE APPELLANT DERIVED SOME ENDURING BENEFIT OF CONTINUI NG NATURE AS A RESULT OF THIS SHIFTING OF OFFICE. 15. THAT THE LD. ASSESSING OFFICER HAS ERRED ON FAC TS AND IN LAW BY TREATING RECRUITMENT EXPENSE AMOUNTING TO RS.20 7 0 000 INCURRED FOR FEE PAID TO CONSULTANTS AND RECRUITMEN T AGENCIES ADVERTISEMENT ETC. AS CAPITAL EXPENDITURE AND DISALLOWING THE CLAIM OF THE APPELLANT FOR REVENUE EXPENSES MADE U/S 37(1). 16. THAT IF THE CONTENTION OF LEARNED ASSESSING OFF ICER THAT THE OFFICE RELOCATION EXPENSES WERE ACTUALLY CAPITAL EX PENDITURE ITA NO. 6083/DEL/2010 8 WAS TO BE ACCEPTED FOR THE SAKE OF ARGUMENT THEN LE ARNED ASSESSING OFFICER SHOULD HAVE ALLOWED ADJUSTMENT OF RS.32 88 224 INCURRED ON SHIFTING OF OFFICE PREMISES FROM THE ALP DETERMINED BY TPO AS CAPITAL EXPENDITURE COU LD NOT HAVE BEEN TREATED AS PART OF OPERATING COST FOR DETERMINATION OF ALP OF INTERNATI09-AL TRANSACTION UNDERTAKEN BY THE APPELLANT AND VICE-VERSA. THE APPELLANT CRAVES LEAVE TO ADD ALTER AMEND OR V ARY FROM THE AFORESAID GROUNDS OF APPEAL BEFORE OR AT TH E TIME OF HEARING. 3. THE BRIEF FACTS OF THE CASE ARE AS UNDER:- THE APPELLANT TRANSWITCH INDIA P. LTD. (OR 'TIPL') A COMPANY INCORPORATED UNDER THE COMPANIES ACT 1956 IS A WHO LLY OWNED SUBSIDIARY OF TRANSWITCH CORPORATION USA. THE APPE LLANT OPERATES A DESIGN CENTRE FOR ITS PARENT COMPANY FOR DESIGN AND DEVELOPMENT OF SOFTWARE AND RELATED SERVICES. THE A PPELLANT IS A CAPTIVE UNIT OF ITS PARENT COMPANY AND HAS NO BUSINE SS TRANSACTIONS WITH ANY OUTSIDE ENTITY. DURING THE FINANCIAL YEAR UNDER CONSIDERATION THE A PPELLANT HAD UNDERTAKEN THE INTERNATIONAL TRANSACTIONS OF PR OVISION OF ITA NO. 6083/DEL/2010 9 SOFTWARE DEVELOPMENT SERVICES AMOUNTING TO RS. 15 95 61 82!- WITH ITS ASSOCIATED ENTERPRISE. THE APPELLANT HAS APPLIED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH OP/TC AS T HE PROFIT LEVEL INDICATOR (PU) FOR BENCHMARKING THE INTERNATION AL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SE RVICE. THE APPELLANT HAD CONSIDERED THREE YEARS WEIGHTED A VERAGE PROFIT MARGIN OF (OP/OC) OF 34 COMPARABLE COMPANIES. T HE RESULT OF TNMM ANALYSIS IS AS UNDER: WEIGHTED AVERAGE OP/ OC % OF34 COMPARABLE)COMPANIES 7.93% OP/OC % OF THE APPELLANT - 8.39% THE OPERATING PROFIT MARGIN (OP/OC) EARNED BY THE APPELLANT AT 8.39% WAS HIGHER THAN THE WEIGHTED AVE RAGE OF OPERATING PROFIT MARGIN OF COMPARABLE COMPANIES AT 7.9 3%. ACCORDINGLY THE INTERNATIONAL TRANSACTION OF PROVI SION OF SOFTWARE DESIGN AND DEVELOPMENT SERVICES WAS CONSIDERED TO BE AT ARM'S LENGTH PRICE. ITA NO. 6083/DEL/2010 10 THE TPO VIDE SHOW CAUSE NOTICE DATED 29.7.2009 HOW EVER SOUGHT TO REJECT SOME OF THE COMPARABLE COMPANIES IDEN TIFIED BY THE APPELLANT ( ON THE GROUND OF RPT EXCEEDING 15% OF SALES AND PERSISTENT LOSS ETC) AND SOUGHT TO INCLUDE 14 NEW COMPARABLES IN THE LIST OF COMPARABLES. IN RESPONSE THERETO VIDE REPLY DATED 4.9.2009 TH E APPELLANT OUT OF THE AGGREGATE OF 38 COMPANIES HAD SUBMITTED OPERATING PROFIT MARGIN (OP/OC) OF 23 COMPANIES ON TH E BASIS OF CURRENT YEAR DATA AS UNDER: WEIGHTED AVERAGE OP/ OC % OF24 COMPARABLE COMPANIES (-) 1.37% OP/ OC % OF THE APPELLANT 8.39% THE OPERATING PROFIT MARGIN (OP/OC) EARNED BY THE APPELLANT AT 8.39% BEING HIGHER THAN THE WEIGHTED A VERAGE OF OPERATING PROFIT MARGIN OF 23 COMPARABLE COMPANIES AT (-) 1.37% THE INTERNATIONAL TRANSACTION OF PROVISION OF SOFTW ARE DESIGN AND DEVELOPMENT SERVICES WAS CONSIDERED TO BE AT ARM'S L ENGTH PRICE. THE TPO HOWEVER IN HIS ORDER REJECTED THE FOLLOWI NG COMPANIES OUT OF THE SET OF 23 COMPARABLE .COMPANIES IDENTIFIED BY THE APPELLANT IN THE TRANSFER PRICING DOCUMENTAT ION FOR THE REASONS AS UNDER: ITA NO. 6083/DEL/2010 11 S. S. S. S. NO. NO. NO. NO. NAME NAME NAME NAME REASON REASON REASON REASON 1. ASM TECHNOLOGIES LTD. - RELATED PARTY TRANSACT ION EXCEEDS 15% OF THE SALES. 2. BLUE STAR INFOTECH LTD. - RELATED PARTY TRANSAC TION EXCEEDS 15% OF 'THE SALES. 3. ONTRACK SYSTEMS LTD. - RELATED PARTY TRANSACTION EXCEEDS 15% OF THE SALES. 4. PENTASOFT TECH. LTD. - RELATED PARTY TRANSACTION EXCEEDS 15% OF THE SALES. 5. PSI DATA SYSTEMS LTD. RELATED PARTY/TRANSACTION E XCEEDS 15% OF THE SALES. 6. SUBEX SYSTEMS LTD. - RELATED PARTY TRANSACTION EXC EEDS 15% OF THE SALES. 7. CRESSANDA SOLUTIONS LTD. PERSISTENTLY LOSS MAKING. 8. CYBER SPACE MULTIMEDIA LTD. PERSISTENTLY LOSS MAKI NG. 9. ESSEL SOFTWARE AND SERVICES LTD. PERSISTENTLY LOSS MA KING. 10. MELSTAR INFO TECHNOLOGY PERSISTENTLY LOSS MAKING. 11. ORIENT INFO TECHNOLOGIES LTD. EXTRAORDINARILY HIGH DEPRECIATION DURING THE YEAR. 12. SPACE COMPUTERS AND SYSTEMS LTD. - NO SERVICE IN COME ONLY TRADING INCOME DURING THE YEAR. 13. SQL STAR INTI. LTD. PERSISTENTLY LOSS MAKING. THE APPELLANT OBJECTED THE INCLUSION OF 13 COMPARABL E COMPANIES IDENTIFIED BY THE TPO ON VARIOUS GROUNDS. HOWEVER T HE TPO HAS CONSIDERED 9 COMPANIES AS COMPARABLES OUT OF HIS OWN LIST OF 13 COMPANIES ALONG WITH 11 COM PARABLES OUT OF 23 COMPAR ABLES ITA NO. 6083/DEL/2010 12 IDENTIFIED BY THE APPELLANT AND ARRIVED AT A SET OF 20 COMPARABLE COMPANIES AS UNDER: S. NO. S. NO. S. NO. S. NO. NAME NAME NAME NAME OP/TC OP/TC OP/TC OP/TC (200603) (200603) (200603) (200603) 1. COMPUTECH INTI. LTD. 04.59 2. GOLDSTONE TECHNOLOGIES LTD. 04.78 3. IKF TECH LTD. 11.57 4. IT PEOPLE INDIA LTD. 07.77 5. MAARS SOFTWARE INTERNATIONAL LTD. 12.51 6. MEGASOFT LTD. 24.67 7. R S SOFTWARE LTD. 14.36 8. SHRI TULSI ONLINE COM LTD. 03.32 9. VISUAL SOFT TECHNOLOGIES LTD. 13.05 10. VMF SOFTECH LIMITED 06.50 11. HELIOS & MATHESON INFORMATION TECHNOLOGIES LTD . 25.08 12. ICS (INDIA) LIMITED 30.44 13. KALS INFO SYSTEM 45.09 14. MPHASIS B F I LTD. 26.24 15. MYM TECH LTD. 33.72 16. SASKEN COMMUNICATION TECH LTD. 07.28 ITA NO. 6083/DEL/2010 13 -17. SYNERGY LOGIN SYSTEMS LTD. 30.42 18. SYNTAIROS TECHNOLOGIES LTD. 20.21 19. VISHESH INFOTECHNICS LTD. 20.76 20. ASTRA BIO SYSTEMS LTD. -0.52 ARITHMATIC MEAN 17.09% THE TPO ACCORDINGLY IN THE ORDER PASSED UNDER SECTI ON 92CA(3) OF THE ACT COMPUTED AN ADJUSTMENT OF RS. 1 38 85 561/- TO THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS' APPLYING TNMM AS UNDER: TOTAL COST OF PROVISION OF SERVICES BY THE ASSESSEE (A) - RS. 148129154 OP/OC 17.09 MARGIN @ 17.09% AS DISCUSSED ABOVE (B) 2 53 18 235 ARM'S LENGTH PRICE A (A+B) 17 34 47 389 PRICE AT WHICH INTERNATIONAL TRANSACTION HAS BEEN UNDERTAKEN B - RS. 15 95 61 828 DIFFERENCE A-B 1 38 85 561 % OF DIFFERENCE WITH B ABOVE 8.70% 4. WE FIRST TAKE UP GROUND NO. 10 RAISED BY THE AS SESSEE FOR ADJUDICATION. THE SAID GROUND READS AS UNDER:- THAT THE LEARNED TPO ERRED ON FACTS AND IN LAW IN NOT ALLOWING AN ADJUSTMENT OF RS. 1 11 73 078 WHILE ITA NO. 6083/DEL/2010 14 DETERMINING ALP IN CASE OF THE APPELLANT ON ACCOUNT O F EXTRAORDINARY EXPENSE (LOSS) COMPRISING OF (I) RELOCATION EXPENSE (INCLUDING BROKERAGE) FOR N EW PREMISE - RS. 3 288 224 (II) ADDITIONAL RENT PAID FRO 2 MONTHS - RS. 3 97 2 626 (III) SALARY PAID FOR UNPRODUCTIVE/IDLE HOURS - RS . 4 578 633 4.1 ON THIS ISSUE BEFORE THE TPO ASSESSEE HAS SUBMIT TED AS UNDER:- DURING THE FINANCIAL YEAR 2005-06 THE ASSESSEE SHI FTED ITS OFFICE DUE TO THE SEALING DRIVE OF MUNICIPAL CORPOR ATION OF DELHI. THE ASSESSEE SHIFTED ITS OFFICE FROM SAFDARJU NG ENCLAVE TO MOHAN COOPERATIVE INDUSTRIAL ESTATE. THE ASSESSEE HAD TO PAY TWO (2) MONTHS OF EXTRA RENT FOR THE YEAR AND BROKERAGE TO ENGAGE THE NEW OFFICE. FURT HER BECAUSE OF SHIFT IN THE OFFICE THE EMPLOYEES OF TH E ASSESSEE WERE IDLE AND UNPRODUCTIVE FROM 01-MARCH-06 TO 25-MA RCH- 06 AS THE NORMAL OPERATIONS COMMENCED FROM THE NEW OFFICE WITH EFFECT FROM 25-MARCH 2006 . ITA NO. 6083/DEL/2010 15 THE ABOVE EVIDENCE DEMONSTRATES THAT THE ASSESSEE COULD NOT CARRY OUT NORMAL OPERATIONS IN THIS PERIOD . THE COSTS MENTIONED ABOVE WERE UNPRODUCTIVE COSTS AND W ERE NOT BILLED TO THE PARENT COMPANY. AS PER THE SERVIC E AGREEMENT BETWEEN THE ASSESSEE AND ITS PARENT COMPAN Y THE REMUNERATION FOR SOFTWARE DEVELOPMENT SERVICES RENDERED BY THE ASSESSEE WAS FIXED AT $35 PER MAN OU R. THE UNPRODUCTIVE HOURS DURING THE PERIOD 1-MARCH-06 TO 25-MARCH-06 WERE NOT BILLED TO THE PARENT COMPANY. T HIS RESULTED IN REDUCED REVENUE DURING THE FINANCIAL YE AR UNDER CONSIDERATION. THE ADJUSTED NCPM OF THE ASSESSEE AFTER EXCLUDING THE ABOVE MENTIONED ABNORMAL COST IS 17.23%. 4.2 THE TPO WAS NOT IN AGREEMENT WITH THE ASSESS EES SUBMISSIONS AND REJECTED THE SAME BY HOLDING AS UNDER:- - THE NEWSPAPER ARTICLE REFERS TO AN OFFICE IN GK- I WHEREAS IN THE SUBMISSION QUOTED ABOVE AND THE CUSTOMS LICENSE THE OFFICE OF THE ASSESSEE WAS IN SAFDARJUNG ENCLAVE. THE NEWSPAPER CLIPPING IS CLEARLY UNRELIABLE. ITA NO. 6083/DEL/2010 16 - AS PER THE NEWSPAPER ARTICLE IT IS DEAR THAT MCD H AD NOT SEALED THE PREMISES IN GK-L AS ON 1 ST MARCH 2006 AND THE ASSESSEES ARGUMENT THAT NO WORK WAS DONE DURING TH E MONTH OF MARCH 2006 I.E. THE LAST MONTH OF THE RELEV ANT FY IS NOT ACCEPTABLE. - THE ASSESSEE HAS NOT GIVEN A COPY OF THE MCD NOTI CE WHEREBY ITS OFFICE PREMISES WERE ORDERED TO BE SHUT DOWN. - NO COMMUNICATION WITH ITS PARENT SHOWING THE ASSES SEE'S INABILITY TO CARRY OUT ANY WORK DURING MARCH 2006 H AS BEEN SUBMITTED IN THE COURSE OF HEARINGS. - FURTHER CUSTOMS LICENSE INDICATING CHANGE OF ADDR ESS WITH EFFECT FORM 22.3.2006 ALSO DOES NOT INDICATE THAT T HE EARLIER LICENSE HAD LAPSED AND NO BUSINESS COULD BE AFFECTE D. IN FACT THE LICENSE HAD ALREADY BEEN RENEWED UPTO 31.1 2.2006 ON 8.3.2006 AT THE OLD ADDRESS. - EVEN IF FOR THE SAKE OF ARGUMENT IT IS ACCEPTED T HAT THE ASSESSEE'S OFFICE PREMISES WERE SEALED THE NATURE OF ASSESSEE'S BUSINESS IS SUCH THAT SHIFTING OF BUSINE SS FROM ONE PREMISE TO THE OTHER CAN BE EFFECTED OVER A WEEK END WITH OUT CAUSING ANY DISRUPTION. HENCE THE ASSESSE E'S ITA NO. 6083/DEL/2010 17 ARGUMENT THAT UNPRODUCTIVE HOURS DURING THE PERIOD 01.03.06 TO 25.3.2006 WERE NOT BILLED TO THE PARENT COMPANY HAS NO MERIT - THE ASSESSEE HAS SHOWN ADDITIONAL RENT PAID TO MGF DEVELOPMENTS LTD AMOUNTING TO ` 39 72 626/- FOR THE MON TH OF FEBRUARY AND MARCH 2006 FOR HIS NEW PREMISES AT MOHAN COOPERATIVE INDUSTRIAL ESTATE. THE FACT THAT THE ASSESSEE HAS ALREADY RENTED NEW PREMISES IN FEBRUARY 2006 DEFEATS THE ASSESSEES ARGUMENT THAT ITS WORK SUFFERED IN MARCH 2006 BECAUSE OF THE SEALING DRIVE . THE ASSESSEES SUBMISSION OF CLOSURE OF BUSINESS ON ACCO UNT OF SEALING DRIVE IS CONSEQUENTLY UNTENABLE UNACCEPTABL E. - AS DISCUSSED ABOVE THE ASSESSEES CLAIM THAT THE SEALING DRIVE REDUCED ITS REVENUES REMAINS UNSUBSTANTIATED. CONSEQUENTLY ITS CLAIM OF ABNORMAL COST AMOUNTING TO ` 1 11 73 078/- IS ALSO NOT ACCEPTABLE. SUCH COSTS AR E NORMAL BUSINESS REQUIREMENTS AND ADJUSTMENT FOR THE SAME ARE NOT JUSTIFIED. - LASTLY AND MOST IMPORTANTLY NO SUCH CLAIM FOR ADJU STMENT OF ABNORMAL COST HAD BEEN MADE BY THE ASSESSEE IN ITS ITA NO. 6083/DEL/2010 18 TRANSFER PRICING REPORT AND THE ASSESSEES ARGUMENT APPEARS TO BE A DESPERATE MEASURE TO SOMEHOW INCREA SE ITS NCPM. IN VIEW OF THE POINTS DISCUSSED ABOVE THE ASSESSEES CLAIM FOR ADJUSTED NET COST PLUS MARKUP OF 17.23% IS NOT TENABLE AND IS HEREBY REJECTED. 4.3 ASSESSEES SUBMISSIONS RELATING TO GROUND NO . 10 ARE AS UNDER:- RE:- COMPARABILITY ADJUSTMENTS : THE CARDINAL PRINCIPLE OF THE TRANSFER PRICING REGU LATIONS IS TO COMPARE LIKE WITH LIKE AND TO ELIMINATE DIFFERENCES IF ANY BY SUITABLE ADJUSTMENT. DURING THE RELEVANT PREVIOUS Y EAR OWING TO THE SEALING DRIVE UNDERTAKEN BY THE MUNICIPAL CORPOR ATION OF DELHI ('MCD') THE APPELLANT HAD TO SHIFT ITS OFFICE PREMISES FROM SAFDARJUNG ENCLAVE (A RESIDENTIAL AREA) TO MOHAN CO OPERATIVE INDUSTRIAL ESTATE (A COMMERCIAL AREA) ON A VERY SHO RT NOTICE. AS A RESULT OF THE AFORESAID SHIFTING OF OFFICE PREMISES THE APPELLANT HAD TO INCUR FOLLOWING ABNORMAL COSTS: PARTICULARS PARTICULARS PARTICULARS PARTICULARS AMOUNT (RS) AMOUNT (RS) AMOUNT (RS) AMOUNT (RS) RELOCATION EXPENSE (INCLUDING BROKERAGE) 32 88 224 ITA NO. 6083/DEL/2010 19 FOR NEW PREMISE ADDITIONAL RENT PAID FOR 2 MONTHS 39 72 626 SALARY PAID FOR UNPRODUCTIVE/IDLE HOURS 45 78 633 TOTAL TOTAL TOTAL TOTAL 1 18 39 483 1 18 39 483 1 18 39 483 1 18 39 483 AFTER MAKING ADJUSTMENT FOR THE AFORESAID ABNORMAL EXPENSES THE OPERATING MARGIN ('OP/OC') OF THE APPELLANT INCREASES TO 17.80% AS COMPUTED BELOW: PARTICULARS PARTICULARS PARTICULARS PARTICULARS AMOUNT AMOUNT AMOUNT AMOUNT COST OF PROVISION OF SOFTWARE SERVICE 14 81 29 15 4 LESS: ABNORMAL EXPENSES A. OFFICE RELOCATION EXPENSE 32 88 224 B. ADDITIONAL RENT PAID 39 72 626 C. SALARY PAID FOR UNPRODUCTIVE/IDLE HOURS 45 78 6 33 ADJUSTED COST OF PROVISION OF SERVICE 13 62 89 671 OPERATING REVENUE OF THE APPELLANT 16 05 59 393 ADJUSTED PROFIT OF THE APPELLANT 2 42 69 722 ADJUSTED OP/OC% 17.80% ITA NO. 6083/DEL/2010 20 SINCE THE ADJUSTED OPERATING MARGIN OF THE APPELLAN T AT 17.80% IS HIGHER THAN THE OPERATING MARGIN OF 17.09% EARNED BY THE COMPARABLE COMPANIES SELECTED BY THE TPO IT IS RESPE CTFULLY SUBMITTED THAT THE INTERNATIONAL TRANSACTIONS UNDER TAKEN BY THE APPELLANT SATISFIES THE ARM'S LENGTH CRITERIA. THE TPO HOWEVER REJECTED THE AFORESAID CLAIM OF COMP ARABILITY ADJUSTMENT ON ACCOUNT OF ABNORMAL EXPENSES INCURRED B Y THE APPELLANT. THE CONTENTIONS OF THE TPO FOR REJECTING THE APPELLANT'S CLAIM TOWARDS COMPARABILITY ADJUSTMENTS AND THE APPELLA NT'S RESPONSE TO SUCH CONTENTIONS ARE SUMMARIZED BELOW: A) TPO'S CONTENTION: THE APPELLANT HAS NOT PROVIDED THE COPY OF MCD NOTICES WHEREBY ITS OFFICE PREMISES WERE ORDERED TO BE SHUT DOWN AND THAT THE OFFICE PREMISES OF THE APPELLANT WAS NOT SE ALED BY THE MCD APPELLANT'S RESPONSE: APPELLANT'S RESPONSE: APPELLANT'S RESPONSE: APPELLANT'S RESPONSE: IT IS RESPECTFULLY SUBMITTED THAT THE APPELLANT HAD PLACED ON RECORD A NEWSPAPER CLIPPING WHEREIN THE FACT THAT THE APPELL ANT WAS AT THE RELEVANT TIME OPERATING FROM A RESIDENTIAL AREA WAS CLEARLY STATED. THEREFORE IT WAS PROBABLE THAT THE SAID PREMISES F ROM WHICH THE ASSESSEE OPERATED AT THE RELEVANT TIME COULD HAVE BEEN SEALED ON ITA NO. 6083/DEL/2010 21 ACCOUNT OF THE UNAUTHORIZED USE OF A RESIDENTIAL PR EMISES FOR COMMERCIAL PURPOSE. IT WOULD BE APPRECIATED THAT IN SUCH AN EVENT THE OPERATION OF THE APPELLANT WOULD HAVE FACED CERTAIN HALT LEADING TO DISRUPTION OF BUSINESS AND LOSS OF GOODWILL AND SIG NIFICANT REVENUE. IN ORDER TO AVOID SUCH AN EVENTUALITY THE APPELLANT D ECIDED TO SHIFT ITS OFFICE PREMISES TO A COMMERCIAL AREA AND IN THE PROCE SS INCURRED THE AFORESAID ABNORMAL EXPENSES. IT IS RESPECTFULLY SUB MITTED THAT THE APPELLANT HAD TO SHIFT ITS OFFICE OWING TO THE SEAL ING DRIVE BY THE MCD AND THE FACT WHETHER ITS OFFICE WAS ACTUALLY SEALED OR NOT IS IRRELEVANT. IT IS THEREFORE RESPECTFULLY SUBMITTED THAT THE REJ ECTION OF APPELLANT'S CLAIM TOWARDS COMPARABILITY ADJUSTMENT ON THE GROUND THAT ITS PREMISES WAS NOT ACTUALLY SEALED IS UNJUSTIFIED AND UNFOUNDED. B) TPO'S CONTENTION: NO COMMUNICATION WITH ITS PAREN T SHOWING ASSESSEE'S INABILITY TO CARRY OUT ANY WORK DURING M ARCH 2006 HAS BEEN SUBMITTED IN THE COURSE OF THE HEARINGS APPELLANT'S RESPONSE: APPELLANT'S RESPONSE: APPELLANT'S RESPONSE: APPELLANT'S RESPONSE: IT IS SUBMITTED THAT THE ASSESSEE IS RESPONSIBLE FO R CONDUCTING AND MANAGING ITS BUSINESS. FURTHER THIS IS AN IRRELEVAN T CONSIDERATION AND DOES NOT HAVE ANY BEARING ON THE ALLOWABILITY OF CO MPARABILITY ITA NO. 6083/DEL/2010 22 ADJUSTMENTS ON ACCOUNT OF ABNORMAL EXPENSES INCURRED BY THE APPELLANT. C) TPO'S CONTENTION: CUSTOM LICENSE INDICATING CHANG E OF ADDRESS WITH EFFECT FROM 22.03.2006 ALSO DOES NOT INDICATE THAT T HE EARLIER LICENSE HAD LAPSED AND NO BUSINESS COULD BE AFFECTED. IN FA CT THE LICENSE HAD ALREADY BEEN RENEWED UP TO 31.12.2006 ON 08.03.2006 AT THE OLD ADDRESS. APPELLANT'S RESPONSE: APPELLANT'S RESPONSE: APPELLANT'S RESPONSE: APPELLANT'S RESPONSE: IT IS RESPECTFULLY SUBMITTED THAT THE APPELLANT HAD PLACED ON RECORD APPROVAL FROM THE SOFTWARE TECHNOLOGY PARK OF INDIA ('STPI') AUTHORIZING CHANGE IN THE ADDRESS FROM SAFDARJUNG E NCLAVE TO MOHAN CO-OPERATIVE INDUSTRIAL ESTATE. THE CUSTOM LICENSE WAS INITIALLY GRANTED TO THE APPELLANT IN RESPECT OF ITS PREMISES AT A-2/ 9 AND A -218 SAFDARJUNG ENCLAVE NEW DELHI - 110029. THE APPELLA NT HAD ALSO PLACED ON RECORD COPY OF CUSTOM LICENSE APPROVING THE CHAN GE OF ADDRESS W.E.F. MARCH 22 2006 TO MOHAN CO-OPERATIVE INDUSTRI AL ESTATE. HOWEVER THE FACT THAT THE APPELLANT WAS ENTITLED T O CARRY ON ITS OPERATION UNDER THE SAME CUSTOM LICENSE FROM ITS NEW P REMISES AT MOHAN CO-OPERATIVE INDUSTRIAL ESTATE IS EVIDENT FROM THE. NOTING MADE BY THE CUSTOM OFFICIALS ON THE LICENSE ACKNOWLEDGIN G THE CHANGE OF ITA NO. 6083/DEL/2010 23 ADDRESS FROM SAFDARJUNG ENCLAVE TO MOHAN CO-OPERATIVE INDUSTRIAL ESTATE. IT IS THEREFORE SUBMITTED THAT THE REJECTIO N OF APPELLANT'S CLAIM TOWARDS COMPARABILITY ADJUSTMENTS BY THE TPO ON THE A FORESAID GROUND IS NOT TENABLE. D) TPO'S CONTENTION: THE NATURE OF APPELLANT'S BUSIN ESS IS SUCH THAT SHIFTING OF BUSINESS FROM ONE PREMISES TO ANOTHER CAN BE EFFECTED OVER A WEEKEND WITHOUT CAUSING DISRUPTION TO THE BUSINE SS OF THE APPELLANT. APPELLANT'S RESPONSE: APPELLANT'S RESPONSE: APPELLANT'S RESPONSE: APPELLANT'S RESPONSE: IT IS RESPECTFULLY SUBMITTED THAT BEFORE THE OPERATI ONS OF THE APPELLANT COULD BE SHIFTED FROM ONE PREMISES TO ANOTHER THE NE CESSARY EQUIPMENTS & DEVICES SUCH COMPUTERS SYSTEMS SERVERS STORAGE DEVISES POWER BACKUP DEVICES ETC. HAD TO BE DISMANT LED FROM THE EXISTING PREMISES AND RE-INSTALLED AT THE NEW PREMIS ES. A DETAILED LIST OF EQUIPMENTS WHICH WERE SHIFTED FROM THE OLD PREMISE S AT SAFDARJUNG ENCLAVE TO NEW PREMISES AT MOHAN CO-OPERATIVE INDUSTR IAL ESTATE WAS ALSO PLACED ON RECORD BEFORE THE TPO. THE DISMANTLIN G AND RE- INSTALLATION OF SUCH EQUIPMENTS REQUIRES CONSIDERAB LE TIME AND TECHNICAL SKILLS. IT IS RESPECTFULLY SUBMITTED THAT THE OPERATIONS OF THE APPELLANT COULD NOT HAVE COMMENCED TILL THE TIME SUCH EQUIPMENTS AND DEVICES WERE DISMANTLED AND RE-INSTALLED AT THE NEW PREMISES. IN ITA NO. 6083/DEL/2010 24 VIEW OF THE AFORESAID IT IS RESPECTFULLY SUBMITTED THAT THE CONTENTION OF THE TPO THAT THE OPERATIONS OF THE APPELLANT COULD HAVE BEEN SHIFTED OVER A WEEKEND IS UNFOUNDED AND BASED UPON MISCONCEI VED UNDERSTANDING OFTHE FACTS AND CIRCUMSTANCES OF THE C ASE. E) TPO'S CONTENTION: THE APPELLANT HAD ALREADY PAID ADDITIONAL RENT FOR TWO MONTHS FOR ITS NEW PREMISES. THIS FACT DEFEATS TH E APPELLANT'S ARGUMENT THAT ITS WORK SUFFERED DUE TO THE SEALING DRIVE. APPELLANT'S RESPONSE: APPELLANT'S RESPONSE: APPELLANT'S RESPONSE: APPELLANT'S RESPONSE: IT IS RESPECTFULLY SUBMITTED THAT EVEN THOUGH THE AP PELLANT HAD LEASED THE NEW PREMISES AND PAID RENT FOR THE MONTHS OF FEBR UARY AND MARCH IT COULD NOT HAVE COMMENCED ITS COMMERCIAL OPERATIO NS FROM SUCH PREMISES TILL THE TIME NECESSARY INFRASTRUCTURE IN T HE FORM OF FIXTURES POWER SUPPLY ETC. WAS ESTABLISHED. FURTHER AS SUBMI TTED ABOVE BEFORE THE OPERATIONS OF THE APPELLANT COULD BE SHIFTED FR OM ONE PREMISES TO ANOTHER THE NECESSARY EQUIPMENTS & DEVICES HAD TO B E INSTALLED AT THE NEW PREMISES. IT IS RESPECTFULLY SUBMITTED THAT THE A FORESAID ACTIVITIES ALSO REQUIRE CONSIDERABLE TIME AND THE APPELLANT TH EREFORE HAD TO PAY RENT FOR THE PERIOD DURING WHICH THE AFORESAID INFR ASTRUCTURE WAS ESTABLISHED AT THE NEW PREMISES. ITA NO. 6083/DEL/2010 25 F) TPO'S CONTENTION: THE CLAIM OF THE APPELLANT THA T THE SEALING DRIVE REDUCED ITS REVENUE IS UNSUBSTANTIATED APPELLANT'S RESPONSE: APPELLANT'S RESPONSE: APPELLANT'S RESPONSE: APPELLANT'S RESPONSE: IT IS RESPECTFULLY SUBMITTED THAT THE APPELLANT HAD PLACED ON RECORD ITS QUARTERLY CAPACITY UTILIZATION STATEMENT DEMONSTRATIN G THE FALL IN ITS CAPACITY UTILIZATION DURING THE QUARTER JANUARY TO MARCH 2006. THE CAPACITY UTILIZATION OF THE APPELLANT DURING THE QU ARTER JANUARY TO MARCH 2006 FELL TO 72% AS AGAINST THE NORMAL CAPACIT Y UTILIZATION OF 87% TO 94% DURING THE FINANCIAL YEAR ENDING DECEMBER 31 2005. FURTHER THE FACT THAT THE APPELLANT HAD TO SHIFT IT S OFFICE PREMISES AT A VERY SHORT NOTICE SUFFICIENTLY SUBSTANTIATES THE L OW CAPACITY UTILIZATION OF THE APPELLANT DURING THE LAST QUARTER OF FINANCI AL YEAR 2005-06. G) TPO'S CONTENTION: NO CLAIM FOR SUCH COMPARABILITY ADJUSTMENT WAS MADE BY THE ASSESSEE IN THE TP DOCUMENTATION APPELLANTS RESPONSE: APPELLANTS RESPONSE: APPELLANTS RESPONSE: APPELLANTS RESPONSE: IT IS RESPECTFULLY SUBMITTED THAT THE TPO IS REQUIR ED TO COMPUTE THE ARM'S LENGTH PRICE AFTER CONSIDERING ALL THE FACTS A ND MATERIAL PLACED BEFORE HIM BY THE ASSESSEE. IT WOULD BE INAPPROPRIA TE TO REJECT THE CLAIM OF THE ASSESSEE TOWARDS COMPARABILITY ADJUSTMEN T MERELY ON THE GROUND THAT THE SAME WAS NOT INCLUDED IN THE TP STU DY. SECTION ITA NO. 6083/DEL/2010 26 92CA(3) OF THE ACT SPECIFICALLY REQUIRES THE TPO TO TAKE INTO CONSIDERATION ALL THE EVIDENCE WHICH THE ASSESSEE MA Y PRODUCE DURING THE COURSE OF HEARING. THE RELEVANT EXTRACT OF SECT ION 92CA(3) IS REPRODUCED BELOW: '(3) ON THE DATE SPECIFIED IN THE NOTICE UNDER SUB- SECTION (2) OR AS SOON THEREAFTER AS MAY BE. AFTER HEARING SUCH EVIDENCE AS THE ASSESSEE MAY PRODUCE. INCLUDING ANY INFORMATION OR DOCUMENTS REFERRED TO I N SUB-SECTION (3) OF SECTION 92D AND AFTER CONSIDERING SUCH EVIDENCE AS THE TRANSFER PRICING OFFICER MAY REQUIRE ON ANY SPECIFIED POINTS AND AFTER TAKING IN TO ACCOUNT ALL RELEVANT MATERIALS WHICH HE HAS GATHERED THE TRANSFER PRICING OFFICER SHALL BY ORDER IN WRI TING DETERMINE THE ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION IN ACCORDANCE WITH SUB- SECTION (3) OF SECTION 92C AND SEND A COPY OF HIS O RDER TO THE ASSESSING OFFICER AND TO THE ASSESSEE. ' IT IS FURTHER RESPECTFULLY SUBMITTED THAT THE FACT T HAT THE AFORESAID CLAIM FOR A COMPARABILITY ADJUSTMENT ON ACCOUNT OF AB NORMAL COST AGGREGATING TO RS. 1 18 39 483 WAS NOT MADE IN THE T RANSFER PRICING DOCUMENTATION WOULD NOT ACT AS AN ESTOPPEL AGAINST THE ASSESSEE AND ITA NO. 6083/DEL/2010 27 THE TPO WAS REQUIRED TO CONSIDER THE CLAIM MADE BY T HE ASSESSEE IN THE COURSE OF THE ASSESSMENT PROCEEDINGS BEFORE HIM . RELIANCE IN THIS REGARD IS ALSO PLACED ON THE DECISION OF THE SUPREM E COURT IN THE CASE OF CIT VS. C.PARAKH & CO. (INDIA) LTD. 29ITR 661 WH EREIN IT WAS HELD AS UNDER: ''ON THE QUESTION OF THE ADMISSIBILITY OF THE DEDUCT ION OF RS 1 23 719 THE CONTENTION OF THE APPELLANT IS THAT A S THE RESPONDENT HAD ITSELF SPLIT UP THE COMMISSION OF RS 3 12 699 PAID TO THE MANAGING AGENTS AND APPROPRIATED RS 1 23 719 THEREOF TO THE PROFITS EARNED AT KARACHI AND HAD DEBITED THE S AME WITH IT IT WAS NOT ENTITLED TO GO BACK UPON IT AND CLAIM THE A MOUNT AS A DEDUCTION AGAINST THE INDIAN PROFITS. WE DO NOT SEE ANY FORCE IN THIS CONTENTION. WHETHER THE RESPONDENT IS ENTITLED TO A PARTICULAR DEDUCTION OR NOT WILL DEPEND ON THE PROVISION OF LA W RELATING THERETO AND NOT ON THE VIEW WHICH IT MIGHT TAKE OF ITS RIGHTS AND CONSEQUENTLY IF THE WHOLE OF THE COMMISSION IS UNDE R THE LAW LIABLE TO BE DEDUCTED AGAINST THE INDIAN PROFITS T HE RESPONDENT CANNOT HE ESTOPPED FROM CLAIMING THE BENEFIT OF SUCH DEDUCTION BY REASON OF THE FACT THAT IT ERRONEOUSLY ALLOCATED A PART OF IT TOWARDS THE PROFITS EARNED IN KARACHI. WHAT HAS THE REFORE TO BE DETERMINED IS WHETHER NOTWITHSTANDING THE APPORTION MENT MADE ITA NO. 6083/DEL/2010 28 BY THE RESPONDENT IN THE PROFIT AND LOSS STATEMENTS THE DEDUCTION IS ADMISSIBLE UNDER THE LAW. RELIANCE IS ALSO PLACED ON THE FOLLOWING DECISIONS OF THE BENCHES OF THE TRIBUNAL WHEREIN IT IS HELD THAT THE FACT T HAT THE ASSESSEE DID NOT MAKE A CLAIM IN THE TRANSFER PRICING DOCUMEN TATION THE SAME WOULD NOT ACT AS AN ESTOPPELS AND THE SAID CLA IM COULD EVEN BE MADE BEFORE THE APPELLATE AUTHORITY: - DCIT VS. QUARK SYSTEMS PVT. LTD. (ITA NO. 1 15/CHD/200 9) - HONEYWELL AUTOMATION INDIA PVT. LTD. VS. DCIT (ITA N O. 4/PN/08) - SAPIENT CORPORATION PVT. LTD.VS. DCIT (ITA NO. 5263/ DE1/2010) - DCIT VS. BP INDIA SERVICES PVT. LTD. (ITA NO. 4425/M UM/20 10) - DCIT VS QUARK SYSTEMS PVT. LTD. (ITA NO.1 00/CHD/2009) IN VIEW OF THE AFORESAID IT IS RESPECTFULLY SUBMIT TED THAT THE TPO OUGHT TO HAVE CONSIDERED THE CLAIM OF THE APPELLANT MADE V IDE LETTER DATED 22.10.2009 TOWARDS ADJUSTMENT FOR ABNORMAL EXPENSES IRRESPECTIVE OF THE FACT THAT SUCH CLAIM WAS NOT MADE BY THE APPELLA NT IN THE TRANSFER PRICING DOCUMENTATION. IT IS RESPECTFULLY SUBMITTED THAT THE TRANSFER PRICI NG REGULATIONS CLEARLY PROVIDE FOR ADJUSTMENTS IN MARGINS OF THE ENTERPRIS E ENTERING INTO INTERNATIONAL TRANSACTIONS FOR ANY DIFFERENCES BETW EEN SUCH ITA NO. 6083/DEL/2010 29 INTERNATIONAL TRANSACTIONS AND THE TRANSACTION OF T HE COMPARABLES OR BETWEEN THE ENTERPRISE ENTERING INTO INTERNATIONAL TRANSACTIONS AND COMPARABLE COMPANIES. RELIANCE IS ALSO PLACED ON THE FOLLOWING DECISIONS OF THE BENCHES OF THE TRIBUNAL WHEREIN UNDERTAKING ECONOMIC ADJUSTMENT FO R IMPROVED COMPARABILITY OF THE ENTITIES BEING COMPARED FOR BENC HMARKING EXPERIENCE HAS BEEN EMPHASIZED. - MENTOR GRAPHICS (NOIDA) : PRIVATE LIMITED: 109ITD 10 1 (DEL) - SONY INDIA (P) LIMITED: 106 ITD 175 (DEL). - SKODA AUTO INDIA (P) LTD. VS. ACIT : 122 ITJ 699 ( PUNE) - SCHEFENACKER MOTHERSON LTD. VS. ITA (IN ITA NOS. 4 459 & 4469/DEL/07) - HONEYWELL AUTOMATION INDIA PVT. LTD. VS. DCIT (ITA NO. 4/PN/08) - EGAIN COMMUNICATION PVT. LTD. VS. ITA: 118 ITD 243 (PUNE) IN THE CASE OF THE APPELLANT WHILE UNDERTAKING THE BENCHMARKING ANALYSIS APPLYING TNMM IN ORDER TO MAKE COMPARISON O F LIKE TO LIKE THE FOLLOWING COMPARABILITY ADJUSTMENTS ON ACCOUNT O F ABNORMAL EXPENSES INCURRED BY THE APPELLANT FOR SHIFTING OF ITS OFFICE PREMISES ARE REQUIRED TO BE MADE. ITA NO. 6083/DEL/2010 30 4.4 LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAN D RELIED UPON THE ORDER OF THE TPOS IN THIS REGARD. 4.5 WE HAVE HEARD THE RIVAL CONTENTIONS IN LIGHT O F THE MATERIAL PRODUCED AND PRECEDENT RELIED UPON. WE FIND THAT ASSESSEE HAS COGENTLY REBUTTED THE TPOS RESERVATION ON ASSESSEE S PLEA IN THIS REGARD. 4.6 AS REGARDS TPOS CONTENTION THAT ASSESSEE HAS N OT PROVIDED THE COPY OF MCD NOTICES WHEREBY ITS OFFICES PREMISES WER E ORDERED TO BE SHUT DOWN AND THAT THE OFFICE PREMISES OF THE ASSESS EE WAS NOT SEALED BY THE MCD. IN ORDER TO AVOID SUCH AN EVENTUALITY THE ASSESSEE DECIDED TO SHIFT ITS OFFICE PREMISES TO A COMMERCIAL AREA AND IN THE PROCESS INCURRED THE AFORESAID ABNORMAL EXPENSES. HENCE THERE IS CONSIDERABLE COGENCY IN THE ASSESSEES SUBMISSION TH AT THE REJECTION OF ASSESSEES CLAIM TOWARDS COMPARABILITY ADJUSTMENT ON THE GROUND THAT ITS PREMISES WAS NOT ACTUALLY SEALED IS UNJUST IFIED AND UNFOUNDED. 4.7 AS REGARDS TPOS CONTENTION THAT NO COMMUNICATION WITH ITS PARENT SHOWING ASSESSEES INABILITY TO CARRY OUT WO RK DURING MARCH 2006 HAS BEEN SUBMITTED IN THE COURSE OF THE HEARING S. ASSESSEE HAS RIGHTLY CONTENDED THAT THE ASSESSEE IS RESPONSIBLE FOR CONDUCTING AND ITA NO. 6083/DEL/2010 31 MANAGING ITS BUSINESS. THIS RESERVATION OF THE TPO WAS IRRELEVANT CONSIDERATION AND WE AGREE WITH THE SAME. 4.8 ANOTHER TPOS CONTENTION WAS THAT CUSTOM LICENSE INDICATING CHANGE OF ADDRESS WITH EFFECT FROM 22.3.2006 ALSO D OES NOT INDICATE THAT THE EARLIER LICENSE HAD LAPSED AND NO BUSINESS COULD BE AFFECTED. IN FACT THE LICENSE HAD ALREADY BEEN RENEWED UPTO 3 1.3.2006 ON 8.3.2006 AT THE OLD ADDRESS. IN THIS REGARD AS SESSEE HAS CONTENDED THAT ASSESSEE HAS PLACED ON RECORD APPROVAL FROM TH E SOFTWARE TECHNOLOGY PARK OF INDIA (STPI) AUTHORIZING CHANGE IN THE ADDRESS FROM SAFDARJUNG ENCLAVE TO MOHAN COOPERATIVE INDUSTRIAL E STATE. THE CUSTOM LICNESE WAS INITIALLY GRANTED TO THE ASSESSEE IN RESPECT OF ITS PREMISES AT A-2/9 AND A-2/8 SAFDARJUNG ENCLAVE NEW DELHI 29. THE ASSESSEE HAD ALSO PLACED ON RECORD THE COPY OF THE CUSTOM LICENSE APPROVING THE CHANGE OF ADDRESS W.E.F. MARCH 22 2 006 TO MOHAN COOPERATIVE INDUSTRIAL ESTATE. HOWEVER THE FACT THAT THE ASSESSEE WAS ENTITLED TO CARRY ON ITS OPERATION UNDER THE SA ME CUSTOM LICENSE FROM ITS NEW PREMISES AT MOHAN COOPERATIVE INDUSTRIA L ESTATE IS EVIDENT FROM THE NOTING MADE BY THE CUSTOM OFFICI ALS ON THE LICENSES ACKNOWLEDGING THE CHANGE OF ADDRESS FROM SAFDARJUNG ENCLAVE TO MOHAN COOPERATIVE INDUSTRIAL ESTATE. THUS WE F IND THAT ASSESSEE HAS COGENTLY REBUTTED TPO RESERVATION IN THIS REGARD . ITA NO. 6083/DEL/2010 32 4.9 ANOTHER TPOS CONTENTION IS THE NATURE OF ASSES SEES BUSINESS IS SUCH THAT SHIFTING OF BUSINESS FROM ONE PREMISES TO ANOTHER CAN BE EFFECTED OVER A WEEKEND WITHOUT CAUSING DISRUPTION TO THE BUSINESS OF THE ASSESSEE. IN THIS REGARD WE AGREE WITH THE CO NTENTION OF THE ASSESSEE THAT BEFORE THE OPERATIONS OF THE ASSESSE E COULD BE SHIFTED FROM ONE PREMISES TO ANOTHER THE NECESSARY EQUIPMENT S AND DEVICES COMPUTERS SYSTEMS SERVERS STORAGE DEVICES POWER BACKUP DEVICES ETC. HAD TO BE DISMANTLED FROM THE EXISTING PREMISES A ND RE-INSTALLED AT THE NEW PREMISES. THE DISMANTLING AND RE-INSTALLA TION OF SUCH EQUIPMENTS REQUIRES CONSIDERABLE TIME AND TECHNICAL S KILLS. AS SUCH WE DO NOT AGREE WITH THE TPOS CONTENTION THAT THE SHIFTING COULD HAVE BEEN DONE OVER A WEEKEND TIME. 4.10 ANOTHER TPO CONTENTION IS THAT THAT THE ASSESSE E HAD ALREADY PAID ADDITIONAL RENT FOR TWO MONTHS FOR ITS NEW PRE MISES. THIS FACT DEFEATS THE ASSESSEES ARGUMENT THAT ITS WORK SUFFE RED DUE TO THE SEALING DRIVE. IN THIS REGARD ASSESSEE HAS SUBMI TTED THAT EVEN THOUGH THE ASSESSEE HAD LEASED THE NEW PREMISES AND PAID RENT FOR THE MONTHS OF FEBRUARY AND MARCH IT COULD NOT HAVE C OMMENCED ITS COMMERCIAL OPERATIONS FROM SUCH PREMISES TILL THE TI ME NECESSARY INFRASTRUCTURE IN THE FORM OF FIXTURES POWER SUPPL Y ETC. WAS ESTABLISHED. FURTHER BEFORE THE OPERATIONS OF THE ASSESSEE COULD BE ITA NO. 6083/DEL/2010 33 SHIFTED FROM ONE PREMISES TO ANOTHER THE NECESSARY EQUIPMENTS AND DEVICES HAD TO BE INSTALLED AT THE NEW PREMISES. T HE ENTIRE PROCESS AND ACTIVITY REQUIRE CONSIDERABLE TIME AND THE ASS ESSEE THEREFORE HAD TO PAY RENT FOR THE PERIOD DURING WHICH THE AFORES AID INFRASTRUCTURE WAS ESTABLISHED AT THE NEW PREMISES. HENCE WE FIN D OURSELVES IN AGREEMENT WITH THE ASSESSEES CONTENTION IN THIS REG ARD. 4.11 ANOTHER TPOS CONTENTION IS THAT CLAIM OF THE A SSESSEE THAT THE SEALING DRIVE REDUCED ITS REVENUE IS UNSUBSTANT IATED. IN THIS REGARD ASSESSEE HAS SUBMITTED THAT THE ASSESSEE HAD PLACED ON RECORD ITS QUARTERLY CAPACITY UTILIZATION STATEMENT DEMONSTRATING THE FALL IN ITS CAPACITY UTILIZATION DURING THE QUARTE R JANUARY TO MARCH 2006. THE CAPACITY UTILIZATION OF THE ASSESSEE DUR ING THE QUARTER JANUARY TO MARCH 2006 FELL TO 72% AS AGAINST THE NO RMAL CAPACITY UTILIZATION OF 87% TO 94% DURING THE FINANCIAL YEAR ENDING DECEMBER 31 2005. FURTHER THE FACT THAT THE ASSESSEE HAD TO SHIFT ITS OFFICE PREMISES AT A VERY SHORT NOTICE SUFFICIENTLY SUBSTA NTIATES THE LOW CAPACITY UTILIZATION OF THE ASSESSEE DURING THE LAS T QUARTER OF FINANCIAL YEAR 2005-06. WE FIND OUR OURSELVES IN AGREEMENT WITH THE ASSESSEES SUBMISSION IN THIS REGARD. 4.12 ANOTHER TPOS CONTENTION IS THAT NO CLAIM FOR SUCH COMPARABILITY ADJUSTMENT WAS MADE BY THE ASSESSEE I N THE TP ITA NO. 6083/DEL/2010 34 DOCUMENTATION. IN THIS REGARD ASSESSEE HAS SUBMITTE D THAT THE TPO REQUIRED TO COMPUTE ARMS LENGTH PRICE AFTER CONSID ERING ALL THE FACTS AND MATERIAL PLACED BEFORE HIM BY THE ASSESSEE. IT HAS BEEN PLEADED THAT IT WOULD BE INAPPROPRIATE TO REJECT T HE CLAIM OF THE ASSESSEE TOWARDS COMPARABILITY ADJUSTMENT MERELY ON T HE GROUND THAT THE SAME WAS NOT INCLUDED IN THE TP STUDY. SECTION 92CA(3) OF THE ACT SPECIFICALLY REQUIRES THE TPO TO TAKE INTO CONSIDER ATION ALL THE EVIDENCE WHICH THE ASSESSEE MAY PRODUCE DURING THE COURSE OF HEARING. THUS THE ASSESSEES CONTENTION HAS CONSIDERABLE COGENCY THAT THE AFORESAID CLAIM FOR A COMPARABILITY ADJUSTMENT ON ACC OUNT OF ABNORMAL COST AGGREGATING TO ` 1 18 39 483/- WAS NOT MADE IN THE TRANSFER PRICING DOCUMENTATION WOULD NOT ACT AS AN ESTOPPELS AGAINST THE ASSESSEE AND THE TPO WAS REQUIRED TO CONSIDER THE CL AIM MADE BY THE ASSESSEE IN THE COURSE OF ASSESSMENT PROCEEDINGS BE FORE HIM. THE ASSESSEE RELIANCE IN THIS REGARD UPON THE HON BLE SUPREME COURT DECISION IN THE CASE OF C.I.T. VS. C. PARAKH & CO. (INDIA) LTD. 29 ITR 661 WHICH IS ALSO GERMANE. IN THIS REGARD ASSESSEE HA S ALSO PLACED RELIANCE UPON THE CATENA OF DECISIONS OF THE TRIBUN AL WHEREIN IT HAS BEEN HELD THAT THE FACT THAT THE ASSESSEE DID NOT MA KE A CLAIM IN THE TRANSFER PRICING DOCUMENTATION THE SAME WOULD NOT AC T AS AN ITA NO. 6083/DEL/2010 35 ESTOPPEL AND THE SAID CLAIM COULD EVEN BE MADE BEFOR E THE APPELLATE AUTHORITY. 5. IN THE BACKGROUND OF THE AFORESAID DISCUSSIONS A ND PRECEDENTS RELIED UPON WE FIND THAT TPOS RESERVATION ON THE A SSESSEES CLAM IS NOT COGENT ONE AND THE ASSESSEE HAS QUITE CONVINCIN G REBUTTED TPOS RESERVATION. UNDER THE CIRCUMSTANCES IN OUR CONSI DERED OPINION ADJUSTMENT FOR IMPUGNED EXPENDITURE TOTALING TO ` 1 18 39 483/- WAS JUSTIFIABLY CLAIMED BY THE ASSESSEE. AFTER MAKING THE ADJUSTMENT FOR THE AFORESAID ABNORMAL EXPENSES THE OPERATING MARG IN (OP/OC) OF THE ASSESSEE INCREASES TO 17.80%. SINCE THE ADJUSTED OP ERATING MARGIN OF THE ASSESSEE AT 17.80% IS HIGHER THAN THE OPERATING MARGIN OF 17.09% EARNED BY THE COMPARABLE COMPANIES SELECTED BY THE TPO WE AGREE WITH THE SUBMISSIONS OF THE ASSESSEE THAT INTERNATIO NAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE SATISFIES THE ARMS LENG TH CRITERIA. HENCE WE HOLD THAT TPO HAS WRONGLY REJECTED THE AFO RESAID CLAIM OF COMPARABILITY ADJUSTMENT ON ACCOUNT OF ABNORMAL EXPE NSES INCURRED BY THE ASSESSEE AND ALLOW THE ASSESSEES APPEAL ON THIS ISSUE. 5.1 SINCE THE ADJUDICATION ON THIS ISSUE HAS RESULTE D IN OPERATING MARGIN OF THE ASSESSEE AT 17.80% WHICH IS HIGHER THA N THE OPERATING MARGIN OF 17.09% EARNED BY THE COMPARABLE COMPANIES SE LECTED BY THE TPO INTERNATIONAL TRANSACTIONS UNDERTAKEN BY TH E ASSESSEE ITA NO. 6083/DEL/2010 36 SATISFIES THE ARMS LENGTH CRITERIA. IN SUCH SCENAR IO AS AGREED BY BOTH THE COUNSEL ADJUDICATION OF ANOTHER TRANSFER PRICI NG ISSUE IN THIS REGARD IS INFRUCTUOUS. ACCORDINGLY WE ARE NOT DE ALING WITH THE OTHER ISSUES OF TRANSFER PRICING RAISED BY THE ASSESSE E IN THE GROUND OF APPEAL. 6. NOW WE TAKE UP THE GROUND NO. 13 WHICH READS AS UNDER:- THAT THE LEARNED ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN TREATING THE OFFICE RELOCATION EXPENSE INCUR RED AMOUNTING TO RS.32 88 224 FOR SHIFTING OF OFFICE BY THE APPELLANT IN ORDER TO AVOID THE DRIVE UNDERTAKEN BY MCD FOR SEALING THE OFFICE PREMISES OF COMMERCIAL ESTABLISHMEN TS LOCATED IN RESIDENTIAL AREAS AS CAPITAL EXPENDITURE AND DISALLOWING THE CLAIM OF THE APPELLANT FOR REVENUE EXPENSE MADE U/S 37(1). 7. IT HAS FURTHER BEEN SUBMITTED THAT ASSESSING OF FICER IS WRONG IN CONSIDERING THE ACTIVITY OF THE SHIFTING OF OFFICE AT PAR WITH THE RE- ESTABLISHMENT OF BUSINESS. ON THIS ISSUE ASSESSING OFFICER FOUND THAT ASSESSEE HAS CLAIMED OFFICE RELOCATION EXPENSES OF ` 32 88 224/-. JUSTIFICATION FOR CLAIMING THE OFFICE RELOCATION EXP ENSES AS REVENUE EXPENDITURE WAS SUBMITTED AS UNDER:- ITA NO. 6083/DEL/2010 37 IT IS S SUBMITTED THAT DURING THE YEAR UNDER CONSID ERATION THE COMPANY HAD SHIFTED ITS OFFICE FROM SAFDURJUNG E NCLAVE (A RESIDENTIAL AREA) TO MOHAN CO-OPERATIVE INDUSTRI AL ESTATE AT A VERY SHORT NOTICE. DETAILS OF OFFICE RELOCATION EXPENSES ALONGWITH COPIES OF INVOICE AND SUPPORTING DOCUMENT S ORE ENCLOSED AS ANNEXURE I. IT IS SUBMITTED THAT RELOCAT ION EXPENSES CONSISTS OF BROKERAGE CHARGES PAID TO BROK ER FOR NEW PREMISES PACKING AND FORWARDING CHARGES SHIFTI NG CHARGES OF UPS STP; CIRCUIT AND LOADING UNLOADING CH ARGES. IT IS FURTHER SUBMITTED THAT APPROPRIATE TDS WAS ALS O DEDUCTED AND DEPOSITED BY THE COMPANY ON THE ABOVE PAYMENTS. IN THIS CONNECTION IT IS SUBMITTED THAT ABOVE EXPENDITURE HAS BEEN MERELY INCURRED TO GUARD AGAI NST VARIOUS SECURITY / OTHER CONCERNS WHICH MAY ARISE ON THE ASSESSEE BY VIRTUE OF THE PRESENCE OF A COMMERCIAL ESTABLISHMENT IN A RESIDENTIAL AREA. THE SAID EXPE NDITURE HAS BEEN INCURRED TO FACILITATE EFFICIENT CONDUCT OF THE BUSINESS BY SHIFTING THE OFFICE PREMISES TO A COMMER CIAL AREA. NO ENDURING BENEFIT OR AN ADVANTAGE IN THE CA PITAL FIELD HAS BEEN DERIVED BY THE ASSESSEE ON ACCOUNT OF THE ITA NO. 6083/DEL/2010 38 AFORESAID EXPENDITURE. IT IS SUBMITTED THAT THE SAME HAS BEEN INCURRED IN THE NORMAL COURSE OF BUSINESS AND ARE ALLOWABLE AS REVENUE DEDUCTION. IN THIS REGARD KIND ATTENTION IS INVITED TO THE D ECISION OF THE HONBLE SUPREME COURT IN THE CASE OF EMPIRE J UTE CO. LTD. VS C.I.T. (124 ITR 1) WHEREIN THE TEST FOR DE TERMINING AS TO WHAT CONSTITUTES CAPITAL EXPENDITURE HAS BEEN LAID DOWN IN THE FOLLOWING TERMS:- IT IS NOT EVERY ADVANTAGE OF ENDURING NATURE ACQUIRED BY AN ASSESSEE THAT BRINGS THE CASE WITHI N THE PRINCIPLE LAID DOWN IN THIS TEST. WHAT IS MATERI AL TO CONSIDER IS THE NATURE OF THE ADVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHERE THE ADVANTAGE IS IN THE CAPITAL FIELD THAT THE EXPENDITURE WOULD BE DISALLOWABLE ON AN APPLICATION OF THIS TEST. IF TH E ADVANTAGE CONSISTS MERELY IN FACILITATING THE ASSESSEES TRADING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEES BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITA BLY WHILE LEAVING THE FIXED CAPITAL UNTOUCHED THE EXPENDITURE WOULD BE ON REVENUE ACCOUNT EVEN ITA NO. 6083/DEL/2010 39 THOUGH THE ADVANTAGE MAY ENDURE FOR AN INDEFINITE FUTURE. THE RATIO DECIDENDI LAID DOWN IN THE AFORESAID JUDGMENT HAS BEEN REITERATED BY THE SUPREME COURT IN LD. COMMISSIONER OF INCOME TAX VS ASSOCIATED CEMENT COMPANIES LTD. (172 ITR 257) AND AGAIN IN THE CASE OF ALEMBIC CHEMICAL WORKS CO. LTD. VS C.I.T.(177 ITR 37 7). FURTHER IN THE CASE OF C.I.T. VS BRAKES INDIA LTD. (161 TAXMAN 47) HON'BLE' CHENNAI HIGH COURT HELD THAT ' EXPENSES INCURRED BY THE ASSESSEE ON RELOCATING ITS PLANT BY WAY OF READJUSTMENT WITHIN THE SOME FACTORY SHED TO ACHIEVE BETTER PRODUCTIVITY WERE DEDUCTIBLE AS BUSINESS EXPENDITUR E.' (COPY ENCLOSED AS ANNEXURE- II). HENCE IN VIEW OF THE ABOVE IT IS SUBMITTED THAT RE LOCATION EXPENSES ARE IN THE NATURE OF REVENUE EXPENDITURE A ND SHALL BE ALLOWED AS ALLOWABLE DEDUCTION UNDER SECTION37 OF T HE ACT. 8. ASSESSING OFFICER WAS NOT CONVINCED BY THE ASSE SSEES ARGUMENTS. HE HELD THAT THIS EXPENDITURE IS CAPIT AL IN NATURE. IN THIS REGARD ASSESSING OFFICER ALSO PLACED RELIANCE UPO N THE HONBLE PATNA HIGH COURT DECISION IN THE CASE OF C.I.T. VS. JAMS HEDPUR ENGG. AND ITA NO. 6083/DEL/2010 40 MACHINE MFG. CO. LTD. (1986) 157 ITR 730 IN WHICH IT HAS BEEN SPECIFICALLY OBSERVED THAT THE EXPENSE INCURRED IN CONNECTION WITH THE SHIFTING INCLUDING THE EXPENSES IN THE FORM OF PAYM ENTS MADE TO THE LAWYERS COULD NOT BE CATEGORIZED AS REVENUE EXPENDI TURE IN NATURE. 9. UPON ASSESSEES APPEAL DRP AFFIRMED THE ASSESSING OFFICERS ACTION. 10 ASSESSEE IS AGGRIEVED ON ACCOUNT OF THIS FINDING OF THE ASSESSING OFFICER. 11. IN THIS REGARD IT HAS BEEN SUBMITTED THAT THE RELOCATION EXPENSES WERE INCURRED BY THE ASSESSEE ON SHIFTIN G OF ITS OFFICE FROM SAFDARJUNG ENCLAVE TO MOHAN COOPERATIVE INDUSTRIAL E STATE DUE TO DRIVE OF MCD FOR SEALING OF PREMISES. BY SHIFTING THE OP ERATIONS TO A NEW PREMISES SITUATED IN A COMMERCIAL AREA THE ASSESSEE WAS ABLE TO WARD OFF THE IMPENDING RISK OF SEALING OF MCD AND SAVE ITS BUSINESS FROM DISCONTINUANCE. THE SAID EXPENSES INCURRED ON RE LOCATION OF THE OFFICE ARE ESSENTIALLY REVENUE EXPENSES IN AS MUCH A S IT DID NOT RESULT IN ENDURING BENEFIT IN THE CAPITAL FIELD AS PER TH E TEST LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF EMPIRE JUTE COMPA NY VS. C.I.T. 125 ITR 1 (SC) AND REITERATED IN C.I.T. VS. MADRA S AUTO SERVICE PVT. LTD. 233 ITR 468. THEREFORE WE HOLD THAT THE C LAIM OF THE ASSESSEE ITA NO. 6083/DEL/2010 41 FOR RELOCATION EXPENSES OF ` 32 88 224/- OUGHT TO BE ALLOWED IN FULL UNDER THE PROVISIONS OF SECTION 37(1) OF THE IT ACT . 12. NOW WE TAKE UP THE GROUND NO. 15 WHICH READS AS UNDER:- THAT THE LD. ASSESSING OFFICER HAS ERRED ON FACTS AND IN LAW BY TREATING RECRUITMENT EXPENSE AMOUNTING TO RS.20 7 0 000 INCURRED FOR FEE PAID TO CONSULTANTS AND RECRUITMEN T AGENCIES ADVERTISEMENT ETC. AS CAPITAL EXPENDITURE AND DISALLOWING THE CLAIM OF THE APPELLANT FOR REVENUE EXPENSES MADE U/S 37(1). 13. ON THIS ISSUE ASSESSEE SUBMITTED BEFORE THE A SSESSING OFFICER AS UNDER:- RECRUITMENT EXPENSES INCURRED BY THE ASSESSEE CONS IST OF PAYMENT MADE TO CONSULTANTS FOR HIRING THE EMPLOYEES ADVERTISEMENT EXPENSES FOR RECRUITMENT NEW EMPLOYEES ETC. (DETAILS ENCLOSED AS ANNEXURE III). THE SAME H AS BEEN INCURRED IN THE NORMAL COURSE OF BUSINESS AND IS AL LOWABLE REVENUE DEDUCTION UNDER SECTION 37 OF THE ACT. FOL LOWING THE RATIO DECIDENDI OF THE DECISION OF THE SUPREME COURT IN THE CASE OF EMPIRE JUTE (SUPRA) IT IS SUBMITTED TH AT NO ENDURING BENEFIT HAS BEEN DERIVED BY THE ASSESSEE B Y ITA NO. 6083/DEL/2010 42 VIRTUE OF INCURRING THE ABOVE EXPENDITURE. FURTH ER APPROPRIATE TDS WAS ALSO DEDUCTED AND DEPOSITED BY THE COMPANY ON THE ABOVE PAYMENTS. IT IS SUBMITTED THAT COMPANY IS IN THE BUSINESS OF DEVELOPMENT OF COMPUTER SOFTWARE AND MAJOR EXPENDITUR E WAS INCURRED BY THE COMPANY ON SALARIES AND ALLOWANC ES PAID TO THE EMPLOYEES. HENCE COMPANY WAS NECESSARIL Y REQUIRED TO INCUR THE EXPENDITURE ON RECRUITMENT OF EMPLOYEES. HONBLE DELHI ITAT DECISION IN THE CASE OF DCIT VS . BECHTEL INDIA P LTD. (ITA NOS. 4278/DEL/2005) AND 1803/DEL/2006) HAD NOTED THAT RECRUITMENT AND TRAINI NG EXPENSES INCURRED BY THE ASSESSEE COMPANY WAS NOT RELATED TO THE CAPITAL FILED AND HAVING REGARD TO T HE NATURE OF ITS BUSINESS THE SAME WAS CLEARLY OF REVENUE NA TURE BEING INCURRED FOR THE PURPOSE OF INCREASING THE E FFICIENCY OF ITS BUSINESS. ACCORDINGLY TRIBUNAL HAD ALLOWE D THE DEDUCTION TO THE ASSESSEE ON ACCOUNT OF EXPENDITURE INCURRED ON RECRUITMENT AND TRAINING EXPENSES. (COP Y ENCLOSED AS ANNEXURE IV). ITA NO. 6083/DEL/2010 43 FURTHER IN THE CASE OF BHEL-GE GAS TURBINE SERVIC ES (P) LTD. VS. JCIT (ITA NO. 490/DEL/2005) HONBLE DE LHI ITAT HAS ALSO ALLOWED THE DEDUCTION ON ACCOUNT OF RECRU ITMENT EXPENSES BEING REVENUE IN NATURE. (COPY ENCLOSED AS ANNEXURE V). HENCE IN VIEW OF THE ABOVE IT IS SUBMITTED THAT RECRUITMENT EXPENSES ARE IN THE NATURE OF REVENUE EXPENDITURE AND SHALL BE ALLOWED AS ALLOWABLE DEDUC TION UNDER SECTION 37 OF THE ACT. 13.1 THE ASSESSING OFFICER WAS NOT CONVINCED BY TH E ABOVE ARGUMENTS. HE HELD THAT ASSESSEE IS ENGAGED IN TH E BUSINESS OF DEVELOPMENT OF COMPUTER SOFTWARE AND THE HUMAN RESO URCE POWER IS THE MAIN BASIS POWER BASED ON WHICH THE ASSESSEE I S EARNING ITS INCOME. EXPENSES INCURRED IN RELATION TO THE MA IN BUILDING BLOCKS OF THE COMPANY I.E. HUMAN RESOURCE POWER WILL GIVE THE ENDURING BENEFITS TO THE ASSESSEE THEREFORE THE EXPENSES I NCURRED IN RELATION TO THE SAME CAN NOT BE ALLOWED TO THE ASSESSEE BY CONSIDERING THE SAME AS REVENUE IN NATURE. THEREFORE THE ASSESSI NG OFFICER HELD THAT EXPENSES INCURRED IN RELATION TO THE RECRUITMENT O F MAIN STAFF OF THE ASSESSEE COMPANY WHICH IS A SOFTWARE DEVELOPER IS C ONSIDERED TO BE CAPITAL IN NATURE AND THE SAME WAS THEREFORE DISA LLOWED. ITA NO. 6083/DEL/2010 44 14. UPON THE ASSESSEES APPEAL THE DRP UPHELD THE ASSESSING OFFICERS ACTION. 15. WE HAVE HEARD THE RIVAL CONTENTIONS IN LIGHT OF THE MATERIAL PRODUCED AND PRECEDENT RELIED UPON. LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT DURING THE YEAR CONSIDERATION THE ASSESSEE INCURRED AN AGGREGATE AMOUNT OF ` 20 70 000/- AS RECRUITMENT E XPENSES BEING EXPENSES INCURRED IN RELATION TO HIRING OF EMPLOYEES WHICH WERE PAID TO CONSULTANTS AND FOR ADVERTISEMENT AND OTHER INCI DENTAL EXPENSES AS REVENUE EXPENDITURE. WE AGREE THAT THE AFORESAID E XPENDITURE ARE ESSENTIALLY ON REVENUE ACCOUNT AND DID NOT RESULT I N EITHER AN ENDURING BENEFIT IN CAPITAL FILED OR CREATION OF CAPITAL ASS ETS AS PER THE TEST LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF E MPIRE JUTE CO. LTD. VS. C.I.T. 124 ITR 1. THUS WE HOLD THAT RECRUITMEN T EXPENSES OF ` 20 70 000/- ESSENTIALLY REVENUE EXPENDITURE IS TO BE ALLOWED. 16. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE STANDS ALLOWED IN THE MANNER AS AFORESAID. ORDER PRONOUNCED IN THE OPEN COURT ON 30/3/2012. SD/ SD/ SD/ SD/- -- - SD/ SD/ SD/ SD/- -- - [ [[ [A.D. JAIN A.D. JAIN A.D. JAIN A.D. JAIN] ]] ] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER DATE 30/3/2012 SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: - -- - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR ITAT TRUE COPY BY ORDER ASSISTANT REGISTRAR ITAT DELHI BENCHES