R.S.Syal, Member (A) -
(1.) THIS appeal by the assessee is directed against the order passed by the Assessing Officer on 21.1.2014 u/s. 143(3) r.w.s. 144C of the Income -tax Act, 1961 (hereinafter also called 'the Act') in relation to the assessment year 2009 -10.
(2.) 1. The first issue is a challenge to the addition on account of Transfer Pricing Adjustment amounting to Rs. 8,56,01,801/ - in the 'Software development services' segment. Briefly stated the facts of the case are that the assessee was incorporated in India in 2005 and is engaged in the business of development of systems and applications software. It is a subsidiary of Hughes Systique Maurities Pvt. Ltd. Four international transactions were reported by the assessee, viz., Receipts on account of software development services, Payment on account of marketing support services, Payment for services availed and Miscellaneous income. The Transfer Pricing Officer (TPO) accepted the last two transactions at ALP. First international transaction of receipts on account of software development services amounted to Rs. 52,42,68,870/ -. In its Transfer pricing study report, the assessee benchmarked this transaction by selecting Comparable Uncontrolled Price (CUP) method as the most appropriate method and a corroborative internal Transactional Net Margin Method (TNMM). The TPO observed that the assessee provided software engineering services in the telecom sector and it was an essential Software Development Centre of its US holding company. Following the view taken by him in the immediately preceding year, the TPO held that the use of CUP method as the most appropriate method and a corroborative internal TNMM were not capable of acceptance. For rejecting such methods, he observed that the CUP method can be used only if there are potentials to lead to the correct results. The assessee had international transactions with its four AEs under this segment. He noticed that the assessee supplied details of transactions with only one of such four entities, namely, M/s. Hughes Network Systems Inc. and it failed to submit any data as regards the transactions with the other three AEs. It was further noticed by him that the assessee tried to demonstrate that the payments received from M/s. Hughes Network Ltd. was more than what that A.E. claimed to have paid to its unrelated parties for the same work, but the nature of services provided by the unrelated parties to the AE were not brought on record. In view of these reasons, the TPO held that the CUP method could not be applied. As regards the application of internal TNMM, the TPO noticed that there were no separate accounts maintained in respect of transactions with AEs and non -AEs. It was seen that the assessee allocated cost between A.E. and non -A.E. segments in such a manner as to boost the profitability of the A.E. segment so as to claim that it had earned more profit form the international transactions vis -vis the transactions with non -AEs. He, therefore, refused to rely on the segmental results provided by the assessee for doing an internal TNMM analysis. The TPO carried out a fresh search and selected certain companies as comparable for applying external TNMM for benchmarking the assessee's international transactions under this segment. The companies chosen by him as comparable were confronted to the assessee. After entertaining objections from the assessee, he shortlisted sixteen companies as comparable. A list of such companies has been drawn on page 46 of the TPO's order. By applying the Profit Level Indicator (PLI) of Operating Profit/Operating Costs, the TPO determined arithmetic mean of such PLI of the sixteen comparable companies at 21.17%. This profit rate was applied to the total Operating costs incurred by the assessee under this segment at Rs. 50.33 crore to work out the ALP at Rs. 60.98 crore. Since, the assessee had received only a sum of Rs. 52.42 crore, the TPO proposed Transfer Pricing Adjustment amounting to Rs. 8.56 crore. The assessee failed to convince the Dispute Resolution Panel (DRP) on its line of reasoning. Resultantly, the A.O. made an addition on account of Transfer Pricing Adjustment under this segment for a sum of Rs. 8.56 crore. The assessee is aggrieved against this addition.
2.2. We have heard the rival submissions and perused the relevant material on record. It is clear from para 4.2 of the TPO's order that he rejected the application of CUP method as the most appropriate method and a corroborative internal TNMM by relying on the view taken by him in the preceding year. It is noticed that his order for such earlier year came up for consideration before the tribunal. The tribunal has passed a common order on 5.7.2013 (in ITA Nos. 5420/Del/2011 and 6057/Del/2012) not only for the immediately preceding assessment year 2008 -09 but also assessment year 2007 -08. It can be seen that in both the years, the assessee benchmarked its international transactions under the 'Software development services' segment by applying CUP method as the most appropriate method and internal TNMM as the corroborative method, as the position is obtaining for the instant year. The TPO disregarded the benchmarking analysis done by the assessee and proceeded to determine ALP of the international transactions by applying external TNMM. The Tribunal examined the correctness of the TPO's approach in the light of detailed submissions advanced on behalf of the rival parities. Vide para 14 of its order, the co -ordinate Bench accepted the assessee's contention that the applicability of internal CUP method was not properly dealt with by the DRP and TPO. Eventually, the Tribunal restored the matter to the TPO with a direction: 'to decide this issue afresh after giving the assessee an opportunity of being heard and give proper reason if the CUP method is proposed to be not considered'. The crux and the admitted inference of the view taken by the Tribunal in assessee's own case for the immediately preceding two assessment years is that firstly, the internal CUP should be applied and if, for any reasons the CUP method cannot be applied, then TNMM should be resorted to. The ld. AR contended that the TPO in his order for the assessment year 2010 -11 has accepted the assessee's approach of benchmarking the international transactions under this segment in the fashion similar to what has been done for the instant year. It was, therefore, contended that the assessee's benchmarking done in the TP study report for the current year be accepted as correct and the resultant addition be deleted.
2.3. It is apparent from the order passed by the TPO for the instant year that he relied on the view taken by him for the immediately preceding assessment year. It is further noticeable that the appeals for not only the immediately preceding assessment year but also a year earlier, have been decided by the Tribunal, in which specific directions have been given as noted above. On one hand, we have the benefit of an order passed by the Tribunal in assessee's own case for the immediately preceding assessment year, which also forms the basis for the addition made in the instant year, and on the other hand, there is an order passed by the TPO culminating into the assessment order for a succeeding year, whose facts may be different and which itself may be amenable to rectification or reassessment or revision. There is hardly any need to accentuate that in such circumstances, the view taken by the Tribunal in assessee's own case should prevail over any other thing. We, therefore, set aside the impugned order and remit the matter to the file of AO/TPO for fresh determination of ALP under this segment in consonance with the directions given by the Tribunal for the immediately preceding two assessment years.
2.4. At this stage, we consider it important to clarify that the CUP method can be used only if the products or services of the assessee are comparable to those of the other uncontrolled transaction. Thus, it follows that it is of utmost importance to first precisely determine the nature of services offered by the assessee to its AEs in order to make an effective comparison with the services rendered by it to the non -AEs. Unless the nature of services rendered by the assessee to its AEs and non -AEs is accurately ascertained, there can be no question of making a meaningful comparison. Coming back to the TPO's order, it is observed that the assessee had international transactions with four of its A.Es. under this segment. The details of transactions with only one A.E., namely, Hughes Network Systems Inc., were made available to the TPO in the shape of Agreement etc. No other details or copies of the Agreements for the transactions with the remaining three A.Es were provided to the TPO, enabling him to carry out an analysis of the functions performed by the assessee for making a logical comparison with the uncontrolled transactions undertaken by it. As, while following the tribunal order for the preceding years, we are restoring the matter to the file of A.O. with a direction to first consider the applicability of CUP method, the assessee is directed to provide all necessary details to the TPO facilitating him to make a meaningful comparison of the services rendered by it to the AEs and non -AEs. Such details of the transactions to the TPO may be in the form of Agreements with the remaining three A.Es as well, copies of invoices and other relevant details, as the TPO may deem necessary. Only if the CUP method is found to be inapplicable by the TPO due to one reason or the other, including not providing of the necessary details of the international transactions with the other three AEs or the details of services provided by the assessee to non -AEs, that the TPO will switch over to the TNMM for benchmarking international transactions under this segment. In the final analysis, we set aside the impugned order on this score and remit the matter to the file of AO/TPO for a fresh determination of the ALP of the international transactions under this segment as discussed above.
Next issue raised through ground No. 4 is against the making of an addition on account of Transfer pricing adjustment amounting to Rs. 9,13,17,896/ - in respect of international transaction in the nature of 'Marketing support services'.
3.2. Having considered the rival submissions and perused the relevant material on record, it is noticed that the Tribunal for the immediately preceding two assessment years restored the matter to the file of AO/TPO for a fresh determination of ALP under this segment as well. The directions given by the tribunal, as discussed above, were admittedly common to both the segments, namely, Software development services segment and Marketing support services. The view canvassed by the TPO in making the addition for the instant year under this segment again traces its origin to the preceding year. Without going into the further details and respectfully following the precedent, we are of the considered opinion that the ends of justice would meet adequately, if the impugned order on this score is also set aside and the matter is sent back to the AO/TPO for a fresh determination of the ALP under this segment in consonance with the directions given by the Tribunal. We order accordingly.
(3.) 1. Ground No. 5 is against the addition of Rs. 18,98,367/ - on account of excess claim of depreciation. The facts apropos this ground are that the assessee claimed depreciation on computer UPS and other peripherals @ 60%, which was reduced by the Assessing Officer to 15%.
4.2. After considering the rival submissions and perusing the relevant material on record, we find that this issue is no more res integra in view of the direct decision of the Hon'ble jurisdictional High Court in the case of CIT Vs. BSES Rajdhani Powers Ltd. (Delhi) and a Special Bench order in the case of DCIT Vs. Datacraft India Ltd. : (2010) 133 TTJ (Mum) (SB) 377. In these decisions, it has been held that UPS and other computer peripherals are eligible for depreciation @ 60%. The ld. AR contended that the Tribunal has also taken similar view in assessee's own case for the earlier years. In view of the foregoing discussion, we are of the considered opinion that the assessee deserves to succeed on this issue. We order accordingly. This ground is allowed.;