IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: `I-2' NEW DELHI
BEFORE SMT DIVA SINGH, JUDICIAL MEMBER
AND
SH.O.P.KANT, ACCOUNTANT MEMBER
I.T.A .No.-2751/Del/2013
(ASSESSMENT YEAR-2005-06)
DCIT, vs Nortel Networks India Pvt. Ltd.,
Circle-13(1), 2nd Floor, Orchid Plaza Suncity,
New Delhi. Sector-54, Gurgaon
PAN-AABCN1424B
(APPELLANT) (RESPONDENT)
Appellant by Sh.Deepak Chopra, Adv. &
Sh. Rohan Khare, Adv.
Respondent by Sh.Sanjay Kumar, Sr. DR
Date of Hearing 29.10.2015
Date of 11.01.2016
Pronouncement
ORDER
PER DIVA SINGH, JM
The present appeal has been filed by the Revenue assailing the
correctness of the order dated 31.12.2013 of CIT(A)-29, New Delhi
pertaining to 2005-06 assessment year on the following grounds:-
1. "The Ld. CIT(A) has erred in law and on facts in deleting the
addition on account of difference in ALP determined by the
TPO & the assessee amounting to Rs.2,60,42,622/-
ignoring the fact that the as per the transfer pricing issues,
an entity is held to be making persistent losses if it makes
losses in 2 out of 3 financial years' including the financial
year under consideration. The HFCL has made losses in FY
2003-04 and FY 2004-05, thus, it has incurred losses in 2
I.T.A .No.-2751/Del/2013
of the 3 financial years which have been considered by the
assessee in its TP study;
2. The Ld. CIT (A) has erred in law and on facts in deleting the
addition on account of disallowance of provision of
warranty amounting to Rs.22,92,76,418/- ignoring the fact
that assessee during assessment proceedings has himself
admitted that the amount of Rs.10.14 crores was
mistakenly calculated excessively which shows that the
assessee has not at all crystallized the amount of warranty
while creating the provision;
3. The Ld. CIT(A) has erred in law and on facts in allowing
depreciation on UPS (Uninterrupted Power Supply) @ 60%
by not considering the fact that UPS is merely a part which
is used to regulate the electric supply to computer and by no
means as per Section 32 of the Act be termed as 'computer
including computer software' as computer can work without
UPS also;
4. The Ld. CIT(A) has erred in law and on facts in deleting the
addition on account of recognition of revenue for BSNL
project amounting to Rs.13,87,91,437/- by ignoring the fact
that the assessee has not provided any justification for
excluding AMC revenue from revenue recognition for the
relevant Asstt year; and
5. The appellant craves to be allowed to add any fresh
grounds of appeal and/or delete or amend any of the
grounds of appeal."
2. Right at the outset the Ld.AR submitted that although the
present appeal has been filed by the department but he has been
instructed by his client to state that since the assessee in the
process of winding up its activities and is liquidating its business
thus he is under instruction to take certain position in the appeal in
order to facilitate and ensure that the litigation ends. It was his
submission that this fact has been brought to the notice of the
Hon'ble High Court in various litigations pending before it also.
2.1. It was his submission that these facts may be kept in mind
while deciding the departmental appeal as the position taken by the
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I.T.A .No.-2751/Del/2013
assessee in Ground No.4 is on account of these peculiar facts and
circumstances as it is in an endeavour to avoid protracted litigation.
3. The relevant facts of the case as available from para 2 of the
assessment order u/s 143(3) dated 29.12.2008 address the
background of the assessee as under:-
2. "The assessee is engaged in the business of marketing and
after sales support services to Nortel group companies,
installation, testing and commissioning services in relation
to telecom equipment/I.T/other products and technical
services, including repair and maintenance services in
relation to the telecom equipment/IT products supplied by
Nortel group of companies in India."
3.1. The assessee in the year under consideration returned an
income of Rs.33,34,44,830/- wherein the assessment was concluded
at a figure of Rs.74,27,57,980/-. The assessee in the year under
consideration disclosed the following international transactions in its
3CEB Report:-
S.No. International Transactions Method Value Rs.
1. Import of components TNMM 714,98,28,572
2. Provision of technical support services TNMM 4,63,56,666
(R&D)
3. Availing of technical services from AE TNMM 2,57,26,109
4. Provision of professional services (BSNL TNMM 153,23,49,052
contract)
5. Provision of professional services TNMM 31,82,66,038
(Others)
6. Provision of marketing and after sales TNMM 90,55,13,532
support services
4. The issue raised by the Revenue vide Ground No.1 pertains to
the transactions disclosed at Sl. No.3 in the above chart. The facts
as appreciated by the CIT(A) show that the assessee had entered into
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I.T.A .No.-2751/Del/2013
a contract with Reliance Infocomm Ltd. for provision of services in
relation to installation, commissioning, operation, management and
maintenance of its optical network. On consideration of the said
agreement it was seen that it required the assessee to provide
training to RIL personnel in relation to optical software network
being installed by the assessee. The contract also provided for
training to be provided by expatriates from North America, Asia
Pacific and Europe, therefore the assessee as per record was found
to have availed of the services of expatriates from its AE's for
provision of technical services to RIL under the agreement. This
factual position has not been disputed by the Revenue.
4.1. The assessee in its transfer pricing study selected TNMM as the
most appropriate method and applied operating profit/operating
revenue as PLI. The following ten comparable companies were
selected by the assessee for working out the arm's length price:-
S.No. Comparable Adjusted operating profit on Weighted Average
Companies adjusted operating revenue % Adjusted operating
2005 2004 2003 profit on adjusted
operating revenue %
2003-05
1. Engineers India 20.75 20.23 17.26 20.71
Limited
2. Esquire Engineers NA NA -14.36 -14.36
and Consultants
Limited
3. F L Smidth Limited 5.01 NC NC 5.01
4. Powerplant NA NA -12.04 -12.04
Performance
Improvement Ltd.
5. RITES Limited NA 21.16 9.53 15.38
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I.T.A .No.-2751/Del/2013
6. TCE Consulting 9.63 -0.02 4.18 4.96
Engineers Ltd.
7. Water & Power NA 8.25 -9.86 1.08
Consultancy
Services Ltd.
8. CMC Ltd. NC -0.17 1.46 0.52
9. Hartron NA -26.25 -19.12 -21.99
Communication
10. Himachal NA -31.38 9.08 -5.96
Futuristic
Communication
Ltd.
Arithmetic mean -0.67
4.2. Considering the mean average profit margin of 0.67% of these
above ten comparable companies the assessee whose operating
margin of this segment 7% and since it was higher than the mean
margin of the comparable companies, the transaction was concluded
to be at arm's length.
4.3. The TPO considering the comparables chosen by the assessee
excluded 3 of the above on the ground that their financials for F.Y.
2004-05 were not available. He further excluded two loss making
comparables, namely Hartron Communication and Himachal
Futuristic Communication Ltd. Accordingly after retaining 5
comparables of the originally offered comparable companies by the
assessee, he proposed an upward adjustment of Rs.2.60 crore odd
as their operating profits on operating revenue margin worked out
as 13.52% whereas the assessee's margin was only 7%. The
following five comparables retained were retained:-
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I.T.A .No.-2751/Del/2013
S.No. Particulars Operating profits on
operating revenue
(%) (2005)
1. Engineers India Limited 20.75
2. F L Smidth Limited 5.01
3. RITES Limited 19.24
4. TCE Consulting Engineers 13.01
Ltd.
5. Water & Power Consultancy 13.01
Services Ltd.
Arithmetic Mean 13.52
5. Aggrieved the assessee in appeal before the CIT(A) objected to
the exclusion of HFCL based on the negative financial result of FY
2003-04 and 2004-05 and argued that simply because the company
shown loss in 01-02 years it cannot be concluded that it is
consistently a loss making company as it has earned an operating
margin of 10.18% for FY 2002-03; 0.04% in FY 2005-06; and
17.82% in FY 2006-07 thus the loss incurred in 2003-04 and 2004-
05 cannot make the said comparable an inherently loss making
company to be excluded.
5.1. Considering these arguments the CIT(A) came to the following
submissions:-
9.1. "I have carefully gone through various contentions raised by
the appellant. The TPO has proposed addition in respect of only
one segment of international transactions i.e. 'Technical Services'
and arm's length nature of other categories of international
transactions have been accepted. Both appellant and TPO have
adopted same set of comparables, TNMM as MAM and operating
profit / operating revenue as PLI. However, TPO has rejected two
companies as comparable, being loss making companies.
9.2 The appellant has contended that a loss making company can
not be discarded from the list of comparables just because it has
incurred loss when its FAR is comparable with the tested party.
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I.T.A .No.-2751/Del/2013
The appellant has relied upon Indian TP regulations, judicial
decisions and OECD guidelines for this proposition. I find force in
contention of the appellant that comparability is not about
comparing only the profit making entities with the tested party.
Various judicial decisions have laid down the principle that
abnormally high profit and loss making companies should be
excluded. Further, if a company is consistently loss making over a
substantial period, then obviously its business model is such that
it can not be taken as comparable. In present case, the appellant
has contended that Himachal Futuristic Communication Ltd. is not
a consistently loss making company as under:-
S.No. Particulars FY 2002- FY 2003- FY 2004-05 FY 2005- FY 2006-
03 04 06 07
1. Revenue 302.05 184.24 73.44 89.27 564.2
2. Profit 64.16 -23.57 -19.83 0.03 100.58
3. OP/OR % 21.24 -12.79 -27.01 0.04 17.82
The TPO has not disputed FAR of Himachal Futuristic
Communication Ltd. so far as its comparability with the appellant
is concerned. In view of above, it cannot be said that HFCL is a
consistently loss making company and hence can be treated as
comparable. Therefore, I hold that HFCL is a comparable
company.
9.3. Regarding Hartron Communication, TPO has discarded it as
comparable by observing that it is a BPO company specializing in
medical billing and coding. The appellant has contended that it
has considered only job work segment of the said company under
which it is engaged in repairing and servicing of electronic cards
for Keltron Ltd., a company operating in telecom sector. Obviously,
Hartron Communication is not directly engaged in
telecommunication industry and hence its business profile is
substantially different from that of the appellant. Even if the
appellant has used its job work segment, it can not be said that
repairing and servicing of electronic cards are comparable with
business activities of the appellant. Hence, I hold that FAR
analysis of Hartron Communication does not permit it to be taken
as comparable.
9.4 In view of discussion supra, there shall be 6 comparables
and their profit margin after taking current year data only is
worked out as under:
S.No. Particulars Operating profits on
operating revenue (%)
1. Engineers India Limited 20.75
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I.T.A .No.-2751/Del/2013
2. FL Smidth Limited 5.01
3. RITES Limited 19.24
4. TCE Consulting 9.63
Engineers Ltd.
5. Water & Power 13.01
Consultancy Services
Ltd.
6. Himachal Futuristic -27.01
Communication Ltd.
Arithmetic Mean 6.77
9.5. Since the operating margin earned by Appellant at 7% is
higher than the mean margin of comparable companies, the
international transaction relating to availing of services by the
Appellant from its associated enterprises is considered to be at
arm's length. Therefore, AO is directed to delete the addition of
Rs.2,60,42,622 made on this account."
6. Aggrieved by this, the Revenue is in appeal. Ld. Sr.DR
submitted that no doubt HFCL has shown some profits in
subsequent years and is managing to keep alive but the loss in the
year under consideration cannot be stated to be against the trend
and thus the said comparable was correctly excluded by the TPO.
7. The Ld. AR on the other hand heavily relying upon the finding
of the CIT(A) and carrying us through the same, submitted that the
Revenue has not till date assailed FAR analysis of the said
comparables. Thus where functional similarity of the comparables
with the assessee has not been assailed the arguments re-iterating
the TPO's version should have no relevance. Further it was also his
submission that looking at the figures of FY 2005-06 and 2006-07, it
cannot be said that the said comparable is barely surviving and the
law is well-settled as the criteria for exclusion on the grounds of loss
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I.T.A .No.-2751/Del/2013
making or profit making companies cannot be accepted. The non-
acceptance of such reasoning is well settled by jurisprudence which
is clear that either functional similarity needs to be assailed or the
party praying for exclusion or inclusion needs to establish that there
was something inherently wrong with the company. Some facts and
circumstances as an event of amalgamation liquidation etc. needs to
be established and no such effort has been made by the Revenue to
justify its exclusion except that it is a loss making company.
Accordingly relying upon the impugned order it was his submission
that the same may be upheld.
8. We have heard the rival submissions and perused the material
available on record. On a careful reading of the impugned order, we
find that in the absence of any infirmity in the reasoning adopted by
the First Appellate Authority, the arguments of the Ld. Sr.DR
cannot be accepted. The Revenue has not assailed the finding of the
CIT(A) that functional comparability of the assessee with HFCL
stands established. Thus where on FAR analysis the conclusion
that it is correctly chosen as a comparable remains is unassailed,
then it is necessary for the Revenue at that stage to bring some
cogent reason, argument or fact justifying that still the comparable
needs to be excluded. Merely re-iterating the TPO's stand at this
stage that it was consistently a loss making company does not hold
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I.T.A .No.-2751/Del/2013
good in the face of the finding of the CIT(A). The data placed on
record by the assessee assails the conclusion and this fact has been
accepted by the CIT(A). We further find that it remains unrebutted
on record. In the afore-mentioned peculiar factual position, we find
that there is no merit in the departmental appeal. The conclusion
drawn is found supported by the decision of the Hon'ble Delhi High
Court in the case of Chrys Capital and finding ourselves in
agreement with the reasoning and the finding of the CIT(A), Ground
no.1 of the Revenue is dismissed.
9. The facts relatable to Ground No.2 are found discussed in
pages 3-5 of para 4 of the assessment order. In view of the stand
taken by the assessee qua the same reference thereto is not
necessary.
10. The issue has been considered by the CIT(A) at pages 19 to 20
in paras 21 to para 21.4 and again for similar reason there is no
need to bring out the facts.
11. The reason for so holding is that the Ld.AR submitted that
actual warranty expenses have been allowed in subsequent years
and thus he would have no objection if the said Ground of the
Revenue is allowed. In view of the said stand the Ld. Sr. DR though
placed reliance on the assessment order had nothing further to
state. In view of the above, Ground No.2 of the Revenue is allowed.
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I.T.A .No.-2751/Del/2013
12. The issue addressed by Ground No.3 in the departmental
appeal is found discussed at pages 7 & 8 of the assessment order
where the AO has discussed the same in paras 7 & 7.1. The same
is reproduced hereunder for ready-reference:-
7. Disallowance of excess depreciation:
"On perusal of depreciation chart as per I. Tax Act, it is noticed
that the assessee has purchased ARC Symmetra UPS and
Symmetra battery module " on various dates in July 2004 for a
total of Rs. 4,96,365/- and claimed depreciation on the same @
60% amounting to Rs. 2,97,819/-under the head "Computer" .
Further , the assessee has purchased ARC Symmetra UPS on in
March 2005 for a total of Rs. 1,24,000/- and claimed depreciation
on the same @ 30% amounting to Rs. 37,200/- under the head
"Computer" (Being 50% of normal rate of depreciation of 60%
permissible on computers as it was used for less than 180 days).
Accordingly, during the course of the assessment proceedings the
assessee was asked to justify the claim of higher rate of
depreciation on these equipments , as it is a part of the block of
asset "Plant and machinery" and not of "computer" as provided in
Section 32 of the income tax Act.
7.1. The submission of the assessee that UPS is also a part of
computer were considered but the same were not found
convincing. The only function of the UPS is to ensure regular
supply of power and by no means as per Section 32 of the I.Tax
Act 1961 it can be termed as "computers including computer
software" and be a part of the block of asset i.e. "computer".
Therefore, the rate of depreciation charged @ 60% is restricted to
15% treating the UPS as normal 'Plant and Machinery". As per the
details furnished by the assessee in its depreciation chart, it has
made an addition to the ape Symmetra UPS of Rs 1,24,000/- on
24.03.2005. Therefore, the assessee is eligible for depreciation of
Rs. 9,300/- @7 5% being put to use for less than 180 days.
Similarly, the claim on UPS and symmetra battery module added
in July 2004 is allowed @15% on 4,96,365/- i.e Rs. 74,455/- .
Hence the excess claim of depreciation amounting to
Rs.2,51,264/- (Rs.2,23,364/-+ Rs.27,900/-) is hereby disallowed
u/s 32 of the I.Tax Act and added back to the total income of the
assessee.
I am satisfied that the assessee company has furnished
inaccurate particulars of its income and has suppressed its
income on this issue, therefore, penalty proceedings u/s 271(1)(c)
of I. Tax Act have been initiated separately."
(Addition Rs.2,51,264/- )
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I.T.A .No.-2751/Del/2013
13. The facts qua the issue are not in dispute and have been
brought out in the impugned order as under:-
26. Appellant's case
· "During the financial year relevant to subject assessment
year, the appellant claimed depreciation of INR 297,189 @
60% on the opening balance of UPS of INR 496,365 under
the head `Computer'.
· The appellant had purchased another UPS in March 2005
for INR 124,000 and claimed depreciation of INR 37,200 on
the same @ 30 per cent under the head `Computer' since it
was put to use for less than 180 days (i.e. 50% of the
normal rate of depreciation permissible on computers under
the Act).
· The UPS has been installed by the appellant in its server
room and forms an integral part of the computer system.
Accordingly, the appellant claimed depreciation on the same
at the rate of 60 per cent (applicable to `computers') in its
return of income for subject assessment year."
· The term "computer system has been defined under
Explanation (a) to Section 36l(1)(xi) of the Act as follows:
"computer system" means a device or collection of devices
including input and output support devices and excluding
calculators which are not programmable and capable of
being used in conjunction with external filed, or more of
which contain computer programmes, electronic
instructions, input data and output data, that performs
functions including, but not limited to, logic,
arithmetic, data storage and retrieval communication
and control".
The "Merriam-Webster" dictionary defines computer
peripherals as - 'a device connected to a computer to provide
communication (as input and output) or auxiliary functions
(as additional storage) ".
· The appellant placed reliance on following case laws:
CIT v. BSES Rajdham Powers (Del);
ITO vs Samiran Majumdar (98 ITD 119) Kol;
ACIT vs Continental Carriers (P) Ltd (ITA No.
2137/Del/2008) (1TAT, Delhi);
Mumbai DCIT vs Datacraft India Ltd (ITA Nos.7462 &
754/Mum/2007) (Special Bench, ITAT, Mumbai)
27.0 Finding:
· In view of jurisdictional High Court's decision in case of C1T
v. BSES Rajdhani Powers Limited, 1 hold that UPS, printers
and scanner form integral part of computer system and
accordingly entitled to depreciation @ 60% as applicable to
block of computer. The AO is therefore, directed to allow the
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I.T.A .No.-2751/Del/2013
depreciation on these items at 60%. This ground of appeal
is allowed.
28.Ground of appeal no. 7 is regarding recognition of revenue
on account of AMC.
14. On facts there is no dispute. The Ld. Sr.DR relies on the
assessment order and the Ld. AR on the impugned order. A perusal
of the order shows that relying upon the decision of the Delhi High
Court in the case of CIT vs BSES Rajdhani Power Ltd., depreciation @
60% for UPS, printers and scanners on the ground that they formed
integral part of the computer system is allowed and held to be
applicable to block of computer. The position of law is well-settled
thereon by consistent orders of the Delhi High Court and Co-
ordinate Benches of the ITAT. In the absence of any arguments to
the contrary by the Revenue, Ground No.3 of the Revenue is
dismissed.
15. The facts relatable to Ground No.4 are found addressed at
pages 8-12 of the assessment order and the issue has been
considered by the CIT(A) at pages 23-29 vide paras 29-30.3 wherein
before the start of the arguments of the Revenue, the Ld. AR
submitted that in the peculiar facts of the present case, he is under
instruction to seek a direction from the Bench that by allowing the
Ground of the Revenue, the issue may be restored to the AO
directing him to allow necessary relief as permissible on facts and
law, keeping the concept of matching principle in mind where the
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I.T.A .No.-2751/Del/2013
Revenue is recognized and the necessary expenses to the extent
incurred duly certified by the auditors sought to be placed on record
by way of additional evidence may be considered and verified and if
satisfied on facts may be directed to be allowed.
16. Ld. Sr. DR considering the fresh evidences sought to be filed by
the assessee stated that he has no objection if the same are taken
into consideration however the impugned order was assailed on the
ground that it was passed by the CIT(A) without taking any
evidences into consideration.
17. The Ld. AR in reply took serious exception to the said stand
and referring to the finding under challenge it was submitted that
the same was supported by facts. The prayer was made only in the
background that further fortifying evidence in support of the relief
given is available on record.
18. We have heard the rival submission and gone through the
material on record. We find that though in terms of the additional
evidence sought to be placed on record which has not been objected
to by the Revenue the issue needs to be restored. However, we find
on a reading of the order under challenge that the departmental
stand that the impugned order has been passed dehors facts is not
correct. It is seen that the conclusion is drawn by the CIT(A) on
facts where the contract entered into by the assessee with BSNL for
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I.T.A .No.-2751/Del/2013
provision of telecommunication network installation services was
taken into consideration. The fact that payments were made over for
a period of 4-5 years on the basis of percentage Completion method
has also been considered. It is seen that the Revenue was
recognized by dividing cost of sales by Total estimated project cost
and multiplying it by total estimated Revenue. The said position was
taken by the assessee on the reasoning that in the first three years
since the process of tele-communication networks installation
services was still under progress. The AMC revenue and the
expenses were claimed in 2008-09 assessment year. The CIT(A) in
the year under consideration took note of the fact that the AO in
2008-09 assessment year did not allow the entire corresponding cost
of Rs. 66.45 crores and allowed the expenses only to the extent of
Rs.44.36 crores. Whereas the AO disallowed the 2/3 expenses
holding that it pertains to 2005-06 and 2006-07 assessment years
on account of this finding of the AO in 2008-09 assessment year
which finding is sought to be read into in the year under
consideration. The CIT(A) on these facts concluded that keeping the
matching principle of the accounting system in mind, the AO was
directed to give necessary relief. It is seen that on a reading of the
finding under challenge by no stretch imagination, it leads to the
conclusion the CIT(A) has arrived at a finding dehors facts. Thus, we
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find that the arguments of the Ld. Sr. DR have no force. However,
reverting to the prayer of the assessee for admission of additional
evidence which was not objected to by the Ld. Sr. DR we find that
allowing the admission of the same and accepting the assessee's
stand where it is stated that the assessee would have no objection if
allowing the departmental ground, the issue is restored back to the
file of the AO directing that considering the fresh evidences and
direct necessary relief in accordance with law may be granted in
terms of the matching principle concept, if supported by facts.
Ordered accordingly.
19. In the result, the appeal of the Revenue is partly allowed.
The order is pronounced in the open court on 11th of January,
2016.
Sd/- Sd/-
(O.P.KANT) (DIVA SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 11/01/2016
*Amit Kumar*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
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