Commissioner Of Income Tax,Patiala v. M/S. Rakhra Technologies Pvt. Ltd., V.rakhra,Patiala

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. --- Income Tax Appeal No. 169 of 2011Date of decision: 7.7.2011 Commissioner of Income Tax,Patiala --- Appellant Versus M/s. Rakhra Technologies Pvt. Ltd., V.Rakhra,Patiala --- Respondent CORAM:HON’BLE MR. JUSTICE ADARSH KUMAR GOELACTING CHIEF JUSTICE HON’BLE MR. JUSTICE AJAY KUMAR MITTAL --- Present:Mr. Tejinder K. Joshi, Standing Counselfor the appellant. --- AJAY KUMAR MITTAL, J. This is revenue’s appeal filed under Section 260A of theIncome-Tax Act, 1961 (for short “the Act”) against the order dated27.8.2010, passed by the Income Tax Appellate TribunalChandigarh Bench ‘A’, Chandigarh (in short “the Tribunal”) in ITANo. 171/CHANDI/2010, relating to the assessment year 2005-06. 2.The following substantial questions of law have beenclaimed for determination of this Court: “ (i)Whether in the facts and circumstances of the case, theTribunal was legally correct in directing the AssessingTribunal was legally correct in directing the Assessing Officer (AO) to re-compute Arm’s Length Price (ALP) at21.97% even when the Transfer Pricing Officer (TPO)had arrived at 35.26% after due consideration of all therelevant factors. (ii) Whether in the facts and circumstances of the case, theITAT was justified in issuing direction to the AO to re-compute ALP after adopting total cost at Rs.1,70,84,964/- instead of Rs. 2,02,67,550/- and whetherthe adjustment for the depreciation on administrativeassets, as directed by the ITAT, is sustainable in theeyes of law. (iii) Whether in the facts and circumstances of the case, theTribunal was legally correct in deleting the addition ofRs. 1,00,000/- on account of disallowance ofAdvertisement expenses, even when the same wereinadmissible, being capital in nature.” 3. The facts, in brief, necessary for adjudication as narrated in the appeal, are that the assessee is engaged in thebusiness of research and development of software/IT enabledservices. For the assessment year 2005-06, the assessee filed itsreturn on 31.10.2005, declaring loss of Rs.25,28,901/-. The returnwas processed under Section 143(1) of the Act. Assessment underSection 143(3) was completed vide order dated 26.12.008 at anincome of Rs.61,29,390/- whereby the assessing officer madecertain additions, i.e. Rs.79,84,438/- on account of difference inArm’s Length Price; Rs. 1,00,000/- on account of disallowance ofadvertisement and three more amounts of Rs. 4,80,000/-, 52,416/-,and 41,434/- on account of disallowance of Diwali expenses, Refreshment expenses and Printing and Stationery expenses,respectively. 4.The assessee filed appeal before the Commissioner ofIncome Tax (Appeals) [for short “the CIT(A)”]. The CIT(A) partlyaccepted the appeal vide order dated 8.12.2009, deleting theaddition of Rs. 41,06,206/- out of the total amount of Rs.79,84,438/- on account of difference in Arm’s Length Price and allother remaining additions noticed above but sustaining the additionon account of disallowance of Advertisement expenses amountingto Rs.1,00,000/-. 5.Both the sides felt aggrieved by the order of the CIT(A)and preferred their separate appeals before the Tribunal. TheTribunal, by order dated 27.8.2010, dismissed the appeal of theRevenue and partly allowed the appeal of the assessee in respectof the addition of Rs. 1,00,000/- on account of disallowance ofAdvertisement expenses holding that expending of money onsignboard enables conduct of assessee’s business more profitablyand facilitated the assessee’s trading operations even if theadvantage was of enduring nature. 5.Both the sides felt aggrieved by the order of the CIT(A)and preferred their separate appeals before the Tribunal. TheTribunal, by order dated 27.8.2010, dismissed the appeal of theRevenue and partly allowed the appeal of the assessee in respectof the addition of Rs. 1,00,000/- on account of disallowance ofAdvertisement expenses holding that expending of money onsignboard enables conduct of assessee’s business more profitablyand facilitated the assessee’s trading operations even if theadvantage was of enduring nature. 6.The Tribunal further set aside the order of the CIT(A) onthe issue of addition made on account of Arm’s Length Price andwhile doing so, a direction was given to the assessing officer to re-compute the same by taking the operating profit/total cost at therate of 21.97% as against 35.26% and further, adopting the totalcost at Rs.1,70,84,964/- as against Rs. 2,02,67,550/-, after makingadjustment for the depreciation on administrative assets of Rs.31,82,586/-. 8. Adverting to the first question regarding Arm’s LengthPrice to be applied by the Transfer Pricing Officer for determinationof correct profits of the assessee, the revenue had relied upon theinstances of the following three Companies. The data of the saidCompanies is reproduced here-in-below: 9.By relying upon the above, the Revenue had tried toconvince the Tribunal that average of 35.26% should have beenadopted. On the other hand, the assessee had placed reliance onthe same kind of data of different Companies to persuade theauthorities for applying the average of 16.83% by drawing inferencethere from. The said data is noticed hereunder: 10. The Tribunal, however, on appreciation of the material onrecord concluded that 21.97% was the appropriate percentage to be applied for adopting the Arm’s Length Price. For doing so, theTribunal took into consideration the data of the followingcomparable Companies: 11. The findings recorded by the Tribunal in that behalf are as under: “We have examined the aforesaid aspect carefully. Theselection of three Comparables made by the assessee,in our view, is also skewed because it leaves out thecase of Asian Cerc Technologies Limited wherein theturnover is almost near-about the turnover of theassessee-company. Of course, the three casesselected by the assessee do merit consideration ascomparable cases. Apart from the three cases adoptedby the assessee and the case of Asian CercTechnologies Limited, the other seven casesenumerated in para 7.4.2 of the T.P.O’s order are notstrictly comparable having regard to their level ofoperation and turnover. Therefore, we are not inclined to accept the plea of the learned DR that all the elevencases be considered for the purposes of comparabilityanalysis. At this point, we may also notice that thoughthe assessee assailed the selection of comparablecases before the CIT(A) but there is no specific findingon this aspect, and instead he has adopted an adhocOperating cost/Total cost ratio of 15% for the purposesof computing the ultimate ALP. We find no justificationto approve the action of the CIT(A) in this regard.Considering the entirety of circumstances, in ourconsidered opinion, the following four companies out ofthe list searched by the TPO and contained in para 7.4.2of his order, deserve to be selected for the purpose ofcomparability analysis: 12. The Tribunal found the four comparable companies foradopting the Arm’s Length Price. No perversity could be pointedout by the learned counsel for the appellant that may warrantinterference in the finding recorded by the Tribunal in the abovecontext. 13.Adverting to question No.2, the Tribunal held that theclaim for depreciation on administrative assets amounting to Rs.31,82,586/- was liable to be accepted for determining the profits ofthe assessee. The findings recorded by the Tribunal in this regardare noticed here: 12. The Tribunal found the four comparable companies foradopting the Arm’s Length Price. No perversity could be pointedout by the learned counsel for the appellant that may warrantinterference in the finding recorded by the Tribunal in the abovecontext. 13.Adverting to question No.2, the Tribunal held that theclaim for depreciation on administrative assets amounting to Rs.31,82,586/- was liable to be accepted for determining the profits ofthe assessee. The findings recorded by the Tribunal in this regardare noticed here: “Having identified the Comparables companies, we maynow proceed to determine the ALP. The arithmeticmean of the Operating Profit/Total Cost ratios work outto 21.97%. At this stage we may now adjudicate the second objection raised by the assessee. Theassessee had explained before the lower authorities thatfor the Comparability analysis two adjustments arerequired to be made to the profit disclosed by theassessee. Such adjustments were on account of twoexpenses of extra-ordinary nature, namely, Charity &Donation, amounting to Rs. 1,09,49,785/- andDepreciation on administrative assets amounting to Rs.31,82,586/-. It has been explained that such expensesare generally not found incurred in other similarly placedconcerns. The TPO has accepted the plea of theassessee regarding charity & donation as is evidentfrom the working done in para 9 of his order, andaccordingly there is no dispute on this aspect. Thedispute surviving before us pertains to the plea of theassessee for adjustment of depreciation amounting toRs. 31,82,586/- which has been denied while computingthe LAP as per para 9 of the TPO’s order. In thisconnection the TPO has observed as under in para 8.2of the order: “8.2 As may be observed from above,Depreciation / cost ratio in the case of assessee is26.16% and is far higher as compared to all thecomparables listed in the table below para No.7.4.2. Considering the submission of assessee onextraordinary expenditure on administrative assets(cars purchased), Wages/ Total cost andDepreciation/ Total cost ratios are taken at 40% and 12% respectively (as submitted by theassessee vide its letter dated 14.10.2008)”assessee vide its letter dated 14.10.2008)” (underlined for emphasis by us) “8.2 As may be observed from above,Depreciation / cost ratio in the case of assessee is26.16% and is far higher as compared to all thecomparables listed in the table below para No.7.4.2. Considering the submission of assessee onextraordinary expenditure on administrative assets(cars purchased), Wages/ Total cost andDepreciation/ Total cost ratios are taken at 40% and 12% respectively (as submitted by theassessee vide its letter dated 14.10.2008)”assessee vide its letter dated 14.10.2008)” (underlined for emphasis by us) 18.Ostensibly, TPO accepted the Depreciation/Totalcost ratio computed at 12% by the assessee,which working is placed at page 95 of the Paper-book filed by the assessee. Pertinently, theDepreciation/Total cost ratio computed andaccepted by the TPO at 12% was calculatedafter making adjustment for the saidextraordinary item of depreciation amounting toRs. 31,82,586/-. Having accepted the working,the TPO in para 9 of the order while determiningthe ALP has failed to make adjustment forextraordinary items of depreciation amounting toRs. 31,82,586/- . Perhaps, non-adjustment ofsuch depreciation in the course of determinationof ALP in para 9 of the TPO is a case of anoversight. Because, in principle the TPOaccepted the plea of the assessee as reflectedby the discussion in para 8.2 of his order butinexplicably he has not considered it whiledetermining the ALP in para 9 of the order.Notwithstanding the aforesaid, on merits also,we find enough merit in the plea of the assesseefor adjustment of such depreciation in order tocompare the profit disclosed by the assessee.The assessee has to succeed on this plea.”cost ratio computed at 12% by the assessee,which working is placed at page 95 of the Paper-book filed by the assessee. Pertinently, theDepreciation/Total cost ratio computed andaccepted by the TPO at 12% was calculatedafter making adjustment for the saidextraordinary item of depreciation amounting toRs. 31,82,586/-. Having accepted the working,the TPO in para 9 of the order while determiningthe ALP has failed to make adjustment forextraordinary items of depreciation amounting toRs. 31,82,586/- . Perhaps, non-adjustment ofsuch depreciation in the course of determinationof ALP in para 9 of the TPO is a case of anoversight. Because, in principle the TPOaccepted the plea of the assessee as reflectedby the discussion in para 8.2 of his order butinexplicably he has not considered it whiledetermining the ALP in para 9 of the order.Notwithstanding the aforesaid, on merits also,we find enough merit in the plea of the assesseefor adjustment of such depreciation in order tocompare the profit disclosed by the assessee.The assessee has to succeed on this plea.” 14. No illegality could be pointed out by the learned counselfor the appellant in the above findings of the Tribunal so as topersuade this Court to warrant inference therewith. Thus, nosubstantial question of law, as claimed on this issue, arises forconsideration by this Court. 15. The last question is, whether the advertisementexpenses would form part of capital expenses. The assessee haddebited a sum of Rs. 1,00,000/- on account of advertisementexpenses which it had spent on purchase of sign-boards and had,thus, treated the same as revenue expenses. The case of therevenue on this point, however, was that it was capital in nature.The Tribunal recorded the following findings on this issue, whichare: 14. No illegality could be pointed out by the learned counselfor the appellant in the above findings of the Tribunal so as topersuade this Court to warrant inference therewith. Thus, nosubstantial question of law, as claimed on this issue, arises forconsideration by this Court. 15. The last question is, whether the advertisementexpenses would form part of capital expenses. The assessee haddebited a sum of Rs. 1,00,000/- on account of advertisementexpenses which it had spent on purchase of sign-boards and had,thus, treated the same as revenue expenses. The case of therevenue on this point, however, was that it was capital in nature.The Tribunal recorded the following findings on this issue, whichare: “We have considered the rival submissions carefully. Inour considered opinion, cost of a signboard cannot becontemplated as a capital expenditure because thebenefit accruing to the assessee cannot be said to be inthe capital field. Quite clearly, expending of money onsignboard may result in a benefit of an enduring nature,yet such benefit is in the revenue field inasmuch as itmerely facilitates the assessee’s trading operations. Incommercial sense, it enables conduct of assessee’sbusiness more profitably even if the advantage by wayof the usage more profitably even if the advantage byway of the usage of signboard, endures over a longerperiod. Following the ratio of the decision of Hon’bleSupreme Court in the case of Empire Jute Co. Ltd. vs.CIT 124 ITR 1 (SC), the impugned expenditure is held to be a revenue expenditure and accordingly the additionsustained by the CIT(A) is hereby ordered to bedeleted.” 16. The aforesaid finding being a finding of fact which hasnot been shown to be erroneous in any manner and being based onappreciation of material on record, the same calls for nointerference by this Court. No substantial question of law, thus,arises in this appeal for consideration of this Court. 17.In view of the above, the appeal is dismissed. (AJAY KUMAR MITTAL) JUDGE July 7, 2011*rkmalik* (ADARSH KUMAR GOEL) ACTING CHIEF JUSTICE