Transwitch India (P.) Ltd. v. Dy. CIT

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The Tax Publishers2013 TaxPub(DT) 0482 (Del-Trib) : (2013) 151 TTJ 0177 : (2013) 081 DTR 0233 INCOME TAX ACT, 1961 --Transfer pricing--Computation of ALP Treatment of extra ordinary expenses--Assessee was engaged in operating a design centre for its parent company for design and development of software and related services. During the relevant previous years the assessee had to shifted its office due to sealing derive of municipal corporation. Assessee had to pay extra rent for two months and brokerage to engage the view office. Further, the employees were idle and unproductive from 1-3-2006 to 25-3-2006 as the normal operation commenced from new office with effect from 25-3-2006. The assessee incurred unproductive costs comprised of reallocation expenses, additional salary for unproductive houses and rent which were not billed to the parent company. Held: ,/i>In fact the assessees claim for TP adjustment of claim for comparability adjustment on account of abnormal cose/extraordinary cost was not made in the transfer pricing documentation would not act as estopped against the assessee for making such claim and thus TPO was required to consider the such claim in the cause of proceeding before him. As regards TPO's contention that assessee has not provided the copy of MCD notices whereby its offices premises were ordered to be shut down and that the office premises of the assessee 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 assessee's submission that the rejection of assessee's claim towards comparability adjustment on the ground that its premises was not actually sealed is unjustified and unfounded. [Para 4.6] As regards TPO's contention that no communication with its parent showing assessee's inability to carry out work during March, 2006 has been submitted in the course of the hearings. Assessee has rightly contended that the assessee is responsible for conducting and managing its business. This reservation of the TPO was irrelevant consideration and we agree with the same. [Para 4.7] Another TPO's contention was that customs license indicating change of address with effect from 22-3-2006 also does not indicate that the earlier license had lapsed and no business could be effected. In fact the license had already been renewed upto 31-3-2006 on 8-3-2006 at the old address. In this regard assessee has contended that assessee has placed on record approval from the Software Technology Park of India (STPI) authorizing change in the address from Safdarjung Enclave to Mohan Co-operative Industrial Estate. The customs licence was initially granted to the assessee in respect of its premises at A-2/9 and A-2/8, Safdarjung Enclave, New Delhi. The assessee had also placed on record the copy of the custom license approving the change of address with effect from 22-3-2006 to Mohan Co-operative Industrial Estate. However, the fact that the assessee was entitled to carry on its operation under the same customs license from its new premises at Mohan Cooperative Industrial Estate is evident from the noting made by the customs officials on the licenses, acknowledging the change of address from Safdarjung Enclave to Mohan Co-operative Industrial Estate. Thus, assessee has cogently rebutted TPO's reservation in this regard. [Para 4.8] Another TPO's contention is that the nature of assessee's 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 contention of the assessee that before the operations of the assessee could be shifted from one premises to another, the necessary equipments and devices, computers systems, servers, storage devices, power backup devices etc. had to be dismantled from the existing premises and reinstalled at the new premises. The dismantling and reinstallation of such equipments requires considerable time and technical skills. As such, we do not agree with the TPO's contention that the shifting could have been done over a weekend time. [Para 4.9] Another TPO contention is that that the assessee had already paid additional rent for two months for its new premises. This fact defeats the assessee's argument that its work suffered due to the sealing drive. In this regard, assessee has submitted that even though the assessee had leased the new premises and paid rent for the months of February and March, it could not have commenced its commercial operations from such premises, till the time necessary infrastructure in the form of fixtures, power supply etc. was established. Further, before the operations of the assessee could be shifted from one premises to another, the necessary equipments and devices had to be installed at the new premises. The entire process and activity require considerable time and the assessee therefore, had to pay rent for the period during which the aforesaid infrastructure was established at the new premises. Hence, the assessee's contention in this regard is agreed. [Para 4.10] Another TPO's contention is that claim of the assessee that the sealing drive reduced its revenue is unsubstantiated. 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 quarter January to March, 2006. The capacity utilization of the assessee during the quarter January to March, 2006 fell to 72 per cent as against the normal capacity utilization of 87 per cent to 94 per cent during the year ending 31-12-2005. Further, the fact that the assessee had to shift its office premises at a very short notice, sufficiently substantiates the low capacity utilization of the assessee during the last quarter of financial year 2005-06. [Para 4.11] In the background of the aforesaid discussions and precedents relied upon, TPO's reservation on the assessee's claim is not cogent one and the assessee has quite convincingly rebutted TPO's reservation. Under the circumstances, in our considered opinion, adjustment for impugned expenditure totaling to Rs. 1,18,39,483 was justifiably claimed by the assessee. After making the adjustment for the aforesaid abnormal expenses, the operating margin (OP/OC) of the assessee increases to 17.80 per cent. Since the adjusted operating margin of the assessee at 17.80 per cent is higher than the operating margin of 17.09 per cent earned by the comparable companies selected by the TPO, Tribunal agree with the submissions of the assessee that international transactions undertaken by the assessee satisfies the arm's length criteria. Hence, TPO has wrongly rejected the aforesaid claim of comparability adjustment on account of abnormal expenses incurred by the assessee and allow the assessee's appeal on this issue. [Para 5] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 0482 (Del-Trib) : (2013) 151 TTJ 0177 : (2013) 081 DTR 0233

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALP Treatment of extra ordinary expenses--Assessee was engaged in operating a design centre for its parent company for design and development of software and related services. During the relevant previous years the assessee had to shifted its office due to sealing derive of municipal corporation. Assessee had to pay extra rent for two months and brokerage to engage the view office. Further, the employees were idle and unproductive from 1-3-2006 to 25-3-2006 as the normal operation commenced from new office with effect from 25-3-2006. The assessee incurred unproductive costs comprised of reallocation expenses, additional salary for unproductive houses and rent which were not billed to the parent company. Held: ,/i>In fact the assessees claim for TP adjustment of claim for comparability adjustment on account of abnormal cose/extraordinary cost was not made in the transfer pricing documentation would not act as estopped against the assessee for making such claim and thus TPO was required to consider the such claim in the cause of proceeding before him.

As regards TPO's contention that assessee has not provided the copy of MCD notices whereby its offices premises were ordered to be shut down and that the office premises of the assessee 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 assessee's submission that the rejection of assessee's claim towards comparability adjustment on the ground that its premises was not actually sealed is unjustified and unfounded. [Para 4.6] As regards TPO's contention that no communication with its parent showing assessee's inability to carry out work during March, 2006 has been submitted in the course of the hearings. Assessee has rightly contended that the assessee is responsible for conducting and managing its business. This reservation of the TPO was irrelevant consideration and we agree with the same. [Para 4.7] Another TPO's contention was that customs license indicating change of address with effect from 22-3-2006 also does not indicate that the earlier license had lapsed and no business could be effected. In fact the license had already been renewed upto 31-3-2006 on 8-3-2006 at the old address. In this regard assessee has contended that assessee has placed on record approval from the Software Technology Park of India (STPI) authorizing change in the address from Safdarjung Enclave to Mohan Co-operative Industrial Estate. The customs licence was initially granted to the assessee in respect of its premises at A-2/9 and A-2/8, Safdarjung Enclave, New Delhi. The assessee had also placed on record the copy of the custom license approving the change of address with effect from 22-3-2006 to Mohan Co-operative Industrial Estate. However, the fact that the assessee was entitled to carry on its operation under the same customs license from its new premises at Mohan Cooperative Industrial Estate is evident from the noting made by the customs officials on the licenses, acknowledging the change of address from Safdarjung Enclave to Mohan Co-operative Industrial Estate. Thus, assessee has cogently rebutted TPO's reservation in this regard. [Para 4.8] Another TPO's contention is that the nature of assessee's 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 contention of the assessee that before the operations of the assessee could be shifted from one premises to another, the necessary equipments and devices, computers systems, servers, storage devices, power backup devices etc. had to be dismantled from the existing premises and reinstalled at the new premises. The dismantling and reinstallation of such equipments requires considerable time and technical skills. As such, we do not agree with the TPO's contention that the shifting could have been done over a weekend time. [Para 4.9] Another TPO contention is that that the assessee had already paid additional rent for two months for its new premises. This fact defeats the assessee's argument that its work suffered due to the sealing drive. In this regard, assessee has submitted that even though the assessee had leased the new premises and paid rent for the months of February and March, it could not have commenced its commercial operations from such premises, till the time necessary infrastructure in the form of fixtures, power supply etc. was established. Further, before the operations of the assessee could be shifted from one premises to another, the necessary equipments and devices had to be installed at the new premises. The entire process and activity require considerable time and the assessee therefore, had to pay rent for the period during which the aforesaid infrastructure was established at the new premises. Hence, the assessee's contention in this regard is agreed. [Para 4.10] Another TPO's contention is that claim of the assessee that the sealing drive reduced its revenue is unsubstantiated. 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 quarter January to March, 2006. The capacity utilization of the assessee during the quarter January to March, 2006 fell to 72 per cent as against the normal capacity utilization of 87 per cent to 94 per cent during the year ending 31-12-2005. Further, the fact that the assessee had to shift its office premises at a very short notice, sufficiently substantiates the low capacity utilization of the assessee during the last quarter of financial year 2005-06. [Para 4.11] In the background of the aforesaid discussions and precedents relied upon, TPO's reservation on the assessee's claim is not cogent one and the assessee has quite convincingly rebutted TPO's reservation. Under the circumstances, in our considered opinion, adjustment for impugned expenditure totaling to Rs. 1,18,39,483 was justifiably claimed by the assessee. After making the adjustment for the aforesaid abnormal expenses, the operating margin (OP/OC) of the assessee increases to 17.80 per cent. Since the adjusted operating margin of the assessee at 17.80 per cent is higher than the operating margin of 17.09 per cent earned by the comparable companies selected by the TPO, Tribunal agree with the submissions of the assessee that international transactions undertaken by the assessee satisfies the arm's length criteria. Hence, TPO has wrongly rejected the aforesaid claim of comparability adjustment on account of abnormal expenses incurred by the assessee and allow the assessee's appeal on this issue. [Para 5]