Diva Singh, Judicial Member

1. 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 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 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 Honble 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 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 TransactionsMethodValue Rs.

1.Import of componentsTNMM714,98,28,572

2.Provision of technical support services (R&D)TNMM4,63,56,666

3.Availing of technical services from AETNMM3,57,26,109

4.Provision of professional services (BSNL contract)TNMM153,23,49,052

5.Provision of professional services (Others)TNMM31,82,66,038

6.Provision of marketing and after sales support servicesTNMM90,55,13,532

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4. The issue raised by the Revenue vide Ground No. l pertains to the transactions disclosed at SI. No. 3 in the above chart. The facts as appreciated by the CIT(A) show that the assessee had entered into 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 AEs 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 arms length price:

S. No.Comparable CompaniesAdjusted operating profit on adjusted operating revenue %Weighted Average Adjusted operating profit on adjusted operating revenue % 2003-05

200520042003

1.Engineers India Limited20.7520.2317.2620.71

2.Esquire Engineers and Consultants LimitedNANA-14.36-14.36

3.F L Smidth Limited5.01NCNC5.01

4.Powerplant Performance Improvement Ltd.NANA-12.04-12.04

5.RITES LimitedNA21.169.5315.38

6.TCE Consulting Engineers Ltd.9.63-0.024.184.96

7.Water & Power Consultancy Services Ltd.NA8.25-9.861.08

8.CMC Ltd.NC-0.171.460.52

9.Hartron CommunicationNA-26.25-19.12-21.99

10.Himachal Futuristic Communication Ltd.NA-31.389.08-5.96

Arithmetic mean-0.67

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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 arms 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 assessees margin was only 7%. The following five comparables retained were retained:

S. No.ParticularsOperating profits on operating revenue (%) (2005)

1.Engineers India Limited20.75

2.F L Smidth Limited5.01

3.RITES Limited19.24

4.TCE Consulting Engineers Ltd.13.01

5.Water & Power Consultancy Services Ltd.13.01

Arithmetic Mean113.52

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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 arms 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.

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.ParticularsFY 2002-03FY 2003-04FY 2004-05FY 2005-06FY 2006-07

1.Revenue302.05184.2473.4489.27564.2

2.Profit64.16-23.57-19.830.03100.58

3.OP/OR %21.24-12.79-27.010.0417.82

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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.ParticularsOperating profits on operating revenue (%)

1.Engineers India Limited20.75

2.FL Smidth Limited5.01

3.RITES Limited19.24

4.TCE Consulting Engineers Ltd.9.63

5.Water & Power Consultancy Services Ltd.13.01

6.Himachal Futuristic Communication Ltd.-27.01

Arithmetic Mean6.77

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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 arms 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 TPOs 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 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 TPOs stand at this stage that it was consistently a loss making company does not hold 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 aforementioned 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 Honble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. v. Dy. CIT [2015] 376 ITR 183 [LQ/DelHC/2015/1053] /232 Taxman 20 [LQ/DelHC/2015/1053] /56 taxmann.com 417 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.

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/- @ 75% 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(l)(c) of I. Tax Act have been initiated separately.

(Addition Rs. 2,51,264/-)

13. The facts qua the issue are not in dispute and have been brought out in the impugned order as under:

26. Appellants 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 361(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 Rajdhani Powers Ltd. [IT Appeal No. 1266 of 2010, dated 31-8-2010]; ITO v. Samiran Majumdar [2006] 98 ITD 119 (Kol.); ACIT v. Continental Carriers (P.) Ltd. [IT Appeal No. 2137 (Delhi) of [2008]; Dy. CIT v. Datacraft India Ltd. [2010] 40 SOT 295 (Mum.) (SB)

27.0 Finding:

* In view of jurisdictional High Courts decision in case of CIT 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 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 v. 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 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 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 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 assessees 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.