UPS is Integral part of Computer and eligible for 60% Depreciation

ACIT Vs M/s. Caparo Engineering India Pvt. Ltd. (ITAT Delhi)

With regard to the disallowance of claim of depreciation @ 60% on UPS, the Assessing Officer has allowed 15% instead of 60% claimed by the assessee on the ground that UPS is not part of computer and thereby made the addition of Rs.2,21,895/-. The assessee had purchased UPS for Rs.4,93,110/- and had claimed depreciation thereon @ 60% for Rs.2,95,860/-. The Assessing Officer observed that depreciation mentioned in Appendix-I Rule 5 of IT Rules applies only to computer and computers software, which alone are entitled for depreciation @ 60% and same rate cannot be applied for UPS.

The ld. CIT(A) has deleted the addition, following the judgment of Hon’ble Delhi High Court in the case of CIT vs. BSES Rajdhani Powers Ltd. in ITA 1266/2010, wherein computer accessories/peripherals like printers, scanners, server, UPS, etc., have been held to be integral part of computer system, and therefore, entitled to depreciation @60%. Accordingly, the ld. CIT (A) following the judgment of Hon’ble Delhi High Court and other decisions of the Tribunal allowed the assessee’s claim @60%.

ITAT find any infirmity in the order of the ld. CIT(A) as the issue, whether computer accessories/ peripherals like printers, scanners, server, UPS etc, the rate of depreciation allowable is @ 60% as held by the Hon’ble Jurisdictional High Court and catena of other judgments.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

The aforesaid appeal has been filed by the Revenue against the impugned order dated 12.09.2014, passed by the Ld. CIT(Appeals)-XX, New Delhi for the quantum of assessment passed u/s.144C(3) for the Assessment Year 2007-08. In the grounds of appeal, following grounds have been raised.

1. On the facts and circumstances of the case and in law, the Ld. CIT (Appeals) has erred in deleting the addition of Rs. 5,09,12,109/-made without appreciating the findings of TPO.

2. On the facts and in circumstances of the case and in law, the Ld. CIT (A) has erred in restricting the disallowance to Rs. 1,21,854/-on account of disallowance u/s 14A of the Income Tax Act read with Rule 8D if IT Rules 1962.

3. On the facts and in circumstances of the case and in law, the Ld. CIT (A) has erred in deleting the addition of Rs.2,21,895/-, made by Assessing Officer, on account of disallowance of claim of depreciation @ 60% on UPS, as against @ 15% allowable.”

2. The notice for hearing was sent to the respondent-assessee through speed post on the address mentioned in ‘Form 36’ and in the address mentioned in the first appellate order. However, the said notice has been returned back as “not found”. Accordingly, we are proceeding to decide the appeal on merits after hearing the learned DR and on the basis of the material available on record.

3. The brief facts qua the issue of transfer pricing adjustment are that, assessee had international transaction with its AE, ‘Caparo Vehicle Products Ltd., UK’ for purchase of old/used machinery and accessories along with reimbursement of freight, insurance and handling charges for the value of Rs.9,97,93,331/-. In the TP study report, assessee has chosen itself as tested party and CUP method was adopted the most appropriate method for benchmarking the said transaction. During the relevant financial year, assessee has imported certain machines from its AE, ‘Caparo Vehicles Products Ltd’ UK, (CVPL) like in the earlier years which were used for the business purpose. The assessee’s contention was that, instead of investing heavy amount for buying new machines, it had decided to purchase the similar used machines from CVPL and for ascertaining the fair market value of the machines, an inspection was made by Chartered Engineers and on the basis of said inspection, a certificate containing market value, estimated life of machine, etc, was issued by the Chartered Engineer. On such FMV price, the machine was accordingly imported, that is, on the price mentioned in the certificate after ascertaining the value of machine amount paid in GBP. Apart from the value of machines, freight, insurance and handling charge which was paid at CVPL had also been reimbursed by the assessee. The assessee stated that the same certificate provides the value of machines which was equal to fair market value of the machines which was accepted by the custom authorities. Thus, it constitutes a kind of a CUP for ascertaining the ALP, and therefore, transaction is at arm’s length.

4. The TPO however did not accept the FMV as certified by the Chartered Engineer and observed that even if such value has been accepted by the custom authorities, it would not fulfill the transfer pricing principles. The relevant observation of the TPO in this regard reads as under:-

“the question before the undersigned is not the determination of Fair Market Value of machines under transfer but determination of arm’s length price of the transaction of purchase of machines. For this purpose, the assessee has used comparable uncontrolled price method. Rule 10B(1) (a) of the Income Tax Rules, 1962 where procedure for determination of ALP under CUP method is given, nowhere mentions the fair value for the property transferred. However, it does mentions the price charged or paid in a comparable uncontrolled transaction. Purpose of valuation under Customs Act and determination of ALP under the Transfer Pricing Regulations are two different and distinct functions and so to hold transactional value certified by Custom Authorities as ALP under the Transfer Pricing Regulations is neither fair nor reasonable. Support is derived from the judgment of Hon’ble Supreme Court in the case of Associated Cement Companies Ltd v Commissioner of Customs [2001] 4 SCC 593; 124 STC 59 wherein the value of the goods imported’ has been distinguished from the ‘price of the goods’. Secondly, the ARs have filed copies of EPGC Authorization Letters wherein there is no valuation of the machinery purchased. Under the circumstances, no credence possibly can be given to the same for transfer pricing purposes So far as certificates of Chartered Engineers are concerned, it is to be pointed out that these certificates are indicative of Fair market value of the machines inspected by the individual concerned; the same may or may not be price paid under comparable uncontrolled transaction. Secondly, the Chartered Engineers issuing certificates are paid for the job carried out under instruction of the assessee or its AE and so it cannot be said that their opinions have emanated under uncontrolled circumstances. Thirdly, no methodology or norms have been given by these engineers regarding particular value of machines taken by them on a particular date. Therefore, value given in the certificates cannot be accepted as price of the machines under comparable uncontrolled circumstances. It is to be made clear here that no other method is applicable in the case of the assessee as only international transaction is purchase of machinery.”

5. The TPO, however for computing the arm’s length price adopted a unique approach whereby life of the machinery given by Chartered Engineer at India along with year of manufacturing given by the Chartered Engineer at UK has been taken by the TPO as the basis for working out the market value of the machinery during the transaction year. Where the manufacturing year was not given in the report of UK engineer, the original purchase date given in the report of the Indian Engineer has been taken by the TPO and had applied the following formula to determine the FMV price for the purpose of ALP:-

“Market Value = (Value at the time machinery manufactured/total life of the machinery) * residual life”

Accordingly, the TPO determined the sum total of ALP of machinery so imported at Rs.4,18,50,851/- as against the FOB value of Rs.9,27,62,960/- and the difference amounting to Rs.5,09,12,109/- has been added as TP Adjustment.

6. Before the ld. CIT (A), detailed submissions were made which has been dealt and incorporated in the appellate order from pages 5 to 7. Ld. CIT (A) noted that similar issue had arisen in the succeeding year also, i.e., in A.Y. 2008-09, wherein the TPO has accepted the same method of valuation done by the Chartered Engineer and no adjustment was made. He further observed that the method adopted by the TPO is not recognized anyway and it is not prescribed under any provision of law, because the TPO has taken the original cost, estimated life and residual life as given by the Chartered Engineer hired by the assessee, but, the current estimate value as prescribed by the same Chartered Engineer has been rejected by him. Moreover, the TPO has not carried out any valuation for the machinery by the any approved valuer. Further, the ld. CIT (A) relying upon the decision of ITAT Hyderabad Bench in the case of Tecumseh Products India (P.) Ltd. vs. ACIT (2014) 41 com 385 (Hyd-Trib), deleted the said adjustment.

7. Before us the learned DR submitted that under the transfer pricing regulations, if CUP method is to be applied, then it has to be seen, whether the same price would have been paid under comparable uncontrolled transaction. Here in this case, nothing has been brought on record by the assessee. Thus, he submitted that the matter could be restored back to the file of the TPO so that the assessee could submit proper documents for the proper bench marking.

8. After considering the relevant findings and material discussed in the impugned orders as well as the submission made by the learned DR, we find that assessee like in the earlier years and in the subsequent years have purchased certain machineries along with accessories from its AE, ‘Caparo Vehicle Products Ltd., UK’. The cost of freight, insurance and handling charges were also reimbursed by the assessee to its AE. The aggregated cost was Rs.9,97,93,331/-. For the purpose of benchmarking the Fair Market Value of the said machinery, the assessee had submitted a certificate from a Chartered Engineer who has valued the machinery taking into account various factors and then based on such valuation of FMV the assessee has made the payment to its AE. The TPO rejected the said certificate and has determine the ALP so imported at Rs.4,18,50,851/-.

9. It is a trite principle that under our Transfer Pricing regulations, the international transaction with associated enterprises has to be bench marked under the prescribed methods so as to arrive at arm’s length price paid for the services or the product. Under CUP method, which is undisputedly the most appropriate method in the present case, it has to be seen that for arriving at the ALP, price charged or paid for the services provided in a comparable uncontrolled transaction is identified and if there is any differences between the international transaction and comparable uncontrolled transactions which could materially affect the price in the open market, then such a price is adjusted to account for the differences. It is the adjusted price paid for availing services which constitute the bench mark for comparison with the price paid for availing of any service in an international transaction. Here in this case, the price paid for the old machine has been sought to be justified by determining the fair market value of the old machine imported by the AE. The fair market value is the price which is to be paid under comparable uncontrolled transaction by any independent entity in the open market. The valuation by an independent qualified expert for determining the fair market price or the FMV of the machinery has to be treated as the arm’s length price for the value of such products or services, which could be reckoned as the price paid by any independent party in the open market for such product or goods.

10. The assessee in the present case, to determine the fair market value of the said machine has got the valuation done by a Chartered Engineer who has certified the cost of the machinery taking into account various factors for determining the fair market value. In case of used machinery, ostensibly the purchase price of a new product cannot be taken as the comparable uncontrolled price, because the cost of used/ old machinery depends upon number of various factors like:-

• Usage: a lot is dependent upon the capacity utilization of the machinery;
• Maintenance: secondly during its usage, how the same has been maintained;
• Obsolescence: despite the fast changing life, some items do not get its value and gets reduced by passage of time.
• Number of change in ownership: if an asset is sold number of times, it will certainly fetch less value than the asset not sold so frequently;
• Model: a change in model/ or if new model is available in market, then value of the old model diminishes.
• Change of market: there are instances where the same asset is having less value in one country but can get good price in the global world.

These are some of the illustrative factors which by and large need to be seen while valuing the old machines, which in our opinion TPO has failed to take note of. He has also not carried out any independent exercise for the value of the machinery by any approved valuer/Chartered Engineer so as to controvert the fair market value determined by the assessee’s Chartered Engineer. Moreover, here in this case, it is an admitted fact that in the A.Y.2008-09, the TPO has accepted the same value as per the valuation report given by the Chartered Engineer in respect to the purchase of similar old machine along with its accessories from its AEs. Thus, we do not find any infirmity in the order by the ld. CIT (A) in holding that the adjustment made by the TPO is without any basis and has rightly been deleted by him. Accordingly, ground no.1 is dismissed.

11. So far as the issue relating to disallowance of Rs.1,21,854/- on account of u/s.14A read with Rule 8D is concerned, the brief facts are that the assessee has made investment in shares from where it has earned dividend income at Rs.29,21,709/-, which was claimed as exempt. The assessee’s case before the Assessing Officer was that the dividend has been earned from mutual funds whereby the bank itself has done the entire transaction of buying and selling the mutual fund unit on the basis of specific instruction and no exclusive staff has been deployed by the assessee company to manage the investment in mutual fund and no specific expenditure can be said to be attributable to the earning of dividend income. The learned Assessing Officer held that the invocation of Section 14A is automatic and it comes into operation without any exception as soon as the dividend income is claimed exempt and the possibility of incurring certain expenditure cannot be ruled out. Accordingly, he disallowed sum of Rs.8,87,378/- after applying Rule 8D, even though the same was not applicable in the Assessment Year 2007-08.

12. Before the ld. CIT(A), the detailed submissions on behalf of the assessee has been made and also reliance was placed upon the decision of the ld. CIT(A) in the Assessment Year 2009-10, wherein the Assessing Officer was directed to delete the addition made u/s.14A read with Rule 8D. It was also brought on record before the ld. CIT (A) that the company has used its own equity money for investment in mutual fund units and no interest bearing funds have been used for such purpose, and therefore, no disallowance of interest could be made. Ld. CIT(A) held that though interest expenditure of Rs.7,65,524/- could not have been disallowed by the Assessing Officer under Rule 8D, because admittedly no interest bearing fund have been used for the purpose of investment. However, he has confirmed the disallowance on account of indirect expenditure incurred under the head ‘administrative expenses’ which has been worked out as per Rule 8D at Rs.1,21,854/-.

13. After considering the submission of the learned Sr. DR who was strongly relied upon the order of the Assessing Officer and the relevant findings given in the impugned order, we find that, it is an undisputed fact that assessee has invested in units with the availability of equity fund which is evident from following chart:-

From the above, it is quite evident that no interest bearing funds have been diverted for the purpose of investment, therefore, ld. CIT(A) has rightly deleted the disallowance of interest of Rs.7,65,524/-.

14. So far as the indirect expenditure is concerned, there is no appeal by the assessee and hence no inference is called for. Accordingly, ground no.2 raised by the Revenue is dismissed.

15. Lastly, with regard to the disallowance of claim of depreciation @ 60% on UPS, the Assessing Officer has allowed 15% instead of 60% claimed by the assessee on the ground that UPS is not part of computer and thereby made the addition of Rs.2,21,895/-. The assessee had purchased UPS for Rs.4,93,110/- and had claimed depreciation thereon @ 60% for Rs.2,95,860/-. The Assessing Officer observed that depreciation mentioned in Appendix-I Rule 5 of IT Rules applies only to computer and computers software, which alone are entitled for depreciation @ 60% and same rate cannot be applied for UPS.

16. The ld. CIT(A) has deleted the addition, following the judgment of Hon’ble Delhi High Court in the case of CIT vs. BSES Rajdhani Powers Ltd. in ITA 1266/2010, wherein computer accessories/peripherals like printers, scanners, server, UPS, etc., have been held to be integral part of computer system, and therefore, entitled to depreciation @60%. Accordingly, the ld. CIT (A) following the judgment of Hon’ble Delhi High Court and other decisions of the Tribunal allowed the assessee’s claim @60%.

17. We do not find any infirmity in the order of the ld. CIT(A) as the issue, whether computer accessories/ peripherals like printers, scanners, server, UPS etc, the rate of depreciation allowable is @ 60% as held by the Hon’ble Jurisdictional High Court and catena of other judgments.

Thus, ground no.3 raised by the Revenue is dismissed.

18. In the result, the appeal of the Revenue is dismissed.