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DCIT, Circle-13(1), New Delhi. Vs. Nortel Networks India Pvt. Ltd., 2nd Floor, Orchid Plaza Suncity, Sector-54, Gurgaon
January, 13th 2016
                DELHI BENCH: `I-2' NEW DELHI


                     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

          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



     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

                                                                          Page 2 of 16
                                                               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
 3.              Availing of technical services from AE       TNMM     2,57,26,109
 4.              Provision of professional services (BSNL     TNMM     153,23,49,052
 5.              Provision of      professional    services   TNMM     31,82,66,038
 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
                                                                              Page 3 of 16
                                                       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 %
1.    Engineers    India   20.75     20.23      17.26                20.71
2.    Esquire Engineers      NA         NA    -14.36                   -14.36
      and Consultants
3.    F L Smidth Limited    5.01        NC       NC                      5.01
4.    Powerplant             NA         NA    -12.04                   -12.04
      Improvement Ltd.
5.    RITES Limited          NA      21.16      9.53                    15.38

                                                                    Page 4 of 16
                                                         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
       Services Ltd.
8.     CMC Ltd.                NC       -0.17     1.46                     0.52
9.     Hartron                 NA      -26.25   -19.12                   -21.99
10.    Himachal                NA      -31.38    9.08                      -5.96
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:-

                                                                      Page 5 of 16
                                                           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
                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


     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.

                                                                           Page 6 of 16
                                                           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

     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

                                                                           Page 7 of 16
                                                         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
          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
                                                                         Page 8 of 16
                                                   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

                                                                Page 9 of 16
                                                  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


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.

                                                              Page 10 of 16
                                                            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
            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/- )

                                                                        Page 11 of 16
                                                               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

                                                                           Page 12 of 16
                                                       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


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
                                                                   Page 13 of 16
                                                    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

                                                                Page 14 of 16
                                                   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

                                                               Page 15 of 16
                                                   I.T.A .No.-2751/Del/2013

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,
     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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