DCIT, Bangalore v. M/s Novell Software Development India Pvt. Ltd.,, Bangalore

ITA 281/BANG/2015 | 2010-2011
Pronouncement Date: 30-09-2016

Appeal Details

RSA Number 28121114 RSA 2015
Bench Bangalore
Appeal Number ITA 281/BANG/2015
Duration Of Justice 1 year(s) 6 month(s) 27 day(s)
Appellant DCIT, Bangalore
Respondent M/s Novell Software Development India Pvt. Ltd.,, Bangalore
Appeal Type Income Tax Appeal
Pronouncement Date 30-09-2016
Appeal Filed By Department
Bench Allotted A
Tribunal Order Date 30-09-2016
Date Of Final Hearing 28-02-2017
Next Hearing Date 28-02-2017
Assessment Year 2010-2011
Appeal Filed On 03-03-2015
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL BENCH- A BANGALORE BEFORE SMT. ASHA VIJAYARAGHAVAN JUDICIAL MEMBER SHRI S JAYARAMAN ACCOUNTANT MEMBER IT(TP)A NO.281 /BAN G/2015 (ASST. YEAR 2010-11) THE DY. COMMISSIONER OF INCOME-TAX CIRCLE-5(1)(2) BANGALORE. . APPELLANT VS. M/S NOVELL SOFTWARE DEVELOPMENT INDIA PVT. LTD. LAUREL BLOCK-D 65/2 BAGMANE TECH PARK C.V RAMAN NAGAR BYRASANDRA BANGALORE-560 093. . RESPONDENT CO NO.101 /BANG/2015 (ASST. YEAR 2010-11) (BY ASSESSEE) REVENUE BY : SHRI G.R REDDY CIT ASSESSEE BY : SHRI T SURYANARAYANA ADVOCATE DATE OF HEARING : 4-8-2016 DATE OF PRONOUNCEMENT : 30-9-2016 IT(TP)A NO.281/B/15 CO NO.101/B/15 2 O R D E R PER ASHA VIJAYARAGHAVAN JUDICIAL MEMBER: THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF DY. COMMISSIONER OF INCOME-TAX CIRCLE 5(1)(2) D ATED 29/1/2015 AND IT PERTAINS TO THE ASSESSMENT YEAR 2010-11. 2. THE ASSESSEE NOVELL SOFTWARE DEVELOPMENT (INDIA ) PRIVATE LIMITED IS A SUBSIDIARY OF NOVELL INC. USA (NOVE LL US) AND IS A CAPTIVE SERVICE PROVIDER. IT IS ENGAGED IN THE BUS INESS OF PROVIDING SOFTWARE DEVELOPMENT AND SUPPORT SERVICES TO ITS AS SOCIATED ENTERPRISE NAMELY NOVELL US. 3. DURING THE RELEVANT PREVIOUS YEAR THE ASSESSEE PROVIDED SOFTWARE DEVELOPMENT AND SUPPORT SERVICES TO THE NO VELL US. THE TRANSFER PRICING STUDY DONE BY THE ASSESSEE CONCLUD ED THAT THE SAID TRANSACTION WAS AT ARMS LENGTH. ALSO DURING THE YEAR THE ASSESSEE IT(TP)A NO.281/B/15 CO NO.101/B/15 3 HAD INCURRED AN EXPENDITURE OF RS. 7 61 738/- TOWAR DS THE PURCHASE OF SOFTWARE WHICH WAS CAPITALIZED AND DEPRECIATION CLAIMED THEREON. 4. THE TPO HOWEVER MADE A TOTAL ADJUSTMENT FOR RS . 8 50 32 504/- TOWARDS THE AFORESAID INTERNATIONAL T RANSACTION. THE ASSESSING OFFICER (THE AO FOR SHORT) PASSED A DRA FT ASSESSMENT ORDER DATED 28.03.2014 AFTER INCORPORATING THE AFOR ESAID TP ADJUSTMENT. APART FROM THE SAID TP ADJUSTMENT THE AO ALSO MADE A DISALLOWANCE UNDER SECTION 40(A)(IA) OF THE ACT OF THE DEPRECIATION CLAIMED ON THE GROUND THAT NO TAX HAD BEEN DEDUCTED AT SOURCE BY THE ASSESSEE ON PAYMENTS MADE TOWARDS THE PURCHASE OF S OFTWARE. THE AO ALSO MADE A DISALLOWANCE UNDER SECTION 14A OF RS .15 26 315/- AS EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOM E DESPITE THERE BEING NO EXEMPT INCOME HAVING BEEN EARNED BY THE AS SESSEE IN THE PREVIOUS YEAR. 5. THE ASSESSEE FILED ITS OBJECTIONS BEFORE THE DRP WHICH VIDE ITS DIRECTIONS DATED 23.12.2014 REDUCED THE TP ADJ USTMENT MADE BY THE TPO BY GRANTING AN ADJUSTMENT TOWARDS DEPRECIAT ION AS PRAYED FOR BY THE ASSESSEE. THE DISALLOWANCE MADE UNDER SE CTION 40(A)(IA) IT(TP)A NO.281/B/15 CO NO.101/B/15 4 WAS CONFIRMED WHILE THE DISALLOWANCE UNDER SECTION 14A WAS DELETED. 6. PURSUANT TO THE DIRECTIONS OF THE DRP THE TPO R EWORKED THE TP ADJUSTMENT AT NIL. THE AO PASSED THE FINAL ASS ESSMENT ORDER DATED 29.01.2015 INCORPORATING THE SAME AND ALSO RE TAINED THE DISALLOWANCE MADE UNDER SECTION 40(A)(IA) OF THE AC T. 7. TO THE EXTENT THAT THE DRPS DIRECTIONS GRANTED AN ADJUSTMENT TOWARDS DEPRECIATION IN COMPUTING THE ARMS LENGTH PRICE OF THE TRANSACTION AND TO THE EXTENT THE DISALLOWANCE UNDE R SECTION 14A WAS DELETED THE REVENUE HAS FILED THE ABOVE APPEAL. SI NCE UPON GIVING EFFECT TO THE TP ORDER THERE WAS NO TRANSFER PRICI NG ADJUSTMENT THE ASSESSEE DID NOT FILE A SEPARATE APPEAL BEFORE THIS HONBLE TRIBUNAL. HOWEVER ON RECEIPT OF NOTICE OF THE ABOVE REVENUES APPEAL IT FILED CROSS-OBJECTIONS TO THE REVENUES APPEAL URGING GR OUNDS TO THE EXTENT THAT THE TPOS ORDER STANDS CONFIRMED AND AL SO AS REGARDS THE DISALLOWANCE MADE UNDER SECTION 40(A)(IA). IT(TP)A NO.281/B/15 CO NO.101/B/15 5 8. AGGRIEVED THE DEPARTMENT HAS FILED THE FOLLOWIN G GROUNDS : THE DRP ERRED IN DIRECTING THE AO IN DELETING THE ADDITION MADE WITHOUT APPRECIATING THE PROVISIONS OF SECTION 14A R.W.R.8D AND THE CLARIFICATION GIVEN BY THE BOARD IN CIRCULAR NO.5/2014 DATED 11.02.2014 WHICH EMPHASIZES THAT ONLY EXPENDITURE ALLOWABLE IS WHICH IS RELATABLE TO EARNING OF INCOM E AND THEREFORE THE EXPENSES WHICH ARE RELATABLE TO EARNING OF EXEMPT INCOME HAVE TO BE CONSIDERED FOR DISALLOWANCE IRRESPECTIVE OF THE FACT WHETHER ANY SUCH INCOME HAS BEEN EARNED DURING THE FINANCIAL YEAR OR NOT. 2. THE LEARNED DRP MEMBER ERRED IN DIRECTING TO EXCLUDE THE DEPRECIATION FROM THE COST OF THE TAXPAYER AS WELL AS THE COMPARABLES. 9. WE FIND THAT THE HONBLE HIGH COURT OF DELHI IN ITA 749/2014 IN THE CASE OF ITA 749/2014 IN THE CASE OF CHEM IN VESTMENT LTD. VS CIT HAS HELD THAT SECTION 14A WILL NOT APPLY IF NO EXEMPT INCOME IS RECEIVED OR RECEIVABLE DURING THE RELEVANT PREVIOUS YEAR. IT(TP)A NO.281/B/15 CO NO.101/B/15 6 10. RESPECTFULLY FOLLOWING THE ABOVE SAID DECISION OF HONBLE DELHI HIGH COURT WE DISMISS GROUND NO.1 RAISED BY THE D EPARTMENT. 11. WITH RESPECT TO GROUND NO.2 THE ASSESSEES SUBM ISSIONS ON THE REVENUES APPEAL ARE AS UNDER: RE. GROUND 2 IN THE REVENUES APPEAL: THE DRP RIGHT LY DIRECTED ALLOWANCE OF A DEPRECIATION ADJUSTMENT FO LLOWING THE ORDER OF THE CIT(A) DATED 16.9.2014 IN THE ASSESSEE S OWN CASE FOR ASSESSMENT YEAR 2009-10 [PARA 14.5 AT PAGE S 63 AND 64 OF THE CIT(A)S ORDER] AND HENCE NO INTERFERENC E IS CALLED FOR. THE ASSESSEE MAKES THE FOLLOWING SUBMISSIONS IN SUPPORT OF ITS CLAIM FOR DEPRECIATION ADJUSTMENT. * RATIONALE FOR MAKING DEPRECIATION ADJUSTMENT RULE 10B OF THE INCOME-TAX RULES 1962 (THE RULES FOR SHORT) PROVIDES THE METHOD IN WHICH THE COMPARABILI TY ANALYSIS IS TO BE CONDUCTED UNDER THE TRANSACTIONAL NET MARG IN METHOD. UNDER SUB CLAUSE (I) OF RULE 10B(1)(E) TH E NET PROFIT MARGIN REALIZED BY THE TAXPAYER FROM AN INTERNATION AL TRANSACTION IS COMPUTED HAVING REGARD TO A RELEVANT BASE E.G COSTS INCURRED SALES EFFECTED ETC. UNDER SUB-CLA USE (II) OF RULE 10BH(1)(E) THE NET PROFIT MARGIN REALIZED BY AN UNRELATED ENTERPRISE/COMPARABLE COMPANY IS COMPUTED HAVING IT(TP)A NO.281/B/15 CO NO.101/B/15 7 REGARD TO THE SAME RELEVANT BASE AS WAS SELECTED IN SUB CLAUSE (I). SUB-CLAUSE (III) OF THE SAID RULE SPECIFIES THAT BE FORE A COMPARISON OF THE NET MARGINS REALIZED UNDER SUB-CL AUSES (I) AND (II) IS DONE THE NET MARGIN REALIZED UNDER SUB -CLAUSE (II) MUST BE ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENC ES WHICH COULD MATERIALLY AFFECT THE NET PROFIT MARGIN IN TH E OPEN MARKET. RELEVANT EXTRACT OF RULE 10B(1)(E)(III) IS REPRODUCED AS UNDER:- (III) THE NET PROFIT MARGIN REFERRED TO IN SUB- CLAUSE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTION IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES IF ANY BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING I NTO SUCH TRANSACTIONS WHICH COULD MATERIALLY AFFECT TH E AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; BASED ON THE ABOVE THERE IS A NEED FOR MAKING AN ADJUSTMENT ON ACCOUNT OF DIFFERENCE BETWEEN THE NET MARGIN OF THE ASSESSEE AND THAT OF THE COMPARABLE COMPANIES. IT(TP)A NO.281/B/15 CO NO.101/B/15 8 IT WOULD ALSO BE RELEVANT TO NOTE THAT RULE 10B(3) OF THE RULES PROVIDES THAT AN UNCONTROLLED TRANSACTION SHALL BE CONSIDERED AS A COMPARABLE IF: A) NONE OF THE DIFFERENCES BETWEEN THE COMPARABLE COMP ANY AND THE CONTROLLED TRANSACTION ARE LIKELY TO MATERI ALLY AFFECT THE PROFIT ARISING FROM SUCH TRANSACTIONS IN THE OPEN MARKET; OR B) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECT OF SUCH DIFFERENCES. ASSESSEES DEPRECIATION POLICY VIS-AVIS DEPRECIATIO N POLICIES OF THE COMPARABLES SELECTED BY THE TPO: THE ASSESSEE HAS A POLICY OF CHARGING A HIGHER RATE OF DEPRECIATION AS COMPARED TOT EH COMPANIES SELECTED BY THE TPO. IT IS THEREFORE SUBMITTED T6HAT THERE I S A NEED FOR MAKING AN ADJUSTMENT TO ELIMINATE THE DIFFERENC ES IN THE ACCOUNTING POLICIES OF THE ASSESSEE AND THE COMPARABLE COMPANIES. THE ASSESSEES DEPRECIATION POLICY FOR THE YEAR IS AS BELOW: (III) DEPRECIATION DEPRECIATION IS PROVIDED FROM THE DATE OF CAPITALIZATION ON STRAIGHT LINE METHOD AT THE RATES MENTIONED BELOW BASED ON MANAGEMENTS ESTIMATE OF THE USEFUL LIVES OF ASSETS CONCERNED WHICH ARE HIGHER THAN THE IT(TP)A NO.281/B/15 CO NO.101/B/15 9 CORRESPONDING RATES PRESCRIBED IN SCHEDULE XIV OF T HE COMPANIES ACT 1956: THE USEFUL LIFE OF FIXED ASSETS ARE AS FOLLOWS: ASSET RATE OF DEPRECIATION COMPUTER SYSTEMS SERVERS 33.33% COMPUTER SYSTEM OTHER THAN SERVERS 50.00% COMPUTER SOFTWARE 33.33% PLANT AND MACHINERY 20.00% OFFICE EQUIPMENT 33.33% FURNITURE AND FIXTURES 20.00% VEHICLES 33.33% LEASEHOLD IMPROVEMENTS ARE DEPRECIATED OVER THE PRIMARY PERIOD OF LEASE OR THEIR ESTIMATED USEFUL L IFE WHICHEVER IS SHORTER. INDIVIDUAL ASSETS OTHER THAN SOFTWARE COSTING LESS THAN RS.90 000/- ARE FULLY DEPRECIATED IN THE YEAR OF PU RCHASE. SOFTWARE INDIVIDUALLY COSTING LESS THAN RS.90 000/- IS FULLY CHARGED TO THE PROFIT AND LOSS ACCOUNT. MOST OTHER COMPANIES PROVIDE FOR DEPRECIATION AT T HE RATES SPECIFIED IN THE COMPANIES ACT 1956. IT(TP)A NO.281/B/15 CO NO.101/B/15 10 DECISIONS OF THIS HONBLE TRIBUNAL RELIANCE IS PLACED ON THE DECISION OF THE BANGALORE BENCH OF THIS HONBLE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2005-06 IN ITA NO.1047/BANG/2011. HOWEVER UNLIKE IN THE AFORESAID CASE FOR AY 2005-0 6 WHEN THIS HONBLE TRIBUNAL HAD REMANDED THE MATTER TO THE TPO FOR CONSIDERATION OF THE ASSESSEES REQUEST FOR A DEPRECATION ADJUSTMENT IT IS SUBMITTED THAT THERE IS NO REQUIREMENT FRO4R SUCH AN ORDER OF REMAND BY THIS HONBLE TRIBUNAL AS THE TPO HAS ALREADY LOOKED INTO THE DETAILED WORKINGS AND SUBMISSIONS OF EH ASSESSEE FI LED BEFORE THE DRP AND GRANTED THE DEPRECATION ADJUSTME NT PURSUANT TO WHICH THE FINAL ASSESSMENT ORDER TOO HA S BEEN PASSED. ALSO IN THE ASSESSEES OWN CASE FOR THE ASSESSMEN T YEAR 2002-03 THE CIT(A) IN HIS ORDER DATED 9.8.201 2 ALLOWED THE ADJUSTMENT FOR DEPRECIATION (PARA 4.7 A T PAGES 27 AND 28 OF THE ORDER). LIKEWISE IN THE AS SESSEES OWN CASE FOR AY 2011-12 THE DRP VIDE ITS DIRECTION S DATED 27.11.2015 DIRECTED THAT AN ADJUSTMENT FOR DEPRECIATION BE ALLOWED (PARA 7.1.2. AT PAGE 11 OF THE DIRECTIONS). IT(TP)A NO.281/B/15 CO NO.101/B/15 11 THE ASSESSEE ALSO PLACES RELIANCE ON THE JUDGMENTS OF THIS HONBLE TRIBUNAL IN E-GAIN COMMUNICATION PVT. LTD. VS. ITO REPORTED IN [2008] 23 SOT 385 (PUNE) (AT PA GE 36) AND HONEYWELL TECHNOLOGY SOLUTIONS LAB P. LTD. IN IT(TP)A NO.1344/BANG/2011 AT PARA 5.71. THE DECISION OF HYDERABAD BENCH B IN THE CASE OF MARKET TOOLS RESEARCH PVT. LTD. IN ITA NO.2066/2011 IS TO BE F OLLOWED WHEREIN THE HONBLE JM IS A PARTY TO THE ORDER. THE RELEVAN T PORTION IS EXTRACTED BELOW: ALL FACTS WHICH IMPACT THE FINANCIAL RESULT OF COMP ARABLE COMPANIES SHOULD BE TAKEN INTO ACCOUNT AND REASONAB LE ACCURATE ADJUSTMENT SHOULD BE MADE FOR THE SAME. IN THIS CONNECTION THE RATES OF DEPRECIATION ADOPTED B Y THE ASSESSEE ARE SIGNIFICANTLY DIFFERENT FROM (STRAIGHT LINE AS COMPARED WITH WTP; HIGHER RATE THAN THAT PRESCRIBED IN SCHEDULE VI) THOSE ADOPTED BY THE COMPARABLE COMPANIES SUITABLE ADJUSTMENT FOR THE DIFFERENT HAS TO BE MADE OR THE PROFIT BEFORE DEPRECIATION MAY BE CONSIDERED. 12. FOLLOWING THE RATIO OF THE ABOVE SAID DECISION IN THE CASE OF MARKET TOOLS RESEARCH PVT. LTD. (SUPRA) WE HOLD T HAT DRP ERRED IN IT(TP)A NO.281/B/15 CO NO.101/B/15 12 DIRECTING TO EXCLUDE DEPRECIATION FROM THE COST OF THE TAX PAYER AS WELL AS COMPARABLES. HENCE WE DIRECT THE AO TO RE WORK DEPRECIATION FOLLOWING DECISION IN THE CASE OF MARKET TOOLS RESE ARCH PVT. LTD. (SUPRA). 13. IN THE RESULT THE DEPARTMENT APPEAL IS DISMISS ED. CO NO./101/BANG/2015 14. THE LD COUNSEL FOR THE ASSESSEE PRESSED ONLY FO LLOWING GROUNDS AMONG THE GROUNDS FILED BEFORE THE TRIBUNAL AGAINST THE DEPARTMENTAL APPEAL. 1 (A) THE LEARNED TPO AND THE DRP ERRED IN FACT AND LAW IN INCLUDING (A) INFOSYS LTD. (B) K ALS INFORMATION SYSTEMS LTD. (SEG) C) LARSEN & TOUBRO INFOTECH LTD. D) MINDTREE LTD. (SEG) E) PERSISTENT SYSTEM LTD. F) SASKEN COMMUNICATION TECHNOLOGIES (SEG) G ) TATA ELXSI LTD. (SEG) AS COMPARABLE COMPANIES WIT HOUT CONSIDERING THE FUNCTIONAL DIFFERENCES OF THE SAID COMPANIES VIS--VIS THE RESPONDENT. IT(TP)A NO.281/B/15 CO NO.101/B/15 13 1 (B) THE DRP ERRED IN ACCEPTING THE ACTION OF THE LEARNED. AO/LEARNED. TPO IN REJECTING THE COMPARABLE COMPANIES ARRIVED AT IN THE RESPONDENTS TRANSFER PRICING STUDY AS MENTIONED BELOW A) AKSHAY SOFTWARE TECHNOLOGIES LTD B) EVOKE TECHNOLOGIES PVT . LTD. 3. THE DRP/THE DCIT 12(2) BANGALORE [DCIT OR AO] ERRED I NOT HOLDING THAT THE AMOUNT OF RS.688 872 CLAIMED AS DEPRECIATION ON SOFTWARE EXPE NSES SHOULD NOT BE DISALLOWED U/S 40(A)(IA) OF THE ACT. 15. THE LD COUNSEL SUBMITTED THAT REGARDING GROUND 1 IN THE ASSESSEES CROSS-OBJECTION THE DRP DID NOT ADJUDIC ATE UPON THE ASSESSEES GROUNDS TO EXCLUDE CERTAIN COMPANIES CHO SEN BY THE TPO AS COMPARABLES AND INCLUDE CERTAIN COMPANIES FROM ITS TP STUDY AS COMPARABLES. THE ACCEPT-REJECT MATRIX OF THE TPOS 11 COMPARABLES BASED ON THE ASSESSEES SUBMISSIONS WOULD BE AS FOL LOWS: ---- SPACE INTENTIONALLY LEFT BLANK ------- IT(TP)A NO.281/B/15 CO NO.101/B/15 14 SN NAME OF THE COMPANY SALES (RS. IN CRORES) MARK- UP ON COSTS (UNADJ) % MARK-UP ON COSTS (DEPRECIATION ADJ) % MARK-UP ON COSTS (WC AND DEPRECIATION ADJ % ASSESSEES REMARKS GROUNDS FOR REJECTION FUNCTIONALLY DISSIMILAR 1 LGC GLOBAL LTD. 240.74 11.95 13.70 9.10 ACCEPT 2 INFOSYS LTD. * 21140 45.01 53.51% 52.51% REJECT 3 KALS INFORMATION SYSTEMS LTD. (SEG)* 2.17 38.37 47.69 43.13 REJECT 4 LARSEN & TOUBRO INFOTECH LTD. 1176.76 19.33 23.33 23.22 REJECT 5 MINDTREE LTD. (SEG) 698.02 14.83 21.75 19.04 ACCEPT 6 PERSISTENT SYSTEMS & SOLUTIONS LTD. 6.67 15.38 20.35 16.78 ACCEPT 7 PERSISTENT SYSTEM LTD.** 504.41 30.35 42.30 41.26 REJECT 8 RS SOFTWARE (IND) LTD. 161.83 10.29 15.92 15.55 ACCEPT 9 SASKEN COMMUNICATION TECHNOLOGIES 401.50 17.36 25.14 25.12 REJECT 10 TATA ELXSI (SEG)* 336.94 21.88 28.80 26.21 REJECT 11 THINKSOFT GLOBAL SERVICES LTD. 74.55 17.05 19.44 17.99 ACCEPT IT(TP)A NO.281/B/15 CO NO.101/B/15 15 16. THE SIX COMPARABLES COMPANIES 1) INFOSYS LTD. 2) KALS INFORMATION SYSTEMS LTD. (SEG) 3) PERSISTENT SYST EM LTD. 4) SASKEN COMMUNICATION TECHNOLOGIES 5) TATA ELXSI 6) LARSEN & TOUBRO INFOTECH LTD. ARE COVERED BY THE DECISION OF CO-OR DINATE BENCH IN IT(TP) NO.212/BANG/2015 IN THE CASE OF M/S ELECTRON ICS FOR IMAGING INDIA PVT. LTD. AND REJECTED SINCE THESE ARE FUNC TIONALLY DISSIMILAR TO THAT OF THE ASSESSEE COMPANY. 17. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED AS FOLLOWS: 18. ADDITIONALLY THE ASSESSEE SEEKS INCLUSION OF T HE FOLLOWING TWO COMPANIES WHICH WERE PART OF ITS TP STUDY IN THE FINAL LIST OF COMPARABLES: AKSHAY SOFTWARE TECHNOLOGIES LTD: THE COMPANY IS FUNCTIONALLY COMPARABLE TO THE ASSESSEE. ORIGINALL Y THE TPO PROPOSED TO REJECT THE SAID COMPANY AS A COMPARABLE ON THE GROUND THAT THERE WAS NO RELATED PARTY DISCLOSURE FOR FY 2009-10(PAGE 269 OF THE PAPERBOOK ). THE ASSESSEE HAD OBJECTED TO THE SAME STATING THAT ON THE IT(TP)A NO.281/B/15 CO NO.101/B/15 16 BASIS OF THE ANNUAL REPORT OF THE COMPANY THE REL ATED PARTY TRANSACTIONS WOULD ONLY BE 4.33% AND THAT THEREFORE IT OUGHT TO BE INCLUDED IN THE LIST OF F INAL COMPARABLES (PAGE 307 OF THE PAPERBOOK). HOWEVER IN THE TP ORDER THE TPO REJECTED THE SAID COMPANY ON THE BASIS THAT 90% OF ITS EXPORT REVENUES FOR THE YEAR WERE FROM DUBAI OPERATIONS WHEREAS THE ASSESSEE EARNS 1 00% OF ITS REVENUES FROM INDIA. ON THE BASIS THAT THE COMPANY AND THE ASSESSEE OPERATED IN DIFFERENT GEOGRAPHICAL AREAS THE TPO EXCLUDED THE SAID COMPA NY. THE ASSESSEE SUBMITS THAT THE COMPANY PASSES ALL TH E FILTERS APPLIED BY THE TPO AND THEREFORE THE EXCL USION OF THE COMPANY SOLELY ON THE BASIS THAT ITS OPERATIONS LIE IN DIFFERENT GEOGRAPHICAL AREAS WHICH WAS NOT AT ALL A FILTER APPLIED BY THE TPO IS WHOLLY ARBITRARY AND THUS TH E COMPANY OUGHT TO BE INCLUDED IN FINAL LIST OF COMPARABLES. IT(TP)A NO.281/B/15 CO NO.101/B/15 17 IN FACT IN THE ASSESSEES OWN CASE FOR THE IMMEDIA TELY PRECEDING ASSESSMENT YEAR AKSHAY SOFTWARE TECHNOLOGIES LTD. (AKSHAY FOR SHORT) HAS BEEN ACC EPTED BY THE TPO AND CONFIRMED BY THE CIT(A) AS BEING COMPARABLE TO THE ASSESSEE. IN ADDITION AKSHAY IS CONSISTENTLY FIGURING IN THE FINAL LIST OF COMPARABLES IN THE CASES OF SEVERAL OTHER S IMILARLY PLACED ASSESSES FOR THE SAME ASSESSMENT YEAR IN QUE STION. FURTHER IN AROWANA CONSULTING LTD. V.ITO IN IT(T P)A NO.235/BANG/2015 THIS HONBLE TRIBUNAL VIDE ITS OR DER DATED 29.06.2015 FOR AY 2010-11 DIRECTED THAT AKSHA Y BE INCLUDED IN THE FINAL LIST OF COMPARABLES. 19. WE FIND THAT THE COORDINATING BENCH OF THE TRIB UNAL IN THE CASE OF AROWANA CONSULTING LTD. VS ITO IN IT(TP)A NO.23 5/ BANG2015 HAS DIRECTED THAT AKSHAY SOFTWARE TECHNOLOGIES LTD IS TO BE INCLUDED AS COMPARABLE. IT(TP)A NO.281/B/15 CO NO.101/B/15 18 20. HENCE WE DIRECT THE TPO TO INCLUDE THE SAME IN THE LIST OF COMPARABLES. EVOKE TECHNOLOGIES PVT. LTD. : THE TPO IN HIS NOTICE DATED 19.11.2013 PROPOSED TO REJECT THE COMPANY ON THE GROUND THAT ITS DATA FOR FY 2009-10 WAS UNAVAILAB LE (PAGE 269 OF THE PAPER BOOK). HOWEVER IN ITS SUBMISSIONS DATED 18.12.2013 (AT PAGE 307 OF THE PAPERBOOK) THE ASSESSEE SUBMITTED THAT THE ANNUAL R EPORT OF THE COMPANY WAS AVAILABLE IN THE PUBLIC DOMAIN. IN THE ORDER PASSED BY THE TPO (AT PAGE 8 THEREOF) HE IN FACT NOTED THAT IT QUALIFIES ALL THE FILTERS APPLI ED BY HIM AND ACCEPTED THE COMPANY AS A COMPARABLE. THE COMPANY HOWEVER DID NOT FIGURE IN THE FINAL LIST OF COMPARABLES SELECTED BY THE TPO PRESUMABLY DUE TO A N OVERSIGHT ON THE PART OF THE TPO. THE ASSESSEE SUB MITS THAT THE TPO HAVING ACCEPTED THE COMPANY AS A COMPARABLE THE DRP OUGHT TO HAVE GIVEN NECESSARY DIRECTIONS FOR ITS INCLUSION IN THE FINAL LIST OF COMPARABLES. IT(TP)A NO.281/B/15 CO NO.101/B/15 19 FURTHER THE COMPANY IS CONSISTENTLY FIGURING IN TH E FINAL LIST OF COMPARABLES IN THE CASES OF SEVERAL OTHER S IMILARLY PLACED ASSESSES FOR THE SAME ASSESSMENT YEAR IN QUE STION AND ITS INCLUSION HAS NEITHER BEEN CHALLENGED BY TH E ASSESSEES NOR BY THE REVENUE. IT QUALIFIES ALL DEPENDENTS APPLIED BY THE TPO ARE ACCEPTED. 21. HENCE EVOKE TECHNOLOGIES PVT. LTD. TO BE INC LUDED IN THE LIST OF COMPARABLES. COMPUTATION OF ARITHMETIC MEAN OF 7 COMPARABLES: 22. THE FINAL LIST OF 7 COMPARABLES AND THE ARITHM ETICAL MEAN OF THEIR MARGINS WOULD BE AS FOLLOWS: ---- SPACE INTENTIONALLY LEFT BLANK----- IT(TP)A NO.281/B/15 CO NO.101/B/15 20 SN NAME OF THE COMPANY MARK-UP ON COSTS (UNADJ) % MARK-UP ON COSTS (DEPRECIATION ADJ) % MARK-UP ON COSTS (WC AND DEPRECIATION ADJ % 1 PERSISTENT SYSTEMS & SOLUTIONS LTD. 15.38 20.35 16.78 2 LGS GLOBAL LTD. 11.95 13.70 9.10 3 RS SOFTWARE (IND) LTD. 10.29 15.92 15.55 4 THINKSOFT GLOBAL SERVICES LTD. 17.05 19.44 17.99 5 MINDTREE LTD. (SEG) 14.83 21.75 19.04 6 AKSHAY SOFTWARE TECHNOLOGIES LTD. -1.04 -0.53 -1.09 7 EVOKE TECHNOLOGIES P LTD 19.35 21.41 20.70 ARITHMETIC MEAN 12.54 16.01 14.01 23. THE ASSESSEES NCP MARGIN FOR FY 2009-10 AFTER EXCLUDING THE DEPRECIATION CHARGED BY IT FROM ITS OPERATING C OST IS 26.12%. 24. THUS SINCE THE ASSESSEES MARGIN OF 26.12% IS HIGHER THAN THE ARITHMETICAL MEAN OF THE MARGINS OF THE COMPARA BLES THAT IS 14.01% THE INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES BY THE ASSESSEE TO ITS AE IN F Y 2009-10 CAN BE CONCLUDED AS BEING AT ARMS LENGTH. IT(TP)A NO.281/B/15 CO NO.101/B/15 21 25. WITH RESPECT TO G ROUND NO.3 IN THE ASSESSEES CROSS-BJECTIONS THE ASSESSEE SUBMITS : 26. THE DRP ERRED IN CONFIRMING THE DISALLOWANCE OF RS.6 88 872/- MADE UNDER SECTION 4D(A)(IA). IT IS SUBMITTED THAT DURING THE RELEVANT PREVIOUS YEAR THE ASSESSEE INC URRED A TOTAL EXPENDITURE OF RS.7 61 738/- ON SOFTWARE. OUT OF T HE SAID EXPENDITURE THE ASSESSEE HAD WRITTEN OFF RS.6 88 8 72/- WAS TREATED AS AN INADMISSIBLE EXPENDITURE AND BOOK DEPRECIATIO N ON CAPITALIZED SOFTWARE EXPENSES OF RS.72 866/- WAS ADDED BACK. F OR INCOME TAX PURPOSES THE ASSESSEE HAD CAPITALIZED SOFTWARE EXP ENSES OF RS.7 61 738/- AND APPROPRIATE INCOME TAX DEPRECIATI ON OF RS.3 69 858/- WAS CLAIMED UNDER SECTION 32. 27. THE ASSESSING OFFICER HOWEVER HELD THAT THE P AYMENT FOR PURCHASE OF SOFTWARE WAS IN THE NATURE OF ROYALTY IN TERMS OF EXPLANATION 2 TO SECTION 9(1)(VI) OF THE ACT AND HE LD THAT THE ASSESSEE OUGHT TO HAVE DEDUCTED TAX AT SOURCE UNDER SECTION 194J OF THE ACT. SINCE SUCH DEDUCTION WAS NOT MADE A DISA LLOWANCE OF IT(TP)A NO.281/B/15 CO NO.101/B/15 22 RS.6 88 872/- UNDER SECTION 40(A)(IA) WAS MADE ALT HOUGH THE DEPRECIATION CLAIMED WAS RS.3 69 858/-. 28. THE ASSESSEE SUBMITS THAT THE PROVISIONS OF SEC TION 40(A)(IA) DO NOT APPLY TO DEPRECIATION ALLOWANCE UNDER SECTIO N 32 OF THE ACT. THE DISALLOWANCE UNDER THE SAID PROVISION APPLIES T O AMOUNTS IN THE NATURE OF INTEREST COMMISSION BROKERAGE RENT RO YALTY ETC. A PLAIN READING OF THE PROVISION SHOWS THAT THE DISALLOWANC E UNDER THE PROVISION IS ONLY IN RELATION TO EXPENDITURE INCURR ED WHICH WOULD BE DEDUCTIBLE WHILE COMPUTING THE TOTAL INCOME AND WOU LD THEREFORE APPLY ONLY TO REVENUE EXPENDITURE. DEPRECIATION IS IN THE NATURE OF AN ALLOWANCE THAT IS A STATUTORY DEDUCTION UNDER SECTION 32 OF THE ACT AND DOES NOT REPRESENT AN OUTGO/ EXPENDITURE T O ATTRACT THE PROVISIONS OF SECTION 40(A)(IA). 29. IN SUPPORT OF THIS PROPOSITION RELIANCE IS PL ACED ON THE FOLLOWING DECISIONS: (I) CRANE SOFTWARE INTERNATIONAL LTD. V. ACIT (JUDGMENT DATED 08.02.2011 IN ITA NO.741/BANG/2010). IT(TP)A NO.281/B/15 CO NO.101/B/15 23 (II) SKOL BREWERIES LTD. V. ACIT (2013) 29 TAXMANN.COM 111/ITAT MUM) (III) SMS DEMAG P.LTD V. DCIT (2010) 132 TTJ 498 (ITAT DEL) (IV) KAWASAKI MICROELECTRONICS INC. V. DDIT (2015) 60 TAXMANN.COM 256 (BANGALORE TRB.) 30. WE ARE OF THE OPINION THAT THE ISSUE IS SQUAREL Y COVERED BY THE DECISION IN THE CASE OF KAWASAKI MICROELECTRONICS I NC. VS DICT (INTERNATIONAL TAXATION) IN IT(TP) NO.1512/BANG/201 0 DATED 26 6 2015 WHERE IT HAS BEEN HELD THAT ONCE THE A SSESSEE HAS CAPITALIZED PAYMENT IN QUESTION THOUGH THE ASSESSEE HAS NOT DEDUCTED TAX AT SOURCE ON SUCH PAYMENT SECTION 40 (A) (1) C ANNOT BE INVOKED FOR DISALLOWANCE OF DEPRECIATION. 31. THE CROSS-OBJECTION FILED BY THE ASSESSEE IS ALLOWED. 32. IN THE RESULT THE APPEAL OF THE DEPARTMENT IS DISMISSED AND THE CROSS-OBJECTION OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30TH SEPTEMBER 2016 . IT(TP)A NO.281/B/15 CO NO.101/B/15 24 SD/- SD/- (S JAYARAMAN) (ASHA VIJ AYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE DATED : 30/09/2016 VMS COPY TO :1. THE ASSESSEE 2. THE REVENUE 3.THE CIT CONCERNED 4.THE CIT(A) CONCERNED 5.DR 6.GF BY ORDER ASST. R EGISTRAR ITAT BANGALORE. IT(TP)A NO.281/B/15 CO NO.101/B/15 25