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TMI Blog2021 (11) TMI 1032X X X X Extracts X X X X X X X X Extracts X X X X ..... g services, visual computing labs, etc. No contrary view has been brought to our notice regarding comparability of this company with that of a pure software development service provider. Accordingly we direct to exclude from the list of comparables. Cat Technologies Ltd.- This has to go back to the file of AO/TPO to verify the related party transaction and if there is no related party transaction, this comparable is to be considered as comparable, while determining ALP of international transactions. With these observations, we remit the issue to the file of AO/TPO for fresh consideration. Disallowance u/s 40(a)(ia) on deprecation claimed on purchase of Software - HELD THAT:- We find force in the argument of the ld.AR in view of the judgment in the case of Engineering Analysis Center of Excellence Pvt. Ltd., [ 2021 (3) TMI 138 - SUPREME COURT] wherein it is held that software purchased from nonresident is rightly capitalized by assessee in its books of account and are entitled for depreciation u/s 32 of the Act and not allowable to deduct TDS. As such, it cannot be denied depreciation on the purchase of software which has been actually capitalized by the assesee and directed to gran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions with its Associated Enterprises (AEs). 4. That on the facts and in law, the Ld. CIT(A) erred in upholding the action of the Ld. AO/ Ld. TPO in determining the arm's length mark-up/ price using only FY 2009-10 data, which was not available to the Assesseeat the time of complying with the contemporaneous transfer pricing documentation requirements. 5. That on the facts and in law, the Ld. CIT(A) erred in upholding the action of the Ld. TPO of the rejection/modification of certain quantitative and qualitative filters that were applied by the Assesseeand application of certain additional filters to arrive at the set of comparable companies in determining the arm's length price for the international transactions of provision of Software Development ('SWD') services of the Appellant. 6. That on the facts and in law, the Ld. CIT(A) erred in upholding the Ld. TPO's approach of including certain companies as comparable in the final set of comparables selected in the TP Order, which do not satisfy the test of comparability and /or are functionally dissimilar to the SWD services provided by the Appellant: • By disregarding the dissimilarities pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 32 of the Act is a revenue expenditure. 15. That on the facts and in law, the Ld. CIT(A) further erred in holding that 'thus the entire amount of purchase of software on which TDS has not been deducted is to be disallowed.' 16. That on the facts and in law, the Ld. CIT(A) erred in upholding the action of the Ld. AO in not granting depreciation on goodwill to the assesseeamounting to INR 12,092,590 under section 32 of Act. 17. That on the facts and in law, the Ld. CIT(A) failed to appreciate that the difference between consideration for purchase of business and value of net assets acquired constitutes a goodwill, which is eligible for depreciation under section 32 of the Act. 18. That on the facts and in law, the Ld. CIT(A) erred in upholding the action of the Ld. AO in levying consequential interest under section 234B of the Act." 3. The Revenue has raised the following grounds of appeal: "1. The order of the CIT (Appeals) is opposed to law and the facts and circumstances of the case. 2. On the facts and circumstances of the case, Whether the ld.CIT is justified In directing the TPO to exclude the company, M/s. Kals Infotech Ltd., as functionally dissimilar to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) partly allowed the appeal. To the extent aggrieved by the CIT(A)'s order, the Assessee has preferred the present appeal before this Hon'ble Tribunal. To the extent the CIT(A) granted relief to the Assessee, the Revenue has preferred the above appeal before this Hon'ble Tribunal. ASSESSEE'S SUBMISSIONS: A. DETAILS OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE: Particulars Amount in Rs. Outcome of TP Order Rendering of software development services 4,760,500,236 Adjustment of ₹ 29,15,57,492/- Payment of communication charges 29,450,115 Accepted to be at arm's length Purchase of fixed assets 20,657,944 Accepted to be at arm's length Reimbursement of salary, Wages and Bonus 52,510,058 Accepted to be at arm's length Reimbursement of GERP IT expenses 68,48,819 Accepted to be at arm's length B. ANALYSIS OF THE TP STUDY OF THE ASSESSEE AND THE TPO: B.1. Net mark-up on cost earned by the Assessee as reflected in the TP Order: Operating Income ₹ 4,063,374,287/- Operating Cost ₹ 3,607,166,221/- Operating Profit (Op. Income - Op. Cost) ₹ 456,208,066/- Operating/Net margin (OP/OC) 13% B.2. Comparison of the TP studies d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a was available - accepted 2. Companies whose software development service income < ₹ 1 crore - rejected 3. Companies whose software development service revenue is less than 75% of the total operating revenue - rejected 4. Companies which have more than 25% related party transactions of the sales - rejected 5. Companies which have export sales < 75% of the sales- rejected 6. Companies whose employee cost < 25% of their turnover - rejected 7. Companies which have persistent losses for the last three years upto and including financial year 2009-10 - rejected 8. Companies having different financial year ending (i.e. not March 31, 2010) or data of the company which does not fall within 12 month period i.e., 01.04.2009 to 31.03.2010 - rejected 9. Companies that are functionally different - rejected 10. Companies having peculiar economic circumstances - rejected B.6. Comparables selected by TPO and their arithmetic mean: Sl. No. Name of the company Margin Unadj. (%) Margin - WC adjusted (%) 1. ICRA Techno Analytics Ltd. (seg) 24.94 24.10 2. Infosys Ltd 44.98 44.15 3. Kals Information Systems Ltd. (seg) 34.41 27.86 4. Larsen & Toubro Inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14. At the outset, we note that apart from having the related party revenue at 20.94% of the total revenue, this company was also found to be functionally not comparable with software development services segment of the assessee. The DRP has given its finding at pages 13 to 14 as under:- "Having heard the contention, on perusal of the annual report, it is noticed by us that the segmental information is available for two segments i.e., services and sales. However, it is evident from the annual report that the service segment comprises of software development, software consultancy, engineering services, web development, web hosting, etc. for which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude the above company from the comparables. 15. We find that the facts recorded by the DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development & hosting and substantially diversified itself into domain of business analysis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arability of this company and the findings of the Delhi Bench of the Tribunal has been confirmed by the Hon'ble Delhi High Court. The Hon'ble Delhi High Court has observed that this company having brand value as well as intangible assets cannot be compared with an ordinary entity provide captive service. We further note that this company provides end to end business solutions that leverage cutting edge technology thereby enabling clients to enhance business performance. This company also provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management service. In addition, the company offers software product for banking industry. Thus, this company is engaged in diversified services including design as well as technical consultancy, consulting, reengineering, maintenance, systems integration as well as products for banking industry. 20. In view of the above facts that Infosys Ltd. having a huge brand value and intangibles as well as having bargaining power, the same cannot be compared with the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware products and other services. The DRP has come to the conclusion that this company earned revenue from 3 segments. However, no segmental information is available. Accordingly, the DRP directed the AO to exclude this company from the comparables. 28. We have heard the id. DR as well as Id. AR and considered the relevant material on record. The DRP has reproduced the break-up of revenue in the impugned order as under:- Amount in Rs. Lakhs Year ended March 31, 2010 Year ended March 31, 2019 Software Services 37,736.22 40,531.20 Software products 2,041.00 6,146.43 Other services 372.77 1,297.05 Total revenues 40,150.89 47,974.68 17. Accordingly this company is excluded from the list of comparables. 18. Tata Elxsi 19. The ld.AR submitted that the company is functionally dissimilar, being engaged in software product development and intellectual property led business. During the year, the company was involved in acquisition and restructuring. 20. The ld.DR relied on the order of CIT(A). 21. We have heard both the parties and perused the materials on record. This company has been considered as not comparable in the case of Electronics for Imaging India Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable parties." 33. No contrary view has been brought to our notice regarding comparability of this company with that of a pure software development service provider. Accordingly, in view of the decision of the 1umbai Bench of the Tribunal in the case of Telcordia Technologies India (P.) Ltd. (supra), we do not find any reason to interfere with the finding of the DRP." 22. According to this comparable, we direct to exclude from the list of comparables. 23. Cat Technologies Ltd., It is submitted that the TPO had excluded the said company for the reason that the details of related party transactions were not available. The CIT(A) has however failed to adjudicate on the inclusion of the said company. 24. In this regard, it is submitted that no related parties transaction have been reported in the annual report of CAT Technologies and therefore it is reasonable to comprehend that there are no related party transactions and therefore CAT Technologies passes the RPT filter applied by the TPO. Further, it is submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee that refers to the financials of this company and to reach a fresh conclusion on the aspect of this cat technologies Ltd passing or not the RPT filter." 27. The ld.DR relied on the orders of the lower authorities. 28. We have heard both the parties and perused the materials on record. In our opinion, this has to go back to the file of AO/TPO to verify the related party transaction and if there is no related party transaction, this comparable is to be considered as comparable, while determining ALP of international transactions. With these observations, we remit the issue to the file of AO/TPO for fresh consideration. 29. No other ground argued before us with regard to TP matters by the ld.AR in the assessee's appeals. Hence, it is not considered, though ld.AR's submitted to some arguments in its written submissions. Corporate tax matters:- 30. The disallowance claimed u/s 40(a)(ia) of the Act on deprecation claimed on purchase of Software. 31. We have heard both the parties and perused the materials on record. In our opinion, we find force in the argument of the ld.AR in view of the judgment of Supreme Court in the case of Engineering Analysis Center of Excellence Pv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e circumstances of the case, the CIT(A) erred in directing the TPO to include M/s LGS Global Ltd, the company which was excluded by eh TPO as the same had failed to pass the TPO's filter export sales/sales ,75% this filter is also deciding factor for treating a company as a comparable and accordingly erred in including the comparable, M/s LGS Global Ltd., in Software Development Segment." 24. In this regard, the learned DR brought to our notice the order of the TP at page 45 which reads as under:- "As in the case of Aztecsoft, this company also was rejected because, the forex earnings repatriated on export sales was less than 75% of revenues earned during the year. Though export sales were 96% of total sales in the P&L account, the forex earnings repatriated was only 40.61%. If the P&L account of this company is further examined, it is observed that as against total standalone sales of ₹ 189 crores, sundry debtors figure stands at ₹ 175 crores (including ₹ 96.7 crores debtors outstanding for more than six months, ref. Sch.6 to balance sheet). Obviously, the business model of this company is not comparable to that of the taxpayer. Therefore, this company is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the case of Electronics for Imaging India Pvt. Ltd., cited supra, wherein in para 22 and 23 of the order, it is held as under:- 41. The DRP has directed the AO to exclude this company from the list of comparables by taking note of the fact that there were inventories in the books of accounts of this company which shows that this company is in the software product business. Further, by following the decision of this Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. v. Dy. CIT [2013] 140 lTD 540/29 taxmann.com 310 (Bang. - Trib.), this company was found to be not comparable with that of the assessee. 42. We have heard the ld.DR as well as ld.AR and considered the relevant material on record. The Id. DR has not disputed the fact that comparability of this company has been examined by this Tribunal in a series of decisions including in the case of Trilogy ebusiness Software India (P.) Ltd. (supra). We further note that in the balance sheet of this company as on 31.3.2010, there are inventories of ₹ 60,47,977. Therefore, when this company is in the business of software products, the same cannot be compared with a pure software development services provider ..... X X X X Extracts X X X X X X X X Extracts X X X X
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