M/s.State Street Global Advisors India Private Limited ( Formerly known as State Street Services (India) Private Limited), Bengaluru V. Deputy Commissioner Of Income Tax, Circle- 6(1)(2), Bengaluru

CO 1/BANG/2020

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 7689 (ITAT-BANGALORE)
• Duration Of Justice: 7 month(s) 28 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 31-08-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 19-08-2020
• Assessment Year: 2010-2011
• Appeal Filed On: 03-01-2020
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; TDS; Set aside
• Section: 43; 92CA; 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N V VASUDEVAN, VICE PRESIDENT AND SHRI G MANJUNATHA , ACCOUNTANT MEMBER IT (TP) A NO. 2193/BANG/2019 ASSESSMENT YEAR: 2010 - 11 THE DEPUTY COMMISSIONER INCOME TAX, CIRCLE 6(1)(2), BENGALURU. VS. M/S. STATE STREET SERVICES (INDIA) PVT. LTD., RMZ INFINITY, 7 TH FLOOR, TOWER D, OLD MADRAS ROAD, BENGALURU 560 016. PAN: AALCS 1213K APPELLANT RESPONDENT CO NO.1/BANG/2020 [IN IT (TP) A NO. 2193/BANG/2019] ASSESSMENT Y EAR: 2010 - 11 STATE STREET GLOBAL ADVISORS (INDIA) PVT. LTD. [FORMERLY M/S. STATE STREET SERVICES (INDIA) PVT. LTD.], 4 TH FLOOR, CAMPUS 8A, RMZ ECOWORLD, BENGALURU 560 103. PAN: AALCS 1213K VS. THE DEPUTY COMMISSIONER INCOME TAX, CIRCLE 6(1)(2), BENGALURU. CROSS OBJECTOR APPELLANT IN APPEAL / RESPONDENT APPELLANT BY : SHRI P RIYADARSHI MISRA, JT.CIT(DR)(ITAT), BENGALURU. RESPONDENT BY : SHRI DARPAN KIRPALANI, ADVOCATE. DATE OF HEARING : 19 .0 8 .2020 DATE OF PRONOUNCEMENT : 31 .0 8 .2020 IT(TP)A NO.2193/BANG/2019 & CO 1/BANG/2020 PAGE 2 OF 12 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT THE APPEAL IS BY THE REVENUE AGAINST THE ORDER D ATED 12.6.2019 OF THE CIT(APPEALS)-6, BENGALURU RELATING TO ASSESSMEN T YEAR 2010-11. THE ASSESSEE HAS FILED CROSS OBJECTION AGAINST THE VERY SAME ORDER OF CIT(APPEALS). 2. THE ASSESSEE IN ENGAGED IN THE BUSINESS OF PROVI SION OF INFORMATION TECHNOLOGY ENABLED SERVICES (ITES) TO ITS WHOLLY OW NED HOLDING COMPANY. IN TERMS OF THE PROVISIONS OF SEC.92-A OF THE ACT, THE ASSESSEE AND ITS WHOLLY OWNED HOLDING COMPANY WERE ASSOCIATED ENTERP RISES ('AES'). IN TERMS OF SEC.92B(1) OF THE ACT, THE TRANSACTION OF PROVIDING ITES WAS AN INTERNATIONAL TRANSACTION I.E., A TRANSACTION BET WEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR IN TANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR LENDING OR BORROWING MONE Y, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME , LOSSES OR ASSETS OF SUCH ENTERPRISES, AND SHALL INCLUDE A MUTUAL AGREEM ENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE O R FACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES. I N TERMS OF SEC.92(1) OF THE ACT, ANY INCOME ARISING FROM AN INTERNATIONAL T RANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. 3. IN THIS APPEAL BY THE ASSESSEE, THE DISPUTE IS W ITH REGARD TO DETERMINATION OF ARMS LENGTH PRICE (ALP) IN RESPEC T OF THE AFORESAID INTERNATIONAL TRANSACTION OF RENDERING ITES TO THE AE. IT(TP)A NO.2193/BANG/2019 & CO 1/BANG/2020 PAGE 3 OF 12 4. THE ASSESSEE FILED A TRANSFER PRICING STUDY (TP STUDY) TO JUSTIFY THE PRICE PAID IN THE INTERNATIONAL TRANSACTION AS AT A LP BY ADOPTING THE TRANSACTION NET MARGIN METHOD (TNMM) AS THE MOST AP PROPRIATE METHOD (MAM) OF DETERMINING ALP. THE ASSESSEE SELECTED OPE RATING PROFIT/OPERATING COST (OP/OC) AS THE PROFIT LEVEL I NDICATOR (PLI) FOR THE PURPOSE OF COMPARISON. THE OP/OC OF THE ASSESSEE W AS ARRIVED AT 19% BY THE ASSESSEE IN ITS TP STUDY. THE OPERATING INC OME WAS RS 27,68,44,765 AND THE OPERATING COST WAS RS234,26,42 ,660. THE OPERATING PROFIT (OPERATING INCOME OPERATING COST WAS RS4,42,02,105. THUS THE OP/TC WAS ARRIVED AT 19%. THE ASSESSEE CHO SE COMPANIES WHO ARE ENGAGED IN PROVIDING SIMILAR SERVICES SUCH AS T HE ASSESSEE. THE ASSESSEE IDENTIFIED SOME COMPANIES WHOSE AVERAGE AR ITHMETIC MEAN OF PROFIT MARGIN WAS COMPARABLE WITH THE OPERATING MAR GIN OF THE ASSESSEE. THE ASSESSEE THEREFORE CLAIMED THAT THE PRICE IT CH ARGED IN THE INTERNATIONAL TRANSACTION SHOULD BE CONSIDERED AS A T ARMS LENGTH. 5. THE TRANSFER PRICING OFFICER (TPO) TO WHOM THE DETE RMINATION OF ALP WAS REFERRED TO BY THE AO, ACCEPTED TNMM AS THE MAM AND ALSO USED THE SAME PLI FOR COMPARISON I.E., OP/TC. HE A LSO SELECTED SOME COMPARABLE COMPANIES FROM DATABASE. TH E TPO ACCEPTED SOME COMPANIES CHOSEN BY THE ASSESSEE AS COMPARABLE COMP ANIES. THE TPO ON HIS OWN IDENTIFIED SOME OTHER COMPANIES AS COMPA RABLE WITH THE ASSESSEE COMPANY AND WORKED OUT THE AVERAGE ARITHME TIC MEAN OF THEIR PROFIT MARGINS AS FOLLOWS:- SL.NO. NAME PLI 1 ACCENTIA TECHNOLOGIES LTD. 43.06% 2 ACROPETAL TECHNOLOGIES LTD. (SEG) 22.27% 3 E - CLERX SERVICES LTD. 55.97% 4 FORTUNE INFOTECH LTD. 22.80% 5 ICRA ONLINE LTD. (SEG) 43.39% 6 INFORMED TECHNOLOGIES INDIA LTD. 26.15% IT(TP)A NO.2193/BANG/2019 & CO 1/BANG/2020 PAGE 4 OF 12 7 INFOSYS BPO 31.23% 8 COSMIC GLOBAL LTD. 14.97% 9 SUNDARAM BUSINESS SERVICES LTD. - 12.31% 10 JEEVAN SCIENTIFIC TECHNOLOGY LTD. (SEG) 21.05% AVERAGE 26.86% 6. THE TPO COMPUTED THE ADDITION TO TOTAL INCOME ON ACCOUNT OF ADJUSTMENT TO ALP AS FOLLOWS:- ARMS LENGTH MEAN MARK-UP 26.86% LESS: WORKING CAPITAL ADJUSTMENT (AS PER ANNEX. C) 0.23% ADJUSTED MARGIN 26.79% OPERATING COST 23,26,42,650 ARMS LENGTH PRICE (ALP) (126.79% OF OPERATING COST ) 29,49,67,628 PRICE RECEIVED 27,68,44,765 SHORTFALL BEING ADJUSTMENT U/S. 92CA 1,81,22,863 THUS A SUM OF RS. 1,81,22,863 /- WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF DETERMINATION OF ALP FOR PRO VISION OF SWD SERVICES BY THE ASSESSEE TO ITS AE. 7. THE ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE S RESOLUTION PANEL (DRP) AGAINST THE DRAFT ASSESSMENT ORDER PASSED BY THE AO WHEREIN THE ADDITION SUGGESTED BY THE TPO AS ADJUSTMENT TO ALP WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE BY THE AO. THE ASSESS EE FILED OBJECTIONS BEFORE THE DRP AND THE DRP GAVE CERTAIN DIRECTIONS. BASED ON THE DIRECTIONS OF THE DRP, THE AO PASSED THE FINAL ORDE R OF ASSESSMENT. TO THE EXTENT THE ASSESSEE GOT RELIEF FROM THE DRP, THE RE VENUE HAS PREFERRED APPEAL BEFORE THE TRIBUNAL ON THE FOLLOWING GROUNDS :- IT(TP)A NO.2193/BANG/2019 & CO 1/BANG/2020 PAGE 5 OF 12 1. THE ORDER OF THE CIT (APPEALS) IS OPPOSED TO LAW AN D THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, WHETHER THE LD CIT(A) IS JUSTIFIED IN DIRECTING THE TPO TO EXCLUDE THE COMPA NY M/S. ACROPETAL TECHNOLOGIES LIMITED, WITHOUT APPRECIATING THAT THE DEFINITION OF ITES SERVICE IN THE CBDT NOTIFICATION DOESN'T DIFFERENTI ATE BETWEEN BPO AND KPO SERVICES AND THAT THERE IS NO BASIS FOR THE CON TENTION THAT THE COMPANIES PROVIDING KPO SERVICES DO NOT FALL IN THE CATEGORY OF ITES PROVIDERS. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, WHETHER THE LD CIT(A) IS JUSTIFIED IN DIRECTING THE TPO TO EXCLUDE THE COMPA NY M/S. E-CLERX SERVICES LIMITED, WITHOUT APPRECIATING THAT THE DEF INITION OF ITES SERVICE IN THE CBDT NOTIFICATION DOESN'T DIFFERENTIATE BETWEEN BPO AND KPO SERVICES AND THAT THERE IS NO BASIS FOR THE CONTENTION THAT THE COMPANIES PROVIDING KPO SERVICES DO NOT FALL IN THE CATEGORY OF ITES PR OVIDERS. 4. ON THE FACTS A ND CIRCUMSTANCES OF THE CASE, WHETHER THE LD CIT(A) IS JUSTIFIED IN DIRECTING THE TPO TO INCLUDE THE COMPA NY M/S. MICROGENETICS SYSTEMS LIMITED, IN THE LIST OF COMPA RABLES EVEN THOUGH IT WASN'T CONSIDERED BY THE TAXPAYER OR THE TPO DURING THE TP AUDIT PROC EEDINGS AS ITS INCLUSION AT THIS STAGE WOULD AMOUNT OF CHERRY PICKING OF COMPARABLES. 5. FOR THESE AND SUCH OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS HUMBLY PRAYED THAT THE ORDER OF THE CIT(A), IN SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED AND TH AT OF THE ASSESSING OFFICER BE RESTORED. 6. THE APPELLANT CRAVES LEAVE TO ADD, TO ALTER, TO AME ND OR DELETE ANY OF THE GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING OF THE APPEAL. 8. AS FAR AS CO OF ASSESSEE IS CONCERNED, THOUGH GR OUNDS NO.7 TO 15 RAISED ARE WITH REGARD TO THE TRANSFER PRICING DETE RMINATION ISSUE, HOWEVER, AT THE TIME OF HEARING THE LD. COUNSEL FOR THE ASSE SSEE SUBMITTED THAT HE DOES NOT WISH TO PRESS THOSE GROUNDS OF CROSS OBJEC TION AS THE DECISION IN GROUNDS RAISED BY THE REVENUE IN ITS APPEAL IN THE LIGHT OF JUDICIAL PRECEDENTS WOULD BE SUFFICIENT. 9. AS FAR AS APPEAL OF REVENUE IS CONCERNED, BY GRO UND NO.2 THE REVENUE SEEKS EXCLUSION OF ACROPETAL TECHNOLOGIES L TD. AS A COMPARABLE COMPANY. THE CIT(APPEALS) EXCLUDED IT FROM THE LIS T OF COMPARABLES FOR IT(TP)A NO.2193/BANG/2019 & CO 1/BANG/2020 PAGE 6 OF 12 THE REASON THAT IT WAS INTO ENGINEERING DESIGN SERV ICES WHICH WAS A MAJOR COMPONENT OF REVENUE AND THOSE SERVICES FELL WITHIN THE AMBIT OF KNOWLEDGE PROCESS OUTSOURCING [KPO] REQUIRING HIGH SKILL SETS THAN THE BUSINESS PROCESS OUTSOURCING [BPO] FUNCTIONS THAT T HE ASSESSEE PERFORMS. THE CRUX OF THE ARGUMENT OF THE LD. DR I S THAT THERE CANNOT BE ANY DIFFERENCE BETWEEN THE BPO & KPO SERVICES AND I N THIS REGARD SOUGHT TO PLACE RELIANCE ON THE CBDT CIRCULAR WHEREIN THE BOARD IN THE DEFINITION OF INFORMATION TECHNOLOGY ENABLED SERVICES [ITES] D OES NOT MAKE ANY DIFFERENCE BETWEEN BPO & KPO. 10. WE HAVE CONSIDERED THE SUBMISSION OF THE LD. DR AND ARE OF THE VIEW THAT THE SAME IS NOT OF ANY USE TO THE PLEA RA ISED BY THE ASSESSEE REVENUE, AS THE DISTINCTION BETWEEN THE KPO & BPO H AS BEEN CONSIDERED BY THE SPECIAL BENCH IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) P. LTD. [ITA NO.7466/MUM/2012] AND IT WAS HELD THAT THE COMPANIES PROVIDING HIGH END SERVICES CANNOT BE COMPARED TO COMPANIES PROVID ING BACK OFFICE SUPPORT SERVICES. RELEVANT EXTRACT IS REPRODUCED BE LOW:- '78. TO SUM UP, WE HOLD THAT THE POTENTIAL COMPARAB LES OF ITES SECTOR LEVEL CAN BE SELECTED BY APPLYING BROAD FUNC TIONAL TEST AT FIRST STAGE AND ALTHOUGH THE COMPARABLES SO SELECTE D CAN BE PUT TO FURTHER TEST, DEPENDING ON FACTS OF EACH CASE, BY C OMPARING THE SPECIFIC FUNCTIONS PERFORMED IN THE INTERNATIONAL T RANSACTIONS WITH THAT OF UNCONTROLLED TRANSACTIONS TO ATTAIN THE REL ATIVELY EQUAL DEGREE OF COMPARABILITY AS DISCUSSED ABOVE, THE CLA SSIFICATION OF ITES INTO LOW-END BPO SERVICES AND HIGH-END KPO SER VICES FOR COMPARABILITY ANALYSIS WOULD NOT BE FAIR AND PROPER . THE FIRST QUESTION REFERRED TO THIS SPECIAL BENCH IS WHETHER FOR THE PURPOSE OF DETERMINING THE ARM'S LENGTH PRICE OF INTERNATIO NAL TRANSACTIONS OF THE ASSESSEE COMPANY PROVIDING BACK OFFICE SUPPO RT SERVICES TO THEIR OVERSEAS ASSOCIATED ENTERPRISES, COMPANIES PE RFORMING KPO FUNCTIONS SHOULD BE CONSIDERED AS COMPARABLE ?. IN OUR OPINION, THE ANSWER TO THIS QUESTION WILL DEPEND ON THE FACT S AND CIRCUMSTANCES OF EACH CASE INASMUCH AS IF THE ASSESSEE COMPANY, ON THE BASIS OF ITS OWN FUNCTIONAL PROFILE , IS FOUND IT(TP)A NO.2193/BANG/2019 & CO 1/BANG/2020 PAGE 7 OF 12 TO HAVE PROVIDED TO ITS AE THE LOW-END BACK OFFICE SUPPORT SERVICES LIKE VOICE OR DATA PROCESSING SERVICES AS A WHOLE OR SUBSTANTIALLY THE WHOLE, THE COMPANIES PROVIDING MA INLY HIGH-END SERVICES BY USING THEIR SPECIALIZED KNOWLE DGE AND DOMAIN EXPERTISE CANNOT BE CONSIDERED AS COMPARABLE S. ' (EMPHASIS SUPPLIED) 11. AS FAR AS GROUND 3 RAISED BY THE REVENUE IS CON CERNED, THE CHALLENGE TO THE EXCLUSION OF E-CLERK SERVICES LTD. AND THE ARGUMENT IN THIS REGARD ARE IDENTICAL TO THE ARGUMENTS ADVANCED IN T HE CASE OF ACROPETAL TECHNOLOGIES LTD. THE EXCLUSION OF E-CLERK SERVICE S LTD. WAS CONSIDERED BY THE SPECIAL BENCH IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) P. LTD. (SUPRA) AND FOR THE SAME REASON FOR WHICH ACROPETAL TECHNO LOGIES LTD. WAS EXCLUDED, THIS COMPANY WAS ALSO EXCLUDED FROM THE L IST OF COMPARABLE COMPANIES. FOLLOWING THE JUDICIAL PRECEDENT ON EXC LUSION OF THIS COMPANY, WE UPHOLD THE ORDER OF CIT(APPEALS) AND DISMISS GRO UND NO.3 RAISED BY THE REVENUE. 12. GROUND 4 RAISED BY THE REVENUE SEEMS ON THE ASS UMPTION THAT M/S. MICROGENETICS SYSTEMS LTD., HAS BEEN DIRECTED TO BE INCLUDED BY THE CIT(APPEALS), HOWEVER, FOR A READING OF PARA 5.10 O F CIT(APPEALS) ORDER, WE FIND THAT THERE IS A CONTRADICTION IN THE CONCLU SION ON INCLUSION OF THIS COMPANY. THE RELEVANT OBSERVATION OF THE CIT(APPEA LS) ON THIS ISSUE IS AS FOLLOWS:- 5.10 VIDE GROUND OF APPEAL NO. 11, THE APPELLANT HAS SOUGHT FOR INCLUSION OF CERTAIN COMPANIES LIKE CEPHA IMAGING P VT. LTD. AND MICROGENETICS SYSTEMS LTD. AS COMPARABLES. THE COMP ANIES HAD BEEN REJECTED BY THE TPO ON THE GROUNDS THAT THE DA TA WAS NOT AVAILABLE IN THE PUBLIC DOMAIN. DURING THE TP PROCE EDINGS, THE APPELLANT HAD SUBMITTED COPIES OF THE ANNUAL REPORT TO THE TPO HENCE THE SAME ARE BEING CONSIDERED. ON EXAMINATIO N OF THE SAME, IT IS SEEN THAT CEPHA IMAGING PVT. LTD. IS EN GAGED IN E- PUBLISHING SERVICES WHICH INCLUDE TYPE-SETTING, COM POSITION, PROOF-READING, PROJECT MANAGEMENT AND MULTIMEDIA WI TH THE IT(TP)A NO.2193/BANG/2019 & CO 1/BANG/2020 PAGE 8 OF 12 APPELLANT AND HENCE ITS EXCLUSION FROM THE SET OF C OMPARABLES BY THE TPO IS UPHELD. ON THE OTHER HAND, MICROGENETICS SYSTEMS LTD. IS INTO MEDICAL TRANSCRIPTION SERVICES WHICH F ALLS UNDER ITES AND HENCE FUNCTIONAL COMPARABILITY EXISTS WITH THE APPELLANT. THE TPO IS DIRECTED TO INCLUDE THIS COMP ANY AFTER VERIFICATION THAT IT SATISFIES ALL THE FILTERS. IT IS OBSERVED HERE THAT THE APPELLANT HAS SOUGHT INCLUSION OF MICROGEN ETICS SYSTEMS LTD. ON THE GROUNDS THAT SINCE IT IS INTO M EDICAL TRANSCRIPTION SERVICES WHICH FALLS UNDER ITES, IT I S COMPARABLE WITH THE APPELLANT. AT THE SAME TIME, TH E APPELLANT HAS SOUGHT EXCLUSION OF ACCENTIA TECHNOLO GIES EVEN THOUGH THE COMPANY IS ALSO INTO MEDICAL TRANSCRIPTI ON SERVICES, THOUGH FOR THIS PARTICULAR YEAR, IT HAS B EEN EXCLUDED ON ACCOUNT OF EXTRAORDINARY EVENTS. THE APPELLANT'S APPROACH TO THE TP STUDY IS THEREFORE NOT UNIFORM. THE APPELLANT HAS ALSO SOUGHT FOR INCLUSION OF 3 COMPANIES VIZ. R-SYS TEMS INTERNATIONAL LTD., CALIBER POINT BUSINESS SOLUTION S LTD. AND JINDAL INTELLICOM PRIVATE LTD.; HOWEVER THE SAME HA VE BEEN REJECTED BY THE TPO BECAUSE OF THE DIFFERENT FINANC IAL YEAR ENDING. AS THE ADOPTION OF THIS FILTER HAS BEEN UPH ELD IN PARES 5.7 SUPRA, THE EXCLUSION OF THESE THREE COMPANIES BY TH E TPO IS UPHELD. THIS GROUND OF APPEAL IS THEREFORE PARTLY A LLOWED. (EMPHASIS SUPPLIED) 13. WE ARE OF THE VIEW THAT IT WOULD BE JUST AND AP PROPRIATE TO SET ASIDE THE ISSUE OF COMPARABILITY OF THIS COMPANY TO THE T PO/AO FOR CONSIDERATION AFRESH. WE HOLD AND DIRECT ACCORDINGLY. 14. THE OTHER GROUNDS OF APPEAL BY THE REVENUE ARE GENERAL IN NATURE AND CALLS FOR NO SPECIFIC ADJUDICATION. 15. AS FAR AS CO OF THE ASSESSEE IS CONCERNED, THE GROUNDS OF CO WHICH SURVIVE FOR CONSIDERATION ARE GROUNDS 1 TO 6 WHICH ARE AS FOLLOWS:- CORPORATE TAX MATTERS 1. THE LEARNED AO HAS ERRED, IN LAW AND ON FACTS, B Y DISALLOWING DEPRECIATION ON CAPITAL ASSETS ON THE B ASIS THAT NO TAX HAS BEEN DEDUCTED AT SOURCE WHILE MAKING PAYMENT FO R SUCH IT(TP)A NO.2193/BANG/2019 & CO 1/BANG/2020 PAGE 9 OF 12 ASSETS. FURTHER, THE LEARNED AO HAS ERRED IN LAW, B Y NOT GIVING THE ASSESSEE AN OPPORTUNITY OF BEING HEARD IN THIS RESP ECT. 2. THE LEARNED CIT(A) HAS ERRED, IN LAW AND ON FACT S, BY DIRECTING DISALLOWANCE OF THE ENTIRE AMOUNT INCURRE D TOWARDS PURCHASE OF SOFTWARE ON WHICH TAX HAS NOT BEEN DEDU CTED AT SOURCE. IN DOING SO, THE LEARNED CIT(A) FAILED TO A PPRECIATE THAT THE SOFTWARE PURCHASED WAS CAPITALISED AND WHAT WAS CLAIMED AS A DEDUCTION WAS MERELY THE DEPRECIATION ON SUCH SOF TWARE AND NOT THE ENTIRE AMOUNT PAID TOWARDS PURCHASE OF SOFTWARE WHICH WAS CAPITALISED. 3. THE LEARNED CIT(A)/ AO HAVE FAILED TO APPRECIATE THAT NO DISALLOWANCE CAN BE MADE UNDER SECTION 40(A) OF THE INCOME-TAX ACT, 1961 ('THE ACT') IN RELATION TO DEPRECIATION O N CAPITAL ASSETS. 4. THE LEARNED CIT(A)/ AO HAVE FAILED TO APPLY THE JURISDICTIONAL TRIBUNAL RULINGS WHICH HAVE CLEARLY HELD THAT SECTION 40(A) DOES NOT APPLY TO DEPRECIATION ON CAP ITAL ASSETS. 5. WITHOUT PREJUDICE TO THE GROUNDS 3 AND 4 ABOVE, THE LEARNED CIT(A)/ AO HAVE ERRED IN LAW BY NOT CONSIDE RING THAT EVEN IF THE SAID ADJUSTMENT U/S 40(A) IS MADE, THE ASSESSEE'S PROFIT FROM BUSINESS WOULD STAND ENHANCED AS PER TH E PROVISIONS OF THE ACT AND THEREFORE, THE ASSESSEE WOULD BE ENT ITLED TO HIGHER OR ENHANCED DEDUCTION UNDER SECTION 10A OF THE ACT. 6. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT( A)/ AO HAVE GROSSLY ERRED IN NOT GRANTING THE ENHANCED DED UCTION OF SECTION 10A ON THE SAID ADJUSTMENTS, WHEN THE RESPO NDENT HAS ONLY SECTION 10A UNDERTAKINGS. 16. THE AO IN THE COURSE OF ASSESSMENT PROCEEDINGS FOUND THAT THE ASSESSEE COMPANY PURCHASED FOLLOWING SOFTWARE DURIN G THE PREVIOUS YEAR AND CAPITALIZED THE EXPENDITURE FOR PURCHASE OF SOF TWARE AND CLAIMED THE FOLLOWING AMOUNT OF DEPRECIATION:- IT(TP)A NO.2193/BANG/2019 & CO 1/BANG/2020 PAGE 10 OF 12 TYPE OF SOFTWARE NO.OF DAYS PUT >180 DAYS TO USE <180 DAYS DEPRECIATION SQL SERVER ENTERPRISE EDITION 2008 380170 .. 228102 ENTERPRISE SECURITY REPORTER V3, FILE SYSTEM AUDITOR 202591 60777 FOLKLORE ATTENDANCE MODULE & ATTENDANCE READER 328728 98618 TOTAL DEPRECIATION 387497 17. ADMITTEDLY THE ASSESSEE DID NOT DEDUCT TAX AT S OURCE ON THE PAYMENT MADE TO NON-RESIDENT FOR PURCHASE OF SOFTWA RE. THE AO WAS OF THE VIEW THAT THE PAYMENT IN QUESTION WAS IN THE NATURE OF ROYALTY AND SINCE THE ASSESSEE DID NOT DEDUCT TAX AT SOURCE AS REQUIRED U /S.195 OF THE ACT, THE SUM CLAIMED AS DEPRECIATION SHOULD BE DISALLOWED BY INVOKING THE PROVISIONS OF SECTION 40A(I)/(IA) OF THE ACT. ACCOR DINGLY, THE AFORESAID SUM OF RS.3,87,497 CLAIMED AS DEPRECIATION ON SOFTWARE WAS DISALLOWED BY THE AO. 18. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) CO NFIRMED THE ORDER OF AO. 19. THE CRUX OF THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE WAS THAT DEPRECIATION IS A STATUTORY ALLOWANCE AND IT C ANNOT BE DISALLOWED BY INVOKING THE PROVISIONS OF SECTION 40A(I)/(IA) OF THE ACT AND IN THIS CONNECTION PLACED RELIANCE ON THE DECISION OF MUMBA I TRIBUNAL IN THE CASE OF SKOL BREWERIES LTD. V. DCIT [2013] 29 TAXMANN.COM 1 11 [MUM TRIB]. 20. THE LD. DR RELIED ON THE ORDER OF CIT(APPEALS) . 21. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND WE FIND THAT ADMITTEDLY THE EXPENDITURE IN QUESTION INCURRED IN RESPECT OF PURCHASE OF SOFTWARE HAS BEEN CAPITALIZED IN THE BOOKS OF ACCOU NT AND HAS NOT BEEN DEBITED TO THE P&L ACCOUNT. THE QUESTION WHETHER I N SUCH CIRCUMSTANCES, PROVISIONS OF SECTION 40A(I)/(IA) CAN BE INVOKED HA S ALREADY BEEN DECIDED IT(TP)A NO.2193/BANG/2019 & CO 1/BANG/2020 PAGE 11 OF 12 BY THE MUMBAI TRIBUNAL IN THE CASE OF SKOL BREWERIES LTD. (SUPRA) WHEREIN IT WAS HELD AS FOLLOWS:- DEPRECIATION IS A STATUTORY DEDUCTION AND AFTER TH E INSERTION OF EXPLANATION 5 TO SECTION 32. IT IS OBLIGATORY ON TH E PART OF THE ASSESSING OFFICER TO ALLOW THE DEDUCTION OF DEPRECI ATION ON THE ELIGIBLE ASSET IRRESPECTIVE OF ANY CLAIM MADE BY TH E ASSESSEE. THEREFORE, THE DEPRECIATION IS A MANDATORY DEDUCTIO N ON THE ASSET WHICH IS WHOLLY OR PARTLY OWNED BY THE ASSESSEE AND USED FOR THE BUSINESS OR PROFESSION WHICH MEANS THE DEPRECIATION IS A DEDUCTION FOR AN ASSET OWNED BY THE ASSESSEE AND US ED FOR THE PURPOSE OF BUSINESS AND NOT FOR INCURRING OF ANY EX PENDITURE. THE DEDUCTION UNDER SECTION 32 IS NOT IN RESPECT OF THE AMOUNT PAID OR PAYABLE WHICH IS SUBJECTED TO TDS; BUT IT IS A STAT UTORY DEDUCTION ON AN ASSET WHICH IS OTHERWISE ELIGIBLE FOR DEDUCTI ON OF DEPRECATION. DEPRECIATION IS NOT AN OUTGOING EXPEND ITURE AND THEREFORE, THE PROVISIONS OF SECTION 40(A)(I) ARE N OT ATTRACTED ON SUCH DEDUCTION. 22. THE AFORESAID VIEW HAS ALSO BEEN TAKEN BY THE H ONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF MARK AUTO INDUSTRIES LTD., 358 ITR 43 (P&H). IN VIEW OF THE AFORESAID DECISIONS, WE ARE OF THE V IEW THAT THE DISALLOWANCE OF DEPRECIATION IN THE PRESENT CASE CA NNOT BE SUSTAINED. ACCORDINGLY, THE RELEVANT GROUNDS OF APPEAL 1 TO 4 OF CO ARE ALLOWED AND GROUNDS 5 & 6 BECOME INFRUCTUOUS. 23. IN THE RESULT, THE APPEAL BY THE REVENUE IS PAR TLY ALLOWED FOR STATISTICAL PURPOSES, WHILE THE CO BY THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF AUGUST, 2020. SD/- SD/- ( G MANJUNATHA ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 31 ST AUGUST, 2020. / DESAI S MURTHY / IT(TP)A NO.2193/BANG/2019 & CO 1/BANG/2020 PAGE 12 OF 12 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.