Novell Software Development (India) Private Limited, Bangalore V. DCIT, Bangalore

CO 69/BANG/2015

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 2368 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 4 month(s) 12 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 04-09-2019
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 22-04-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Earning of tax free income; Wholly owned subsidiary; TDS; Rule 8D
• Section: 92C; 14A; 40(a)(ia); 10B

Judgement Text

IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES : B, BANGALORE BEFORE SHRI J. SUDHAKAR REDDY, AM AND SMT.BEENA PILLAI, JM IT (TP) A NO. 1491 (BANG)/201 4 (ASSESSMENT YEAR : 20 09 - 10 ) THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 5 (1)( 2 ), BANGALORE APPELLANT VS M/S NOV E LL SOFTWARE DEVELOPMENT INDIA PVT.LTD., LAUREL, BLOCK - D, 65/2, BAGMANE TECH PARK, C V RAMAN NGAR, BYRASANDRA, BANGALORE - 560 093 PAN NO.AAACN6992K RESPONDENT AND C.O.NO.69(BANG)/2015 ( IN IT (TP)A NO. 1 491 (B)/201 4 (ASSESSMENT YEAR : 20 09 - 10 ) (BY ASSESSEE) REVENUE BY : MS. NEER A MALHOTRA, CIT APPELLANT BY : SMT. TANMAY E E RAJKUMAR, ADVOCATE DATE OF HEARING : 1 8 - 07 - 2019 DATE OF PRONOUNCEMENT : 04 - 09 - 2019 O R D E R PER BEENA PILLAI, JUDICIAL MEMBER : P RESENT CROSS APPEALS HAS BEEN FILED BY REVENUE AS WELL AS ASSESSEE AGAINST ORDER DATED 31/05/13 PASSED BY LD. CIT (A) - 4, BANGALORE FOR ASSESSMENT YEAR 2009 - 10 ON FOLLOWING REVISED GROUNDS OF APPEAL: IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 2 ITA NO. 1491/B/2014 (ASSESSMENT YEAR : 2009 - 10) 1. THE ORDER OF THE LEARNED CIT(A) IS OPPOSED TO LAW AND FACTS OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) ERRED IN HOLDING THAT SIZE AND TURNOVER OF THE COMPANY ARE DECIDING FACTORS FOR TREATING A COMPANY AS A COMPARABLE AND ACCORDINGLY ERRED IN EXCLUDING THE COMPARABLES PERSISTENT SYSTEMS LT D., ZYLOG SYSTEMS LTD., MINDTREE LTD, L & T INFOTECH, INFOSYS LTD., IN SOFTWARE DEVELOPMENT SEGMENT WITHOUT APPRECIATING THAT ECONOMIES OF SCALE IS NOT RELEVANT IN THE SOFTWARE INDUSTRY AND TURNOVER CRITERION IS NOT PRESCRIBED IN RULE 10B OF IT RULES. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) ERRED IN LAW IN DIRECTING THE AO TO PROVIDE FOR DEPRECIATION ADJUSTMENT WITHOUT APPRECIATING THE FACT THAT SUCH CRITERION IS NOT PRESCRIBED IN RULE 10B OF IT RULES. 4 . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) ERRED IN LAW IN DELETING THE DISALLOWANCE U/S 40(A)(IA) WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAD PURCHASED SOFTWARE WHICH IS IN NATURE OF A LICENSE PAID FOR USAGE OF THE SOFTWARE AND THE CONSIDERA TION FOR SUCH LICENSES WOULD FALL WITHIN THE DEFINITION OF THE ROYALTY DEFINED IN EXPLANATION 9(1)(IV) AND HENCE DEDUCTION OF TAX AT SOURCE UNDER SECTION 194J SHOULD HAVE BEEN DONE BY THE ASSESSEE. 5 . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE L EARNED CIT(A) ERRED IN LAW IN DELETING THE DISALLOWANCE U/S 14A R.W.R. 8D WITHOUT APPRECIATING THE FACT THAT AS PER PROVISIONS OF SECTION 14A THERE IS NO DIFFERENTIATION TO BE MADE ON THE BASIS OF THE SOURCE OF INVESTMENT EARNING EXEMPT INCOME AND IN LIGHT OF BOARD CIRCULAR NO. 5/2014 DATED 11.020.2014, THE ACTION OF AO IS FULLY JUSTIFIED. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT(A) IN SO FAR AS IT IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 3 C I I RELATES TO THE ABOVE GROUNDS MAY BE REVERSE D AND THAT OF THE AO MAY BE RESTORED. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. CO NO. 69/B/2015 (ASSESSMENT YEAR : 2009 - 10) ASSESSMENT AND REFERENCE TO TRANSFER PRICING OFFICER ARE BAD IN LAW A) THE COMMIS SIONER OF INCOME TAX (APPEALS) LD. CIT(A)'] ERRED IN CONFIRMING THE ORDER OF THE DEPUTY COMMISSIONER OF INCOME TAX - CIRCLE 12(2) [PRESENTLY, THE DEPUTY COMMISSIONER OF INCOME - TAX, CIRCLE 5(1)(2)] RA01, IN SO FAR AS THE FACT THAT THE AO DID NOT ISSUE TO MICRO FOCUS SOFTWARE INDIA PRIVATE LIMITED (EARLIER KNOWN AS NOVELL SOFTWARE DEVELOPMENT (INDIA) PRIVATE LIMITED) [`THE RESPONDENT OR `THE COMPANY'], A SHOW CAUSE NOTICE AS PER PROVISO TO SECTION 92C(3) OF THE INCOME TAX ACT, 1961. B) THE LD. CIT (A) ERRED IN CONFIRMING THE ACTIONS OF THE LD. AO, IN MAKING A REFERENCE TO THE JOINT COMMISSIONER OF INCOME TAX (TRANSFER PRICING) II UTP01, WHICH WAS NOT IN ACCORDANCE WITH LAW GIVEN THAT, INTER ALIA, THE LD. AO HAS NOT RECORDED AN OPINION THAT ANY OF THE CONDITIONS IN SECTION 92C(3) OF THE ACT, WERE SATISFIED IN THE INSTANT CASE. ACCORDINGLY, THE LD. CIT(A) ERRED IN NOT HOLDING THAT THE ORDER PASSED BY THE LD. TPO IS WITHOUT JURISDICTION . C)THE DIRECTIONS ISSUED BY THE LD. CIT(A) AND THE ORDER PASSED B Y THE LD. AO IS WITHOUT JURISDICTION, INTER ALIA, IN SO FAR AS IT PURPORTS TO GIVE EFFECT TO AN INVALID ORDER OF THE LD.TPO. D) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN UPHOLDING THE ACTIONS OF THE LD. AO/ THE L D. TPO WHO ERRED IN NOT DEMONSTRATING THAT THE MOTIVE OF THE RESPONDENT WAS TO SHIFT PROFITS OUTSIDE INDIA BY MANIPULATING THE PRICES CHARGED IN THE INTERNATIONAL TRANSACTION, WHICH IS A PRE - IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 4 REQUISITE CONDITION TO MAKE ANY ADJUSTMENT UNDER THE PROVISION OF CHAPTER X OF THE ACT. 2 . DETERMINATION OF ARM'S LENGTH PRICE A) THE LD. CIT(A) AND LD. AO ERRED IN UPHOLDING THE ACTIONS OF THE LD. TPO IN REJECTING THE VALUE OF INTERNATIONAL TRANSACTIONS AS RECORDED IN THE BOOKS OF ACCOUNTS, AS THE ARM'S LENGTH PRICE. B) THE LD. CIT(A) ERRED IN UPHOLDING THE ACTION OF THE LD. AO/ LD. TPO ON FACTS AND IN LAW IN CONDUCTING A FRESH BENCHMARKING ANALYSIS USING NON CONTEMPORANEOUS DATA AND SUBSTITUTING THE RESPONDENT'S ANALYSIS WITH FRESH BENCHMARKING ANALYSIS ON HIS OWN CONJECTURE S AND SURMISES AND IN DOING SO DETERMINED A NEW ARM'S LENGTH PRICE. THUS, THE RESPONDENT PRAYS THAT THE FRESH BENCHMARKING ANALYSIS CONDUCTED BY THE LD. AO/ LD. TPO IS LIABLE TO BE QUASHED. 3 COMPARABILITY ANALYSIS ADOPTED BY THE TPO FOR DETERMINATION OF ARM'S LENGTH PRICE. A) THE LD CIT(A ) ERRED IN CONFIRMING THE ACTION OF THE LD. AO/ LD. TPO WHO ERRED IN COMPARING THE BENCHMARKING OF THE RESPONDENT'S INTERNATIONAL TRANSACTION (I.E., SOFTWARE DEVELOPMENT SERVICES) WITH COMPANIES OPERATING AS FULL - FLEDGED ENT REPRENEURS WITHOUT CONSIDERING THE DIFFERENCES IN THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISK UNDERTAKEN BY THE RESPONDENT VIS - - VIS COMPARABLE COMPANIES IDENTIFIED. B)THE LD.CIT(A) ERRED IN ACCEPTING THE ACTION OF THE LD.AO/TPO/LD.TPO IN APPLYING AR BITRARY FILTERS TO ARRIVE AT A FRESH SET OF COMPANIES AS COMPARABLE TO THE RESPONDENT WITHOUT FUNCTIONAL COMPARABILITY OF SUCH COMPARABLE COMPANIES IDENTIFIED. C) THAT WITHOUT PREJUDICE AND ANY EVENT, KALS INFORMATION SYSTEMS LTD. BODHTREE CONSULTING LTD. IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 5 TATA ELXSI LTD. A ND S ASKEN COMMUNICATION TECHNOLOGIES LTD. O UGHT TO BE EXCLUDED FROM THE LIST OF COMPARABLES AS THEY ARE FUNCTIONALLY DISSIMILAR TO THE RESPONDENT B E SIDES OTHERWISE FAILING THE TEST OF COMPARABILITY. D)THE PERSISTENT SYSTEMS LTD. INFOSYS TECHNOLOGIES LTD. AND L&T INFOTECH LTD. (WHICH WERE EXCLUDED BY THE CIT(A) FOR HAVING TURNOVER IN EXCESS OF RS.500 CRORES IN FY: 2008 - 09 OUGHT TO REMAIN EXCLUDED FROM THE LIST OF COMPARABLES AS THEY ARE FUNCTIONALLY DISSIMILAR TO THE RESPONDENT BESIDES OTH ERWISE FAI LING THE TEST OF COMPARABILITY IN ADDITION TO THE AB O VE, L&T I N FOTECH LTD. O UGHT TO REMAIN EXCLUDED ALSO BECAUSE IT HAS RPT/TOTAL SAL E S IN FY: 2008 - 09 IN EXCESS O 15%. E) THE LD. CIT(A) ERRED IN ACCEPTING THE ACTION OF THE LD. AO/ LD. TPO IN APPLYING ARBITRARY FILTERS TO ARRIVE AT A FRESH SET OF COMPANIES AS COMPARABLE TO THE THAT, WITHOUT PREJUDICE AND IN ANY EVENT, CG VAK SOFTWARE & EXPORTS LIMITED OUGHT TO BE INCLUDED IN TH E LIST OF COMPARABLES TO THE APPELLANT AS IT IS FUNCTIONALLY COMPARABLE TO THE APPELLANT AND PASSES ALL THE FILTERS APPLIED BY THE TPO. F)THAT, WITHOUT PREJUDICE AND IN ANY EVENT, CG VAK SOFTWARE & EXPORTS LTD. OUGHT TO BE INCLUDED IN THE LIST OF COMPARABL ES TO HE APPELLANT AS IT IS FUNCTIONALLY COMPARABLE TO THE APPELLANT AND PASSES ALL THE FILTERS APPLIED BY THE TPO. G)THE LD. CIT(A) ERRED IN CONSIDERING A TURNOVER FILTER OF INR 500 CRORES VIS - - VIS THE RESPONDENT'S REQUEST FOR APPLICATION OF AN INR 200 C RORES UPPER TURNOVER FILTER WHICH WAS BASED ON THE NORMS PRESCRIBED BY DUN & BRADSTREET CLASSIFICATION H). THE LD. CIT(A) ERRED IN CONFIRMING THE ACTION OF THE LD. AO/ LD. TPO IN DEVIATING FROM THE UNCONTROLLED PARTY TRANSACTION DEFINITION AS PER THE INCOME - TAX RULES AND ARBITRARILY APPLYING A 25% RELATED PARTY CRITERIA IN ACCEPTING / REJECTING COMPARABLES. IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 6 THE LD. CIT(A) ERRED IN ACCEPTING THE ACTION OF THE LD. AO/ LD. TPO ON FACTS AND IN LAW IN ARBITRARILY REJECTING COMPANIES WITH DIFFERENT YEAR ENDI NG (I.E. OTHER THAN 31 MARCH 2009). ERRONEOUS DATA USED BY THE AO/TPO A) THE LD. CIT(A) ERRED IN CONFIRMING THE ACTION OF THE LD. AO/ LD. TPO IN USING DATA, WHICH WAS NOT CONTEMPORANEOUS AND WHICH WAS NOT AVAILABLE IN THE PUBLIC DOMAIN AT THE TIME OF CONDUCTI NG THE TRANSFER PRICING STUDY BY THE RESPONDENT. B) THE LD.CIT(A) ALSO ERRED IN CONFIRMING THE ACTION OF LD.AO/TPO IN REJECTING APPLICATION OF MULTIPLE YEAR DATA WHILE COMPUTING THE MARGIN OF ALLEGED COMPARABLE COMPANIES AS SUCH DATA HAD AN INFLUENCE IN DETE RMINING THE TRANSFER PRICING POLICY OF THE RESPONDENT. 5. NON - ALLOWANCE OF APPROPRIATE ADJUSTMENTS TO THE COMPARABLE COMPANIES, BY THE AO/TPO. THE LD. CIT(A) ERRED IN UPHOLDING THE ACTION OF THE LD. AO/THE LD. TPO IN NOT ALLOWING APPROPRIATE ADJUSTMENTS UNDER RULE 10B TO ACCOUNT FOR, INTER ALIA, DIFFERENCES IN (A) MARKETING EXPENDITURE ADJUSTMENT, (B) RESEARCH AND DEVELOPMENT EXPENDITURE ADJUSTMENT, (C) RISK PROFILE BETWEEN THE RESPONDENT AND THE COMPARABLE COMPANIES; AND (D) WORKING CAPITAL ADJUSTMENT. FURTHER, THE LD. TPO ERRED IN RESTRICTING THE WORKING CAPITAL ADJUSTMENT IN THE CASE OF THE COMPANY TO 1.71 %. THE LD. AO / THE LD. CIT(A) ERRED IN UPHOLDING THE SAME. 6 . VARIATION OF 5% FROM THE ARITHMETIC MEAN THE LD.CIT(A) ERRED IN UPHOLDING, THE ACTION OF THE LD. AO/THE LD. TPO IN NOT GRANTING THE BENEFITS OF PROVISO TO SECTION 92C(2) OF THE ACT AVAILABLE TO THE RESPONDENT. 7. TAX DEDUCTION AT SOURCE ON PURCHASE OF COMPUTER SOFTWARE IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 7 THE CIT(A) ERRED IN NOT HOLDING THAT THE PAYMENTS FOR PURCHASE OF COMPUTER SOFTWARE WAS NOT SUBJECT TO TAX DEDUCTION AT SOURCE. 7. DISALLOWANCE UNDER SECTION 14A OF THE ACT 8. THE LD. CIT(A) ERRED IN NOT HOLDING THAT THE PROVISIONS OF SECTION 14A OF THE ACT OUGHT NOT TO APPLY ON THE BASIS THAT THE RESPONDENT HAD NOT EARNED ANY EXEMPT INCOME DURING THE FINANCIAL YEAR 2008 - 09 [I.E. AY 2009 - 10]. RELIEF : A) THE RESPONDENT PRAYS THAT DIRECTIONS BE GIVEN TO GRANT ALL SUCH RELIEF ARISING FROM THE ABOVE GROUNDS AND ALSO ALL RELIEF CONSEQUENTIAL THERETO. B) THE RESPONDENT CRAVES LEAVE TO ADD TO OR ALTER, BY DELETION, SUBSTITUTION OR OTHERWISE, THE ABOVE GROUNDS OF APPEAL, AT ANY TIME BEFORE OR DURING THE HEARING OF THE APPEAL 2. BRIEF FACTS OF THE CASE ARE AS UNDER: ASSESSEE FILED ITS RETURN OF INCOME FOR YEAR UNDER CONSIDERATION ON 30/09 /09 DECLARING TOTA L INCOME OF RS.15,10,49,397/ - . R ETURN WAS PROCESSED UNDER SECTION 143 (1) OF THE ACT AND CASE WAS SELECTED FOR SCRUTINY. LD.AO OBSERVED THAT ASSESSEE INCURRED EXPENDITURE OF RS.14,93,486/ - ON PURCHASE OF SOFTWARE DURING THE YEAR WHICH IS C APITALISED AND DE PRECIATION OF 60% WAS CLAIMED. IT WAS OBSERVED THAT ASSESSEE DID NOT DEDUCT TDS , AND THEREFORE LD.AO DISALLOWED THE DEPRECIATION CLAIMED BY ASSESSEE. LD.AO ALSO OBSERVED THAT ASSESSEE HAD INVESTMENT IN EQUITY SHARES OF RS.3283.02 LAKHS FOR YEAR UNDER CONSIDERATION. INVOKING RULE 8D, LD.AO COMPUTE D DISALLOWANCE UNDER SECTION 14 A, AMOUNTING TO RS.16,41,510/ - . 2.1 FURTHER, ON PERUSAL OF DETAILS FILED BY ASSESSEE, LD.AO OBSERVED THAT ASSESSEE ENTERED INTO INTERNATIONAL TRANSACTION WITH ASSOCIAT ED IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 8 ENTERPRISES FOR MORE THAN RS.15 CRORES, AND ACCORDINGLY REFERENCE WAS MADE TO LD.TPO FOR DETERMIN ING ARMS LENGTH PRICE OF TRANSACTIONS. UPON RECEIPT OF REFERENCE LD.TPO CALLED FOR ECONOMIC DETAILS OF IN TERNATIONAL TRANSACTION IN FORM - 3 CEB. LD .TPO OBSERV ED THAT ASSESSEE ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTERPRISES. INTERNATIONAL TRANSACTIONS AMOUNT(IN RS.) SOFTWARE DEVELOPMENT SERVICES 114,64,39,408 REIMBURSEMENT OF EXPENSES PAID 64,07,771 RECOVERY OF EXPENSES RECEIVED 73,96,565 3. LD.TPO AC CEPTED ARMS LENGTH PRICE, COMPUT ED BY ASSESSEE IN RESPECT OF REIMBURSEMENT OF EXPENSES PAID AND RECOVERY OF EXPENSES RECEIVED. THE ONLY SEGMENT DISPUTED BY THE LD.TPO WAS IN RESPECT OF S OFTWARE DEVELOPMENT S ERVICES. IT IS OB SER VED THAT ASSESSEE USED TNMM AS MOST APPROPRIATE METHOD AND COMPUTED ITS MARGIN BY USING OP/TC AS PLI AND COMPUTED ITS MARGIN AT 16.61%. ASSESSEE SELECTED FOLLOWING 17 COMPARABLES WITH AN AVERAGE MARGIN OF 12.66%: COMPANY NAME PROWESS, CAPITALINE, SEGME NTAL MARKUP ON TOTAL COST AKSHAY SOFTWARE TECHNOLOGIES LTD. 6.17% AZTECSOFT LTD. 8.38% BIRLA TECHNOLOGIES LTD. - 1.77% CG VAK SOFTWARE & EXPORTS LTD. 5.73% COMPUTECH INTERNATIONAL LTD. 1.94% HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. 28.52% LGS GLOBAL LTD. 22.00% PSI DATA SYSTEMS LTD 2.94% POWERSOFT GLOBAL SOLUTIONS 19.26% QUINNOX CONSULTANCY SERVICES LTD. 11.70% R S SOFTWARE (INDIA) PVT.LTD. 18.20% R SYSTEMS INTERNATIONAL LTD. 9.66% SAGARSOFT( I NDIA)LTD 11.82% SONATA SOFTWARE LTD 13.49% THIRDWARE SOLUTIONS LTD. 25.54% VAMA INDUSTRIES LTD 23.31% NUMBER OF COMPANIES 17 MEAN 12.66% IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 9 ASSESSEE THUS HELD TRANSACTION WITH ITS ASSOCIATED ENTERPRISE TO BE AT ARMS LENGTH. 3.1 LD.TPO DISSATISFIED WITH COMPARABLES SELECTED BY ASSESSEE , APPLIED VARIOUS FILTERS AND EXCLUDED CERTAIN COMPARABLES FROM ASSESSEES LIST. HE THUS SHORTLISTED FOLLOWING 11 COMPARABLES WITH AN AVERAGE MARGIN OF 21.61%: SL.NO. COMPARABLES SELECTED BY THE TPO NCP MARGINS AS PER TPO ORDER (%) (WC ADJ 1 KALS INFORMATION SYSTEMS LTD. 10.57 2 AKSHAY SOFTARE TECHNOLOGIES LTD 6.65 3 BODHTREE CONSULTING LTD 59.93 4 RS SOFTWARE (I) LTD. 9.07 5 TATA ELXSI LTD. (SEG.) 17.49 6 SASKEN COMMUNICATION TECHNOLOGIES LTD 25.92 7 PERSISTENT SYSTEMS LTD. 38.77 8 ZYLOG SYSTEMS LTD. 2.79 9 MINDTREE LTD.(SE.) 1.80 10 L&T INFOTECH LTD. 23.14 11 INFOYS TECHNOLOGIES LTD. 41.56 ARITHMETIC MEAN 21.61 LD.TPO THUS PROPOSED ADJUSTMENT OF RS.5,89,73,015/ - . 4. AGGRIEVED BY ORDER OF LD. AO/ TPO ASSESSEE PREFERRED APPEAL BEFORE LD.CIT(A). LD.CIT(A) ON CONSIDERING SUBMISSIONS BY ASSESSEE, EXCLUDED 5 COMPARABLES FROM LIST, THEREBY RETAINING TOTAL 6 COMPARABLES IN FINAL LIST, WHICH ARE AS UNDER: I.BODHTREE CONSULTING LTD. II. AKSHAY SOFTWARE TECHNOLOGIES LTD. III. RS SOFTWARE (I)LTD. I V . KALS INFORMATION SYSTEMS LTD. V. SASKEN COMMUNICATION TECHNOLOGIES LTD. VI. AT ELXSI LTD., (SEG. 5. LD.CIT(A) UPHELD TPOS ACTION AND APPLYING AN UPPER LIMIT OF WORKING CAPITAL ADJUSTMENT AT 1.71%, ALTHOUGH IT WAS WORKED OUT TO BE AT 2.71%. IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 10 REGARDING CORPORATE TAX ISSUES, LD.CIT (A) FOLLOWED ORDER PASSED BY HIS PREDECESSOR DATED 09/08/12 IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2002 - 03 , WHEREIN LD.AO WAS DIRECTED TO RECOMPUTE ADJUSTMENT UNDER SECTION 92C OF THE ACT, IF ANY, AF TER EXCLUDING DEPRECIATION FROM OPERATING COSTS OF COMPARABLES AND ALSO FROM OPERATING COST OF ASSESSEE. 6. AGGRIEVED BY ORDER OF LD.CIT (A), REVENUE IS IN APPEAL BEFORE US AGAINST WHICH ASSESSEE HAS FILED CROSS OBJECTION. 6.1 AT THE OUTSET, LD.AR SUBMITT ED THAT, CROSS OBJECTION MAY BE CONSIDERED, ONLY IF REVENUES APPEAL IS ALLOWED. WE ARE THEREFORE TAKING UP REVENUES APPEAL IN ITA NO. 1491/B/2014. LD.CIT DR SUBMITTED THAT GROUNDS NO. 1, 6, 7 ARE GENERAL IN NATURE, AND THEREFORE DO NOT REQUIRE ANY ADJUDICATION. BEFORE WE UNDERTAKE COMPATIBILITY, IT IS SINE QUA NON TO UNDERSTAND FUNCTIONS PERFORMED, ASSETS EMPLOYED, RISKS ASSUMED BY ASSESSEE UNDER THIS SEGMENT. IT HAS BEEN OBSERVED BY LD.TPO, T HAT ASSESSEE IS WHOLLY OWNED SUBSIDIARY OF NOVELL INC.USA, AND IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SUPPORT SERVICES TO NOVELL INC.USA. FUNCTIONS IN TP STUDY, ASSESSEE IS SUBMITTED TO BE PROVIDING DEVELOPMENT SERVICES TO AE WHICH INCLUDES DEVELOPIN G CERTAIN COMPONENTS OF NOVELL PRODUCTS, LIKE E - DIRECTORY, DEVELOPER TOOLS FOR NETWARE 6 AND NETWARE 5 EX - IP ETC. IN TP STUDY, ASSESSEE HAS BEEN CLASSIFIED INTO VARIOUS PRODUCT GROUPS: IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 11 THE APPLICATION GROUP; NETWORKING AND ADVANCED SERVICES GROUP; NETWOR K MANAGEMENT SERVICES GROUP; OPERATING SYSTEMS GROUP; QUALITY MANAGEMENT GROUP AND TECHNOLOGY GROUP; IT HAS BEEN SUBMITTED IN TP STUDY THAT WORKFLOW OF SOFTWARE DEVELOPMENT SERVICES PROVIDED BY ASSESSEE CAN BE SUMMARISED AS FOLLOWS: NOVELL US PREPARES A PR ODUCT R EQUIREMENT DOCUMENT(PRD) WHICH IS DEVELOPED Y THE PRODUCT MANAGEMENT TEAM OF NOV ELL BASED ON THE INPUTS FROM THE CUSTOMER, THE MARKETING TEAM OF T HE PRODUCT GROUP AND THE CORE TEAM MANAGEMENT OF NOVELL US, AND THE PRODUCT ENGINEER I NG GROUP OF NOVELL INDIA. THE PRODUCT IS INITIATED ONCE THE PRD IS RECEIVED. THE PRODUCT ENGINEERING T E AM OF NOVELL INDIA MAKES AN ENGINEERING REQUIREMENT SPECIFICATION. THE PROJECT ENGINEERING TEAM AT NOVELL INDIA DEVELOPS THE PROJECT BASED ON THE INPUTS RECEIVED F ROM NOVELL US TO ENSURE THAT THE DELIVERIES ARE TIED INTO THE PRODUCT RELEASE. BASED ON THE PROJECT PLAN DEVELOPED, THE PRODUCT ENGINEERING TEAM OF NOVELL INDIA PERFO R MS SPECIFIC FUNCTIONS WHICH COMPRISE OF DEFINING AND DESIGNING THE FUNCTIONAL SPECIFICAT IONS FOR THE PROJECT, IDENTIFICATION OF INTERFACES, FUNCTIONS, COMPONENTS, CODING AND BUG FIXING, CODE DROP, UNIT TEST, INTEGRATION AND FINAL SYSTEM SET. THE CO MPONENT DEVELOPED IS TESTED FOR QUALITY AND FUNCTIONALITY WITH SIGNIFICANT FOCUS ON REAL - LIFE CUSTOMER SCENARIO S. IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 12 THE FINAL TESTS TO DETERMINE THE QUALITY OF A PRODUCT DEVELOPED BEFORE IT IS RELEASED INTO THE MARKET IS PERFORMED B Y THE PRODUCT ENGINEERING TAM OF NOVELL INDIA IN COORDINATION WITH NOVELL US. NOV E LL US IS RESPONSI B LE FOR THE LAUNCH OF THE PRODUCT DEVELOPED. NOVELL I NDIA ALSO RENDERS THIRD LEVEL CUSTOMER SUPPORT WHEREIN THE PRODUCT ENGINEERING TEAM OF NOVELL INDIA RENDERS TECH N ICAL SUPPORT TO THE TECHNICAL SERVICE TEAM OF N O VELL US. NOVELL US ACTS AS T HE CUSTOMER INTERFACE, THOUGH THE SUPPORT SERVICE COULD BE P ROVIDED BY NOVELL INDIA. NOVELL INDIA IS RESPONSIBLE FOR PROVIDING BOTH TECHNICAL AND USER DOCUMENTS FOR ALL COMPONENTS, PROVIDING COMMUNICATION SUPPORT, PROJECT DOCUMENTATION AND WEB PUBLISHING. ASSETS EMPLOYED: IT HAS BEEN SUBMITTED IN TP STUDY THAT, ASSESSEE DO NOT OWN ANY NON - ROUTINE VALUABLE INTANGIBLE ASSETS. RISKS ASSUMED: IT HAS BEEN SUBMITTED THAT ASSESSEE DOES NOT ASSUME ANY SIGNIFICANT RISKS AS ENTIRE CONTRACT IS ENTERED INTO BY AE WITH END CUSTOMERS. EXCEPT FOR FOREIGN EXCHANGE FLUCTUATION RISK ASSESSEE DOES NOT BARE ANY OTHER RISK WITH RESPECT TO THE ULTIMATE SUCCESS OR FAILURE OF THE ACTIVITIES. THUS F ROM THE ABOVE ASSESSEE HAS BEEN CHARACTERISED AS BACK - OFFICE SERVICE PROVIDER IN THE PROCESS OF SOFTWARE DEVELOPMENT CARRIED OUT BY THE AE. 7. GROUND NO.2 & CROSS EXAMINATION: IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 13 GROUND NO. 2 IN REVENUES APPEAL IS IN RESPECT OF EXCLUDING COMPARABLES BY HOLDI NG THAT SIZE AND TURNOVER OF THESE COMPANIES WERE DECIDING FACTORS AND THEREFORE, WAS NOT COMPARABLE WITH THAT OF ASSESSEE. LD.CIT DR SUBMITTED THAT, LD.CIT (A) EXCLUDED PERSISTENT SYSTEMS LTD, ZYLOG SYSTEMS LTD, MINDTREE LTD, L&T INFOTECH LTD., AND INFOSY S LTD., BY APPLYING TURNOVER FILTER. SHE SUBMITTED THAT SUCH FILTER IS NOT PRESCRIBED UNDER IT RULES, AS ONE, WHICH IS TO BE APPLIED WHILE DETERMINING ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION. LD.CIT DR PLACED RELIANCE ON ORDERS PASSED BY LD.AO/TPO. SHE RELIED UPON FOLLOWING DECISIONS OF THIS TRIBUNAL IN SUPPORT OF HER CONTENTION: NTT DATA GLOBAL DELIVERY SERVICES LTD. VS ACIT REPORTED IN (2016) 59 TAXMANN.COM 7; LSI TECHNOLOGIES INDIA PVT.LTD VS ITO REPORTED IN (2016) 70 TAXMANN.COM 189; SOCIETE GENE RALE GLOBAL SOLUTIONS CENTRE PVT.LTD VS DCIT REPORTED IN (2016) 69 TAXMANN.COM 336; CAPGEMINI INDIA PVT.LTD VS ACIT REPORTED IN (2015) 58 TAXMANN.COM 175; WILLS PROCESSING SERVICES INDIA PVT.LTD VS DCIT REPORTED IN (2013) 30 TAXMANN.COM 350. 8. LD.AR SUBMITTED THAT, APPLICATION OF TURNOVER FILTER HAS BEEN UPHELD BY THIS TRIBUNAL IN SEVERAL DECISIONS INCLUDING GENESIS INTEGRATING SYSTEMS INDIA PVT. LTD. VS DCIT REPORTED IN [2012] 20 TAXMANN.COM 715, WHEREIN, PERSISTENT SYSTEMS LTD., L&T INFOTECH L TD., AND INFOSYS LTD., WERE EXCLUDED ON HIGH TURNOVER FILTER, AND IT IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 14 HAS BEEN HELD THAT APPROPRIATE TURNOVER RANGE SHOULD BE APPLIED IN SELECTING COMPARABLES OF UNCONTROLLED COMPANIES. HE SUBMITTED THAT THIS TRIBUNAL IN CASE OF GENESIS INTEGRATING SYSTEMS INDIA PVT.LTD., (SUPRA) OBSERVED AS UNDER: FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SALES OR TURNOVER, A REASONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET AND NASSCOM HAVE GIVEN DIFFERENT RANGES. TAKING THE INDIAN SCENAR IO INTO CONSIDERATION, THE CLASSIFICATION MADE BY DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN VIEW OF THE SAME, IT IS HELD THAT THE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS.1.00 CRORE TO 200 CRORES HAVE TO BE TAK EN AS A PARTICULAR RANGE AND THE ASSESSEE BEING IN THAT RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200.00 CRORES ONLY SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY 9. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN LIGHT OF RECORDS PLACED BEFORE US. IT IS OBSERVED THAT COMPANIES ENGAGED IN SOFTWARE DEVELOPMENT SERVICES ARE TREATED BY BOTH SIDES AS COMPARABLES IRRESPECTIVE OF VARIOUS VERTICALS OF SOFTWARE. LD.TPO AS WELL AS ASSESS EE SEARCHED FOR COMPARABLES, WHICH ARE ENGAGED IN SOFTWARE DEVELOPMENT SERVICES, BUT HAS NOT CONSIDERED VERTICALS/FUNCTIONAL OR SERVICE LINES, IN WHICH THE COMPANY IS ENGAGED. THUS IT IS OBSERVED THAT COMPARABLES SELECTED ARE INTO DIFFERENT VERTICALS AND F UNCTIONAL LINES, THOUGH ASSESSEE IS CATERING TO SOFTWARE DEVELOPMENT AND MAINTENANCE NEEDS OF THE GROUP IN THE GLOBAL TRADE AND LOGISTICS IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 15 DOMAIN AND HAS BEEN CHARACTERIZED AS PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER. THIS TRIBUNAL IN CASE OF GENESIS INTE GRATING SYSTEMS INDIA PVT. LTD., VS DCIT REPORTED IN (2012) 20 TAXMAN.COM 715 , WHILE CONSIDERING VARIOUS FILTERS APPLIED BY LD. TPO OBSERVED AS UNDER: 6. FUNCTIONALLY DIFFERENT FILTER; THE ASSESSEE IS ENGAGED IN PROVIDING THE SOFTWARE DEVELOPMENT SERVICES AND THE SOFTWARE DEVELOPMENT PROCESS IS A STRUCTURE IMPOSED ON DEVELOPMENT OF SOFTWARE PRODUCTS. OFTEN, THE FIRST STEP IN ATTEMPTING TO DESIGN A NEW PIECE OF SOFTWARE IS TO DECIDE WHETHER IT WOULD BE IN ADDITION TO EXISTING SOFTWARE OR IS IT NEW APPLICATION, A NEW SUBSYSTEM OR A WHOLE NEW SYSTEM. THIS IS WHAT IS GENERALLY REFERRED TO AS 'DOMAIN ANALYSIS'. ASSUMING THAT THE DEVELOPERS ARE NOT SUFFICIENTLY KNOWLEDGEABLE IN THE SUBJECT AREA OF THE NEW SOFTWARE, THE FIRST TASK IS TO INVESTIGATE THE SO CALLED 'DOMAIN' OF THE SOFTWARE, BECAUSE MORE KNOWLEDGEABLE THEY ARE ABOUT THE DOMAIN ALREADY, THE LESS THE WORK THAT IS REQUIRED. ANOTHER OBJECTIVE OF THIS WORK IS TO MAKE THE ANALYSTS WHO WILL LATER TRY TO ELICIT AND GATHER THE REQUIREMENTS FROM THE ARE A EXPERTS OR PROFESSIONALS, SPEAK WITH THEM IN THE DOMAIN'S OWN TERMINOLOGY AND TO BETTER UNDERSTAND WHAT IS BEING SAID BY THESE PEOPLE BECAUSE OTHERWISE THEY WILL NOT BE TAKEN SERIOUSLY. THE NEXT MOST IMPORTANT TASK IN CREATING A SOFTWARE PRODUCT IS EXTRA CTING THE REQUIREMENT OF THE CUSTOMERS AND THEN PRECISELY DESCRIBING THE SOFTWARE TO BE WRITTEN POSSIBLY IN A RIGOROUS WAY. IN PRACTICE, MOST SUCCESSFUL SPECIFICATIONS ARE WRITTEN TO UNDERSTAND AND FINE TUNE APPLICATIONS THAT WERE ALREADY WELL DEVELOPED, A LTHOUGH SAFETY CRITICAL SOFTWARE SYSTEMS ARE OFTEN CAREFULLY SPECIFIED PRIOR TO APPLICATION AND DEVELOPMENT. THE ARCHITECTURE OF A SOFTWARE SYSTEM REFERS TO AN ABSTRACT SPECIFICATION OF THE SOFTWARE SYSTEM AND IS CONCERNED WITH MAKING SURE THAT THE SOFTWAR E SYSTEM WILL MEET THE REQUIREMENTS OF THE PRODUCT AS WELL AS ENSURING THAT FUTURE REQUIREMENTS CAN BE ADDRESSED. THE ARCHITECTURE STEP ALSO ADDRESSES INTERFACES BETWEEN THE SOFTWARE SYSTEM AND OTHER SOFTWARE PRODUCTS, AS WELL AS THE UNDERLYING HARDWARE OR THE HOST OPERATING SYSTEM. THEREAFTER, A DESIGN IS REDUCED IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 16 TO CODE AND WHERE THE CODE IS TO BE WRITTEN BY TWO DIFFERENT ENGINEERS, THEY MUST WORK TOGETHER AND THE TESTING OF SOFTWARE FALLS ON TO THE SHOULDERS OF SOFTWARE ENGINEERS. THE NEXT IMPORTANT TASK IS DOCUMENTING THE INTERNAL DESIGN OF SOFTWARE FOR THE PURPOSE OF FUTURE MAINTENANCE AND ENHANCEMENT. A LARGE PERCENTAGE OF SOFTWARE PROJECTS FAIL BECAUSE THE DEVELOPERS FAIL TO REALIZE THAT IT DOES NOT MATTER HOW MUCH TIME AND PLANNING A DEVELOPMENT TEAM PUTS INTO CREATING A SOFTWARE IF NOBODY IN THE ORGANIZATION ENDS UP USING IT. THEREFORE, IT IS VERY IMPORTANT TO HAVE TRAINING CLASSES FOR THE MOST ENTHUSIASTIC SOFTWARE USERS, SHIFTING THE TRAINING TOWARDS THE NEUTRAL USERS INTERMIXED WITH THE AVID SUPPO RTERS AND FINALLY INCORPORATE THE REST OF THE ORGANIZATION INTO ADOPTING THE NEW SOFTWARE. THE NEXT IMPORTANT STEP IS THE MAINTAINING AND ENHANCING SOFTWARE TO COPE WITH NEWLY DISCOVERED PROBLEMS OR NEW REQUIREMENTS. THIS CAN TAKE FAR MORE TIME THAN THE IN ITIAL DEVELOPMENT OF THE SOFTWARE AND ABOUT 2/3 RD SOFTWARE ENGINEERING WORK IS MAINTENANCE AND A SMALL PART OF IT I.E. FIXING BUGS. THE BEST KNOWN AND OLDEST PROCESS OF SOFTWARE DEVELOPMENT IS THE WATERFALL MODEL WHICH FOLLOWS ALL THE ABOVE PROCESSES AND A FTER EACH STEP IS FINISHED, THE PROCESS PROCEEDS TO THE NEXT STEP JUST AS BUILDERS DO NOT REVISE THE FOUNDATION OF A HOUSE AFTER FRAMING HAS BEEN ERECTED. 3. FROM THE ABOVE ANALYSIS, IT CAN BE SEEN THAT A COMPANY WHICH DEVELOPS A SOFTWARE PRODUCT BY FOLLOW ING ALL THE ABOVE STEPS INVOLVED IN CREATING A SOFTWARE IS A SOFTWARE DEVELOPMENT COMPANY AND IN THIS CASE, INTELLECTUAL PROPERTY GENERATED BELONGS TO THE COMPANY AND THE PRODUCTS ARE GENERALLY SOLD ON LICENSE BASIS WHEREIN THE RIGHT TO USE THE SOFTWARE IS TRANSFERRED WITHOUT GIVING THE SOURCE CODE. UNLIKE THESE SOFTWARE DEVELOPMENT COMPANIES, PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER DOES A PORTION OF THE DESCRIBED SOFTWARE DEVELOPMENT LIFE CYCLE. IT DOES NOT GENERATE ANY INTELLECTUAL PROPERTY OF ITS OWN. THE INTELLECTUAL PROPERTY GENERATED BELONGS TO THE CUSTOMER AND NOT TO THE SERVICE PROVIDER. A SOFTWARE CUSTOMIZATION COMPANY BUYS SOFTWARE PRODUCTS IN THE FORM OF LICENSES FROM THIRD PARTY OR USES ITS OWN SOFTWARE PRODUCTS FOR CUSTOMIZATION TO SUIT THE R EQUIREMENTS OF THE CUSTOMER AND IN THIS CASE, ONLY THE RIGHT TO USE THE SOFTWARE IS PASSED ON TO THE CUSTOMER AND THEREFORE, THE SAME IS ALSO CONSIDERED AS SOFTWARE DEVELOPMENT SERVICE PROVIDERS. A SOFTWARE TRADING COMPANY PURCHASES SOFTWARE PRODUCTS IN TH E FORM IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 17 OF LICENSES OR ON ROYALTY BASIS AS A RIGHT TO USE AND SELLS THESE PRODUCTS AS A RESELLER. 3.1 THE ASSESSEE BEING A SOFTWARE DEVELOPMENT SERVICE PROVIDER, IT CANNOT BE COMPARED TO A SOFTWARE DEVELOPMENT COMPANY OR A SOFTWARE TRADING COMPANY. THEREFORE, THE COMPANIES THAT ARE FUNCTIONALLY DIFFERENT FROM THAT OF THE TAX PAYER ARE TO BE EXCLUDED. 9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THE RIVAL CONTENTIONS AND ALSO THE JUDICIAL PRECEDENTS ON THE ISSUE, WE FIND THAT THE TPO HIMSELF HAS REJECTED THE COMPANIES WHICH ARE MAKING LOSSES AS COMPARABLES. THIS SHOWS THAT THERE IS A LIMIT FOR T HE LOWER END FOR IDENTIFYING THE COMPARABLES. IN SUCH A SITUATION, WE ARE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER LIMIT ALSO. WHAT SHOULD BE UPPER LIMIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTION OF THE LEARNED COU NSEL FOR THE ASSESSEE THAT THE SIZE MATTERS IN BUSINESS. A BIG COMPANY WOULD BE IN A POSITION TO BARGAIN THE PRICE AND ALSO ATTRACT MORE CUSTOMERS. IT WOULD ALSO HAVE A BROAD BASE OF SKILLED EMPLOYEES WHO ARE ABLE TO GIVE BETTER OUTPUT. A SMALL COMPANY MA Y NOT HAVE THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOULD COME DOWN REDUCING PROFIT MARGIN. THUS, AS HELD BY THE VARIOUS BENCHES OF THE TRIBUNAL, WHEN COMPANIES WHICH ARE LOSS MAKING ARE EXCLUDED FROM COMPARABLES, THEN THE SUPER PROFIT MAKING COMPAN IES SHOULD ALSO BE EXCLUDED. FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REASONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET AND NASSCOM HAVE GIVEN DIFFERENT RANGES. TAKING THE INDIAN SCENARIO INTO CONSIDERATION, WE FEEL THAT THE CLASSIFICATION MADE BY DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN VIEW OF THE SAME, WE HOLD THAT THE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS.1.00 CORE TO 200 CRORES HAVE TO BE TAKEN AS A PARTICULAR RANGE AND THE ASSESSEE BEING IN THAT RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200.00 CRORES ONLY SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY. IN FACTS OF PR ESENT CASE, ASSESSEE IS DOING PART OF SOFTWARE DEVELOPMENT CYCLE AND THEREFORE HAS BEEN CATEGORIS ED AS A CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROVIDER CATERING TO NEEDS OF THE GROUP . ASSESSEE IN TP STUDY HELD TO BE COMPRISE OF SOFTWARE ENGINEERS, WHO DEVEL OP PROJECT BASED ON INPUTS RECEIVED FROM AE. IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 18 ENGINEERS EMPLOYED BY AS S ESSEE DESI G NS FUNCTIONAL SPECIFICATIONS FOR THE PROJECT IDENTIFICATION OF INTERFACES COMPONENTS CODING AND BUG FIXING. ULTIMATE APPROVAL AND OWNER OF PROJECT DEVELOPED IS THE AE. IN OU R VIEW, BY INVOLVING ITSELF IN PROCESS OF SOFTWARE DEVELOPMENT FOR AE, A SSESSEE CANNOT BE HELD TO BE FULFLEDGED SOFTWARE DEVELOPMENT COMPANY. ONE HAS TO LOOK INTO TRANSACTION IN REGARDS TO SERVICES RENDERED AND FAR, WHICH CATAGORISES IT TO BE A CAPTIVE SER VICE PROVIDER, WORKING ON BUSINESS MODEL OF COST PLUS MARGIN. IT IS OBSERVED THAT COMPARABLES SOUGHT TO BE EXCLUDED ARE 100 % SOFTWARE DEVELOPMENT COMPANIES, HAVING HIGH TURNOVER AND THEREFORE RESPECTFULLY FOLLOWING AFORESTATED VIEW IN CASE OF GENESIS INTEGRATING SYSTEMS INDIA PVT. LTD., VS DCIT (SUPRA) THESE COMPARABLES ARE TO BE EXCLUDED ON BOTH THE COUNTS OF FUNCTIONALLY NOT BEING SIMILAR WITH THAT OF ASSESSEE AND ALSO BECAUSE THEY HAVE A HIGH TURNOVER OF MORE THAN 200 CRORE . IT IS SUBMITTED THAT SUBSEQUENTLY THIS TRIBUNAL IN CASE OF YODLEE INFOTECH PVT. LTD VS ITO IN IT(TP)A NO. 108/BANG/2014 FOR ASSESSMENT YEAR 2009 - 10, VIDE ORDER DATED 12/12/14, EXCLUDED THESE COMPANIES FOLLOWING GENESIS INTEGRATING SYSTEMS INDI PVT.LTD VS .DCIT(SUPRA). RELIANCE HAS BEEN PLACED ON DECISION OF THIS TRIBUNAL IN CASE OF AUTODESK INDIA PVT.LTD. VS DCIT REPORTED IN (2018) 96 TAXMANN.COM 263 FOLLOWED SIMILAR VIEW TO EXCLUDE IDENTICAL COMPARABLES BY APPLYING TURNOVER FILTER, WHEREIN ALL THE DECISI ONS RELIED UPON BY LD. CIT DR HAS BEEN CONSIDERED AND DEALT WITH. IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 19 THEREFORE, RESPECTFULLY FOLLOWING ABOVE DECISIONS, WE UPHOLD EXCLUSION OF INFOSYS LTD, LARSEN & TOUBRO INFOTECH LTD., AND PERSISTENT SYSTEMS LTD., BY LD.CIT (A) FROM FINAL LIST. NOW COMING TO ZYLOG SYSTEMS LTD., MINDTREE LTD., IT HAS BEEN SUBMITTED THAT THESE COMPANIES ALSO HAVE TURNOVER MORE THAN 200 CRORES AND THEREFORE SHOULD BE EXCLUDED. IN SUPPORT, RELIANCE WAS PLACED ON DECISIONS OF THIS TRIBUNAL IN CASE OF TRIOLOGY E BUSINESS SOFTWARE INDIA PVT.LTD., VS DCIT REPORTED IN (2013) 29 TAXMANN.COM 310 AND DECISION OF HONBLE BOMBAY HIGH COURT IN CASE OF CIT VS PENTAIR WATER INDIA PVT. LTD IN ITA NO. 18/2015 VIDE ORDER DATED 16/09/15 . HONBLE HIGH COURT IN CASE OF PAINTAIR WATER INDIA PVT.LT D (SUPRA) HELD THAT, TURNOVER IS A RELEVANT CRITERIA FOR CHOOSING COMPANIES AS COMPARABLES FOR DETERMINING ALP OF INTERNATIONAL TRANSACTION. EVEN OTHERWISE, ALL ABOVE REFERRED COMPARABLES ARE FUNCTIONALLY NOT SIMILAR WITH THAT OF ASSESSEE, WHICH IS ONLY A CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROVIDER, WHICH DOES NOT DESIGN/DEVELOP/SELL SOFTWARE PRODUCTS AND DOES NOT OWN ANY IP. WE THEREFORE UPHOLD EXCLUSION OF THIS COMPARABLE IS BY LD. CIT (A). 10. CROSS OBJECTION FILED BY ASSESSEE: IT IS OBSERVED THAT AS SESSEE IN CROSS OBJECTION SEEKS INCLUSION OF CGK VAK SOFTWARE & EXPORTS LTD ., AND EXCLUSION OF BODHTREE CONSULTING LTD., AND KALS INFORMATION SYSTEMS LTD. , AS THEY ARE FUNCTIONAL DISSIMILAR. FURTHER, SASKEN COMMUNICATIONS TECHNOLOGIES LTD AND TATA ELXSI LTD., ARE SOUGHT TO BE EXCLUDED ON HAVING HIGH TURNOVER . IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 20 LD.AR HOWEVER SUBMITTED THAT IN THE EVENT, COMPARABLES SOUGHT FOR INCLUSION BY REVENUE ARE EXCLUDED, AVERAGE MARGIN OF COMPARABLES IS WITHIN TOLERANCE LIMIT OF +/ - 5%. AS WE HAVE DISMISSED GROUNDS O F REVENUE IN RESPECT OF COMPARABLES ALLEDGED FOR INCLUSION, CROSS OBJECTION OF ASSESSEE IS DISMISSED AS NOT PRESSED. ACCORDINGLY THIS GROUND RAISED BY REVENUE AND CROSS OBJECTION FILED BY ASSESSEE STANDS DISMISSED. 11. GROUND NO.3 IS IN RESPECT OF DISALLO WING DEPRECIATION AS AN ADJUSTMENT IN COMPARABLES. LD.AR SUBMITTED THAT ASSESSEE HAS A POLICY OF CHARGING HIGHER RATE OF DEPRECIATION AS COMPARED TO COMPANIES SELECTED BY LD.TPO. ASSESSEE PLACED RELIANCE ON THE ACCOUNTING NOTES WHEREIN POLICY O F DEPRECIATI ON AT PAGE15 OF PAPER BOOK, VOL - 1 HAS BEEN ENCAPSULATED. SHE THUS SUBMITTED THAT ADJUSTMENT IS TO BE MADE TO ELIMINATE DIFFERENCE BETWEEN ASSESSEE AND COMPARABLES. PLACING RELIANCE UPON DECISION OF THIS TRIBUNAL AS WELL AS PUNE TRIBUNAL IN HONEYWELL TECHN OLOGY SOLUTIONS LAB PVT.LTD IN ITA NO. 1344/BANG/2011 AND E - GAIN COMMUNICATIONS PVT.LTD VS IT O REPORTED IN (2008) 23 SOT 385, SHE SUBMITTED THAT LD.CIT (A) RIGH TLY DIRECTED LD.TPO TO EXCLUDE DE PRECIATION FROM OPERATING COSTS OF ASSESSEE AS WELL AS COMPARAB LES. LD.CIT DR PLACED RELIANCE UPON ORDERS PASSED BY LD.AO/TPO. 12. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. IT HAS BEEN SUBMITTED BY THE LD.AR THAT FOR ASSESSMENT YEAR 2005 - 06 IN ASSESSEES OWN CASE WHEN THIS ISSUE WAS REMANDED BY THIS TRIBUNAL IS LD.TPO/AO HAD INTER ALIA GRANTED THE ADJUSTMENT ON IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 21 DEPRECIATION AFTER TAKING INTO CONSIDERATION THE DETAILED WORKING SUBMITTED BY ASSESSEE. PLACING RELIANCE UPON PAGE 892 - 898 OF PAPER BOOK, IT HAS BEEN SUBMI TTED THAT FOR YEAR UNDER CONSIDERATION DETAILED WORKING IS ALREADY AVAILABLE BEFORE AUTHORITIES BELOW. LD.CIT (A) OBSERVED AS UNDER: 14.5.(V) DEPRECIATION ADJUSTMENT 14.5.1. A N EXTRACT OF MY PREDECESSORS ORDER IS REPRODUCED AS UNDER; DURING THE APPELLATE PROCEEDINGS, IT IS SUBMITTED THAT THE APPELLANT COMPANY AS A POLICY OF CHARGING A HIGHER R ATE OF DEPRECIATI O N AS COMPARED TO THE COMPANIES SELECTED BY THE TPO, THEREFORE, THERE IS NEED FOR MAKIN G AN ADJUST M ENT TO ELIMINATE THE DIFFEREN CE IN THE ACCOUNTING POLICIES FOR THE TESTED PARTIES AND THE COMPARABLE COMPANIES. HAVING HEARD THE CONTENTION OF THE APPELLANT, AS PER RULE 10B(3), THE MARGIN OF THE COMPARABLES AND THE TESTED PA R TY HAVE TO B COMPUTED ON T HE SAME BASE CONSIDERING THE ACCOUNTING POLICIES FOLLOWED. ACCORDINGLY, INSTEAD OF ALLOWING ANY ADJUSTMENT ON THIS ACCOUNT, THE AO IS DIRECTED TO COMPUTE THE MARGI N IN RESPECT OF THE COMPARABLES AFTER EXCLUDING THE DEPRECIATION FROM THE COST AND ALSO IN THE C A S E OF THE APPELLANT TH E DEPRECIATION TO BE EXCLUDED FROM THE COST FOR COMPUTING THE ARMS LENGTH DIFFERENCE. THE APP E AL ON THE ABOVE ISSUE IS D I S POSED ACCORDINGLY. 14.5.2 SIMILAR C LAIM HAS BEEN MADE IN THIS YEAR AND I SEE NO REASON TO DIFFER WITH MY PREDECESSOR AND HENCE, TH E TPO IS DIRECTED TO FOLLOW THIS DIRECTION IN THE CURRENT YEAR. IT IS ORDERED ACCORDINGLY. IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 22 CONSIDERING ABOVE DISCUSSION AND OBSERVATIONS BY LD.CIT (A), WE DO NOT FIND ANY INFIRMITY IN ADOPTING A CONSISTENT VIEW AND THE SAME IS UPHELD. ACCORDINGLY, THIS GR OUND RAISED BY REVENUE STANDS DISMISSED. 13. GROUND NO. 4 IS IN RESPECT OF DISALLOWANCE UNDER SECTION 40 (A) (IA) OF THE ACT, IS FOR NOT DEDUCTING TAX AT SOURCE UNDER SECTION 194J AT THE TIME OF PURCHASE OF SOFTWARE. ADMITTEDLY, IT HAS BEEN SUBMITTED THAT THIS ISSUE STANDS SETTLED AGAINST ASSESSEE IS BY DECISION OF THIS TRIBUNAL IN CASE OF DCIT VS WS ATKINS INDIA PVT.LTD IN ITA NO. 1467/BANG/2014 AND KAWASAKI MICROELECTRONICS INC. VS DDIT REPORTED IN (2015) 60 TAXMANN.COM 256 . ACCORDINGLY THIS GROUND RAISED BY REVENUE STANDS ALLOWED. 14. GROUND NO. 5 IS IN RESPECT OF DISALLOWANCE DELETED BY LD.CIT (A) UNDER SECTION 14 A READ WITH RULE 8D OF THE ACT. IS IT HAS BEEN SUBMITTED THAT THERE IS NO EXEMPT INCOME EARNED BY ASSESSEE DURING YEAR UNDER CONSIDERATION. BO TH PARTIES ADMITTEDLY SUBMITTED THAT, ISSUE STANDS SQUARELY COVERED BY DECISION OF HONABLE DELHI HIGH COURT IN CASE OF CHEMINVEST LTD VS CIT REPORTED IN 378 ITR 33 . WE THEREFORE DO NOT FIND ANY INFIRMITY IN THE VIEW ADOPTED BY LD. CIT (A). ACCORDINGLY THE SAME IS UPHELD. IN THE RESULT APPEAL FILED BY REVENUE AND CROSS OBJECTIONS FIL ED BY ASSESSEE STANDS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 04 - 09 - 2019 SD/ - S D / - (J.SUDHAKAR REDDY) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: THE 4 TH SEPTEMBER, 2019. *AM IT(TP)A NO.1491(B)/2014 & CO NO.69(B)/2015 23 COPY OF THE ORDER FORWARD ED TO: 1.APPELLANT; 2.RESPONDENT; 3.CIT; 4.CIT(A); 5. DR 6. ITO (TDS) 7.GUARD FILE BY ORDER ASSTT.REGI STRAR