Honeywell Technology Solutions Lab Private Limited, Bangalore V. DCIT, Bangalore

ITA 1344/BANG/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 0677 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 3 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-03-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 12-02-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 23-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K AMBASTHA CITI
• Keywords: Depreciation; Transfer pricing; Business expenditure; International transaction; Initiation of penalty proceedings; Wholly owned subsidiary; Revenue expenditure
• Section: 80HHC; 10B; 32

Judgement Text

IT(TP)A.1344/BANG/2011 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'A', BANGALORE BEFORE SHRI. N. BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI. GEORGE GEORGE K. JUDICIAL MEMBER I.T(TP).A NO.1344/BANG/2011 (ASSESSMENT YEAR : 2007-08) M/S. HONEYWELL TECHNOLOGY SOLUTIONS LAB P. LTD., 151/1, DORAISARIPALYA, BANNERGHATTA ROAD, BANGALORE 560 076 .. APPELLANT PAN : AABCC0258Q V. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 11(4), BANGALORE .. RESPONDENT APPELLANT BY : SHRI. RAJAN VORA, CA RESPONDENT BY : SHRI. S. K. AMBASTHA, CIT-I, DR DATE OF HEARING : 12.02.2013 DATE OF PRONOUNCEMENT : 28.03.2013 O R D E R PER N. BARATHVAJA SANKAR, VICE PRESIDENT : THIS IS AN APPEAL PREFERRED BY THE ASSESSEE, M/S. HONEYWELL TECHNOLOGY SOLUTIONS LAB P. LTD., BANGALORE, FOR TH E ASSESSMENT YEAR 2007-08 AGAINST THE ASSESSMENT ORDER DATED.13.10.20 11, OF THE DCIT, CIRCLE -11(4), BANGALORE. 02. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT HONEYWELL TECHNOLOGY SOLUTIONS LAB P. LTD., (HEREINAFTER REFE RRED TO AS HTSL), IT(TP)A.1344/BANG/2011 PAGE - 2 IS A PRIVATE LIMITED COMPANY INCORPORATED IN BANGAL ORE AND IS A WHOLLY OWNED SUBSIDIARY OF HONEYWELL INTERNATIONAL INC. USA. THE ASSESSEE IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE, PRIMARILY FOR ITS PARENT COMPANY AND OTHER HONEYWELL GROUP OF COMPANI ES, SPECIFICALLY HIGH-END SOFTWARE ENGINEERING PRODUCT DEVELOPMENT A ND TECHNOLOGY DEVELOPMENT FOR THE AEROSPACE AND AUTOMATION CONTRO L BUSINESS. FOR THE A.Y.2007-08, THE ASSESSEE FILED ITS RETURN OF I NCOME ON 31.10.2007 DECLARING TOTAL INCOME OF RS.8,39,46,266/- AFTER CL AIMING DEDUCTION U/S.10A, AMOUNTING TO RS.50,75,75,651/- AND DEDUCTI ON U/S.80JJAA AMOUNTING TO RS.11,09,95,555/-. IN THE PROCEEDINGS U/S.143(3) R.W.S.144C, THE ASSESSING OFFICER AND THE TPO PROPO SED CERTAIN CORPORATE TAX AND TRANSFER PRICING ADJUSTMENTS TO T HE RETURNED INCOME OF THE ASSESSEE WHICH WERE INCORPORATED IN THE DRAF T ASSESSMENT ORDER DATED.20.12.2010, THE ASSESSING OFFICER MADE THE F OLLOWING ADDITIONS/DISALLOWANCES TO THE TOTAL INCOME OF THE ASSESSEE : SL NO NATURE OF ADDITION/DISALLOWANCES AMOUNT (RS,) AMOUNT (RS,) 1A REDUCTION OF THE FOLLOWING AMOUNTS FROM 'EXPORT TURNOVER' FOR COMPUTING DEDUCTION U/S.10A OF THE ACT -DATA LINK CHARGES -CERTAIN EXPENDITURE INCURRED IN FOREIGN CURRENCY 2,35,08,825 33,09,33,846 1B. REDUCTION IN TOTAL 10A DEDUCTION(RS.59,75,75,651 RS,56,01,43,562 3,74,32,089 2. CAPITALISATION OF EXPENSES 3,83,71,306 IT(TP)A.1344/BANG/2011 PAGE - 3 INCURRED ON PURCHASE OF SOFTWARE DEBITED TO THE PROFIT & LOSS ACCOUNT 3. DISALLOWANCE OF ENTIRE DEDUCTION U/S.80JJAA 11,09,95,555 4. ADDITIONS MADE ON ACCOUNT OF TP ADJUSTMENTS 49,23,67,726 THUS THE TOTAL TAXABLE INCOME DETERMINED IN THE DRA FT ASSESSMENT ORDER WAS RS.74,96,05,889/-, AS AGAINST THE RETURNED INCO ME OF RS.8,39,46,266/-. THE MATTER ALSO BECAME THE SUBJE CT MATTER OF THE ORDER U/S.92CA OF THE IT ACT BY THE TPO BY ORDER DA TED.14.10.2010. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE'S COUNSEL, THE ASSESSING OFFICER PASSED THE FINAL ASSESSMENT ORDER DATED.13.10.2011. AGGRIEVED BY THIS ORDER, ASSESSEE IS IN APPEAL BEFO RE US. 03. AT THE TIME OF HEARING, THE LEARNED CHARTERED A CCOUNTANT SHRI. RAJAN VOHRA, APPEARED AND ARGUED ON BEHALF OF THE A SSESSEE. HE HAS FILED VARIOUS PAPER BOOKS, CHARTS, CASE LAWS ETC., ON RECORD. 04. NOW LET US TAKE UP THE ISSUE RELATING TO TRANSF ER PRICING ADJUSTMENT, GROUNDS OF APPEAL RELATING TO WHICH ARE REPRODUCED UNDER : 'ASSESSMENT AND REFERENCE TO TRANSFER PRICING OFFIC ER ARE BAD IN LAW 8. THE FINAL ORDER ISSUED BY THE LEARNED DCIT IS BA D ON FACTS AND IN LAW, AND IS IN VIOLATION OF THE PRINCIPLES OF NA TURAL JUSTICE. WITHOUT PREJUDICE TO THE ABOVE, THE ORDER ISSUED BY THE LEARNED DCIT IS BAD IN LAW INSOFAR AS THE FACT THAT THE DCI T DID NOT ISSUE IT(TP)A.1344/BANG/2011 PAGE - 4 TO HTSL, A SHOW CAUSE NOTICE, AS PER PROVISO TO SEC TION 92C(3) OF THE ACT. 9. THE LEARNED DCIT HAS ERRED IN MAKING A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO), INTER ALIA, SINCE HE HAS NOT RECORDED AN OPINION THAT ANY OF THE CONDITIONS IN S ECTION 92C(3) OF THE ACT, WERE SATISFIED IN THE INSTANT CASE. THE LEARNED DCIT ALSO ERRED IN NOT FOLLOWING THE PROVISION CONTAINED IN SECTION 92CA(1) OF THE ACT. THE FRESH COMPARABLE SEARCH UNDERTAKEN BY THE TPO I S BAD IN LAW 10. THE LEARNED TPO/ DCIT ERRED ON FACTS AND IN LAW IN CONDUCTING A FRESH BENCHMARKING ANALYSIS USING NON CONTEMPORANEOUS DATA AND SUBSTITUTING THE APPELLANT S ANALYSIS WITH FRESH BENCHMARKING ANALYSIS ON HIS OWN CONJECT URES AND SURMISES. 11. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE TPO/ DCIT ERRED IN NOT DEMONSTRATING THAT THE M OTIVE OF THE APPELLANT WAS TO SHIFT PROFITS OUTSIDE OF INDIA BY MANIPULATING THE PRICES CHARGED IN ITS INTERNATIONAL TRANSACTIONS, W HICH IS A PRE- REQUISITE CONDITION TO MAKE ANY ADJUSTMENT UNDER TH E PROVISION OF CHAPTER X OF THE ACT. COMPARABILITY ANALYSIS ADOPTED BY THE TPO/ DCIT FOR DETERMINATION OF ARMS LENGTH PRICE 12. THE LEARNED TPO/ DCIT GROSSLY ERRED ON FACTS IN BENCHMARKING THE TRANSACTIONS OF THE CAPTIVE SOFTWA RE SERVICES OF THE APPELLANT WITH COMPANIES OPERATING AS FULL-FLED GED ENTREPRENEURS, WITHOUT CONSIDERING THE DIFFERENCES IN THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISK UNDER TAKEN BY THE APPELLANT VIS--VIS COMPARABLE COMPANIES. 13. THE LEARNED TPO/ DCIT ERRED ON FACTS IN REJECTI NG THE COMPARABLE COMPANIES ARRIVED AT IN THE TRANSFER PRI CING STUDY, WITHOUT CONSIDERING THE FUNCTIONAL AND RISK ANALYSI S OF THE APPELLANT. 14. THE LEARNED TPO/ DCIT ERRED IN LAW IN APPLYING ARBITRARY FILTERS TO ARRIVE AT A FRESH SET OF COMPANIES AS CO MPARABLES TO THE APPELLANT, WITHOUT ESTABLISHING FUNCTIONAL COMPARAB ILITY. IT(TP)A.1344/BANG/2011 PAGE - 5 15. THE LEARNED TPO/ DCIT GROSSLY ERRED IN LAW IN D EVIATING FROM THE UNCONTROLLED PARTY TRANSACTION DEFINITION AS PER THE INCOME-TAX RULES, 1963 AND ARBITRARILY APPLYING A 2 5% RELATED PARTY CRITERIA IN ACCEPTING/ REJECTING COMPARABLES. 16. THE LEARNED TPO! DCIT ALSO ERRED ON FACTS AND I N LAW IN ARBITRARILY REJECTING COMPANIES WITH DIFFERENT YEAR ENDING (I.E. OTHER THAN 31 MARCH 2007). 17. THE LEARNED TPOI DCIT ERRED ON FACTS IN ARBITRA RILY REJECTING COMPANIES HAVING EMPLOYEE COST LESS THAN 25% OF THE OPERATING REVENUE. 18. THE LEARNED TPO/ DCIT ALSO ERRED ON FACTS IN AR BITRARILY REJECTING COMPANIES HAVING EXPORT REVENUES LESS THA N 25% OF THEIR TOTAL SALES. 19. THE LEARNED TPOI DCIT ERRED ON FACTS IN ARBITRA RILY REJECTING COMPANIES HAVING ONSITE REVENUE MORE THAN 75% OF TH E EXPORT REVENUE. 20. THE LEARNED TPO/ DCIT GROSSLY ERRED ON FACTS IN ARBITRARILY REJECTING COMPANIES HAVING SOFTWARE DEVELOPMENT REV ENUE LESS THAN 75% OF TOTAL OPERATING REVENUE AND INCONSISTEN TLY APPLYING SUCH FILTER, WITHOUT CONSIDERING THE SPECIFIC SEGME NTAL RESULTS. 21. THE LEARNED TPO/ DCIT ALSO ERRED ON FACTS IN AR BITRARILY REJECTING COMPANIES BASED ON THEIR FINANCIAL RESULT S WITHOUT CONSIDERING THE FUNCTIONAL COMPARABILITY. 22. THE LEARNED TPO/ DCIT ERRED ON FACTS AND IN LAW IN CONSIDERING A SET OF SECRET DATA, (I.E. DATA WHIC H WAS NOT AVAILABLE IN PUBLIC DOMAIN), IN ARRIVING AT A FRESH SET OF COMPANIES USING HIS POWER UNDER SECTION 133(6), WHI CH IS GROSSLY UNJUSTIFIED. ERRONEOUS DATA USED BY THE TPO/ DCIT 23. THE LEARNED TPO/ DCIT HAS ERRED IN LAW IN USING DATA, WHICH WAS NOT CONTEMPORANEOUS AND WHICH WAS NOT AVAILABLE IN THE PUBLIC DOMAIN AT THE TIME OF CONDUCTING THE TRANSFE R PRICING STUDY BY THE APPELLANT. IT(TP)A.1344/BANG/2011 PAGE - 6 24. THE LEARNED TPO/ DCIT ERRED IN LAW IN NOT APPLY ING THE MULTIPLE-YEAR DATA WHILE COMPUTING THE MARGIN OF AL LEGED COMPARABLE COMPANIES. NON-ALLOWANCE OF APPROPRIATE ADJUSTMENTS TO THE COM PARABLE COMPANIES 25. THE LEARNED TPO! DCIT ERRED IN LAW AND ON FACTS IN NOT ALLOWING APPROPRIATE ADJUSTMENTS UNDER RULE L0B TO ACCOUNT FOR, INTER ALIA, DIFFERENCES IN (A) ACCOUNTING PRACTICES , (B) MARKETING EXPENDITURE, (C) RESEARCH AND DEVELOPMENT EXPENDITU RE AND (D) RISK PROFILE BETWEEN THE APPELLANT AND THE COMPARAB LE COMPANIES. 26. THE LEARNED TPO/DCIT ERRED IN LAW IN NOT GRANTI NG THE BENEFITS OF PROVISO TO SECTION 92C(2) OF THE ACT AV AILABLE TO THE APPELLANT.' THOUGH THE ASSESSEE HAS TAKEN VARIOUS GROUNDS AS NA RRATED ABOVE, THE LEARNED REPRESENTATIVE MAINLY ARGUED THE GROUNDS RE LATING TO TURNOVER FILTER AND FILTER RELATING TO FUNCTIONALLY DIFFEREN T COMPANIES. 05. THE ASSESSEE UNDERTOOK A TRANSFER PRICING STUDY FOR ESTABLISHING THE ARM'S LENGTH PRICE OF ITS INTERNATIONAL TRANSAC TIONS WITH THE ASSOCIATED ENTERPRISES (AES). THE TRANSFER PRICING STUDY WAS CARRIED OUT BY AN INDEPENDENT EXTERNAL CONSULTANT IN ACCORD ANCE WITH THE PROVISIONS OF THE ACT, READ WITH INCOME-TAX RULES 1 962. AN ANALYSIS WAS UNDERTAKEN TO DETERMINE THE FUNCTIONS PERFORMED , RISKS ASSUMED AND ASSETS UTILIZED (FAR ANALYSIS) BY THE ASSESSEE AND ITS AES IN RESPECT OF THE INTERNATIONAL TRANSACTIONS BETWEEN T HEM. BASED ON THE TP STUDY, THE INDEPENDENT EXTERNAL CONSULTANT CONCL UDED THAT THE PRICE CHARGED BY THE ASSESSEE IN RESPECT OF ITS INTERNATI ONAL TRANSACTION WITH IT(TP)A.1344/BANG/2011 PAGE - 7 AES IS AT ARM'S LENGTH. THE KEY FEATURES OF THE TP STUDY UNDERTAKEN FOR SOFTWARE SERVICES ARE AS UNDER : AS PER THE FUNCTIONAL ANALYSIS, THE ASSESSEE WAS C ATEGORIZED AS A 'RISK MITIGATED SERVICE PROVIDER' AND SELECTED AS T HE TESTED PARTY. TNMM WAS DETERMINED AS THE MOST APPROPRIATE METHOD TO DETERMINE THE ALP. THE SEARCH WAS CONDUCTED ON PROWESS DATAB ASE AND CAPITALINE DATABASE TO SELECT COMPARABLE COMPANIES. GIVEN THE NATURE OF THE INTERNATIONAL TRANSACTIONS UNDER REVIEW, ECO NOMIC CONDITIONS, DIFFERENCES IN BUSINESS OR PRODUCT LIFE CYCLES AND OTHER RELEVANT FACTORS AND ALSO THE FACT THAT FINANCIAL DATA FOR THE FINAN CIAL YEAR 2006-07 WAS NOT AVAILABLE IN ALL CASES, FINANCIAL DATA FOR FINA NCIAL YEARS 2004-05 AND 2005-06, WHEREVER AVAILABLE, WAS ALSO CONSIDERE D. THE SEARCHES ON THE DATABASES YIELDED A SET OF 17 COMPARABLES FO R SOFTWARE SERVICES, WITH WEIGHTED AVERAGE OPERATING PROFIT/OPERATING CO ST OF 10.86%. AS THE OPERATING MARGIN OF THE ASSESSEE WAS 15.07% ON OPERATING COST (I.E., HIGHER THAN THE ARITHMETIC MEAN MARGIN OF TH E IDENTIFIED COMPARABLES), THE INTERNATIONAL TRANSACTION WAS CON SIDERED TO BE AT ARM'S LENGTH FROM AN INDIAN TP REGULATIONS' STANDPO INT. THE COMPARABLES ULTIMATELY SELECTED BY THE ASSESSEE ARE AS FOLLOWS : SL NO NAME OF THE COMPANY 2005 2006 2007 AVERAGE 1 AKSHAY SOFTWARE TECHNOLOGIES LTD 7.68% 7.07% NA 7.38% 2. BRELS INFOTECH LTD 2.46% NA NA 2.46% IT(TP)A.1344/BANG/2011 PAGE - 8 3. DYNACONS SYSTEMS 2.83% 3.17% NA 3.00% 4. MELSTAR INFOTECH -9.06% 1.39% NA -3.84% 5. ORIENT INFORMATION TECHNOLOGY LTD 15.37% - 16.66% NA -0.65% 6. QUINTEGRA SOLUTIONS LTD., 12.81% 14.95% NA 13.88% 7. R S SOFTWARE (INDIA) LTD 8.08% 15.69% 13.55% 12.44% 8. RANKLIN SOLUTION 5.80% 7.55% NA 6.68% 9. SIP TECHNOLOGIES & EXPORTS LTD NA 21.99% NA 21.99% 10. SANKHYA INFOTECH LTD 27.73% 25.81% NA 26.77% 11. SHREE TULSI ONLINE.COM LTD 1.75% 2.82% NA 2.29% 12. SYSTEMLOGIC SOLUTIONS LTD 26.52% 30.94% NA 28.73% 13. TUTIS TECHNOLOGIES LTD 7.28% 10.85% NA 9.07% 14. V & K SOFTECH LTD 16.33% 1.49% NA 8.91% 15. VJIL CONSULTING LTD 8.26% 9.86% NA 9.06% 16. VISUALSOFT TECHNOLOGIES LTD 16.10% 13.29% NA 14.70% 17. BODHTREE CONSULTING LTD 26.47% 17.18% NA 21.83% AVERAGE (ARITHMETIC MEAN) 11.03% 10.46% 13.55% 10.86% 06. THE ASSESSEE MADE VARIOUS SUBMISSIONS BEFORE TH E TPO TO JUSTIFY THE ARM'S LENGTH NATURE OF ITS INTERNATIONA L TRANSACTION. WHILE DETERMINING THE ALP OF THE ASSESSEE IN RELATION TO THE SOFTWARE SERVICES TO ITS AES, THE TPO DID NOT ACCEPT THE ECO NOMIC ANALYSIS UNDERTAKEN BY THE ASSESSEE AND CONDUCTED A FRESH EC ONOMIC ANALYSIS AND UNDERTOOK A FRESH ANALYSIS, FOR WHICH THE TPO C HOSE THE FOLLOWING 26 COMPANIES AS COMPARABLES : NO. NAME OF THE COMPANY TURNOVER GROSS MARGIN 1 ACCEL TRANSMATIC LTD.(SEGMENT) 9.68 21.11 2 AVANI CIMCOM TECHNOLOGIES LTD 3.55 52.59 3 CELESTIAL LABS LTD. 14.13 58.35 4 BATAMATICS LTD 54.51 1.38 5 E-ZEST SOLUTIONS LTD. 6.26 36.12 6 FLEXTRONICS SOFTWARE SYSTEMS LTD. (SEGMENT) 848.66 25.31 IT(TP)A.1344/BANG/2011 PAGE - 9 7 GEOMETRIC LTD. (SEGMENT) 158.38 10.71 8 HELIO C MATHESON INFORMATION TECHNOLOGY LTD. 178.63 36.63 9 IGATE GLOBAL SOLUTIONS LTD 747.27 7.49 10 INFOSYS TECHNOLOGIES LTD 13,149.00 40.30 11 ISHIR INFORTECH LTD. 7.42 30.12 12 KALS INFORMATION SYSTEMS LTD. 2.00 30.55 13 LGS GLOBAL LTD. 45.39 15.75 14 LUCID SOFTWARE LTD 1.70 19.37 15 MEDIA SOFT SOLUTIONS PVT. LTD 1.85 3.66 16 MEGASOFT LTD 139.33 60.23 17 MINDTREE LTD 590.35 16.90 18 PERSISTENT SYSTEMS LTD 293/75 24.52 19 QUINTEGRA SOLUTIONS LTD 62.72 12.56 20 R 5 SOFTWARE (INDIA) LTD 101.04 13.47 21 R SYSTEMS INTERNATIONAL LTD(SEGMENT) 112.01 15 07 22 SASKEN COMMUNICATION TECHNOLOGIES LTD(SEGMENT) 343.57 22.17 23 S I P TECHNOLOGIES & EXPORTS LTD 3.80 13.90 24 TATA ELXSI LTD (SEGMENT) 262.58 26.51 25 THIRDWARE SOLUTIONS LTD. (SEGMENT) 36.08 25.12 26 WIPRO LTD (SEGMENT) 9,616.09 33.65 ARITHMETIC MEAN 25.14 THE TPO USED ONLY SINGLE YEAR DATA I.E, FOR F.Y.200 6-07 FOR ANALYSIS. BY USING HIS POWERS VESTED U/S.133(6), THE TPO OBTA INED INFORMATION IN RESPECT OF CERTAIN COMPANIES. HE REJECTED CERTA IN COMPARABLES ON THE FOLLOWING FILTERS : COMPANIES HAVING SOFTWARE DEVELOPMENT SALES REVENUE LESS THAN 75% OF THE TOTAL OPERATING REVENUE; COMPANIES HAVING ECONOMIC PERFORMANCE CONTRARY TO T HE INDUSTRY BEHAVIOR (EG COMPANIES WHICH SHOWED A DIMI NISHING REVENUE TREND); COMPANIES HAVING CONSISTENT OPERATING LOSSES; IT(TP)A.1344/BANG/2011 PAGE - 10 COMPANIES WHOSE TURNOVER WAS LESS THAN RS.1 CRORE; COMPANIES HAVING DIFFERENT ACCOUNTING YEAR, OTHER T HAN MARCH 31 OR COMPANIES WHOSE FINANCIAL STATEMENTS WERE FOR A PERIOD OTHER THAN 12 MONTHS; COMPANIES HAVING ONSITE REVENUES GREATER THAN 75% O F THE EXPORT REVENUES; COMPANIES HAVING EMPLOYEE COST GREATER THAN 25% OF THE TOTAL REVENUES; ETC THE TPO PROVIDED AN ADJUSTMENT TOWARDS WORKING CAP ITAL OF 0.64%. THE ADJUSTED NET MARGIN OF COMPARABLE COMPANIES AFT ER PROVIDING THE WORKING CAPITAL ADJUSTMENT WAS DETERMINED AT 24.49% ON OPERATING COST. HE DID NOT MAKE SUITABLE ADJUSTMENTS TO ACCO UNT FOR DIFFERENCES IN THE RISK PROFILE, ACCOUNTING POLICIES, MARKETING & R&D EXPENSES OF THE ASSESSEE, VIS--VIS THE COMPARABLE COMPANIES AN D ALSO DID NOT CONSIDER THAT THE ADJUSTMENT TO THE ALP, IF ANY, SH OULD BE LIMITED TO THE LOWER END OF THE 5% RANGE AS THE ASSESSEE HAS T HE RIGHT TO EXERCISE THIS OPTION UNDER THE PROVISO TO SECTION 92C(2) OF THE ACT. 07. THE ASSESSEE APPEALED AGAINST THE DRAFT ASSESSM ENT ORDER BEFORE THE DRP. HOWEVER, THE DRP AGREED WITH THE VIEWS OF THE ASSESSING OFFICER/TPO AND REJECTED THE CONTENTIONS RAISED BY THE ASSESSEE. THUS THE ADJUSTMENTS WERE CONFIRMED BY THE DRP VIDE DIRE CTIONS DATED.14.09.2011. THE FINAL ASSESSMENT ORDER WAS P ASSED ON 13.10.2011, BY MAKING TP ADJUSTMENT OF RS.49,23,67, 720/-, WHICH IT(TP)A.1344/BANG/2011 PAGE - 11 WAS ARRIVED AT AS UNDER, CONSIDERING THE COMPUTATIO N OF ALP, PRICE RECEIVED VIS--VIS THE ARM'S LENGTH PRICE : COMPUTATION OF ARM'S LENGTH PRICE : THE ARITHMETIC MEAN OF THE PLI IS TAKEN AS THE ARM' S LENGTH MARGIN. BASED ON THIS, THE ALP OF THE SOFTWARE DEV ELOPMENT SERVICES RENDERED BY THE TAXPAYER TO ITS AE(S) IS C OMPUTED AS UNDER : ARITHMETIC MEAN PLI : 25.14% LESS : WORKING CAPITAL ADJUSTMENT : 0.64% ADJUSTED ARITHMETIC MEAN PLI : 24.50% ARM'S LENGTH PRICE : OPERATING COST RS.519,84,56,000 ARM'S LENGTH MARGIN 24.50% OF THE OPERATING COST ARM'S LENGTH PRICE (ALP) @ 124.40% OF OPERATING COST RS.647,20,77,720 THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATE D ENTERPRISES IS COMPARED TO THE ARM'S LENGTH PRICE, AS UNDER : ARM'S LENGTH PRICE @ 124.50% OF OPERATING COST (A) RS.647,20,77,720 PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS (B) RS.594,15,42,882 OPERATING REVENUES (C) RS.597,97,10,000 REVENUES FROM NON-AE PARTIES (D) = (C) (B) RS. 3,81,67,118 ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS (C) = (A) (D) RS.643,39,10,602 SHORTFALL BEING ADJUSTMENT U/S.92CA (F) = (E) (B) RS. 49,23,67,720 AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. IT(TP)A.1344/BANG/2011 PAGE - 12 08. WHILE RELYING ON THE CRUX OF THE GROUNDS OF APP EAL EXTRACTED ELSEWHERE, THE LEARNED CHARTERED ACCOUNTANT FILED W RITTEN SUBMISSIONS ALONG WITH CHARTS AND THE SAME IS COMPILED IN THE F OLLOWING LINES. THE REPRESENTATIVE RELIED ON THE DECISIONS OF THIS TRIB UNAL IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD V. DCI T (ITA NO.1231/BANG/2010) AND M/S. TRILOGY E-BUSINESS SOFT WARE INDIA LTD., (ITA NO.1054/BANG/2011) AND SUBMITTED THAT IN THE A BOVE DECISIONS, THE CLASSIFICATION OF THE COMPANIES ON THE BASIS OF NET SALES/TURNOVER ARE UPHELD AND THE HON'BLE TRIBUNAL HAS HELD THAT CONSI DERING THE INDIAN SCENARIO, THE CLASSIFICATION MADE BY DUN BRADSTREE T IS MORE SUITABLE AND REASONABLE. AS PER THE RATIO LAID DOWN, COMPAR ABLES HAVING TURNOVER BETWEEN RS.200 CRORES TO RS.2,000 CRORES N EEDS TO BE CONSIDERED IN THE CASE OF THE ASSESSEE AS THE REVEN UE OF THE ASSESSEE IS RS.597 CRORES. ON APPLICATION OF THE PRINCIPLES OF THE AFORESAID DECISIONS, THERE WOULD ONLY BE 6 COMPARABLES AS BEL OW, OUT OF THE SET OF 26 COMPARABLES AS IDENTIFIED BY THE TPO : SL. NO. COMPANY NAME TURNOVER AS PER TPO GROSS MARGINS AS PER TPO 1. FLEXT RONICS SOFTWARE SYSTEMS LTD., (SEG.) 848.66 25.31% 2. IGATE GLOBAL SOLUTIONS LTD., 747.27 7.49% 3. MINDTREE LTD., (SEG.) 590.35 16.90% 4. PERSISTENT SYSTEMS LTD., 293.75 24.52% 5. SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG.) 34 3.57 22.18% 6. TATA ELXI LTD. (SEG.) 262.56 26.51% IT(TP)A.1344/BANG/2011 PAGE - 13 09. ON THE OTHER HAND, THE LEARNED DR SUBMITTED AS UNDER : '4. LD. AR HAS CONTENDED THAT BY APPLYING THE TURNO VER FILTER OF RS. 200 CRORES TO RS. 2000 CRORES TO THE COMPARA BLES TAKEN BY THE TPO, THE ASSESSEES PROFIT MARGIN WOULD FALL WITHIN THE ALP. FOR TAKING LOWER TURNOVER LIMIT OF RS. 200 CRO RES, LD. AR HAS RELIED ON THE ITAT BANGALORE DECISION IN CASE O F GENESIS INTEGRATING SYSTEMS (ITA 1231/B/2010) AND TRIOLOGY E- BUSINESS (ITA 1054/B/2011) ORDER DATED 23.11.2012. IT MAY BE SUBMITTED THAT IN THE CASE OF GENESIS, THE ASSESSEE S TURNOVER WAS MERELY RS. 8 CRORES, IT WAS HELD THAT THE TURNO VER FILTER (UPPER LIMIT) OF RS. 200 CRORES (BEING 25 TIMES OF THE TESTED COMPANY) SHOULD BE APPLIED TO EXCLUDE THE SUPER BIG COMPANIES, AS COMPARABLES. FOR THIS BASIS, A MERE R EFERENCE HAS BEEN MADE TO DUN AND BRADSTREET STUDY OF 2005 O F SOFTWARE INDUSTRY IN INDIA, WHICH HAS CATEGORISIED THE SOFTWARE COMPANIES OF INDIA ON THE BASIS OF TURNOVER IN ORDE R TO STUDY THEIR FINANCIAL TRENDS OVER THE PERIOD OF STUDY (TW O YEARS). IN CASE OF TRIOLOGY ALSO, THE TURNOVER WAS OF ONLY RS. 48 CRORES, AND HENCE TURNOVER FILTER OF RS. 200 CRORES WAS ADO PTED. 4.2 IT IS SUBMITTED THAT IN BOTH THESE CASES, TURNO VER FILTER HAS BEEN USED FOR THE UPPER LIMIT OF THE COMPARABLES. F URTHER, THE DUN AND BRADSTREET STUDY (D & B STUDY) CANNOT BE FO LLOWED TO ADOPT BOTH THE UPPER AND LOWER LIMIT OF TURNOVER AS A RIGID COMPARTMENT, ASSUMABLY SEGREGATING DIFFERENT SPECIE S OF SOFTWARE COMPANIES FOR THE FOLLOWING REASONS: (I) THIS IS NOT A STUDY OF ANY BASIC AND INHERENT E CONOMIC PARAMETERS/DIFFERENCES WHICH LEADS TO ANY CONCLUSIO N THAT THE THREE DISTINCT CATEGORIES OF SOFTWARE COMPANIES EXI ST IN INDIA, IN TERMS OF PROFITABILITY. (II) THE TURNOVER CRITERION HAS BEEN ADOPTED MERELY TO FACILITATE THE STUDY OF COMPARATIVE ANALYSIS IN ECO NOMIC BEHAVIOUR OF THREE GROUPS OF SOFTWARE COMPANIES OVE R TWO YEARS, I.E. 2004 & 2005. IT MAY BE COMPARED TO A FO OTBALL TOURNAMENT AMONG FOUR SECTIONS OF STANDARD IX STUDE NTS OF A SCHOOL. WHILE THE TOURNAMENT WOULD THROW UP SOME SE CTION (SAY C) AS WINNER AND THE OTHER WOULD BE RANKED LAS T (SAY A), IT CANNOT BE CONCLUDED BASED ON THE RESULTS THAT ST UDENTS WITH BETTER FOOTBALL SKILLS HAVE BEEN KEPT SELECTIVELY I N SECTION C OR THAT EVERY TIME/YEAR SECTION C WOULD WIN THE FOOTBA LL TOURNAMENT. THIS IS BECAUSE THERE IS NOTHING FUNDAM ENTALLY DIFFERENT IN SECTION C AS COMPARED TO OTHER SECTION S. THE IT(TP)A.1344/BANG/2011 PAGE - 14 OUTCOME OF STUDIES IN SOCIAL SCIENCES (FINANCIAL ST UDIES INCLUDED) CANNOT BE ADOPTED IN TAX LAWS, AS ECONOMI C THEORIES OR UNIVERSAL PRINCIPLES OF FINANCIAL BEHAVIOUR. (III) NO ECONOMIC PRINCIPLES HAVE BEEN LAID DOWN B ASED ON ANY EMPIRICAL STUDY, AND THE D & B STUDY IS NEITHER AIMED NOR ATTEMPTS TO CONCLUDE, AND HAS NEITHER CONCLUDED THA T BASED ON ANY ECONOMIC PARAMETERS SUCH AS RETURN ON INVESTMEN T, SIZE OF INVESTMENT, THE SOFTWARE COMPANIES OF THE SELECTED CATEGORIES BEHAVE IN SIMILAR FASHION OR TREND, IN A GIVEN YEAR OR OVER THE STUDY PERIOD. (IV) THE STUDY ITSELF SHOWS THAT THERE WERE SIGNIFI CANT VARIATIONS IN PROFIT MARGINS (ON A CATEGORY AVERAGE ) OF THE THREE SEGMENTS- VIZ, SMALL, MEDIUM, AND LARGE, OF T HE SAMPLE SOFTWARE COMPANIES IN INDIA, OVER THE TWO CONSECUTI VE YEARS OF COMPARATIVE STUDY. (V) NO RELIABLE AND REASONABLE ECONOMIC PRINCIPLE R ELATING TO PROFIT MARGINS BASED ON TURNOVER, COULD BE DEDUCED FROM THE STUDY, WHICH COULD BE UNIVERSALLY APPLIED AS LAWS O F NATURE, OVER ALL THE YEARS. (VI) THE PRINCIPLE OF ECONOMY OF SCALE OPERATES DIF FERENTLY FOR THE MANUFACTURING SECTOR (RETURN ON INVESTMENT IN C APITAL ASSETS) AND TRADING SECTOR (LAWS OF DIMINISHING RET URNS). THE SAME COULD NOT BE APPLIED, MUTATIS MUTANDIS TO THE SOFTWARE INDUSTRY WHICH DEPENDS PRIMARILY ON MANPOWER RESOUR CES AND THE MANPOWER COST TO OPERATING COST IS UNIVERSALLY AND GENERALLY 60-70%, IRRESPECTIVE OF THE SCALE OF OPERATIONS/TURNOVER. 4.3 WHILE THE UPPER LIMIT OF TURNOVER ADOPTED IN GE NESIS AND TRIOLOGY, BASED ON D & B STUDY MAY APPEAR REASONABL E AND LOGICAL FILTER IN THE GIVEN FACTS OF THOSE CASES, I T WOULD BE ABSURD TO DISCARD A COMPARABLE HAVING RS. 210 CRORE S AGAINST THE TURNOVER OF RS. 190 CRORES OF THE TESTED COMPAN Y, FOR THE SAKE OF CONFORMING TO THE UNRELIABLE D & B STUDY, W HICH IS NOT BASICALLY AND FUNDAMENTALLY RELEVANT TO ADOPTING A TURNOVER FILTER FOR THE TRANSFER PRICING STUDY. EVEN OTHER-W ISE, THE TRIBUNAL ORDERS DO NOT LAY DOWN ANY ALL ENCOMPASSIN G PRINCIPLE TO BE UNIVERSALLY APPLIED, AT LEAST NOT W ITH REGARD TO THE LOWER TURNOVER LIMIT IN A CASE OF WITH TURNOVER OF RS. 598 CRORES, AS THAT OF THE ASSESSEE. THE CASE LAWS MAY BE APPLIED ONLY IN CASES HAVING SIMILAR TURNOVER FOR THE SAKE OF UPPER TURNOVER MARGIN OF RS. 200 CRORES AS FILTER. AS EXP LAINED IT(TP)A.1344/BANG/2011 PAGE - 15 ABOVE, THERE IS NO FINDING EVEN IN THE D&B STUDY TH AT SUCH SEGMENTS OF SOFTWARE INDUSTRY CONFORM TO ANY FIXED RATE OR RANGE OF PROFIT MARGINS TO OPERATIONAL COST. 4.4 THE ASSESSEES TURNOVER IS ABOUT RS. 598 CRORES , AND DURING THE PROCEEDINGS BEFORE THE TPO, IT AGREED TO THE SELECTION OF COMPARABLES HAVING MINIMUM TURNOVER OF RS. 100 CRORES AND MAXIMUM OF RS.2000 CRORES. FOR THE PURPO SE OF LOWER TURNOVER LIMIT, IT IS SUBMITTED THAT RS. 60 C RORES MAY BE ADOPTED WHICH WOULD BE REASONABLE BEING 10 TIMES SM ALLER THAN THE ASSESSEE, AND UPPER LIMIT OF RS. 5000 CROR E, BEING 8 TIMES HIGHER, LD. AR HAS NOT SHOWN ANY FUNDAMENTAL ECONOMIC DIFFERENCES IN THE COMPARABLES HAVING TURNOVER OF R S. 50 CRORES AND ABOVE WITH THAT OF THE ASSESSEE.' 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS ON RECORD. REGARDING THE TURNOVER FILTER, WE ARE C ONVINCED THAT THIS ISSUE IS COVERED BY THE DECISION OF THIS TRIBUNAL I N GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD V. DCIT (ITA NO.1231/BANG/ 2010), WHEREIN IT WAS HELD THAT, FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SALES OR TURNOVER AND ALSO TAKING INTO CONSIDERATION THE INDIAN SCENARIO, THE CLASSIFICATION MADE BY DUN & B RADSTREET IS MORE SUITABLE AND REASONABLE. AS PER THE RATIO LAID DOW N BY THE TRIBUNAL, COMPARABLES OF COMPANIES HAVING TURNOVER OF LESS TH AN RS.2000 CRORES AND ABOVE RS.200 CRORES ONLY NEED TO BE CONSIDERED. THE ABOVE DECISION WAS ALSO FOLLOWED BY THE TRIBUNAL IN THE F OLLOWING CASES : SL. NO. NAME OF THE CASE ITA NO. 1. M/S. KODIAK NETWORKS (I) P. LTD V. ACIT ITA.1413/BANG/2010 2. M/S. GENESIS MICROCHIP (I) P. LTD., V. DCIT ITA 1254/BANG/2010 IT(TP)A.1344/BANG/2011 PAGE - 16 3. ELECTRONIC FOR IMAGING INDIA P. LTD., ITA.1171/BANG/2010 4. M/S. TRILOGY E- BUSINESS SOFTWARE INDIA P. LTD., V. DCIT ITA.1054/BANG/2011, DATED.23.11.2012 HENCE, IN ORDER TO BE CONSISTENT WITH THE VIEW OF T HE TRIBUNAL IN ITS EARLIER ORDERS AS ABOVE, WE ELIMINATE 20 COMPARABLE S FROM THE LIST OF 26 COMPARABLES CHOSEN BY THE TPO, AND ACCORDINGLY ONLY SIX COMPANIES WILL BE LEFT OVER AS UNDER : SL. NO. COMPANY NAME TURNOVER AS PER TPO GROSS MARGINS AS PER TPO 1. FLEXTRONICS SOFTWARE SYSTEMS LTD., (SEG.) 848.66 25.31% 2. IGATE GLOBAL SOLUTIONS LTD., 747.27 7.49% 3. MINDTREE LTD., (SEG.) 590.35 16.90% 4. PERSISTENT SYSTEMS LTD., 293.75 24.52% 5. SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG.) 34 3.57 22.18% 6. TATA ELXI LTD. (SEG.) 262.56 26.51% ARITHMETIC MEAN 17.77 IT IS ORDERED ACCORDINGLY. FILTER BASED ON FUNCTIONAL DIFFERENCE : 11. THE LEARNED CHARTERED ACCOUNTANT PLEADED THAT O UT OF THE ABOVE SIX COMPARABLES SHORT-LISTED AS COMPARABLES BASED O N THE TURNOVER FILTER, THE FOLLOWING TWO COMPANIES, NAMELY (I) TAT A ELXSI LTD; AND (II) M/S. FLEXTRONICS SOFTWARE SYSTEMS LTD., DESERVE TO BE ELIMINATED FOR THE FOLLOWING REASONS : IT(TP)A.1344/BANG/2011 PAGE - 17 TATA ELXSI LIMITED (SEG) : THE COMPANY OPERATES IN THE SEGMENTS OF SOFTWARE DEVELOPMENT & SERVICES SEGMENT WHICH COMPRISES OF EMBEDDED PRODUCT DESIGN SERVICES, INDUSTRIAL DESIGN AND ENGINEERING SERVICES AND VISUAL COMPUTING LABS & SY STEM INTEGRATION SERVICES SEGMENT. THERE IS NO SUB SERVICES BREAK UP/INFORMATION PROVIDED IN THE ANNUAL REPORT OR THE DATABASES BASED ON WHICH WE COULD COMPUTE THE MARGIN FROM SOF TWARE SERVICES ACTIVITY ONLY. THE COMPANY HAS ALSO IN ITS RESPONSE TO THE NOTICE U/S 133(6 STATED THAT IT CANNOT BE CONSI DERED AS COMPARABLE TO ANY OTHER SOFTWARE SERVICES COMPANY D UE TO ITS COMPLEX NATURE. ACCORDINGLY, THE APPELLANT WISHES TO SUBMIT THAT TATA ELXSI SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. FLEXTRONICS SOFTWARE SYSTEMS LIMITED (SEG) THE COMPANY HAS EARNED REVENUES FROM SOFTWARE SERV ICES ON THE BASIS OF A HYBRID REVENUE MODEL (I.E. ROYALTY T HAT WOULD BECOME RECEIVABLE ON SUCCESSFUL SALE OF PRODUCTS BY THE CUSTOMERS OF THE COMPANY) WHICH IS BASED ON THE INF ORMATION PROVIDED UNDER REVENUE RECOGNITION IN THE ANNUAL REPORT OF THE COMPANY. THIS MODEL ADOPTED BY THE COMPANY IS N OT SIMILAR TO THE REGULAR MODELS ADOPTED BY OTHER SOFT WARE SERVICE PROVIDERS. THE HONBLE TRIBUNAL WOULD APPRE CIATE THAT A REGULAR SOFTWARE SERVICES PROVIDER CANNOT BE COMP ARED TO A COMPANY HAVING SUCH A CONDITIONAL/UNIQUE REVENUE MO DEL, WHEREIN THE REVENUES OF THE COMPANY FROM SOFTWARE/P RODUCT DEVELOPMENT SERVICES DEPENDS ON THE SUCCESS OF THE PRODUCTS SOLD BY ITS CLIENTS IN THE MARKETPLACE. HENCE, IT W OULD BE INAPPROPRIATE TO COMPARE THE BUSINESS OPERATIONS OF THE IT(TP)A.1344/BANG/2011 PAGE - 18 APPELLANT WITH THAT OF A COMPANY WHICH HAS HYBRID B USINESS MODEL (I.E. THE COMPANYS SERVICES REVENUES COMPRIS ES OF ROYALTY INCOME AS WELL AS REGULAR SOFTWARE SERVICES INCOME AND FOR WHICH THE REVENUE BREAK-UP IS NOT AVAILABLE ). ACCORDINGLY, WE WISH TO SUBMIT THAT THE COMPANY SHO ULD NOT BE CONSIDERED AS A COMPARABLE AND SHOULD BE REJECTE D AS FUNCTIONALLY DIFFERENT. 12. ON THE OTHER HAND, THE LEARNED DR RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. HE REITERATED THE CONTENTS OF T HE TPO'S ORDER AS HIS SUBMISSIONS. 13. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDE RED THE FACTS AND MATERIALS ON RECORD. AFTER CONSIDERING THE SUB MISSIONS, WE FIND THAT TATA ELXSI AND FLEXTRONICS ARE FUNCTIONALLY DI FFERENT FROM THAT OF THE ASSESSEE AND HENCE, THEY DESERVE TO BE ELIMINAT ED FROM THE LIST OF SIX COMPARABLES AND HENCE, THERE REMAINS ONLY FOUR COMPANIES AS LISTED BELOW : SL. NO. COMPANY NAME TURNOVER AS PER TPO GROSS MARGINS AS PER TPO 1. IGATE GLOBAL SOLUTIONS LTD., 747.27 7.49% 2. MINDTREE LTD., (SEG.) 590.35 16.90% 3. PERSISTENT SYSTEMS LTD., 293.75 24.52% 4. SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEG.) 34 3.57 22.18% AVERAGE 17.77% IT(TP)A.1344/BANG/2011 PAGE - 19 III. DEPRECIATION ADJUSTMENT FILTER : 14. THE ASSESSEE'S SUBMISSION IN RESPECT OF THIS AR E AS UNDER : '12. THE LEARNED TPO HAS NOT MADE APPROPRIATE DEPRE CIATION ADJUSTMENT. THE APPELLANT WISHES TO SUBMIT THAT HTS L HAS A POLICY OF CHARGING DEPRECIATION ON ITS ASSETS ON A STRAIG HT LINE BASIS AT A HIGHER RATE AS AGAINST MOST OF THE COMPANY ADOPTE D BY THE LEARNED TPO, WHICH EITHER FOLLOW WRITTEN DOWN VALU E METHOD OF DEPRECIATION OR CHARGE DEPRECIATION AT LOWER RATES IN COMPARISON TO THE ASSESSEE. GIVEN THE ABOVE, AS STATED UNDER R ULE 10B OF THE INCOME TAX RULES 1962, THERE IS A NEED TO MAKE APPR OPRIATE DEPRECIATION ADJUSTMENT TO ELIMINATE THE DIFFERENCE IN THE ACCOUNTING POLICIES OF THE APPELLANT AND THE COMPAR ABLE COMPANIES. 13. THE APPELLANTS CONTENTIONS FIND SUPPORT IN THE FOLLOWING RULINGS: MENTOR GRAPHICS (NOIDA) PVT. LTD. V. DY. COMMISSION ER OF INCOME TAX [(2007) 109 ITD 101 (DELHI)] (PAGE 57 3-576 OF PAPERBOOK II) E-GAIN COMMUNICATION PVT. LTD. V. ITO [2008-TIOL- 282- ITAT-PUNE] (PAGE 581-584 OF PAPERBOOK II) SCHEFENACKER MOTHERSON LTD V. INCOME TAX OFFICER [2009- TIOL-376-ITAT-DEL] (PAGE 585- 586 OF PAPERBOOK II) 24/7 CUSTOMER.COM PVT. LTD. VS. DCIT [ITA NO. 227/BANG/2010] 14. THE APPELLANT WISHES TO SUBMIT DETAILED DEPRECI ATION ADJUSTMENT CALCULATION AS FOLLOW: IT(TP)A.1344/BANG/2011 PAGE - 20 STEP 1: DEPRECIATION CHARGED BY COMPANIES SELECTED BY TPO WAS EXTRACTED FROM RESPECTIVE ANNUAL REPORTS; STEP 2: FOR THE PURPOSE OF COMPARISON, THE ASSETS WERE BROA DLY CLASSIFIED UNDER DIFFERENT HEADS, VIZ., COMPUTER, F URNITURE, ETC. STEP 3: THE DEPRECIATION RATE CHARGED BY HTSL WAS APPLIED T O THE ASSETS OF THE COMPARABLE COMPANIES (EXCEPT LAND AND BUILDING TO WHICH THE ACTUAL RATE CHARGED WAS APPLI ED) ACCEPTED BY THE TPO. STEP 4: THE ACTUAL CHARGED BY THE COMPANIES IS ADDED BACK A ND THE REVISED DEPRECIATION IS DEDUCTED TO ARRIVE AT T HE OPERATING PROFITS AND OPERATING MARGIN, WHICH IS COMPARED WIT H THE OPERATING MARGIN OF HTSL. THE REVISED ARITHMETICAL MEAN MARGIN OF THE COMPAN IES SELECTED BY THE LEARNED TPO AS COMPARABLES, AFTER TAKING INT O ACCOUNT THE DEPRECIATION ADJUSTMENT GOES DOWN FROM 25.14% TO 20 .36%. THE APPELLANT WISHES TO SUBMIT THAT TO ENSURE UNIFORMIT Y AND TO ENSURE A FAIR AND EQUITABLE COMPARISON, THE APPELLANT REQU ESTS THE HONBLE BENCH TO GRANT ADJUSTMENTS FOR DEPRECIATION OWING TO THE DIFFERENCES IN DEPRECIATION POLICIES.' 15. PER CONTRA, THE LEARNED DR SUPPORTED THE ORDER OF THE TPO AND DRP AND REITERATED THE CONTENTS OF THE SAME AS HIS SUBMISSIONS. HE RELIED ON THE OBSERVATIONS OF THE DRP AS UNDER : 'THE ELIGIBLE ASSESSEE CONTENDS THAT THE EXPENDITUR E INCURRED IN THIS CONTEXT ARE IN RESPECT OF THE SHELF/APPLICATION SOFTWARE WHICH DO NOT RESULT IN A NY ENDURING BENEFIT TO THE COMPANY. IT(TP)A.1344/BANG/2011 PAGE - 21 IN FACT THIS IS AN ISSUE WHERE NO DISPUTE IS CALLED FOR BECAUSE THE DEPRECIATION TABLE AS PRESCRIBED UNDER THE INCOME-TAX RULES ITSELF CATEGORIZES THE SOFTWARE AS A CAPITAL ITEM ON WHICH DEPRECIATION HAS TO BE CLAIME D AT THE PRESCRIBED RATE. THIS DOES NOT LEAVE SCOPE FOR TRE ATING THE EXPENDITURE ON PURCHASE OF SOFTWARE ANYTHING OTHERW ISE THAN A CAPITALIZED EXPENDITURE ON WHICH DEPRECIATIO N IS ALLOWABLE. NO INTERFERENCE IS CALLED FOR IN THIS REGARD.' 16. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDE RED THE FACTS AND MATERIALS ON RECORD. WE FIND THAT IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD., IN ITA NO.227/BANG/2010, DATED.09.11.2012, FOR THE ASSESSMENT YEAR 2004-05, THE TRIBUNAL IN PARA.19.8, HAS ORDERED AS UNDER : '19.8 HOWEVER, MERE CLAIM FOR AN ADJUSTMENT WILL SERVE NO PURPOSE UNLESS IT IS BACKED BY PROPER DETA ILS. THE ADDITIONAL GROUND STATES THAT THE DEPRECIATION OF T HE ASSESSEE IS A RATIO OF ITS GROSS BLOCK OF 25% AS AGAINST 10% OF THE COMPARABLE COMPANIES. THE ASSESSEE HAS NOT STATED THE DEPRECIATION AS A PERCENTAGE OF OPERATIONAL COST NO R HAS ANY EVIDENCE BEEN PLACED ON RECORD TO SHOW THAT THE DIF FERENCE IN DEPRECIATION IS DUE TO ANY OPERATIONAL REASONS. AS DISCUSSED (SUPRA), THERE COULD BE SEVERAL REASONS FOR DIFFERE NCE IN DEPRECIATION BETWEEN COMPANIES LIKE, RATES OF DEPRE CIATION, AGE OF THE ASSETS ETC., AND THEREFORE ADJUSTMENT TOWARD S DEPRECIATION CAN BE GRANTED ONLY IF THERE ARE OPERATIONAL DIFFER ENCES THAT AFFECT COMPARABILITY. WE REMIT THE ISSUE OF DEPREC IATION RAISED IT(TP)A.1344/BANG/2011 PAGE - 22 BY THE ASSESSEE IN THE ADDITIONAL GROUNDS TO THE FI LE OF THE ASSESSING OFFICER/TPO WITH DIRECTION TO EXAMINE AND CONSIDER THE CLAIM FOR ADJUSTMENT TOWARDS DEPRECIATION IN TH E LIGHT OF OUR OBSERVATIONS FROM PARAS 19.3 TO 19.8 OF THIS ORDER AND TO DISPOSE THE MATTER EXPEDITIOUSLY AFTER AFFORDING ADEQUATE O PPORTUNITY OF BEING HEARD TO THE ASSESSEE. IT IS ORDERED ACCORDI NGLY.' APART FROM THE ABOVE TRIBUNAL DECISION, THE OTHER D ECISIONS OF DELHI AND PUNE BENCHES OF THE ITAT HAVE ALSO TAKEN SIMILA R VIEW REGARDING DEPRECIATION ADJUSTMENT. HENCE, FOLLOWIN G THE ABOVE DECISION, WE ARE DIRECTING THE TPO/ASSESSING OFFICE R TO GIVE THE BENEFIT OF DEPRECIATION ADJUSTMENT TO THE ASSESSEE AS PER THE CHART FILED BY THE ASSESSEE WHICH WORKS OUT TO AROUND 3.3 9%. THUS, AFTER THE DEPRECIATION ADJUSTMENT OF 3.39%, FROM 16.56% ( 105% OF 15.77% THE ALP WILL COME TO 13.17%. APART FROM THI S, THE ASSESSING OFFICER SHALL GIVE EFFECT TO THE PROVISO TO SUB-SECTION (2) OF SECTION 92C, AS PER THE LATEST AMENDED ACT, AS REGA RDS 5% RANGE. THUS, THE ISSUE OF TRANSFER PRICING IS RESTORED TO THE FILE OF THE ASSESSING OFFICER/TPO, TO CARRY OUT THE ABOVE DIREC TIONS, OF COURSE, AFTER GIVING EFFECTIVE OPPORTUNITY OF HEARING TO TH E ASSESSEE. THOUGH THE ASSESSEE HAS TAKEN OTHER GROUNDS RELATI NG TO TP ISSUE (EXTRACTED ELSEWHERE IN THIS ORDER), WE ARE N OT GOING INTO THOSE ISSUES AS THE LEARNED CHARTERED ACCOUNTANT DURING THE COURSE OF HEARING SUBMITTED THAT IF THESE ADJUSTMENTS DEALT B Y US, VIZ., TURNOVER IT(TP)A.1344/BANG/2011 PAGE - 23 FILTER, UNREASONABLE COMPARISON FILTER AND DEPRECIA TION ADJUSTMENT, ARE GIVEN, THE ASSESSEE'S PROFIT WOULD BE WITHIN TH E ALP. IT IS ORDERED ACCORDINGLY. GROUND RELATING TO CORRECTION OF ARITHMETIC MISTAKE S : 17. GROUND RELATING TO CORRECTION OF ARITHMETICAL M ISTAKE IS AS UNDER : THE LEARNED TPO/DCIT ERRED ON FACTS IN ERRONEOUSLY COMPUTING THE ADJUSTMENT U/S.92CA OF THE APPELLANT FROM ITS INTERNATIONAL TRANSACTIONS. 18. THE LEARNED CHARTERED ACCOUNTANT SUBMITTED AS U NDER : 'I) THE TPO HAS DISREGARDED THE OPERATING COSTS ATT RIBUTABLE TO THE NON-AE SEGMENT OF THE APPELLANT WHILE CALCULATI NG THE TP ADJUSTMENT. THE APPELLANT WISHES TO SUBMIT THAT WH ILE CALCULATING THE TP ADJUSTMENT THE TPO HAS NOT EXCLU DED THE OPERATING COST ATTRIBUTABLE TO THE NON-AE TRANSACTI ONS OF THE APPELLANT. THIS HAS RESULTED IN AN ARTIFICIAL INFL ATION OF THE OPERATING COST OF THE APPELLANT THEREBY RESULTING I N ARRIVING AT A HIGHER TP ADJUSTMENT AS DETERMINED IN THE TP ORDE R. II) THE APPELLANT HAS SUBMITTED THE DETAILS OF THE REVISED WORKINGS GIVING EFFECT FOR THE COST ATTRIBUTABLE TO THE NON-AE TRANSACTIONS. THE APPELLANT WISHES TO SUBMIT THE REVISED CALCULAT ION OF THE TP ADJUSTMENT AS PROVIDED IN THE ORDER AND THE REVI SED WORKINGS GIVING EFFECT FOR THE COST ATTRIBUTABLE TO THE NON-AE TRANSACTIONS : IT(TP)A.1344/BANG/2011 PAGE - 24 ADJUSTMENT AS PER TP ORDER AS PER ORDER (RS.) REVISED AMOUNT (RS.) OPERATING COST 519,84,56,000 516,52,67,202 ALP (%) 24.50% 24.50% ALP - (A) 647,20,77,720 643,07,57,666 PRICE CHARGED IN THE INTERNATIONAL TRANSACTION (B) 594,15,42,822 594,15,42,822 OPERATING REVENUE (C) 597,97,10,100 597,97,10,100 REVENUE FROM NON-AE TRANSACTION D= (C) (B) 3,81,67,118 ALP OF INTERNATIONAL TRANSACTION E= (A) (D) 643,39,10,602 643.07,57,666 ADJUSTMENT F=(E) (B) 59,23,67,720 48,92,14,784 MARGINS 15.07% 15.77% 19. THE LEARNED DR SUBMITTED THAT IF ANY ARITHMETIC AL MISTAKES ARE THERE, THIS MAY BE SENT BACK TO THE ASSESSING OFFIC ER FOR REAPPRAISAL OF THE CLAIM OF THE ASSESSEE. 20. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDE RED THE FACTS AND MATERIALS ON RECORD. AS THIS MISTAKE HAS TO BE VERIFIED AT THE LEVEL OF THE ASSESSING OFFICER, WE ACCEPT THE CONTE NTION OF THE LEARNED DR AND RESTORE THIS ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER FOR DOING THE NEEDFUL ADJUSTMENT. 21. NOW LET US TURN TO THE CORPORATE TAX ISSUES. R EGARDING THE COMPUTATION OF DEDUCTION U/S.10A OF THE ACT, THE AS SESSEE HAS TAKEN THE FOLLOWING GROUNDS : 3. THE LEARNED DCIT HAS ERRED, IN LAW AND IN FACTS, BY REDUCING THE EXPENSES INCURRED BY THE APPELLANT TOWARDS IT(TP)A.1344/BANG/2011 PAGE - 25 TELECOMMUNICATION IN RESPECT OF STP UNIT II [AMOUNT ING TO RS 23,508,825] FROM THE EXPORT TURNOVER, AS BEING A TTRIBUTABLE TOWARDS THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE I NDIA IN COMPUTING THE DEDUCTION UNDER SECTION 10A OF THE ACT. 4. THE LEARNED DCIT HAS ERRED IN LAW AND IN FACTS, BY REDUCING CERTAIN EXPENDITURE INCURRED BY THE APPELLANT IN F OREIGN CURRENCY PERTAINING TO STP UNIT II AMOUNTING TO RS 330,933,847, WITHOUT APPRECIATING THE FACT THAT THE APPELLANT IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND DOES NOT RENDER ANY TECHNICAL SERVICES OUTSIDE INDIA. 5. WITHOUT .PREJUDICE TO THE ABOVE, THE LEARNED DCI T HAS ERRED, IN LAW, AND IN FACTS, BY NOT CONSIDERING THE PLEA O F THE APPELLANT THAT, IF THE TELECOMMUNICATION ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA AND FOR EIGN EXPENSES INCURRED TOWARDS RENDERING OF TECHNICAL SE RVICES ARE REDUCED FROM EXPORT TURNOVER, A CORRESPONDING AMOUN T SHOULD ALSO BE REDUCED FROM TOTAL TURNOVER FOR COMPUTING T HE DEDUCTION UNDER SECTION 10A OF THE ACT, BASED ON THE PRINCIP LE OF PARITY. 22. AT THE TIME OF HEARING, THE LEARNED CHARTERED ACCOUNTANT SUBMITTED THAT IF GROUND NO.5 IS DEALT WITH, FOLLOW ING THE KARNATAKA HIGH COURT DECISION, THEN GROUND NOS.3 AND 4 WOULD BECOME INFRUCTUOUS. 23. NOW, LET US DEAL WITH GROUND NO.5. IN THIS REG ARD, THE LEARNED CHARTERED ACCOUNTANT RELIES ON THE DECISION OF THE KARNATAKA HIGH COURT IN THE ASSESSEE'S OWN CASE IN ITA.NO.818 OF 2009, D ATED.30.08.2011, IT(TP)A.1344/BANG/2011 PAGE - 26 FOR THE ASSESSMENT YEAR 2004-05, WHEREIN THE HON'BL E HIGH COURT HAS HELD AS UNDER : 'IF WHAT IS EXCLUDED IN COMPUTING THE EXPORT TURN OVER IS INCLUDED WHILE ARRIVING AT THE TOTAL TURNOVER IS IN CLUDED WHILE ARRIVING AT THE TOTAL TURNOVER, WHEN THE EXPORT TUR NOVER IS A COMPONENT OF TOTAL TURNOVER, SUCH AN INTERPRETATION WOULD RUN COUNTER TO THE LEGISLATIVE INTENT AND IMPERMISSIBLE . IF THAT WERE THE INTENTION OF THE LEGISLATURE, THEY WOULD HAVE E XPRESSLY STATED SO. IF THEY HAVE NOT CHOSEN TO EXPRESSLY DEFINE WH AT THE TOTAL TURNOVER MEANS, THEN, WHEN THE TOTAL TURNOVER INCLU DES EXPORT TURNOVER, THE MEANING ASSIGNED BY THE LEGISLATURE T O THE EXPORT TURNOVER IS TO BE RESPECTED AND GIVEN EFFECT TO, WH ILE INTERPRETING THE TOTAL TURNOVER WHICH IS INCLUSIVE OF THE EXPORT TURNOVER. THEREFORE THE FORMULA FOR COMPUTATION OF THE DEDUCT ION UNDER SECTION 10A, WOULD BE AS UNDER : PROFITS OF THE BUSINESS X EXPORT TURNOVER OF THE UNDERTAKING TOTAL TURNOVER (EXPORT TURNO VER + DOMESTIC TURNOVER) 11. IN THAT VIEW OF THE MATTER, WE DO NOT SEE ANY E RROR COMMITTED BY THE TRIBUNAL IN FOLLOWING THE JUDGEMENTS RENDERE D IN THE CONTEXT OF SECTION 80HHC IN INTERPRETING SECTION 10 A WHEN THE PRINCIPLE UNDERLYING BOTH THESE PROVISIONS IS ONE A ND THE SAME. THEREFORE, WE DO NOT SEE ANY MERIT IN THIS APPEALS. ' 24. WE HAVE HEARD THE LEARNED DR AND CONSIDERED THE FACTS AND MATERIALS ON RECORD. THE DECISION OF THE HON'BLE K ARNATAKA HIGH COURT IN ASSESEE'S OWN CASE HAS BEEN FILED ON RECORD. TH E HON'BLE HIGH IT(TP)A.1344/BANG/2011 PAGE - 27 COURT HAS ALLOWED THE CLAIM OF THE ASSESSEE. IN A NUTSHELL, THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE H ON'BLE HIGH COURT FOR THE ASSESSMENT YEAR 2004-05. RESPECTFULLY FOLL OWING THE SAME, WE ALSO ALLOW THIS GROUND OF APPEAL OF THE ASSESSEE. SINCE GROUND NO.5 IS ALLOWED AS ABOVE IN FAVOUR OF THE ASSESSEE, WE ARE NOT GOING INTO GROUND NOS.3 AND 4 AS THEY BECOME INFRUCTUOUS, EVEN ACCORDING TO THE LEARNED AR. 25. THIS ISSUE IS ALLOWED IN FAVOUR OF THE ASSESSEE . 26. NOW, LET US TURN TO THE GROUND NO.6 RELATING TO SOFTWARE EXPENSES, WHICH READS AS UNDER : 'THE LEARNED DCIT HAS ERRED IN LAW AND IN FACT, IN CAPITALIZING THE SOFTWARE CHARGES EXPENSED BY THE APPELLANT, AMO UNTING TO RS.38,371,306 WITHOUT APPRECIATING THE DETAILED SUB MISSION MADE BY THE APPELLANT THAT SUCH SOFTWARE EXPENSES D O NOT RESULT IN ANY ENDURING BENEFIT TO THE APPELLANT.' 27. THE BRIEF FACTS ARE THAT DURING THE ASSESSMENT YEAR 2007-08, THE ASSESSEE HAS INCURRED SOFTWARE EXPENSES TO THE EXTE NT OF APPROXIMATELY RS 7.7 CRORES, PERTAINING TO ANNUAL MAINTENANCE EXP ENSES AND PURCHASE OF SOFTWARE, WHICH HAVE BEEN DEBITED TO THE P&L ACC OUNT. FURTHER, THE COMPANY HAS ALSO CAPITALIZED IN ITS BOOKS CERTAIN S OFTWARE EXPENSES WHICH PROVIDE ENDURING BENEFIT TO THE COMPANY, AMOU NTING TO APPROXIMATELY RS 4 CRORES. DURING THE COURSE OF T HE ASSESSMENT IT(TP)A.1344/BANG/2011 PAGE - 28 PROCEEDINGS, THE LEARNED AO HAS CAPITALIZED SOFTWAR E EXPENSES DEBITED TO THE P&L ACCOUNT AMOUNTING TO RS 3.8 CRORES INCUR RED TOWARDS PURCHASE OF SOFTWARE (OUT OF THE TOTAL OF RS 7.7 CR ORES), ON THE BASIS THAT SINCE THE DEPRECIATION TABLE SPECIFIES 'COMPUTER SO FTWARE AS A SEPARATE CATEGORY, EXPENSES INCURRED ON PURCHASE OF SOFTWARE WOULD NEED TO BE CAPITALIZED AND DEPRECIATION BE CLAIMED. IN THIS C ONTEXT, THE APPELLANT WISHES TO SUBMIT THAT IN THE CURRENT COMMERCIAL ENV IRONMENT, SOFTWARE TECHNOLOGY IS UNDERGOING RAPID CHANGES. AS A RESULT , THE ORIGINAL SOFTWARE PURCHASED BECOMES REDUNDANT! OBSOLETE VERY QUICKLY AND THIS NECESSITATES RECURRING EXPENDITURE TO BE INCURRED B Y THE APPELLANT ON CONSTANT UPGRADATION OF THE SAME. THE APPELLANT ALS O WISHES TO HIGHLIGHT THAT THE COMPANY ITSELF CAPITALIZES OPERA TING SOFTWARE IN THE BOOKS ALONG WITH MAJOR APPLICATION SOFTWARE WHICH H AVE AN ENDURING BENEFIT, IN ACCORDANCE, WITH THE ACCOUNTING POLICY OF THE COMPANY. THUS, ONLY THOSE OFF-THE-SHELF/ APPLICATION SOFTWAR E ARE CHARGED OFF TO THE P&L A/C BY THE COMPANY, WHICH DO NOT PROVIDE AN Y ENDURING BENEFIT TO THE COMPANY. THIS TYPICALLY COMPRISES SO FTWARE LICENSES WHICH HAVE A SHORT LIFE. IN THIS REGARD, THE DELH I ITAT SPECIAL BENCH IN THE CASE OF AMWAY INDIA ENTERPRISES VS DCIT AND SQL STAR INTERNATIONAL LTD VS ACIT (111 LTD 112) HAS LAID OU T THE FOLLOWING PRINCIPLES IN DETERMINING THE ISSUE OF DEDUCTIBILIT Y OF SOFTWARE EXPENSES, WHICH WAS UPHELD BY THE DELHI HIGH IT(TP)A.1344/BANG/2011 PAGE - 29 COURT AS WELL (TS-639-HC-2011). EXTRACT OF THE CASE LAW IS PRODUCED BEFORE THE TRIBUNAL. IT HAS BEEN HELD BY THE DELHI HIGH COURT AS UNDER: HAVING REGARD TO THE FACT THAT SOFTWARE BECOMES OB SOLETE WITH TECHNOLOGICAL INNOVATION AND ADVANCEMENT WITHIN A S HORT SPAN OF TIME, IT CAN BE SAID THAT WHERE THE LIFE OF THE COMPUTER SOFTWARE IS SHORTER (SAY LESS THAN 2 YEARS), IT MAY BE TREATED AS REVENUE EXPENDITURE, ANY SOFTWARE HAVING ITS UTILIT Y TO ASSESSEE FOR A PERIOD BEYOND 2 YEARS CAN BE CONSIDERED AS AC CRUAL OF BENEFIT OF ENDURING NATURE. HOWEVER, THAT BY ITSELF WILL NOT MAKE EXPENDITURE INCURRED ON SOFTWARE AS CAPITAL IN NATU RE AND THE FUNCTIONAL TESTS AS DISCUSSED ABOVE WILL ALSO NEED TO BE SATISFIED THE DELHI HIGH COURT, IN THE CASE OF ASAHI INDIA SA FETY GLASS LTD (TS- 640-HC-2011) HELD THAT EXPENDITURE INCURRED FOR LIC ENCE FEE, ANNUAL TECHNICAL SUPPORT FEE, ETC DOES NOT RESULT IN CREAT ION OF NEW ASSET OR A NEW SOURCE OF INCOME FOR THE ASSESSEE AND HENCE, WO ULD BE REVENUE IN NATURE (EXTRACT OF THE CASE LAW IS ENCLOSED AT PAGE 530-533 OF THE PAPERBOOK II). THE ABOVE JUDGEMENT ALSO HELD THAT WHAT IS REQUIRED TO BE SEEN IS THE REAL INTENT AND PURPOSE OF THE EXPEN DITURE AND WHETHER THE EXPENDITURE RESULTS IN CREATION OF FIXED CAPITAL FO R THE ASSESSEE. HE EXPENDITURE WHICH IS INCURRED, WHICH ENABLES THE PR OFIT MAKING STRUCTURE TO WORK MORE EFFICIENTLY LEAVING THE SOURCE OF THE PROFIT MAKING STRUCTURE UNTOUCHED, WOULD BE AN EXPENSE IN THE NAT URE OF REVENUE EXPENDITURE. IT(TP)A.1344/BANG/2011 PAGE - 30 28. THE LEARNED AR FURTHER SUBMITTED THAT THE SOFTW ARE EXPENSES DEBITED TO THE P&L A/C ARE ATTRIBUTABLE TOWARDS PUR CHASE OF APPLICATION SOFTWARE AND SOFTWARE LICENSES WHICH PREDOMINANTLY HAVE A SHORT SHELF LIFE. THIS SOFTWARE IS USED TO CARRY OUT THE APPELL ANTS BUSINESS MORE EFFICIENTLY AND PROFITABLY AND IS NOT PART OF THE PROFIT-MAKING APPARATUS. THUS, IN ACCORDANCE WITH THE PRINCIPLES LAID OUT IN THE CASES OF AMWAY AND ASAHI GLASS, THE APPELLANT WISHES TO S UBMIT THAT THE SOFTWARE EXPENSES ARE REVENUE IN NATURE. THE LEARN ED AR PLACED RELIANCE ON CERTAIN OTHER CASE LAWS WHICH HAVE UPHE LD THE ABOVE PRINCIPLES, AS UNDER : RAYCHEM RPG LTD - BOMBAY HIGH COURT (ITA NO 4176 OF 2009) CIT VS. SOUTHERN ROADWAYS LTD - MADRAS HIGH COURT (304 ITR 84) HE ALSO TO PLACED RELIANCE ON THE DELHI HIGH COURT DECISION IN THE CASE OF DENSO INDIA PRIVATE LIMITED (APPEAL NO 1011/2007 , 16/2008, 107/2009, 293, 839 & 840 OF 2010), WHEREIN HC OBSERVED AS UNDER : THERE IS A CLEAR FALLACY IN THE AFORESAID LINE OF ARGUMENT ADVANCED BY THE LEARNED COUNSEL OF THE REVENUE. THE ATTEMPT IS TO COVER THE PAYMENT UNDER SECTION 32 OF THE ACT AND T HEN TO ASSERT THAT IT QUALIFIES FOR DEPRECIATION. THERE FROM, THE LEARNED COUNSEL WANTS TO DRAW THE INFERENCE THAT THE PAYMENT IS CAP ITAL IN NATURE AND NOT REVENUE. THIS KIND OF REVERSE ENGINEERING IN OUR VIEW IS NOT PERMISSIBLE. AS PER THE SCHEME OF THE ACT, WE H AVE TO FIRST DETERMINE THE NATURE OF EXPENDITURE, NAMELY, WHETHE R IT IS OF IT(TP)A.1344/BANG/2011 PAGE - 31 REVENUE IN NATURE OR WHETHER THE EXPENDITURE IS CAP ITAL IN NATURE. THE QUESTION OF DEPRECIATION WOULD ARISE ONLY IF IT IS FIRST DETERMINED AND ESTABLISHED THAT THE EXPENDITURE IS CAPITAL IN NATURE. FURTHER, RELIANCE WAS PLACED ON THE FOLLOWING JUDG EMENTS WHICH WERE RENDERED POST THE INCLUSION OF SOFTWARE AS A CATEGO RY IN THE DEPRECIATION TABLE IE AY 2003-04: JURISDICTIONAL JUDGEMENTS: TOYOTA KIRLOSKAR MOTORS PVT. LTD. KARNATAKA HIG H COURT (ITA NO.174/ 2009 DATED 23RD MARCH, 2011) ROBERT BOSCH ENGINEERING AND BUSINESS SOLUTIONS LTD BANGALORE TRIBUNAL (ITA NO 980/ BANG/ 2008 AY 2 003-04) NON-JURISDICTIONAL JUDGEMENTS: SPICE COMMUNICATIONS LIMITED DELHI TRIBUNAL (IT AS NOS. 2073, 2074 AND 2739/ DEL/ 2008 - AY 2003-04, 2004-05 AND 2005-06) SPICE ELASTIC PRIVATE LIMITED MUMBAI TRIBUNAL (ITA NO 5161/ MUM/ 2008 AY 2004-05) 29. PER CONTRA, THE LEARNED DR SUBMITTED THAT THE S OFTWARE CAN BE AN OPERATING SOFTWARE OR AN APPLICATION SOFTWARE. SOM ETIMES, THE SOFTWARE IS A PART AND PARCEL OF HARDWARE LIKE CAR AND THE CORROBORATOR. AT BEST, THE MATTER CAN GO BACK TO THE ASSESSING OF FICER TO BIFURCATE THE SOFTWARE EXPENSES AS CAPITAL AND REVENUE. IT(TP)A.1344/BANG/2011 PAGE - 32 30. IN HIS REJOINDER, THE LEARNED CHARTERED ACCOUNT ANT SUBMITTED THAT HE HAS NO OBJECTION IF THE TRIBUNAL IS RESTORING TH IS ISSUE BACK TO THE ASSESSING OFFICER TO REAPPRAISE THIS ISSUE WITH RES PECT TO THE EXPENDITURE OF RS.10 LAKHS AND ABOVE. 31. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDE RED THE FACTS AND MATERIALS ON RECORD. WE DEEM IT FIT AND PROPER TO RESTORE THIS ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER TO REAPPRAISE THE EXPENDITURE IN RESPECT OF RS.10 LAKHS AND ABOVE AND DECIDE THE ISSUE IN ACCORDANCE WITH THE DECISIONS OF THE DELHI SPECI AL BENCH IN AMWAY INDIA ENTERPRISES (SUPRA) AND THE DECISION. OF THE KARNATAKA HIGH COURT IN TOYOTA KIRLOSKAR MOTORS P. LTD., (SUP RA), AFTER GIVING EFFECTIVE OPPORTUNITY OF HEARING TO THE ASSESSEE. THUS, THIS ISSUE IS ALLOWED FOR STATISTICAL PURPOSE. IT IS ORDERED ACCORDINGLY. 32. NOW, LET US TURN TO THE GROUND RELATING TO DEDU CTION U/S.80 JJAA OF THE ACT, WHICH READS AS UNDER : 'THE LEARNED DCIT HAS ERRED IN LAW AND IN FACTS BY DISALLOWING THE DEDUCTION CLAIMED BY THE APPELLANT UNDER SECTIO N 80JJAA OF THE ACT AMOUNTING TO RS.110,995,555, WITHOUT APPREC IATING THE DETAILED FACTUAL AND TECHNICAL SUBMISSIONS MADE BY THE APPELLANT IN SUPPORT OF ITS CLAIM.' IT(TP)A.1344/BANG/2011 PAGE - 33 33. THE BRIEF FACTS ARE THAT WHILE FRAMING THE ASSE SSMENT U/S.143(3) R.W.S.144C OF THE ACT, THE ASSESSING OFFICER NOTED THAT DURING THE YEAR, THE ASSESSEE CLAIMED AN AMOUNTING OF RS.11,09 ,55,555/- AS DEDUCTION U/S.80JJAA OF THE IT ACT. THE ASSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSESSEE THE DEDUCTION U/S.80JJAA, AS THE ASSESSEE COULD NOT SUBSTANTIATE THE CLAIM, PARTICUL ARLY WITH RESPECT TO THE DEFINITION OF 'WORKMAN ' AS GIVEN IN THE INDUST RIAL DISPUTES ACT. THE ASSESSEE IS AGGRIEVED AND IS IN APPEAL WITH THI S ISSUE BEFORE US. 34. AT THE TIME OF HEARING, THE LEARNED CHARTERED A CCOUNTANT SUBMITTED AS UNDER : THE APPELLANT IS A COMPANY ENGAGED IN THE DEVELOPME NT OF COMPUTER SOFTWARE. WE WISH TO HUMBLY SUBMIT THAT TH E APPELLANT BELIEVES THAT SOFTWARE ENGINEERS QUALIFY AS WORKMEN AS ENVISAGED UNDER SECTION 8OJJAA OF THE ACT. ACCORDINGLY, DURING THE SUBJECT AY 2007-08, THE APP ELLANT HAS CLAIMED A DEDUCTION UNDER SECTION 8OJJAA OF THE ACT AMOUNTING TO RS 11,09,95,555, IN RESPECT OF SALARY PAID TO THE NEW SOFTWARE ENGINEERS AND TECHNICAL PERSONNEL EMPL OYED DURING THE YEAR. HOWEVER, DURING THE ASSESSMENT PROCEEDINGS, THE LEA RNED AC HAS DISALLOWED THE ENTIRE DEDUCTION CLAIMED BY THE APPELLANT ON THE BASIS THAT THE EMPLOYEES OF THE COMPANY DO N OT QUALIFY AS WORKMEN FOR THE PURPOSES OF SECTION 8O JJAA. AS PER SECTION 8OJJAA, THE DEDUCTION IS AVAILABLE P ROVIDED THE FOLLOWING CONDITIONS ARE FULFILLED: THE ELIGIBLE ASSESSEE SHOULD BE AN INDIAN COMPANY; IT(TP)A.1344/BANG/2011 PAGE - 34 THE GROSS TOTAL INCOME OF THE ASSESSEE SHOULD INCLU DE PROFITS AND GAINS DERIVED FROM AN INDUSTRIAL UNDERTAKING EN GAGED IN THE MANUFACTURE OR PRODUCTION OF AN ARTICLE OR THIN G; THE ELIGIBLE UNDERTAKING SHOULD NOT HAVE BEEN FORME D AS A RESULT OF SPLITTING-UP OR RECONSTRUCTION OF A BUSIN ESS ALREADY IN EXISTENCE; THE ELIGIBLE UNDERTAKING SHOULD EMPLOY AT LEAST 100 WORKMEN. FURTHER, THE ADDITIONAL EMPLOYEES SHOULD B E IN EXCESS OF 10% OF THE WORKFORCE AS ON THE LAST DAY O F THE IMMEDIATELY PRECEDING PREVIOUS YEAR; THE REGULAR WORKMAN SHOULD O NOT BE A CASUAL WORKMAN O NOT BE A WORKER EMPLOYED THROUGH CONTRACT LABOUR O BE EMPLOYED FOR AT LEAST 300 DAYS DURING THE PREVIO US YEAR AN AUDIT REPORT SHOULD BE FURNISHED ALONG WITH THE RETURN OF INCOME. IF THE ABOVE CONDITIONS ARE FULFILLED, THE ELIGIBLE ASSESSEE WOULD BE ABLE TO CLAIM 30% OF THE ADDITIONAL WAGES AS A DEDUCTION, WHICH WOULD BE OVER AND ABOVE THE EXPENDITURE ON WA GES WHICH IS OTHERWISE ALLOWABLE AS BUSINESS EXPENDITURE TO T HE COMPANY. FURTHER, THE DEDUCTION WOULD BE ALLOWABLE FOR THREE YEARS, INCLUDING THE AY RELEVANT TO THE PREVIOUS YEAR IN W HICH SUCH EMPLOYMENT IS PROVIDED BY THE ASSESSEE COMPANY. IN THIS CONTEXT, IT WOULD BE RELEVANT TO EXAMINE TH E DEFINITION OF WORKMEN, AND WHETHER THE EMPLOYEES OF THE COMPAN Y WITH RESPECT TO WHOM THE SAID DEDUCTION HAS BEEN CLAIMED QUALIFY AS WORKMEN UNDER SECTION 8OJJAA. WORKMAN THE BASIS FOR DEDUCTION UNDER SECTION 8OJJAA IS THE SALARY PAID TO NEW REGULAR WORKMAN. THE SECTION CONTAINS THE DEFINITION OF WORKMAN, AND IS DEFINED TO HAVE THE SAME MEANING ASSIGNED TO IT IN CLAUSE (5) OF SECTION (2) OF THE INDUSTRIAL DISPUTES ACT 1947. IT(TP)A.1344/BANG/2011 PAGE - 35 THE TERM WORKMAN IS DEFINED IN THE INDUSTRIAL DIS PUTES ACT AS UNDER: WORKMAN MEANS ANY PERSON (INCLUDING AN APPRENTICE ) EMPLOYED IN ANY INDUSTRY TO DO ANY MANUAL, UNSKILLE D, SKILLED, TECHNICAL, OPERATIONAL, CLERICAL OR SUPERVISORY WORK FOR HIRE OR REWARD, WHET HER THE TERMS OF EMPLOYMENT BE EXPR ESS OR IMPLIED, AND FOR THE PURPOSES OF ANY PROCEEDING UND ER THIS ACT IN RELATION TO AN INDUSTRIAL DISPUTE, INCLUDES ANY SUCH PERSON WHO HAS BEEN DISMISSED, DISCHARGED OR RETREN CHED IN CONNECTION WITH OR AS A CONSEQUENCE OF, THAT DISPUT E, OR WHOSE DISMISSAL, DISCHARGE OR RETRENCHMENT HAS LED TO THAT DISPUTE, BUT DOES NOT INCLUDE ANY SUCH PERSON (I) WHO IS SUBJECT TO THE AIR FORCE ACT, 1950 (45 O F 1950), OR THE ARMY ACT, 1956 (56 OF 1950), OR THE NAVY ACT, 1 957 (62 OF 1957); OR (II) WHO IS EMPLOYED IN THE POLICE SERVICE OR AS AN OFFICER OR OTHER EMPLOYEE OF A PRISON; OR (III) WHO IS EMPLOYED MAINLY IN A MANAGERIAL OR ADMINISTRATIVE CAPACITY; OR (IV) WHO, BEING EMPLOYED IN A SUPERVISORY CAPACITY , DRAWS WAGES EXCEEDING ONE THOUSAND SIX HUNDRED RUPEES PER MENSEM OR EXERCISES EITHER BY THE NATURE OF THE DUT IES ATTACHED TO THE OFFICE OR BY REASON OF THE POWERS V ESTED IN HIM, FUNCTIONS MAINLY OF A MANAGERIAL NATURE. THUS, THE DEFINITION OF WORKMAN IS VERY COMPREHEN SIVE. THE DEFINITION CLEARLY SPECIFIES THE PERSONS INCLUDED T HEREIN AND THOSE EXCLUDED. FURTHER, THE MAIN PART OF THE DEFIN ITION REFERS TO VARIOUS TYPES OF WORKERS AND INCLUDES THOSE ENGA GED IN SKILLED AND TECHNICAL WORK AS WELL. THE APPELLANT WISHES TO SUBMIT THAT THE DEDUCTION I S CLAIMED IN RESPECT OF THE SALARY PAID TO SOFTWARE ENGINEERS WHO CARRY OUT SOFTWARE DEVELOPMENT WORK. SINCE THEY ARE EMPLO YED TO CARRY OUT WORK IN A TECHNICAL CAPACITY, THEY WOULD FALL WITHIN THE PURVIEW OF THE DEFINITION OF WORKMEN. FURTHER, THE APPELLANT ITSELF EXCLUDES THOSE EMPLOYEES WHO ARE PREDOMINANTLY ENGAGED IN CARRYING OUT OF ADMINISTRA TIVE, MANAGERIAL AND SUPERVISORY FUNCTIONS AND NO DEDUCTI ON HAS BEEN CLAIMED IN RELATION TO REMUNERATION PAID TO SU CH WORKMEN . IT(TP)A.1344/BANG/2011 PAGE - 36 TECHNICAL THE WORD TECHNICAL HAS DIFFERENT MEANINGS DEPENDI NG ON THE CONTEXT IN WHICH IT IS USED. THE ETYMOLOGICAL M EANING OF THE WORD TECHNICAL, WHICH ACCORDING TO OXFORD DIC TIONARY IS: OF OR PERTAINING TO THE MECHANICAL ARTS AND AP PLIED SCIENCE GENERALLY, AS IN TECHNICAL EDUCATION, OR IN TECHNICAL SCHOOL. WHETHER A WORK IS TECHNICAL OR NOT DEPENDS UPON THE SPECIAL MENTAL TRAINING OR SCIENTIFIC OR TECHNICAL KNOWLEDGE OF A PERSON. THE BROAD TEST IS THAT IF A PERSON IS EMPLOYED BECAUSE HE POSSESSES SUCH FACULTIES AND THEY ENABLE HIM TO PRODUCE SOMETHING AS A CREATION OF HIS OWN, HE WOUL D BE EMPLOYED ON TECHNICAL WORK EVEN THOUGH IN CARRYIN G OUT THAT WORK, HE MAY HAVE TO GO THROUGH A LOT OF MANUA L LABOUR OR ROUTINE/ REPETITIVE WORK. IN THE CASE OF A PERSON EMPLOYED IN A TECHNICAL CAP ACITY, THE APPLICATION OF KNOWLEDGE OF A PARTICULAR CRAFT OR W ORK IS THE DISTINGUISHING FEATURE. IT IS NOT NECESSARY THAT TH E WORK THAT SUCH A PERSON DOES MUST BE INVENTIVE, BUT IT MUST N ECESSARILY BE A WORK THE CONTOURS OF WHICH ARE NOT PRE-DETERMI NED BEFORE THAT WORK IS ACTUALLY PERFORMED BY THE PERSO N EMPLOYED IN A TECHNICAL CAPACITY. THIS PRINCIPLE WA S BROUGHT OUT BY THE MUMBAI HIGH COURT IN THE CASE OF BOMBAY DYEING AND MANUFACTURING CO LTD VS RA BIDOO(Q) [1991] I LL J 98, 101-2 (EXTRACT OF THE CASE LAW ENCLOSED AT PAGE 549 -550 OF THE PAPERBOOK II). WE ALSO WISH TO PLACE RELIANCE ON THE GUIDING PRINC IPLES BROUGHT OUT IN THE THE LAW OF INDUSTRIAL DISPUTES BY 0 P MALHOTRA ON THE INDUSTRIAL DISPUTES ACT, 1947. WHIL E ANALYSING WHICH PERSONS ARE CONSIDERED TO BE EMPLOYED IN A TE CHNICAL CAPACITY, IT HAS BEEN CONCLUDED THAT PERSONS DOING TECHNICAL WORK SUCH AS DRAFTSMAN, ENGINEERS, ASSISTANT ENGINEERS, FOREMEN, GLASS TECHNOLOGIST, MEDICAL OFFICERS, COMP OUNDERS AND DOCTORS, ETC WOULD THEREFORE FALL WITHIN THE DEFINI TION OF WORKMEN. EXCLUSION FROM THE DEFINITION OF WORKMAN IT(TP)A.1344/BANG/2011 PAGE - 37 AS MENTIONED ABOVE CLAUSE (IV) OF SECTION 2(S) OF T HE INDUSTRIAL DISPUTES ACT, 1947 REQUIRES THE FOLLOWING CONDITION S TO BE FULFILLED FOR A PERSON TO BE EXCLUDED FROM THE DEFI NITION OF A WORKMAN, NAMELY: (A) HE HAS TO BE EMPLOYED MAINLY IN A MANAGERIAL OR ADMINISTRATIVE CAPACITY; OR (B) HE HAS TO BE EMPLOYED IN A SUPERVISORY CAPACITY SHOULD BE DRAWING WAGES EXCEEDING ONE THOUSAND SIX HUNDRED RU PEES PER MENSEM BASED ON THE ABOVE EXCLUSION CONDITIONS, THE APPELL ANT WISHES TO SUBMIT THAT IT EXCLUDES EMPLOYEES ENGAGED IN A M ANAGERIAL OR ADMINISTRATIVE CAPACITY, OR THOSE ENGAGED IN A S UPERVISORY CAPACITY AND DRAWING WAGES EXCEEDING RS 1,600 PER M ONTH. FURTHER, WE WISH TO EMPHASIZE THAT THE MERE FACT TH AT A PERSON DRAWS WAGES EXCEEDING RS 1,600 PER MONTH DOES NOT B Y ITSELF DISENTITLE THAT PERSON FROM BEING REGARDED AS A WO RKMAN. THE PERSON MUST BE NECESSARILY ALSO EMPLOYED IN A SUPE RVISORY CAPACITY. MERE PERFORMANCE OF SOME SUPERVISORY DUTIES WOULD N OT RESULT IN THE EXCLUSION OF THE EMPLOYEE FROM THE DEFINITIO N OF WORKMAN. FURTHER, IN DETERMINING WHETHER A PERSON IS EMPLOYE D IN A SUPERVISORY CAPACITY OR OTHERWISE, THE MERE DESIGNA TION IS NOT DECISIVE OF THE NATURE OF EMPLOYMENT. THE DETERMINATION OF WHETHER AN EMPLOYEE QUALIFIES AS A WORKMAN SHOULD BE WITH REFERENCE TO HIS PRINCIPAL NATURE OF DUTIES AND FUNCTIONS, WHICH IS REQUIRED TO BE DETER MINED HAVING REGARD TO THE CIRCUMSTANCES IN EACH CASE. IN THIS C ONTEXT, WE WISH TO BRING TO YOUR NOTICE THE CASE OF SK MAINI V CARONA SAHU LTD (1994) [2 LU 1153], WHEREIN THE SUPREME CO URT OBSERVED THE FOLLOWING (EXTRACT OF THE CASELAW ENCL OSED AT PAGE 551-552 OF THE PAPERBOOK II): . . . THE DESIGNATION OF AN EMPLOYEE IS NOT OF MUC H IMPORTANCE AND WHAT IS IMPORTANT IS THE NATURE OF DUTIES BEING PERFORMED BY HIM. THE DETERMINATIVE FACTOR IS THE MAIN DUTIES OF THE CONCERNED EMPLOYEE AND NOT SOME WORK INCIDENTALLY D ONE. IN OTHER WORDS, WHAT IS IN SUBSTANCE, THE WORK WHICH E MPLOYEE DOES OR WHAT IS IN SUBSTANCE HE IS EMPLOYED TO DO. VIEWED FROM IT(TP)A.1344/BANG/2011 PAGE - 38 THIS ANGLE, THE EMPLOYEE IS MAINLY DOING SUPEIVISOI Y WORK BUT INCIDENTALLY OR FOR A FRACTION OF TIME, DOES ALSO S OME MANUAL OR CLERICAL WORK, THE EMPLOYEE SHOULD BE HELD TO BE DO ING SUPERVISION WORK. CONVERSELY, IF THE MAIN WORK IS O F MANUAL, CLERICAL OR TECHNICAL NATURE, THE MERE FACT THAT SO ME SUPERVISORY WORK OR OTHER WORK IS ALSO DONE BY THE EMPLOYEE INC IDENTALLY OR ONLY A SMALL FRACTION OF WORKING TIME IS DEVOTED TO SOME SUPERVISORY WORK, THE EMPLOYEE WILL COME WITHIN THE PURVIEW OF THE WORKMAN AS DEFINED IN SECTION 2(S) OF THE IND USTRIAL DISPUTES ACT. THE SUPREME COURT IN THE CASE OF ANANDA BAZAR PATRI KA PVT LTD V ITS WORKMEN (1969) [2 LLJ 670-71] ALSO LAID OUT T HE FOLLOWING SIMILAR PRINCIPLE (EXTRACT OF THE CASE LA W ENCLOSED AT PAGE 553- 554 OF THE PAPERBOOK II): THE QUESTION, WHETHER A PERSON IS EMPLOYED IN A SU PERVISORY CAPACITY OR ON CLERICAL WORK, IN OUR OPINION, DEPEN DS UPON WHETHER THE MAIN AND PRINCIPAL DUTIES CARRIED OUT B Y HIM ARE THOSE OF A SUPERVISORY CHARACTER, OR OF A NATURE CA RRIED OUT BY A CLERK. IF A PERSON IS MAINLY DOING SUPERVISORY WORK , BUT, INCIDENTALLY OR FOR A FRACTION OF THE TIME, ALSO DO ES SOME CLERICAL WORK, IT WOULD HAVE TO BE HELD THAT HE IS EMPLOYED IN SUPERVISORY CAPACITY; AND, CONVERSELY, IF THE MAIN WORK DONE IS OF CLERICAL NATURE THE MERE FACT THAT SOME SUPERVIS ORY DUTIES ARE ALSO CARRIED OUT INCIDENTALLY OR AS A SMALL FRACTIO N OF THE WORK DONE BY HIM WILL NOT CONVERT HIS EMPLOYMENT AS A CL ERK INTO ONE IN SUPERVISORY CAPACITY. THE ABOVE PRINCIPLES HAVE ALSO BEEN BROUGHT OUT IN THE FOLLOWING JUDICIAL PRECEDENTS, ON WHICH WE WISH TO PLACE RELIANCE: ARKAL GOVIND RAJ RAO V CIBA GEIGY OF INDIA LTD, BOM BAY (1985) SUPREME COURT [2 LU 401]) ALL INDIA RESERVE BANK EMPLOYEES ASSN V RESERVE BA NK OF INDIA (1965) SUPREME COURT [2 LU 175, 188] WE ALSO WISH TO HIGHLIGHT THE JUDGEMENT OF THE HON BLE BANGALORE TRIBUNAL IN THE CASE OF TEXAS INSTRUMENTS (INDIA) PVT LTD (115 TTJ 976), WHICH IS ENGAGED IN THE DEVELOPM ENT OF COMPUTER SOFTWARE. THE HONBLE TRIBUNAL HELD THAT T HE EMPLOYEES OF THE COMPANY WERE WORKMEN FOR THE PURP OSES OF IT(TP)A.1344/BANG/2011 PAGE - 39 SECTION 8OJJAA AND THE COMPANY WHICH WAS ENGAGED IN THE DEVELOPMENT OF COMPUTER SOFTWARE WAS ELIGIBLE FOR D EDUCTION UNDER SECTION 80JJA (COPY OF THE CASE LAW IS ENCLOS ED AT PAGE 540-548 OF THE PAPERBOOK II). IT WOULD BE PERTINENT TO NOTE THE OBJECTIVES WITH W HICH SECTION 8OJJAA WAS INTRODUCED INTO THE TAX LEGISLATION. SEC TION 80JJAA WAS INTRODUCED INTO THE BY THE FINANCE (NO 2 ) ACT, 1998, TO BE OPERATIVE FROM APRIL 1, 1999. THE FINAN CE MINISTERS SPEECH AS WELL AS THE MEMORANDUM EXPLAIN ING THE PROVISIONS OF THE FINANCE BILL REFER TO DEDUCTION B EING INTRODUCED TO ENCOURAGE EMPLOYERS TO GENERATE MORE EMPLOYMENT OPPORTUNITIES (EXTRACT ENCLOSED FOR YOUR REFERENCE AT PAGE 559-560 OF THE PAPERBOOK II). THE OBJECTIVE OF INTRODUCING SECTION 8OJJAA IS ALSO EXPLAINED BY CIR CULAR NO 772 DATED DECEMBER 23, 1998 (EXTRACT OF THE CIRCULA R ENCLOSED FOR YOUR REFERENCE ON PAGE 561 OF THE PAPERBOOK II) . BY VIRTUE OF INTRODUCTION OF THIS SECTION, A FISCAL INCENTIVE WAS INTENDED TO BE OFFERED TO EMPLOYERS GIVING EMPLOYMENT TO A S PECIFIED MINIMUM NUMBER OF EMPLOYEES. HENCE, THE INTERPRETAT ION OF THE SECTION SHOULD BE IN A MANNER WHICH PROMOTES TH E OBJECTIVE SOUGHT TO BE ACHIEVED AND NOT FRUSTRATE I T. FURTHER, THE APPELLANT WISHES TO HUMBLY SUBMIT THAT BEING A BENEFICIAL PROVISION, IT MUST BE LIBERALLY CONSTRUE D. THESE WERE THE PRINCIPLES BROUGHT OUT BY THE SUPREME COURT WHI LE DEALING WITH DEDUCTION UNDER SECTION 80J IN THE CASE OF BAJ AJ TEMPO VS CIT (196 ITR 188). HENCE, THE SECTION WOULD NEED TO BE INTERPRETED IN A PURPOSIVE MANNER. IN VIEW OF ALL THE PRINCIPLES ENUMERATED ABOVE, WE WISH TO HUMBLY SUBMIT THAT A SOFTWARE ENGINEER WOULD ALSO B E COVERED BY THE DEFINITION OF THE TERM WORKMAN, AND THE SAL ARY DRAWN BY HIM WOULD ERGO QUALIFY FOR DEDUCTION UNDER SECTION 80JJAA. FURTHER, SINCE THE APPELLANT HAS SATISFIED THE COND ITIONS FOR BEING ELIGIBLE TO CLAIM THE DEDUCTION UNDER SECTION 80JJAA OF THE ACT AND HAS DEMONSTRATED THE SAME IN DETAIL DUR ING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS, WE PRAY THAT THE DEDUCTION NOT BE DISALLOWED IN THE HANDS OF THE APP ELLANT. 35. PER CONTRA, THE LEARNED DR REITERATED THE CONTE NTS OF THE ASSESSMENT ORDER AS HIS SUBMISSIONS. HE ALSO PLEAD ED THAT THIS MATTER MAY BE SENT BACK TO THE ASSESSING OFFICER FOR PASSI NG A DETAILED ORDER IT(TP)A.1344/BANG/2011 PAGE - 40 AS MANY OF THE FACTS ARE TO BE REFERRED TO THE ASSE SSING OFFICER IN THE LIGHT OF THE SUBMISSIONS MADE BY THE LEARNED AR. 36. WE ALSO FIND THAT THE TRIBUNAL IN THE CASE OF T EXAS INSTRUMENTS P. LTD., IN ITA NO.1/BANG/2011, DATED.07.09.2012, FOR THE ASSESSMENT YEAR 2005-06, AT PARA NO.10.7, HAS REMITTED THE MAT TER BACK TO THE COMMISSIONER OF INCOME-TAX (APPEALS) FOR FRESH CONS IDERATION. HENCE, WE ARE INCLINED TO RESTORE THIS ISSUE BACK T O THE FILE OF THE ASSESSING OFFICER WITH A DIRECTION TO REDECIDE THE ISSUE BE PASSING A SPEAKING ORDER, OF COURSE, AFTER GIVING EFFECTIVE O PPORTUNITY OF HEARING TO THE ASSESSEE. THE ASSESSEE IS ALSO HEREBY DIREC TED TO COOPERATE WITH THE ASSESSING OFFICER BY PRODUCING THE DETAILS AS C ALLED FOR BY HIM. IT IS ORDERED ACCORDINGLY. 37. THE ISSUE RAISED BY THE ASSESSEE IN RESPECT OF LEVY OF INTEREST U/S.234D IS CONSEQUENTIAL IN NATURE. WE DIRECT THE ASSESSING OFFICER TO GIVE CONSEQUENTIAL RELIEF. 38. THE LAST ISSUE TAKEN UP BY THE ASSESSEE IS WITH REGARD TO INITIATION OF PENALTY PROCEEDINGS U/S.271(1)(C) OF THE ACT, WHICH IS PREMATURE IN NATURE, SINCE IT IS ONLY INITIATION OF PENALTY. THE ASSESSEE CAN COME ON APPEAL ONLY AFTER LEVY OF PENALTY. IT(TP)A.1344/BANG/2011 PAGE - 41 39. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 28.03.2013. SD/- SD/- (GEORGE GEORGE K) (N. BARATHVAJA SANKAR) JUDICIAL MEMBER VICE PRESIDENT IT(TP)A.1344/BANG/2011 PAGE - 42