M/s Maxim India Intergrated Circuit Design Pvt Ltd , Bangalore V. The Deputy Commissioner of Income TAx Circle-4(1)(2), Bangalore

ITA 1573/BANG/2017

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 3900 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 3 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-11-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 30-09-2020
• Assessment Year: 2013-2014
• Appeal Filed On: 19-07-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Depreciation; Transfer pricing; Rectification of order; International transaction; Additional depreciation; Question of law; Working capital adjustments; Non-deduction of tax; Bad and doubtful debts; Set aside
• Section: 143(3); 10AA; 32(1)(iia); 10B; 195; 144C; 192; 13; 22; 154

Judgement Text

IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH: BANGALORE BEFORE SHRI B. R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A NO.1573/BANG/2017 ASSESSMENT YEAR: 2013-14 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD. 4 TH FLOOR TOWER B, COMMERCIO @ MANTRI, SURVEY NO.51/2, 51/3, 51/4, DEVARABESANAHALLI KARIYAMMANA AGRAHARA VARTHURHOBLI BENGALURU-560 103 PAN NO :AACCM9437E VS. DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-4(1)(2) BENGALURU APPELLANT RESPONDENT APPELLANT BY : SHRI PADAMCHAND KHINCHA, A.R. RESPONDENT BY : SHRI GOLLAPINNI MALLIKARJUNA, D.R. DATE OF HEARING : 30.09.2020 DATE OF PRONOUNCEMENT : 02.11.2020 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: THE ASSESSEE HAS FILED THIS APPEAL CHALLENGING THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER FOR THE ASSES SMENT YEAR 2013- 14 U/S 143(3) R.W.S. 144C OF THE INCOME-TAX ACT,196 1 ['THE ACT' FOR SHORT] IN PURSUANCE OF DIRECTIONS ISSUED BY LD DISP UTE RESOLUTION PANEL (DRP). 2. GROUND NO.1 IS GENERAL IN NATURE. REMAINING GR OUNDS RELATE TO THE FOLLOWING ISSUES:- IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 2 OF 29 (A) DISALLOWANCE OF ADDITIONAL DEPRECIATION (GROUN D NO.2) (B) DISALLOWANCE MADE U/S 40(A)(I) OF THE ACT (GRO UND NO.3) (C) TRANSFER PRICING ADJUSTMENT MADE (GROUND NO.4 TO 15) (D) DISALLOWANCE OF MAT CREDIT (GROUND NO.16) (E) CHARGING OF INTEREST U/S 234C OF THE ACT (GRO UND NO.17) 3. THE ASSESSEE BELONGS TO MAXIM GROUP. IT UND ERTAKES DESIGN AND DEVELOPMENT OF INTEGRATED CIRCUITS AND SOFTWARE AS PER BUSINESS PLANS OF MAXIM GROUP. FOLLOWING ARE THE TASKS INVO LVED IN PROJECTS:- REQUIREMENT GATHERING & MARKET DEFINITION DEVELOP USER & DESIGN SPECIFICATIONS OF A PRODUCT BASED UPON MARKET DEFINITION CIRCUIT DESIGN (INVOLVES ANALOG, LOGIC, RTL, ARCHIT ECTURE LEVEL DESIGN, DFT ETC.) VERIFICATION OF CIRCUIT DESIGN DESIGN LAYOUT AND ITS VERIFICATION TESTING AND CHARACTERIZATION OF IC PRODUCT SAMPLES CUSTOMER SUPPORT MACRO MODELS OF IC PRODUCTS, REFERENCE DESIGN BOARDS FOR APPLICATION DEVELOPMENT SOFTWARE DEVELOPMENT & TESTING PROJECT MANAGEMENT PROJECT DOCUMENTATION PRODUCT SUPPORT (FOR BETTER PRODUCTION 4. WE SHALL FIRST TAKE UP THE TRANSFER PRICING ADJUSTMENT ISSUE. THE ASSESSEE HAS TWO SEGMENTS, VIZ., DESIGN/DEVELOP MENT OF SOFTWARE AND ITES SERVICES. BESIDES THE ABOVE, THE ASSESSEE HAS ALSO ENTERED INTO SOME OTHER INTERNATIONAL TRANSACT IONS, VIZ., INTEREST PAID ON BORROWINGS, PURCHASE OF TANGIBLE P ROPERTY, IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 3 OF 29 REIMBURSEMENTS RECEIVABLE FROM AE AND REIMBURSEMENT S PAYABLE TO AE. 5. THE TPO HAS MADE TRANSFER PRICING ADJUSTMENT IN RESPECT OF INCOME FROM PROVISION OF DESIGN/DEVELOPMENT OF SOFT WARE SERVICES (REFERRED AS SOFTWARE DEVELOPMENT SERVICES). ALL OTHER INTERNATIONAL TRANSACTIONS ARE ACCEPTED TO BE AT AR MS LENGTH. THE TURNOVER OF THE ASSESSEE COMPANY FROM PROVISION OF DESIGN/DEVELOPMENT OF SOFTWARE DURING THE YEAR UNDE R CONSIDERATION WAS RS.40,28,31,048/-. THE ASSESSEE ADOPTED TRANSACTIONAL NET MARGIN METHOD AS MOST APPROPRIATE METHOD. IT ADOPTED OPERATING PROFIT/OPERATING COST (OP/OC) AS PROFIT LEVEL INDICATOR (PLI). AS PER THE SEGMENTAL INFORMATION PROVIDED BY THE ASSESSEE FOR SOFTWARE DEVELOPMENT SERVICES, THE P LI OF THE ASSESSEE WAS WORKED OUT AT 10.71%. THE AVERAGE MAR GIN OF THE COMPARABLE COMPANIES WAS 9.97%. ACCORDINGLY, THE A SSESSEE SUBMITTED THAT ITS INTERNATIONAL TRANSACTIONS IN RE SPECT OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO ITS AES ARE AT ARMS LENGTH. 6. THE TPO, HOWEVER, REJECTED THE T.P STUDY OF THE ASSESSEE AND FINALLY SELECTED FOLLOWING SET OF SEVEN COMPARABLE COMPANIES: - SL.NO. NAME OF THE COMPANY OPERATING MARGIN ON COST WORKING CAPITAL ADJUSTED MARG IN 1 CG-VAK SOFTWARE & EXPORTS LIMITED (SEGMENT) 20.54% 19.32% 2 ICRA TECHNO ANALYTICS LTD. 17.10% 12.42% 3 LARSEN & TOUBRO INFOTECH LTD. 26.06% 24.74% 4 MINDTREE LTD. (SEG) 18.19% 16.73% 5 PERSISTENT SYSTEMS LTD. 28.27% 26.09% 6 R.S. SOFTWARE (INDIA) LTD. 17.41% 17.69% 7 TECH MAHINDRA LTD. (SEGMENTAL) 18.72% 17.39% ARITHMETIC MEAN 20.90% 19.20% IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 4 OF 29 THE AVERAGE MARGIN OF COMPARABLE COMPANIES WORKED O UT TO 20.90%. THE TPO GRANTED WORKING CAPITAL ADJUSTMENT OF 1.70% AND ACCORDINGLY ARRIVED AT ADJUSTED MARGIN OF 19.20%. ACCORDINGLY, HE MADE TRANSFER PRICING ADJUSTMENT OF RS.2,40,04,279/ -. ACCORDINGLY, THE AO PASSED THE DRAFT ASSESSMENT ORDER BY MAKING ADDITION OF TRANSFER PRICING ADJUSTMENT REFERRED ABOVE. 7. THE ASSESSEE CHALLENGED THE DRAFT ASSESSMENT OR DER PASSED BY THE AO BY FILING OBJECTIONS BEFORE LD DRP. THE NET EFFECT OF DIRECTIONS SO GIVEN BY LD DRP ARE SUMMARIZED BELOW: - 1. THE DRP HAS EXCLUDED ICRA TECHNO ANALYTICS LTD. AS A COMPARABLE (PG 40 OF APPEAL PAPERS) 2. THE DRP HAS HELD THAT WORKING CAPITAL ADJUSTMENT SH OULD NOT BE GIVEN (PG 51 OF APPEAL PAPERS) 3. THE DRP HAS HELD THAT FOREIGN EXCHANGE GAIN OR LOSS IS OPERATING IN NATURE (PG 46-47 OF APPEAL PAPERS) 4. THE DRP HAS HELD THAT PROVISION FOR DOUBTFUL DEBTS IS NON-OPERATING IN NATURE (PG 46 OF APPEAL PAPERS) 5. ACCORDINGLY, TP ADDITIONS WERE ENHANCED TO RS.3,23, 60,679/-. THE EFFECT OF DIRECTIONS SO GIVEN BY LD DRP RESULTE D IN ENHANCEMENT OF TRANSFER PRICING ADJUSTMENT TO RS.3,23,60,679/-. THE ASSESSING OFFICER, ACCORDINGLY, PASSED FINAL ASSESSMENT ORDER MAKING TRANSFER PRICING ADJUSTMENT OF RS.3,23,60,679/-. THE AO ALS O MADE CERTAIN ADDITIONS IN THE ASSESSMENT ORDER, BESIDES THE ADDI TION RELATING TO TRANSFER PRICING ADJUSTMENT. 8. THE LD A.R SUBMITTED THAT THE ASSESSEE SEEKS EXCLUSION OF FOLLOWING FOUR COMPARABLE COMPANIES SELECTED BY THE TPO:- NAME OF COMPANY TURNOVER (A) LARSEN & TOUBRO INFOTECH LTD - 3630.15 CRORES (B) MINDTREE LIMITED (SEG.) - 1640.81 CRORES IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 5 OF 29 (C) PERSISTENT SYSTEMS LTD - 996.75 CRORES (D) TECH MAHINDRA LTD (SEG.) - 5595.70 CRORES HE SUBMITTED THAT THE TURNOVER OF THE ASSESSEE COMP ANY DURING THE YEAR WAS RS.40.28 CRORES AND HENCE IT FALLS UNDER T HE CATEGORY OF COMPANIES HAVING TURNOVER IN THE RANGE OF ONE CRORE TO 200 CRORES. HOWEVER THE TURNOVER OF ABOVE SAID COMPANIES IS MOR E THAN 200 CRORES AND HENCE THEY CANNOT BE CONSIDERED AS GOOD COMPARABLE COMPANIES. IN SUPPORT OF THIS PROPOSITION, THE LD A.R PLACED HIS RELIANCE ON THE DECISION RENDERED BY CO-ORDINATE BE NCH IN THE CASE OF TAVANT TECHNOLOGIES INDIA P LTD (IT(TP)A NO.1700 /BANG/2017 DATED 21-08-2020). 9. THE LD D.R HAS FURNISHED WRITTEN SUBMISSIONS , WHEREIN HE HAS TAKEN A STAND THAT THESE COMPANIES ARE FUNCTION ALLY COMPARABLE WITH THE ASSESSEE COMPANY AND HENCE THEI R INCLUSION WAS JUSTIFIED. 10. HOWEVER, THE QUESTION HERE IS ABOUT APPLICAT ION OF TURNOVER FILTER. WE NOTICE THAT THE CO-ORDINATE BENCH HAS C ONSIDERED THE ISSUE OF APPLICATION OF TURNOVER FILTER IN THE CASE OF TAVANT TECHNOLOGIES INDIA P LTD (SUPRA) AND THE CO-ORDINAT E BENCH HAS FOLLOWED THE DECISION RENDERED BY ANOTHER CO-ORDINA TE BENCH IN THE CASE OF AUTODESK INDIA PVT LTD VS. DCIT (IT(TP)A NO .540 & 541/BANG/2013 DATED 06-07-2018. THE DECISION RENDER ED BY THE CO-ORDINATE BENCH IN THE CASE OF TAVANT TECHNOLOGIE S INDIA P LTD (SUPRA)IS EXTRACTED BELOW:- 14. AS FAR AS GROUND NO.6.5 IS CONCERNED, THE QUES TION BOILS DOWN ON APPLICATION OF TURNOVER FILTER IN CHOOSING COMPARAB LE COMPANIES. AS FAR AS EXCLUDING THE COMPANIES ON THE BASIS OF TURNOVER IS CONCERNED, THE ISSUE HAS BEEN SETTLED IN SEVERAL DECISIONS OF THE TRIBUN AL AND HAS BEEN ELABORATELY DISCUSSED BY THIS TRIBUNAL IN THE CASE OF AUTODESK INDIA PVT. LTD. V. DCIT IN IT(TP)A NO.540 & 541/BANG/2013, ORDER DATED 06.07.2018. THE TRIBUNAL IN THIS DECISION AFTER REV IEW OF ENTIRE CASE LAWS ON THE SUBJECT, CONSIDERED THE QUESTION, WHETHER CO MPANIES HAVING IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 6 OF 29 TURNOVER MORE THAN 200 CRORES UPTO 500 CRORES HAS T O BE REGARDED AS ONE CATEGORY AND THOSE COMPANIES CANNOT BE REGARDED AS COMPARABLES WITH COMPANIES HAVING TURNOVER OF LESS THAN 200 CRORES, THE TRIBUNAL HELD AS FOLLOWS:- '17.7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. TH E SUBSTANTIAL QUESTION OF LAW (QUESTION NO.1 TO 3) WHICH WAS FRAM ED BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF CHRYSCAPITA L INVESTMENT ADVISORS (INDIA) PVT. LTD., (SUPRA) WAS AS TO WHETH ER COMPARABLE CAN BE REJECTED ON THE GROUND THAT THEY HAVE EXCEPT IONALLY HIGH PROFIT MARGINS OR FLUCTUATION PROFIT MARGINS, AS CO MPARED TO THE ASSESSEE IN TRANSFER PRICING ANALYSIS. THEREFORE AS RIGHTLY SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THE OBSERVA TIONS OF THE HON'BLE HIGH COURT, IN SO FAR AS IT REFERS TO TURNO VER, WERE IN THE NATURE OF OBITER DICTUM. JUDICIAL DISCIPLINE REQUIR ES THAT THE TRIBUNAL SHOULD FOLLOW THE DECISION OF A NON-JURISD ICTION HIGH COURT, EVEN THOUGH THE SAID DECISION IS OF A NON-JU RISDICTIONAL HIGH COURT. WE HOWEVER FIND THAT THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. PENTAIR WATER INDIA PVT. LTD. TAX A PPEAL NO.18 OF 2015 JUDGMENT DATED 16.9.2015 HAS TAKEN THE VIEW TH AT TURNOVER IS A RELEVANT CRITERION FOR CHOOSING COMPANIES AS COMP ARABLE COMPANIES IN DETERMINATION OF ALP IN TRANSFER PRICI NG CASES. THERE IS NO DECISION OF THE JURISDICTIONAL HIGH COURT ON THIS ISSUE. IN THE CIRCUMSTANCES, FOLLOWING THE PRINCIPLE THAT WHERE T WO VIEWS ARE AVAILABLE ON AN ISSUE, THE VIEW FAVOURABLE TO THE A SSESSEE HAS TO BE ADOPTED, WE RESPECTFULLY FOLLOW THE VIEW OF THE HON 'BLE BOMBAY HIGH COURT ON THE ISSUE. RESPECTFULLY FOLLOWING THE AFORESAID DECISION, WE UPHOLD THE ORDER OF THE DRP EXCLUDING 5 COMPANIES FROM THE LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO ON THE BASIS THAT THE 5 COMPANIES TURNOVER WAS MUCH HIGHER COMPARED TO THAT THE ASSESSEE. 17.8. IN VIEW OF THE ABOVE CONCLUSION, THERE MAY NO T BE ANY NECESSITY TO EXAMINE AS TO WHETHER THE DECISION REN DERED IN THE CASE OF GENISYS INTEGRATING (SUPRA) BY THE ITAT BANGALOR E BENCH SHOULD CONTINUE TO BE FOLLOWED. SINCE ARGUMENTS WERE ADVAN CED ON THE CORRECTNESS OF THE DECISIONS RENDERED BY THE ITAT M UMBAI AND BANGALORE BENCHES TAKING A VIEW CONTRARY TO THAT TA KEN IN THE CASE OF GENISYS INTEGRATING (SUPRA), WE PROCEED TO EXAMI NE THE SAID ISSUE ALSO. ON THIS ISSUE, THE FIRST ASPECT WHICH W E NOTICE IS THAT THE DECISION RENDERED IN THE CASE OF GENISYS INTEGRATIN G (SUPRA) WAS THE EARLIEST DECISION RENDERED ON THE ISSUE OF COMPARAB ILITY OF COMPANIES ON THE BASIS OF TURNOVER IN TRANSFER PRIC ING CASES. THE DECISION WAS RENDERED AS EARLY AS 5.8.2011. THE DEC ISIONS RENDERED BY THE ITAT MUMBAI BENCHES CITED BY THE LEARNED DR BEFORE US IN THE CASE OF WILLIS PROCESSING SERVICES (SUPRA) AND CAPEGEMINI INDIA PVT. LTD. (SUPRA) ARE TO BE REGARDED AS PER-I NCURIUM AS THESE DECISIONS IGNORE A BINDING CO- ORDINATE BENCH DECIS ION. IN THIS IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 7 OF 29 REGARD THE DECISIONS REFERRED TO BY THE LEARNED COU NSEL FOR THE ASSESSEE SUPPORTS THE PLEA OF THE LEARNED COUNSEL F OR THE ASSESSEE. THE DECISIONS RENDERED IN THE CASE OF M/S.NTT DATA (SUPRA), SOCIETE GENERALE GLOBAL SOLUTIONS (SUPRA) AND LSI T ECHNOLOGIES (SUPRA) WERE RENDERED LATER IN POINT OF TIME. THOSE DECISIONS FOLLOW THE RATIO LAID DOWN IN WILLIS PROCESSING SERVICES ( SUPRA) AND HAVE TO BE REGARDED AS PER INCURIUM. THESE THREE DECISIO NS ALSO PLACE RELIANCE ON THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CHRIS CAPITAL INVESTMENT (SUPRA). WE HAVE ALREAD Y HELD THAT THE DECISION RENDERED IN THE CASE OF CHRIS CAPITAL INVE STMENT (SUPRA) IS OBITER DICTA AND THAT THE RATIO DECIDENDI LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF PENTAIR (SUPRA) WH ICH IS FAVOURABLE TO THE ASSESSEE HAS TO BE FOLLOWED. THER EFORE, THE DECISIONS CITED BY THE LEARNED DR BEFORE US CANNOT BE THE BASIS TO HOLD THAT HIGH TURNOVER IS NOT RELEVANT CRITERIA FO R DECIDING ON COMPARABILITY OF COMPANIES IN DETERMINATION OF ALP UNDER THE TRANSFER PRICING REGULATIONS UNDER THE ACT. FOR THE REASONS GIVEN ABOVE, WE UPHOLD THE ORDER OF THE CIT(A) ON THE ISS UE OF APPLICATION OF TURNOVER FILTER AND HIS ACTION IN EXCLUDING COMP ANIES BY FOLLOWING THE RATIO LAID DOWN IN THE CASE OF GENISY S INTEGRATING (SUPRA).' 15. IN THE LIGHT OF THE AFORESAID DECISION OF THE T RIBUNAL, GROUND NO.6.5 RAISED BY THE ASSESSEE IS ALLOWED. 16. SINCE THE 3 COMPANIES REFERRED TO IN GROUND 5.4 ARE EXCLUDED ON THE APPLICATION OF TURNOVER FILTER, THE ASSESSEE'S PLEA FOR EXCLUSION ON THE BASIS OF OTHER FILERS SET OUT IN GROUND 5.4 IS NOT TAKEN UP FOR CONSIDERATION. 11. ADMITTEDLY, THE ABOVE CITED FOUR COMPANIES FA IL UNDER TURNOVER FILTER. ACCORDINGLY, FOLLOWING THE ABOVE SAID DECISION OF CO- ORDINATE BENCH, WE DIRECT EXCLUSION OF ABOVE SAID F OUR COMPANIES APPLYING TURNOVER FILTER. 12. THOUGH THE ASSESSEE HAS SOUGHT INCLUSION OF C ERTAIN COMPANIES AS COMPARABLE COMPANIES, YET THE LD A.R D ID NOT PRESS THE SAME AT THE TIME OF HEARING. HENCE THE GROUNDS RELATING TO INCLUSION OF COMPANIES DO NOT REQUIRE ADJUDICATION. 13. THE NEXT CONTENTION OF THE ASSESSEE IS THAT THE TPO HAS NOT CONSIDERED PROVISION FOR BAD AND DOUBTFUL DEBTS AS AN OPERATING IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 8 OF 29 EXPENDITURE. THE LD A.R SUBMITTED THAT THE CO-ORDI NATE BENCH HAS HELD THIS EXPENDITURE AS OPERATIONAL IN NATURE IN T HE CASE OF BROCADE COMMUNICATIONS SYSTEMS (P) LTD VS. DCIT (20 20)(117 TAXMANN.COM 439)(BANG.). ON THE CONTRARY, THE LD D .R SUBMITTED THAT THE PROVISION FOR BAD AND DOUBTFUL DEBTS IS NO T AN ASCERTAINED LIABILITY AND HENCE IT CANNOT BE CONSIDERED TO BE O PERATIONAL IN NATURE. HE PLACED HIS RELIANCE ON THE DECISION REN DERED BY MUMBAI BENCH OF TRIBUNAL IN THE CASE OF TELCORDIA TECHNOLO GIES INDIA P LTD (22 TAXMANN.COM 96/137 ITO 1) AND THYSSEN KRUPP IND USTRIES PVT LTD (2013)(33 TAXMANN.COM 107). 14. WE HEARD THE PARTIES ON THIS ISSUE AND PERUS ED THE RECORD. WE NOTICE THAT AN IDENTICAL ISSUE HAS BEEN EXAMINED BY THE CO- ORDINATE BENCH IN THE CASE OF BROCADE COMMUNICATION S SYSTEMS (P) LTD (SUPRA) AND IT WAS DECIDED AS UNDER:- 47. IN GROUND NO. 10 THE ASSESSEE POINTED OUT TO THE M ISTAKES IN COMPUTATION OF PLI. IT WAS SUBMITTED THAT THE TP O HAS CONSIDERED PROVISION FOR DOUBTFUL DEBTS AND PROVISI ON FOR DOUBTFUL ADVANCES ARE NON-OPERATING IN NATURE AND T HE ACTION WAS UPHELD BY THE DRP. IN THIS REGARD IT WAS SUBMIT TED THAT PROVISION FOR DOUBTFUL DEBTS IS A PROVISION WHICH I S TO BE MADE AS A PART OF THE OPERATING ACTIVITIES OF BUSINESS G OVERNED BY THE PRINCIPLES OF PRUDENCE, AND THEREFORE IT IS NOT COR RECT TO CONTEND THAT THE SAME IS NON-OPERATING IN NATURE. RELIANCE IN THIS REGARD IS PLACED ON THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF ROLLS-ROYCE INDIA (P.) LTD. V. DCIT [2016] 69 TAXMANN.COM 209 (DELHI - TRIB.). THEREFORE IT WA S SUBMITTED THAT THE AFORESAID ITEMS ARE TO BE TREATED AS BEING OPERATING IN NATURE. 48. THE LD. DR RELIED ON THE ORDER OF THE DRP. 49. WE ARE OF THE VIEW THAT IN THE LIGHT OF THE DECISI ON OF THE TRIBUNAL IN THE CASE OF ROLLS-ROYCE INDIA (P.) LTD. ( SUPRA ), THE PLI SHOULD DIRECTED TO BE REWORKED BY CONSIDERING T HE PROVISION FOR DOUBTFUL DEBTS AS OPERATING EXPENDITURE. WE HOL D AND DIRECT ACCORDINGLY. IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 9 OF 29 IN THE CASE OF ROLLS-ROYCE INDIA (P) LTD (SUPRA), T HE NATURE OF PROVISION FOR DOUBTFUL DEBTS WAS DISCUSSED AS UNDE R:- 51. AS REGARDS PROVISION FOR DOUBTFUL DEBTS, LD. COUNS EL SUBMITTED THAT PROVISION FOR DOUBTFUL DEBTS ARE A PART OF THE OPER ATING ACTIVITIES OF A BUSINESS. THE ACCOUNTING STANDARDS ISSUED BY THE IC AI REQUIRE THAT ACCOUNTING POLICIES MUST BE GOVERNED BY THE PRINCIP LES OF 'PRUDENCE'. PROVISIONS SHOULD BE MADE FOR ALL KNOWN LIABILITIES AND LOSSES EVEN THOUGH THE AMOUNT CANNOT BE DETERMINED WITH CERTAINTY AND REPRESENTS ONLY THE BASIC ESTIMATE IN THE LIGHT OF AVAILABLE INFORMATIO N. PARA 6 OF ACCOUNTING STANDARD-L DEFINES ACCRUAL AS THE ASSUMPTION THAT R EVENUES AND COSTS ARE ACCRUED, I.E., RECOGNIZED AS THEY ARE EARNED OR INC URRED AND RECORDED IN THE FINANCIAL STATEMENTS OF THE PERIOD TO WHICH THEY RE LATE. 52. THUS, GOING WITH THE ABOVEMENTIONED FACTS AND STAT UTORY PROVISIONS, WHEN THE MAKING OF PROVISIONS IS VERY MUCH IN THE I NTEREST OF BUSINESS TO SHOW THE TRUE AND FAIR VIEW AND STATUTORILY REQUIRE D, IT CANNOT BE SAID THAT SUCH PROVISIONS ARE OF NON-OPERATING NATURE. SUCH P ROVISIONS ARE MADE TO COMPLY WITH THE REQUIREMENTS OF STATUTE. 53. THE LEARNED TPO TREATED PROVISION FOR DOUBTFUL DEB TS AS NON-OPERATING REFERRING TO THE SAFE HARBOUR RULES NOTIFIED BY CBD T, WHICH ARE NOT APPLICABLE FOR THE YEAR UNDER CONSIDERATION AS MENT IONED ABOVE. 54. LD. CIT(DR) RELIED ON THE ORDER OF TPO. 55. AS REGARDS THE TREATMENT OF PROVISION OF DOUBTFUL DEBTS ALSO, WE FIND THAT THE REASONING GIVEN BY LD. TPO CANNOT BE ACCEP TED BECAUSE HE HAS PRIMARILY RELIED ON SAFE HARBOR RULE FOR TREATING T HIS AS NON-OPERATING EXPENDITURE. WE FIND CONSIDERABLE FORCE IN THE SUBM ISSION OF LD. COUNSEL FOR THE ASSESSEE, CONSIDERED EARLIER, THAT PROVISION FO R DOUBTFUL DEBTS IS A PROVISION WHICH IS TO BE MADE AS A PART OF THE OPER ATING ACTIVITIES OF BUSINESS GOVERNED BY THE PRINCIPLES OF PRUDENCE. WE , ACCORDINGLY, DIRECT THAT THIS PROVISION BE TREATED AS PART OF OPERATING EXPENDITURE AND TREATMENT BE MADE ACCORDINGLY, BECAUSE, IN ANY VIEW OF THE MA TTER, THE SAFE HARBOR RULE IS NOT APPLICABLE FOR THE CURRENT YEAR UNDER C ONSIDERATION. IN THE RESULT, THIS GROUND IS ALLOWED. 15. BEFORE US, THE LD D.R PLACED HIS RELIANCE ON T HE DECISION RENDERED BY MUMBAI BENCH OF TRIBUNAL IN THE CASE OF THYSSEN KRUPP INDUSTRIES LTD (SUPRA). WE NOTICE THAT THE A SSESSEE HAS CLAIMED THAT THE PROVISION FOR DOUBTFUL DEBTS AS NO N-OPERATING IN NATURE, WHICH WAS NOT ACCEPTED BY THE TPO. THE TRI BUNAL ACCEPTED THE SUBMISSION OF THE ASSESSEE AND ACCORDINGLY IT H AS HELD THAT IT IS A NON-OPERATING IN NATURE. THUS, WE NOTICE THAT TH E ABOVE SAID IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 10 OF 29 DECISION HAS BEEN RENDERED BY THE MUMBAI BENCH OF T RIBUNAL IN A DIFFERENT CONTEXT. IN THE CASE OF TELCORDIA TECHNOL OGIES INDIA P LTD, THE TRIBUNAL HAS MADE FOLLOWING OBSERVATIONS IN RES PECT OF PROVISION FOR DOUBTFUL DEBTS, WHILE CONSIDERING THE COMPANY N AMED M/S R SYSTEMS INTERNATIONAL LTD:- WHILE WORKING OUT THE OPERATING PROFIT, ONLY ITEMS OF RECEIPTS AND EXPENDITURE, WHICH HAVE DIRECT RELATION FOR DETERMI NING THE PROFIT HAS TO BE TAKEN INTO ACCOUNT. OPERATING PROFIT HAS TO BE SEEN IN A COMPARABLE TRANSACTION UNDER COMPARABLE CIRCUMSTANCES. THE PRO FIT LEVEL INDICATORS ARE DERIVED FROM UNCONTROLLED PARTY ENGAGED IN SIMILAR BUSINESS ACTIVITY UNDER SIMILAR CIRCUMSTANCES WHICH IS THE MEASURE OF ARM'S LENGTH RESULT. IF THE ASSESSEE'S BUSINESS TRANSACTIONS DO NOT HAVE ACCRET ION OF DOUBTFUL DEBTS AND DOUBTFUL ADVANCES, SUCH AN ADJUSTMENT HAS TO BE MAD E IN THE COMPARABILITY ANALYSIS OF THE COMPARABLE PARTY TO DETERMINE THE A RMS LENGTH PRICE. THUS, BOTH THESE EXPENSES HAVE BEEN RIGHTLY EXCLUDED BY T HE TPO TO WORK OUT THE OPERATING PROFIT OF THE COMPARABLE PARTY AND ACCORD INGLY THE OPERATING PROFIT RATIO OF THE SAID ENTITY HAS BEEN RIGHTLY TA KEN BY THE TPO. THUS, WE NOTICE THAT THE ABOVE SAID DECISION WAS AL SO RENDERED IN A DIFFERENT CONTEXT. HOWEVER, THERE SHOULD NOT BE AN Y DISPUTE THAT IF THE PROVISION FOR DOUBTFUL DEBTS IS TAKEN AS OPERAT ING EXPENSES IN THE HANDS OF THE ASSESSEE, THEN THE SAID EXPENDITUR E HAS TO BE TAKEN SO IN THE CASE OF COMPARABLE COMPANIES ALSO. 16. ACCORDINGLY, FOLLOWING THE DECISION RENDERED BY THE CO-ORDINATE BENCH IN THE CASE OF BROCADE SYSTEMS (P) LTD (SUPRA ) AND ROLLS ROYCE INDIA (P) LTD (SUPRA), WE DIRECT THE AO/TPO T O CONSIDER PROVISION FOR DOUBTFUL DEBTS AS AN OPERATING EXPENS E. 17. THE NEXT ISSUE IN RESPECT OF TRANSFER PRICIN G ADJUSTMENT RELATES TO THE CLAIM OF WORKING CAPITAL ADJUSTMENT AND RISK ADJUSTMENT. WE HAVE NOTICED THAT TPO HAS GRANTED WORKING CAPITAL ADJUSTMENT OF 1.70% BY MAKING HIS OWN CALCU LATIONS. IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 11 OF 29 HOWEVER, THE LD DRP DIRECTED THE TPO TO DISALLOW TH E WORKING CAPITAL ADJUSTMENT ALLOWED BY HIM, MAINLY ON THE RE ASONING THAT THE AVERAGE WORKING CAPITAL WILL NOT SHOW ACTUAL WO RKING CAPITAL EMPLOYED DURING THE YEAR. 18. THE LD A.R SUBMITTED THAT THE WORKING CAPITAL ADJUSTMENT WAS RIGHTLY ALLOWED BY TPO. HE SUBMITTED THAT THE CO-O RDINATE BENCH HAS HELD IN THE CASE OF NAGRAVISION INDIA P LTD VS. ACIT (IT(TP)A NO.1536/BANG/2017DATED 03-07-2020 THAT WORKING CAPI TAL ADJUSTMENT IS PERMISSIBLE. ON THE CONTRARY, THE LD D.R SUBMITTED THAT THE RELEVANT DATA WAS NOT FURNISHED BY THE ASS ESSEE AND THE DATA FURNISHED BY THE ASSESSEE RELATED TO THE FIGUR ES AS ON THE BALANCE SHEET DATE. HE SUBMITTED THAT, BASED ON BA LANCE SHEET DATE FIGURES, WORKING CAPITAL ADJUSTMENT SHOULD NOT BE WORKED OUT. HE FURTHER SUBMITTED THAT, IF A REASONABLE ACCURATE ADJUSTMENT IS NOT POSSIBLE, THEN THE ASSESSEE SHOULD NOT BE ALLOW ED WORKING CAPITAL ADJUSTMENT. 19. WE NOTICE THAT THE TRIBUNAL HAS HELD IN THE CASE OF NAGRAVISION INDIA P LTD (SUPRA) THAT WORKING CAPITA L ADJUSTMENT SHOULD BE ALLOWED. FOR HOLDING SO, THE TRIBUNAL HA S FOLLOWED THE DECISION RENDERED BY ANOTHER BENCH IN THE CASE OF H UAWEI TECHNOLOGIES (INDIA) PVT LTD VS. DCIT (2019)(101 TA XMANN.COM 313). THE DECISION RENDERED IN THE CASE OF HUAWEI TECHNOL OGIES (INDIA) PVT LTD (SUPRA) ARE EXTRACTED BELOW:- 10. THE NEXT GRIEVANCE PROJECTED BY THE ASSESSEE IN IT S APPEAL IS WITH REGARD TO THE ACTION OF THE CIT (A) IN NOT ALLOWING ANY ADJUSTMENT TOWARDS WORKING CAPITAL DIFFERENCES. ON THIS ISSUE WE HAVE HEARD THE RIVAL SUBMISSIONS. THE RELEVANT PROVISIONS OF THE A CT IN SO FAR AS COMPARABILITY OF INTERNATIONAL TRANSACTION WITH A T RANSACTION OF SIMILAR NATURE ENTERED INTO BETWEEN UNRELATED PARTIES, PROV IDES AS FOLLOWS: DETERMINATION OF ARM'S LENGTH PRICE UNDER SECTION 9 2C. IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 12 OF 29 10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SEC TION 92C, THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION [OR A SPECIFIED DOMESTIC TRANSACTION] SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHO D, IN THE FOLLOWING MANNER, NAMELY ; ( A ) TO ( B )** ** ** ( E ) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, ( I ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FR OM AN INTERNATIONAL TRANSACTION [OR A SPECIFIED DOMESTIC TRANSACTION] ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPU TED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGAR D TO ANY OTHER RELEVANT BASE; ( II ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; ( III ) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE ( II ) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION [OR THE SPECIFIED DOMESTIC TRANSACTION] AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN TH E ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN I N THE OPE N MARKET; ( IV ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AN D REFERRED TO IN SUB- CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB - CLAUSE (III); ( V ) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKE N INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELATION TO T HE INTERNATIONAL TRANSACTION [OR THE SPECIFIED DOMESTIC TRANSACTION) ; ( F ) ** ** ** (2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARABI LITY OF AN INTERNATIONAL TRANSACTION [OR A SPECIFIED DOMESTIC TRANSACTION] WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH RE FERENCE TO THE FOLLOWING, NAMELY:- IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 13 OF 29 ( A ) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSF ERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMP LOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RES PECTIVE PARTIES TO THE TRANSACTIONS; ( C ) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS AR E FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENE FITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANS ACTIONS; ( D ) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE R ESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLU DING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVE RNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITI ON AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION [OR A SPECIFIED DOMESTIC TRANSACTION]IF ( I ) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSA CTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANS ACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE O R COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUC H TRANSACTIONS IN THE OPEN MARKET; OR ( II ) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIM INATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 11. A READING OF RULE 10B(L)(E)(III) OF THE RULES READ WITH SEC.92CA OF THE ACT, WOULD CLEARLY SHOWS THAT THE NET PROFIT MARGIN ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS HAS TO BE ADJU STED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERN ATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET. 12. CHAPTERS I AND III OF THE OECD TRANSFER PRICING GU IDELINES FOR MULTINATIONAL ENTERPRISES AND TAX ADMINISTRATIONS ( HEREAFTER THE 'TPG') CONTAIN EXTENSIVE GUIDANCE ON COMPARABILITY ANALYSES FOR TRANSFER PRICING PURPOSES. GUIDANCE ON COMPARABILIT Y ADJUSTMENTS IS FOUND IN PARAGRAPHS 3.47-3.54 AND IN THE ANNEX TO C HAPTER III OF THE TPG. A REVISED VERSION OF THIS GUIDANCE WAS APPROVE D BY THE COUNCIL IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 14 OF 29 OF THE OECD ON 22 JULY 2010. IN PARAGRAPH 2 OF THES E GUIDELINES IT HAS BEEN EXPLAINED AS TO WHAT IS COMPARABILITY ADJUSTME NT. THE GUIDELINE EXPLAINS THAT WHEN APPLYING THE ARM'S LENGTH PRINCI PLE, THE CONDITIONS OF A CONTROLLED TRANSACTION (I.E. A TRANSACTION BET WEEN A TAXPAYER AND AN ASSOCIATED ENTERPRISE) ARE GENERALLY COMPARED TO TH E CONDITIONS OF COMPARABLE UNCONTROLLED TRANSACTIONS. IN THIS CONTE XT, TO BE COMPARABLE MEANS THAT: NONE OF THE DIFFERENCES (IF ANY) BETWEEN THE SITUAT IONS BEING COMPARED COULD MATERIALLY AFFECT THE CONDITION BEIN G EXAMINED IN THE METHODOLOGY (E.G. PRICE OR MARGIN), OR REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE EFFECT OF ANY SUCH DIFFERENCES. THESE ARE CALLED 'C OMPARABILITY ADJUSTMENTS. 13. IN PARAGRAPHS 13 TO 16 OF THE AFORESAID OECD GUIDE LINES, NEED FOR WORKING CAPITAL ADJUSTMENT HAS BEEN EXPLAINED AS FO LLOWS: '13. IN A COMPETITIVE ENVIRONMENT, MONEY HAS A TIME VALUE. IF A COMPANY PROVIDED, SAY, 60 DAYS TRADE TERMS FOR PAYM ENT OF ACCOUNTS, THE PRICE OF THE GOODS SHOULD EQUATE TO T HE PRICE FOR IMMEDIATE PAYMENT PLUS 60 DAYS OF INTEREST ON THE I MMEDIATE PAYMENT PRICE. BY CARRYING HIGH ACCOUNTS RECEIVABLE A COMPANY IS ALLOWING ITS CUSTOMERS A RELATIVELY LONG PERIOD TO PAY THEIR ACCOUNTS. IT WOULD NEED TO BORROW MONEY TO FUND THE CREDIT TERMS AND/OR SUFFER A REDUCTION IN THE AMOUNT OF CASH SUR PLUS WHICH IT WOULD OTHERWISE HAVE AVAILABLE TO INVEST. IN A COMP ETITIVE ENVIRONMENT, THE PRICE SHOULD THEREFORE INCLUDE AN ELEMENT TO REFLECT THESE PAYMENT TERMS AND COMPENSATE FOR THE TIMING EFFECT. 14. THE OPPOSITE APPLIES TO HIGHER LEVELS OF ACCOUN TS PAYABLE. BY CARRYING HIGH ACCOUNTS PAYABLE, A COMPANY IS BENEFI TTING FROM A RELATIVELY LONG PERIOD TO PAY ITS SUPPLIERS. IT WOU LD NEED TO BORROW LESS MONEY TO FUND ITS PURCHASES AND/OR BENEFIT FRO M AN INCREASE IN THE AMOUNT OF CASH SURPLUS AVAILABLE TO INVEST. IN A COMPETITIVE ENVIRONMENT, THE COST OF GOODS SOLD SHOULD INCLUDE AN ELEMENT TO REFLECT THESE PAYMENT TERMS AND COMPENSATE FOR THE TIMING EFFECT. 15. A COMPANY WITH HIGH LEVELS OF INVENTORY WOULD S IMILARLY NEED TO EITHER BORROW TO FUND THE PURCHASE, OR REDUCE TH E AMOUNT OF CASH SURPLUS WHICH IT IS ABLE TO INVEST. NOTE THAT THE I NTEREST RATE JULY 2010 PAGE 6 MIGHT BE AFFECTED BY THE FUNDING STRUCT URE (E.G. WHERE IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 15 OF 29 THE PURCHASE OF INVENTORY IS PARTLY FUNDED BY EQUIT Y) OR BY THE RISK ASSOCIATED WITH HOLDING SPECIFIC TYPES OF INVENTORY ) 16. MAKING A WORKING CAPITAL ADJUSTMENT IS AN ATTEM PT TO ADJUST FOR THE DIFFERENCES IN TIME VALUE OF MONEY BETWEEN THE TESTED PARTY AND POTENTIAL COMPARABLES, WITH AN ASSUMPTION THAT THE DIFFERENCE SHOULD BE REFLECTED IN PROFITS. THE UNDERLYING REAS ONING IS THAT: A COMPANY WILL NEED FUNDING TO COVER THE TIME GAP B ETWEEN THE TIME IT INVESTS MONEY (I.E. PAYS MONEY TO SUPPL IER) AND THE TIME IT COLLECTS THE INVESTMENT (I.E. COLLECTS MONE Y FROM CUSTOMERS) THIS TIME GAP IS CALCULATED AS: THE PERIO D NEEDED TO SELL INVENTORIES TO CUSTOMERS + (PLUS) THE PERIOD NEEDED TO COLLECT MONEY FROM CUSTOMERS - (LESS) THE PERIOD GRANTED TO PAY DEBTS TO SUPPLIERS.' 14. EXAMPLES OF HOW TO WORK OUT ADJUSTMENT ON ACCOUNT OF WORKING CAPITAL ADJUSTMENT IS ALSO GIVEN IN THE SAID GUIDEL INES. THE GUIDELINE ALSO EXPRESSES THE DIFFICULTY IN MAKING WORKING CAP ITAL ADJUSTMENT BY CONCLUDING THAT THE FOLLOWING FACTORS HAVE TO BE KE PT IN MIND (I) THE POINT IN TIME AT WHICH THE RECEIVABLES, INVENTORY A ND PAYABLES SHOULD BE COMPARED BETWEEN THE TESTED PARTY AND THE COMPAR ABLES, WHETHER IT SHOULD BE THE FIGURES OF RECEIVABLES, INVENTORY AND PAYABLE AT THE YEAR END OR BEGINNING OF THE YEAR OR AVERAGE OF THESE FI GURES, (II) THE SELECTION OF THE APPROPRIATE INTEREST RATE (OR RATE S) TO USE. THE RATE (OR RATES) SHOULD GENERALLY BE DETERMINED BY REFERENCE TO THE RATE(S) OF INTEREST APPLICABLE TO A COMMERCIAL ENTERPRISE OPER ATING IN THE SAME MARKET AS THE TESTED PARTY. THE GUIDELINES CONCLUDE BY OBSERVING THAT THE PURPOSE OF WORKING CAPITAL ADJUSTMENTS IS TO IM PROVE THE RELIABILITY OF THE COMPARABLES. 15. IN THE PRESENT CASE THE TPO ALLOWED WORKING CAPITA L ADJUSTMENT ACCEPTING THE CALCULATION GIVEN BY THE ASSESSEE. TH E CIT (A) IN EXERCISE OF HIS POWERS OF ENHANCEMENT HELD THAT NO ADJUSTMENT SHOULD BE MADE TO THE PROFIT MARGINS ON ACCOUNT OF WORKING CAPITAL DIFFERENCES BETWEEN THE TESTED PARTY AND THE COMPAR ABLE COMPANIES FOR THE FOLLOWING REASONS: ( I ) THE DAILY WORKING CAPITAL LEVELS OF THE TESTED PART Y AND THE COMPARABLES WAS THE ONLY RELIABLE BASIS OF DETERMIN ING ADJUSTMENT TO BE MADE ON ACCOUNT OF WORKING CAPITAL BECAUSE IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 16 OF 29 THAT WOULD BE ON THE BASIS OF WORKING CAPITAL DEPLO YED THROUGHOUT THE YEAR. ( II ) SEGMENTAL WORKING CAPITAL IS NOT DISCLOSED IN THE A NNUAL REPORTS OF COMPANIES ENGAGED IN DIFFERENT SEGMENTS AND THEREFORE PROPER COMPARISON CANNOT BE MADE. ( III ) DISCLOSE IN THE BALANCE SHEET DOES NOT CONTAIN BREA K UP OF TRADE AND NON-TRADE DEBTORS AND CREDITORS AND THEREFORE WORKING CAPITAL ADJUSTMENT DONE WITHOUT SUCH BREAK UP WOULD RESULT IN COMPUTATION BEING SKEWED. ( IV ) COST OF CAPITAL WOULD BE DIFFERENT FOR DIFFERENT CO MPANIES AND THEREFORE WORKING CAPITAL ADJUSTMENT MADE DISREGARD IN G THIS DIFFERENT BASED ON BROAD APPROXIMATIONS, ESTIMATION S AND ASSUMPTIONS MAY NOT LEAD TO RELIABLE RESULTS. 16. THE CIT (A) ALSO PLACED RELIANCE ON A DECISION OF CHENNAI ITAT IN THE CASE OF MOBIS INDIA LTD. V. DY. CIT [2013] 38 TAXMANN.COM 231/[2014] 61 SOT 40 . THAT DECISION WAS BASED ON THE FACTUAL ASPECT THAT THE ASSESSEE WAS NOT ABLE T O DEMONSTRATE HOW WORKING CAPITAL ADJUSTMENT WAS ARRIVED AT BY THE AS SESSEE. THEREFORE NOTHING TURNS ON THE DECISION RELIED UPON BY THE CI T (A) IN THE IMPUGNED ORDER. IN THE MATTER OF DETERMINATION OF A RM'S LENGTH PRICE, IT CANNOT BE SAID THAT THE BURDEN IS ON THE ASSESSE E OR THE DEPARTMENT TO SHOW WHAT IS THE ARM'S LENGTH PRICE. THE DATA AV AILABLE WITH THE ASSESSEE AND THE DEPARTMENT WOULD BE THE STARTING P OINT AND DEPENDING ON THE FACTS AND CIRCUMSTANCES OF A CASE FURTHER DETAILS CAN BE CALLED FOR. AS FAR AS THE ASSESSEE IS CONCERNED, THE FACTS AND FIGURES WITH REGARD TO HIS BUSINESS HAS TO BE FURNISHED. RE GARDING COMPARABLE COMPANIES, ONE HAS TO FALL BACK UPON ONLY ON THE IN FORMATION AVAILABLE IN THE PUBLIC DOMAIN. IF THAT INFORMATION IS INSUFF ICIENT, IT IS BEYOND THE POWER OF THE ASSESSEE TO PRODUCE THE CORRECT INFORM ATION ABOUT THE COMPARABLE COMPANIES. THE REVENUE HAS ON THE OTHER HAND POWERS TO COMPEL PRODUCTION OF THE REQUIRED DETAILS FROM THE COMPARABLE COMPANIES. IF THAT POWER IS NOT EXERCISED TO FIND O UT THE TRUTH THEN IT IS NO DEFENCE TO SAY THAT THE ASSESSEE HAS NOT FURNISH ED THE REQUIRED DETAILS AND ON THAT SCORE DENY ADJUSTMENT ON ACCOUN T OF WORKING CAPITAL DIFFERENCES. REGARDING APPLYING THE DAILY B ALANCES OF INVENTORY, RECEIVABLES AND PAYABLES FOR COMPUTING WORKING CAPI TAL ADJUSTMENT, THE DELHI BENCH OF ITAT IN THE CASE OF ITO V. E VALUE SERVE.COM [2016] 75 TAXMANN.COM 195 (DELHI - TRIB.) . HAS HELD THAT IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 17 OF 29 INSISTING ON DAILY BALANCES OF WORKING CAPITAL REQU IREMENTS TO COMPUTE WORKING CAPITAL ADJUSTMENT IS NOT PROPER AS IT WILL BE IMPOSSIBLE TO CARRY OUT SUCH EXERCISE AND THAT WORKING CAPITAL AD JUSTMENT HAS TO BE BASED ON THE OPENING AND CLOSING WORKING CAPITAL DE PLOYED. THE BENCH HAS ALSO OBSERVED THAT THAT IN TRANSFER PRICING ANA LYSIS THERE IS ALWAYS AN ELEMENT OF ESTIMATION BECAUSE IT IS NOT AN EXACT SCIENCE. ONE HAS TO SEE THAT REASONABLE ADJUSTMENT IS BEING MADE SO AS TO BRING BOTH COMPARABLE AND TEST PARTY ON SAME FOOTING. THEREFOR E THERE IS LITTLE MERIT IN CIT (A)'S OBJECTION ON WORKING ADJUSTMENT BASED ON UNAVAILABLE DAILY WORKING CAPITAL REQUIREMENTS DATA . THERE IS ALSO NO MERIT IN THE OBJECTION OF THE CIT (A) REGARDING ABS ENCE OF SEGMENTAL DETAILS AVAILABLE OF WORKING CAPITAL REQUIREMENTS O F COMPARABLE COMPANIES CHOSEN AND ABSENCE OF DETAILS OF TRADE AN D NON-TRADE DEBTORS OF COMPARABLE COMPANIES AS THESE DETAILS AR E BEYOND THE POWER OF THE ASSESSEE TO OBTAIN, UNLESS THESE DETAILS ARE AVAILABLE IN PUBLIC DOMAIN. REGARDING ABSENCE OF COST OF WORKING CAPITA L FUNDS, THE OECD GUIDELINES CLEARLY ADVOCATES ADOPTING RATE(S) OF INTEREST APPLICABLE TO A COMMERCIAL ENTERPRISE OPERATING IN THE SAME MARKET AS THE TESTED PARTY. THEREFORE THIS OBJECTION OF THE C IT (A) IS ALSO NOT SUSTAINABLE. 17. IN THE LIGHT OF THE ABOVE DISCUSSION WE ARE OF THE VIEW THAT THE CIT (A) WAS NOT JUSTIFIED IN DENYING ADJUSTMENT ON ACCO UNT OF WORKING CAPITAL ADJUSTMENT. SINCE, THE CIT (A) HAS NOT FOUN D ANY ERROR IN THE TPO'S WORKING OF WORKING CAPITAL ADJUSTMENT, THE WO RKING CAPITAL ADJUSTMENT AS WORKED OUT BY THE TPO HAS TO BE ALLOW ED. WE MAY ALSO ADD THAT THE COMPLETE WORKING CAPITAL ADJUSTMENT WO RKING HAS BEEN GIVEN BY THE ASSESSEE AND A COPY OF THE SAME IS AT PAGES 173 & 192 OF THE ASSESSEE'S PAPER BOOK. NO DEFECT WHATSOEVER HAS BEEN POINTED OUT IN THESE WORKING BY THE CIT (A). WE MAY ALSO FURTHE R ADD THAT IN TERMS OF RULE 10B(1)(E) (III) OF THE RULES, THE NET PROFI T MARGIN ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS SHOULD BE ADJU STED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERN ATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET. IT IS NOT THE CASE OF THE CIT (A) THAT DIFFERENCES IN WORKING CAP ITAL REQUIREMENTS OF THE INTERNATIONAL TRANSACTION AND THE UNCONTROLLED COMPARABLE TRANSACTIONS IS NOT A DIFFERENCE WHICH WILL MATERIA LLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET. IF FOR REA SONS GIVEN BY CIT (A) WORKING CAPITAL ADJUSTMENT CANNOT BE ALLOWED TO THE PROFIT MARGINS, THEN THE COMPARABLE UNCONTROLLED TRANSACTIONS CHOSE N FOR THE PURPOSE IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 18 OF 29 OF COMPARISON WILL HAVE TO BE TREATED AS NOT COMPAR ABLE IN TERMS OF RULE 10B(3) OF THE RULES, WHICH PROVIDES AS FOLLOWS : '(3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABL E TO AN INTERNATIONAL TRANSACTION IF ( I ) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSA CTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PR ICE OR COST CHARGED TO PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR ( II ) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIM INATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES.' 18. IN SUCH A SCENARIO THERE WOULD REMAIN NO COMPARABL E UNCONTROLLED TRANSACTIONS FOR THE PURPOSE OF COMPARISON. THE TRA NSFER PRICING EXERCISE WOULD THEREFORE FAIL. THEREFORE IN KEEPING WITH THE OECD GUIDELINES, ENDEAVOR SHOULD BE MADE TO BRING IN COM PARABLE COMPANIES FOR THE PURPOSE OF BROAD COMPARISON. THER EFORE THE WORKING CAPITAL ADJUSTMENT AS CLAIMED BY THE ASSESSEE SHOUL D BE ALLOWED. WE HOLD AND DIRECT ACCORDINGLY. 20. WE NOTICE THAT THE DELHI BENCH OF TRIBUNAL HAS HELD IN THE CASE OF ITO VS. E VALUE SERVE.COM (SUPRA) HAS HELD THAT INSISTING ON DAILY BALANCES OF WORKING CAPITAL REQUIREMENTS TO COMPUTE WORKING CAPITAL ADJUSTMENT IS NOT PROPER AS IT WILL BE IMPO SSIBLE TO CARRY OUT SUCH EXERCISE AND THAT WORKING CAPITAL ADJUSTMENT H AS TO BE BASED ON THE OPENING AND CLOSING WORKING CAPITAL EMPLOYED . HENCE THE REASONING GIVEN BY LD DRP TO REJECT THE WORKING CAP ITAL ADJUSTMENT IS LIABLE TO BE SET ASIDE. ACCORDINGLY WE DIRECT A O/TPO TO ALLOW WORKING CAPITAL ADJUSTMENT. 21. WITH REGARD TO CLAIM OF RISK ADJUSTMENT, WE N OTICE THAT THE ASSESSEE DID NOT RAISE ANY OBJECTION BEFORE LD DRP REGARDING DENIAL OF THE SAME. HENCE WE DECLINE TO ADJUDICATE THIS G ROUND. IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 19 OF 29 22. WE SHALL NOW TAKE UP THE CORPORATE GROUNDS U RGED BY THE ASSESSEE. IN GROUND NO.2, THE ASSESSEE IS CONTESTI NG DENIAL OF ADDITIONAL DEPRECIATION ON COMPUTERS AMOUNTING TO R S.12,47,351/- CLAIMED U/S 32(1)(IIA) OF THE ACT. 23. THE ASSESSEE CLAIMED ADDITIONAL DEPRECIATIO N @ 20% ON THE NEW COMPUTERS PURCHASED BY IT IN TERMS OF SEC.32(1) (IIA) OF THE ACT. THE AO NOTICED THAT, AS PER SEC.32(1)(IIA) OF THE A CT, THE ADDITIONAL DEPRECIATION IS ALLOWABLE ON THE COST OF PLANT & MA CHINERY, WHEN THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACT URE OR PRODUCTION OF ANY ARTICLE OR THING OR IN THE BUSINE SS OF GENERATION OR GENERATION AND DISTRIBUTION OF POWER. THE AO TOOK THE VIEW THAT THE ASSESSEE IS DEVELOPING COMPUTER SOFTWARE AND IT CAN NOT BE TAKEN AS AN ARTICLE OR THING. HE TOOK THE VIEW THAT THE COMP UTERS ARE OFFICE EQUIPMENT AND SEPARATE RATE OF DEPRECIATION IS ALLO WED UNDER THE DEPRECIATION SCHEDULE. ACCORDINGLY HE TOOK THE VIE W THAT THE COMPUTERS CANNOT BE CLASSIFIED AS PLANT & MACHINER Y. ACCORDINGLY, HE REJECTED THE CLAIM OF ADDITIONAL DE PRECIATION. 24. THE LD DRP CONFIRMED THE DISALLOWANCE BY FO LLOWING ITS DECISION RENDERED IN AY 2012-13, WHICH READS AS UND ER:- 4.2 THE OBJECTION OF THE ASSESSEE HAS DULY BEEN C ONSIDERED. THE ISSUE HAS BEEN DISCUSSED IN DETAIL BY THE AO IN PARA 6 OF HIS ORDER. THIS IS IMPORTANT TO NOTE THAT THE BENE FIT OF SECTION 32(IIA) IS AVAILABLE TO THOSE ASSESSEES WHO ARE ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTIO N OF ANY ARTICLE OR THING OR IN THE BUSINESS OF GENERATION O R GENERATION AND DISTRIBUTION OF POWER. THE ASSESSEE IS NOT CAR RYING OUT ANY OF THESE ACTIVITIES AND IT IS IN THE BUSINESS O F COMPUTER SOFTWARE, WHICH IS DIFFERENT FROM ARTICLE OR THING. THE WORDS COMPUTER SOFTWARE HAVE BEEN USED IN DIFFERENT SEC TIONS OF IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 20 OF 29 THE ACT IN ADDITION TO THE WORDS ARTICLES OR THING S WHENEVER BENEFIT WAS INTENDED TO BE EXTENDED TO SUCH BUSINES S ALSO. IN ADDITION TO ABOVE THE PROVISO TO THE SECTION REQ UIRES THAT THE PLANT OR MACHINERY SHOULD NOT BE INSTALLED IN A NY OFFICE PREMISES OR ANY RESIDENTIAL ACCOMMODATION. THIS FU RTHER STRENGTHENS THE INTERPRETATION OF THIS SECTION THAT IT IS NOT MEANT FOR THOSE IN THE BUSINESS OF COMPUTER SOFTWAR E AS ASSESSEE IS OPERATING FROM AN OFFICE PREMISES AND N OT FROM A FACTORY, WHICH IS MEANT FOR PRODUCTION OR MANUFACTU RE OF ARTICLE OR THING. SO THE OBJECTION OF THE ASSESSEE IS NOT ACCEPTED. 25. THE LD A.R SUBMITTED THAT THE COMPUTERS FAL L UNDER THE CATEGORY OF PLANT & MACHINERY AS PER THE DEPRECIA TION SCHEDULE PRESCRIBED UNDER THE I T RULES. HE SUBMITTED THAT THE RULES HAVE PRESCRIBED HIGHER RATE OF DEPRECIATION. MERELY FOR THE REASON THAT A HIGHER RATE OF DEPRECIATION IS PRESCRIBED FOR COMPU TERS, IT CANNOT BE LEFT OUT OF PLANT AND MACHINERY. ACCORDINGLY HE SU BMITTED THAT THE COMPUTERS WOULD FALL UNDER THE CATEGORY OF PLANT AN D MACHINERY AND HENCE THE ASSESSEE IS ELIGIBLE FOR ADDITIONAL D EPRECIATION U/S 32(1)(IIA) OF THE ACT. 26. THE LD D.R SUBMITTED THAT THE ADDITIONAL DEP RECIATION IS ADMISSIBLE 32(1)(IIA) OF THE ACT ONLY TO AN ASSESSE E ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTIC LE OR THING OR IN THE BUSINESS OF GENERATION OR GENERATION AND DISTRI BUTION OF POWER. HE SUBMITTED THAT THE ASSESSEE DOES NOT FALL UNDER THIS CATEGORY, SINCE IT IS ONLY PROVIDING SOFTWARE DEVELOPMENT SER VICES. 27. IN THE REJOINDER, THE LD A.R SUBMITTED THAT A DEDUCTION BY NAME INVESTMENT ALLOWANCE WAS ALLOWED EARLIER FOR NEW MACHINERY IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 21 OF 29 OR PLANT INSTALLED UPTO 31.3.1990 IN AN INDUSTRIAL UNDERTAKING FOR THE PURPOSE OF CONSTRUCTION, MANUFACTURE OR PRODUCT ION OF ANY ARTICLE OR THING NOT BEING AN ARTICLE OR THING SPEC IFIED IN THE LIST IN ELEVENTH SCHEDULE. IN THAT CONTEXT, A QUESTION ARO SE AS TO WHETHER COMPUTERS INSTALLED FOR THE PURPOSE OF DATA PROCESS ING WOULD BE ELIGIBLE FOR INVESTMENT ALLOWANCE OR NOT. THE AHM EDABAD BENCH OF TRIBUNAL HAS HELD IN THE CASE OF STARTRONICS & ENTE RPRISES (P) LTD (1995)(82 TAXMAN 87) THAT DATA PROCESSING AND PRINT -OUT WAS PRODUCTION OR AN ARTICLE OR THING AS CONTEMPLATED U /S 32A(2) OF THE ACT. ACCORDINGLY IT WAS HELD BY THE TRIBUNAL THAT THE ASSESSEE WOULD BE ELIGIBLE FOR INVESTMENT ALLOWANCE IN RESPE CT OF COMPUTERS INSTALLED FOR SUCH PURPOSES. THE ABOVE SAID DECISI ON OF THE TRIBUNAL WAS CHALLENGED BY THE REVENUE BY FILING AP PEAL BEFORE THE HON'BLE HIGH COURT OF GUJARAT. THE HON'BLE HIGH CO URT HELD IN THE VERY SAME CASE REPORTED IN (2007)(165 TAXMAN 153)( GUJ) THAT THE ASSESSEE COMPANY ENGAGED IN THE BUSINESS OF DATA PR OCESSING, SYSTEM DESIGNING AND SOFTWARE DEVELOPMENT AND SUPPL Y WOULD BE ELIGIBLE FOR INVESTMENT ALLOWANCE IN RESPECT OF COM PUTERS INSTALLED IN ITS OFFICE PREMISES. IN THE VERY SAME DECISION, THE HON'BLE GUJARAT HIGH COURT HELD THAT THE COMPUTERS USED FOR DATA PR OCESSING AND SOFTWARE DEVELOPMENT PURPOSES IS ELIGIBLE FOR ADDIT IONAL DEPRECIATION U/S 32(1)(IIA) OF THE ACT, AS PER THE PROVISIONS THEN EXISTING. THE RELEVANT DISCUSSIONS MADE AND DECISI ON RENDERED BY HON'BLE GUJARAT HIGH COURT ARE EXTRACTED BELOW:- 5. IN VIEW OF THE JUDGMENT REPORTED IN CIT V. PROFESSIONAL INFORMATION SYSTEMS & MANAGEMENT , WE MUST HOLD THAT THE COMPUTERS AND THE DATA PROCESSING MACHINES WOUL D BE THE PLANT AND MACHINERY AND THE INVESTMENT ALLOWANC E WOULD BE AVAILABLE. 6. PLACING RELIANCE UPON SECTION 32(1)(IIA) OF THE ACT, IT IS SUBMITTED THAT IF THE PLANT OR MACHINERY IS INSTALL ED IN ANY IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 22 OF 29 OFFICE PREMISES OR IN THE RESIDENTIAL ACCOMMODATION , THEN, NO DEDUCTION SHALL BE ALLOWED UNDER CLAUSE (IIA) OF SECTION 32(1) . SECTION 32(1)(IIA) , WITH ITS PROVISO, FOR THE PURPOSES OF THIS CASE, WOULD READ AS UNDER: 32. (1) IN RESPECT OF DEPRECIATION OF BUILDINGS, MACHINERY, PLANT OR FURNITURE OWNED BY THE ASSESSEE AND USED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION, THE FOLLOWING DEDUCTIONS SHALL, SUBJECT TO THE PROVISIONS OF SECTION 34 , BE ALLOWED- (I) XXXXXX (II) XXXXXX (IIA) IN THE CASE OF ANY NEW MACHINERY OR PLANT (OTHER THAN SHIPS AND AIRCRAFT) WHICH HAS BEEN INSTALLED AFTER THE 31ST DAY OF MARCH, 1980, BUT BEFORE THE 1ST DAY OF APRIL, 1985, A FURTHER SUM EQUAL TO ONE-HALF OF THE AMOUNT ADMISSIBLE UNDER CLAUSE (II) (EXCLUSIVE OF EXTRA ALLOWANCE FOR DOUBL E OR MULTIPLE SHIFT WORKING OF THE MACHINERY OR PLANT AND THE EXTRA ALLOWANCE IN RESPECT OF MACHINERY OR PLANT INSTALLED IN ANY PREMISES USED AS A HOTEL) IN RESPECT OF THE PREVIOUS YEAR IN WHICH SUCH MACHINERY OR PLANT IS INSTALLED OR, IF THE MACHINER Y OR PLANT IS FIRST PUT TO USE IN THE IMMEDIATELY SUCCEEDING PREVIOUS YEAR, THEN, IN RESPECT OF THAT PREVIOUS YEAR: PROVIDED THAT NO DEDUCTION SHALL BE ALLOWED UNDER THIS CLAUSE IN RESPECT OF- (A) ANY MACHINERY OR PLANT INSTALLED IN ANY OFFICE PREMISES OR ANY RESIDENTIAL ACCOMMODATION; X X X X X X X IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 23 OF 29 7. IT IS SUBMITTED THAT EVEN IF THE COMPUTERS AND D ATA PROCESSING MACHINES ARE TAKEN TO BE PLANT AND MACHI NERY AND ARE ENTITLED TO INVESTMENT ALLOWANCE, BECAUSE O F THEIR LOCATION IN THE OFFICE, ADDITIONAL DEPRECIATION WOU LD NOT BE ALLOWABLE. THRUST OF THE ARGUMENT IS ON THE WORDS ' OFFICE PREMISES'. 8. THE SUBMISSION IS THAT THE COMPUTERS AND THE DAT A PROCESSING MACHINES ARE ALWAYS KEPT IN THE OFFICE A ND IN THIS CASE, WHEN THE COMPUTERS AND THE DATA PROCESSI NG MACHINES ARE USED IN THE OFFICE, THEN, THE ADDITION AL DEPRECIATION WOULD NOT BE ALLOWABLE. 9. IT IS TO BE NOTED THAT THE WORDS 'OFFICE PREMISE S' HAVE NOT BEEN DEFINED IN THE IT ACT . THE WORD 'OFFICE' WOULD PARTAKE ITS CHARACTER WITH THE ACTIVITIES CARRIED O N IN THE SAID PREMISES. IN A GIVEN CASE, A DOCTOR'S CLINIC W OULD BE HIS OFFICE, BUT, WOULD ALSO BE HIS CLINIC AND IF HE INSTALLS A COMPUTER OR SOME MACHINE FOR THE PURPOSES OF PATHOL OGY, THEN, HIS OFFICE WOULD BE TAKEN TO BE AN INDUSTRIAL PREMISES FOR THE PURPOSES OF DEPRECIATION AND INVES TMENT ALLOWANCE. IN A GIVEN CASE, A COMPUTER KEPT IN THE OFFICE OF A MANAGER FOR HIS PERSONAL USE OR FOR SOME OTHER PURPOSE, THEN, SUCH COMPUTER WOULD NOT BE ENTITLED TO INVESTMENT ALLOWANCE AND/OR ADDITIONAL DEPRECIATION . IN THE PRESENT CASE, THE WORDS 'OFFICE PREMISES' THOUG H WOULD BE COVERING OFFICE BUT, INDUSTRIAL PREMISES W OULD NOT COME WITHIN OFFICE PREMISES IF THE SAID PREMISE S ARE USED FOR DATA PROCESSING. IN THE PRESENT CASE, UNDI SPUTEDLY, THE OFFICE PREMISES ARE USED AS INDUSTRIAL PREMISES FOR PRODUCTION OF THE DATA PROCESSORS. THE SUBMISSION O F THE LEARNED COUNSEL IS BASED ON A NARROW INTERPRETATION OF THE WORDS 'OFFICE PREMISES', WHICH WE ARE UNABLE TO CON CEDE. 10. IN VIEW OF THE ABOVE REFERRED DISCUSSION, QUEST ION NO. 1 DESERVES TO BE ANSWERED AGAINST THE INTEREST OF T HE REVENUE. CONSEQUENTLY, QUESTION NOS. 2 AND 3 WILL A LSO IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 24 OF 29 HAVE TO BE ANSWERED AGAINST THE INTEREST OF THE REV ENUE. THE REFERENCE STANDS DISPOSED OF. NO COSTS. 28. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED T HE RECORD. THE ADDITIONAL DEPRECIATION IS ALLOWABLE AS PER THE PRO VISIONS OF SEC.32(1)(IIA) OF THE ACT AND IT READS AS UNDER:- ( IIA ) IN THE CASE OF ANY NEW MACHINERY OR PLANT (OTHER THAN SHIPS AND AIRCRAFT), WHICH HAS BEEN ACQUIRED AND INSTALLED AF TER THE 31ST DAY OF MARCH, 2005, BY AN ASSESSEE ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING OR IN THE BUS INESS OF GENERATION OR GENERATION AND DISTRIBUTION OF POWER, A FURTHER SUM EQUAL TO TWENTY PER CENT OF THE ACTUAL COST OF SUCH MACHINERY OR PL ANT SHALL BE ALLOWED AS DEDUCTION UNDER CLAUSE ( II ) : PROVIDED THAT NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF ( A ) ANY MACHINERY OR PLANT WHICH, BEFORE ITS INSTALL ATION BY THE ASSESSEE, WAS USED EITHER WITHIN OR OUTSIDE INDIA BY ANY OTHE R PERSON; OR ( B ) ANY MACHINERY OR PLANT INSTALLED IN ANY OFFICE P REMISES OR ANY RESIDENTIAL ACCOMMODATION, INCLUDING ACCOMMODATION IN THE NATURE OF A GUEST-HOUSE; OR ( C ) ANY OFFICE APPLIANCES OR ROAD TRANSPORT VEHICLES ; OR ( D ) ANY MACHINERY OR PLANT, THE WHOLE OF THE ACTUAL COST OF WHICH IS ALLOWED AS A DEDUCTION (WHETHER BY WAY OF DEPRECIAT ION OR OTHERWISE) IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD ' PROFITS AND GAINS OF BUSINESS OR PROFESSION' OF ANY ONE PREVIOUS YEAR ; A CAREFUL PERUSAL OF THE ABOVE SAID PROVISION WOULD SHOW THAT THE ADDITIONAL DEPRECIATION PRESCRIBED U/S 32(1)(IIA) I S ADMISSIBLE TO AN ASSESSEE ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING ETC. HENCE, IN ORDER TO CLAIM THIS ADDITIONAL DEPRECIATION, AN ASSESSEE SHOULD FIRST SATISFY THE CONDITION THAT HE IS ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUC TION OF ANY ARTICLE OR THING. 29. THE TERM MANUFACTURE IS DEFINED IN SEC. 2( 29BA) OF THE ACT AS UNDER:- ( 29BA ) 'MANUFACTURE', WITH ITS GRAMMATICAL VARIATIONS, M EANS A CHANGE IN A NON-LIVING PHYSICAL OBJECT OR ARTICLE OR THING, IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 25 OF 29 ( A ) RESULTING IN TRANSFORMATION OF THE OBJECT OR ARTI CLE OR THING INTO A NEW AND DISTINCT OBJECT OR ARTICLE OR THING HAVING A DI FFERENT NAME, CHARACTER AND USE; OR ( B ) BRINGING INTO EXISTENCE OF A NEW AND DISTINCT OBJ ECT OR ARTICLE OR THING WITH A DIFFERENT CHEMICAL COMPOSITION OR INTEGRAL STRUCTUR E. THE EXPRESSION MANUFACTURE OR PRODUCTION OF AN ART ICLE OR THING WAS EXAMINED BY HON'BLE SUPREME COURT IN THE CONTE XT OF SEC.80HH OF THE ACT IN THE CASE OF N C BUDHARAJ & C O.(1993)(204 ITR 412) AND THE RELEVANT DISCUSSIONS MADE IN THE A BOVE SAID DECISION ARE EXTRACTED BELOW:- THE WORD 'PRODUCTION' HAS A WIDER CONNOTATION THAN THE WORD 'MANUFACTURE'. WHILE EVERY MANUFACTURE CAN BE CHARACTERISED AS PRO DUCTION, EVERY PRODUCTION NEED NOT AMOUNT TO MANUFACTURE. THE MEANING OF THE EXPRESSION 'MANUFACTURE' WAS CONSIDERED BY THIS COURT IN DY. CST V. PIO FOOD PACKERS [1980] 46 STC 63 AMONG OTHER DECISIONS. IN THE SAID DECISION, THE TEST EVOLVED FOR DETERMINING WHETHER MANUFACTURE CAN BE SAID TO HAVE TAKEN PLACE IS, WHETHER THE COMMODITY WHICH IS SUBJECTED TO THE PROCESS OF MANUFACTURE CAN NO LONGER BE REGARDED AS THE ORIGINAL COMMODITY BUT IS RECOGN ISED IN THE TRADE AS A NEW AND DISTINCT COMMODITY. PATHAK, J., AS HE THEN WAS, STATED THE TEST IN THE FOLLOWING WORDS : '. . . COMMONLY, MANUFACTURE IS THE END RESULT OF O NE OR MORE PROCESSES THROUGH WHICH THE ORIGINAL COMMODITY IS MADE TO PAS S. THE NATURE AND EXTENT OF PROCESSING MAY VARY FROM ONE CASE TO ANOT HER, AND INDEED THERE MAY BE SEVERAL STAGES OF PROCESSING AND PERHAPS A D IFFERENT KIND OF PROCESSING AT EACH STAGE. WITH EACH PROCESS SUFFERE D, THE ORIGINAL COMMODITY EXPERIENCES A CHANGE. BUT IT IS ONLY WHEN THE CHANGE, OR A SERIES OF CHANGES, TAKE THE COMMODITY TO THE POINT WHERE COMMERCIALLY IT CAN NO LONGER BE REGARDED AS THE ORIGINAL COMMODITY BUT INSTEAD IS RECOGNISED AS A NEW AND DISTINCT ARTICLE THAT A MAN UFACTURE CAN BE SAID TO TAKE PLACE. . . .' (P. 65) THE WORD 'PRODUCTION' OR 'PRODUCE' WHEN USED IN JUX TA-POSITION WITH THE WORD 'MANUFACTURE' TAKES IN BRINGING INTO EXISTENCE NEW GOODS BY A PROCESS WHICH MAY OR MAY NOT AMOUNT TO MANUFACTURE. IT ALSO TAKES IN ALL THE BY-PRODUCTS, INTERMEDIATE PRODUCTS AND RESIDUAL PRODUCTS WHICH E MERGE IN THE COURSE OF MANUFACTURE OF GOODS. THE NEXT WORD TO BE CONSIDERE D IS 'ARTICLES', OCCURRING IN THE SAID CLAUSE. WHAT DOES IT MEAN? THE WORD IS NOT DEFINED IN THE ACT OR THE RULES. IT MUST, THEREFORE, BE UNDERSTOOD IN ITS NOR MAL CONNOTATION - THE SENSE IN WHICH IT IS UNDERSTOOD IN COMMERCIAL WORLD. IT IS E QUALLY WELL TO KEEP IN MIND THE CONTEXT SINCE A WORD TAKES ITS COLOUR FROM THE CONTEXT. THE WORD 'ARTICLES' IS PRECEDED BY WORDS 'IT HAS BEGUN OR BEGINS TO MANUFACTURE OR PRODUCE'. CAN WE SAY THAT THE WORD 'ARTICLES' IN THE SAID CLAUSE COM PREHENDS AND TAKES WITHIN ITS IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 26 OF 29 AMBIT A DAM - A BRIDGE, A BUILDING, A ROAD, A CANAL AND SO ON? WE FIND IT DIFFICULT TO SAY SO. 30. THE ASSESSEE HEREIN IS ENGAGED IN SOFTWARE D EVELOPMENT SERVICES. THE QUESTION HERE IS WHETHER THE SAID ACT IVITY WILL FALL UNDER THE DEFINITION OF MANUFACTURE OR PRODUCTION GIVEN ABOVE? THE LD DRP HAS EXPRESSED THE VIEW THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF COMPUTER SOFTWARE AN D IT CANNOT BE EQUATED WITH THE MANUFACTURE OR PRODUCTION OF ARTIC LE OR THING. LD DRP FURTHER OBSERVED THAT THE WORDS COMPUTER SOFTW ARE HAVE BEEN USED IN DIFFERENT SECTIONS OF THE ACT IN ADDIT ION TO THE WORDS ARTICLES OR THINGS, WHENEVER BENEFIT WAS INTENDED TO BE EXTENDED TO SUCH BUSINESS ALSO. HE SUBMITTED THAT THE LEGISL ATURE HAS NOT INTENDED TO INCLUDE DEVELOPMENT OF SOFTWARE UNDER T HE CATEGORY OF MANUFACTURE OR PRODUCTION OF ARTICLE OR THING. WE ALSO NOTICE THAT SEC.10A USES THE EXPRESSION PROFITS AND GAINS ARE DERIVED BY AN UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS O R COMPUTER SOFTWARE. SEC. 10AA USES THE EXPRESSION PROFITS DERIVED FROM THE EXPORT OF ARTICLES OR THINGS OR SERVICES (INCLUDING COMPUTER SOFTWARE). SIMILAR EXPRESSION HAS BEEN USED IN SEC .10B ALSO. THE NEWLY INSERTED PROVISION, VIZ., SEC.115BAB ALLOWS C ONCESSIONAL RATE OF TAX TO A DOMESTIC COMPANY ENGAGED IN THE MANUFAC TURE OR PRODUCTION OF AN ARTICLE OR THING. THIS SECTION SP ECIFICALLY EXCLUDES SOFTWARE DEVELOPMENT ACTIVITY FROM ITS AMBIT. 31. THE LD A.R PLACED HIS RELIANCE ON THE DECIS ION RENDERED BY AHMEDABAD BENCH OF TRIBUNAL AND HON'BLE GUJARAT HIG H COURT IN THE CASE OF STARTRONICS & ENTERPRISES (P) LTD (SUPR A). WE NOTICE THAT THE ABOVE SAID DECISION WAS RENDERED IN THE CONTEXT OF SEC.32A OF THE ACT. UNDER THE SAID SECTION A DEDUCTION BY WAY OF INVESTMENT ALLOWANCE WAS ALLOWED AT PRESCRIBED RATE IN RESPECT OF NEW MACHINERY OR PLANT INSTALLED IN ANY INDUSTRIAL UNDE RTAKING, SMALL SCALE UNDERTAKING ETC., FOR THE PURPOSE OF BUSINESS OF CONSTRUCTION, IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 27 OF 29 MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING THE TRIBUNAL AND THE HON'BLE GUJARAT HIGH COURT ACCEPTED THE CON TENTIONS OF THE ASSESSEE THAT DATA PROCESSING AND PRINT OUT WOULD B E A THING PRODUCED BY THE ASSESSEE. IN THAT CONTEXT, IT WAS FURTHER HELD THAT THE ASSESSEE WOULD BE ELIGIBLE TO CLAIM ADDITIONAL DEPRECIATION AS PER THE PROVISIONS THEN EXISTING. 32. WE NOTICE THAT THE ABOVE SAID DECISIONS HAV E BEEN RENDERED WITHOUT CONSIDERING THE DECISION RENDERED BY HON'BL E SUPREME COURT IN THE CASE OF N C BUDHARAJ & CO (SUPRA). FU RTHER, THE INCOME TAX ACT DID NOT HAVE DEFINITION OF THE TERM 'MANUFACTURE' AT THAT POINT OF TIME. THE EXPRESSIONS USED IN SEC.10 A, 10AA, 10B AND SEC.115BAB (REFERRED SUPRA) HAVE BEEN INSERTED IN THE ACT SUBSEQUENTLY AND THEY BRING OUT THE INTENTION OF TH E GOVERNMENT VERY CLEAR, I.E., THE DEVELOPMENT OF COMPUTER SOFTW ARE IS NOT INTENDED TO BE INCLUDED IN THE EXPRESSION MANUFACT URE OR PRODUCTION OF AN ARTICLE OR THING. 33. THE CONDITIONS FOR ALLOWING ADDITIONAL DEPR ECIATION U/S 32(1)(IIA) WAS DIFFERENT AT THAT POINT OF TIME, WHE N THE CASE OF STARTRONICS & ENTERPRISES (P) LTD (SUPRA) WAS DECID ED BY THE TRIBUNAL AND HIGH COURT. UNDER THE OLD PROVISIONS, THE CONDITION OF MANUFACTURE OR PRODUCTION OF ARTICLE WAS NOT AVAI LABLE. HOWEVER, THE ADDITIONAL DEPRECIATION WAS NOT AVAILABLE TO A MACHINERY OR PLANT INSTALLED IN ANY OFFICE PREMISES. HENCE THE HON'BLE HIGH COURT WAS REQUIRED TO CONSIDER THE QUESTION AS TO W HETHER THE COMPUTERS USED FOR DEVELOPMENT OF SOFTWARE WOULD FALL UNDER THE CATEGORY OF OFFICE EQUIPMENT OR NOT. 34. HOWEVER, UNDER THE CURRENT PROVISIONS OF SE C.32(1)(IIA), THE FIRST CONDITION THAT SHOULD BE SATISFIED IS THAT AN ASSESSEE SHOULD BE IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 28 OF 29 ENGAGED IN THE BUSINESS OF MANUFACTURE OR PRODUCTIO N OF AN ARTICLE OR THING. WE HAVE AGREED WITH THE VIEW EXPRESSED B Y LD DRP THAT THE DEVELOPMENT OF COMPUTER SOFTWARE WOULD NOT FALL UNDER THAT CATEGORY, FOR THE REASONS DISCUSSED ABOVE. ACCORDIN GLY, WE HOLD THAT THE ASSESSEE WOULD NOT BE ENTITLED TO ADDITIONAL DE PRECIATION PRESCRIBED U/S 32(1)(IIA) OF THE ACT. ACCORDINGLY, WE CONFIRM THE ORDER PASSED BY LD DRP. 35. THE LAST GROUND RELATES TO THE DISALLOWANCE MADE U/S 40(A)(I) OF THE ACT IN RESPECT OF LEASE LINE CHARGES AND PA YROLL PROCESSING FEE PAID BY THE ASSESSEE FOR NON-DEDUCTION OF TAX AT SO URCE. 36. THE ASSESSEE CLAIMED THAT THESE PAYMENTS ARE MERE REIMBURSEMENTS AND HENCE DID NOT DEDUCT TAX AT SOUR CE. THE AO ALSO DID NOT EXAMINE THIS ISSUE WHILE PASSING DRAFT ASSESSMENT ORDER. THE LD DRP NOTICED THAT THE ASSESSEE HAS MA DE TWO TYPES OF PAYMENTS TO ITS AE, VIZ., RS.1,20,42,275/- AS LEASE LINE CHARGES AND RS.18,83,967/- AS PAY ROLL PROCESSING FEE. THE LD DRP TOOK THE VIEW THAT THESE PAYMENTS WOULD FALL UNDER THE DEFIN ITION OF ROYALTY, AS PER EXPLANATION 5 AND 6 OF SEC.9(1)(VI) OF THE A CT. SINCE THE ASSESSEE HAS NOT DEDUCTED TAX AT SOURCE FROM THESE PAYMENTS, THE LD DRP HELD THAT BOTH THESE PAYMENTS ARE LIABLE TO DISALLOWED U/S 40(A)(I) OF THE ACT. ACCORDINGLY THE LD DRP DIRECT ED THE AO TO DISALLOW THESE TWO PAYMENTS. HOWEVER, IN THE FINAL ASSESSMENT ORDER DATED 12/05/2017, THE ASSESSING OFFICER DID N OT DISALLOW THESE TWO PAYMENTS AS DIRECTED BY LD DRP. HOWEVER , THE AO PASSED A RECTIFICATION ORDER LATER U/S 154 OF THE A CT ON 19-05-2017 AND MADE THE DISALLOWANCE OF ABOVE SAID TWO PAYMENT S. 37. THE ASSESSEE IS CHALLENGING THE ABOVE SAID AD DITION IN THE PRESENT APPEAL FILED AGAINST THE FINAL ASSESSMENT O RDER. AS NOTICED IT(TP)A NO.1573/BANG/2017 M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD ., BENGALURU PAGE 29 OF 29 BY US EARLIER, THE AO HAS NOT MADE ADDITION OF ABOV E SAID PAYMENTS IN THE FINAL ASSESSMENT ORDER. HENCE THIS ADDITION DOES NOT ARISE OUT OF THE IMPUGNED FINAL ASSESSMENT ORDER. ACCORD INGLY, WE DECLINE TO ADMIT THIS GROUND. 38. THE REMAINING TWO ISSUES RELATE TO THE MAT CR EDIT AND CHARGING OF INTEREST U/S 234C OF THE ACT. WE RESTO RE BOTH THE ISSUES TO THE FILE OF THE AO FOR EXAMINING THEM IN ACCORDANCE WITH LAW. 39. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 2 ND NOV, 2020 SD/- (BEENA PILLAI) JUDICIAL MEMBER SD/- (B.R. BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED 2 ND NOV, 2020. VG/SPS COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE