M/s.Meritor CVC India (P) Ltd., Bangalore V. Income Tax Officer, Bangalore

ITA 1842/BANG/2016

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 0406 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 4 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-03-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 22-02-2021
• Assessment Year: 2012-2013
• Appeal Filed On: 27-10-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRADEEP KUMAR CIT BENGALURU
• Assessee Lawyers: C RAMESH
• Keywords: Business income; Depreciation; Transfer pricing; Wholly owned subsidiary; TDS
• Section: 143(3); 10AA; 10B; 144C; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI CHANDRA POOJARI , ACCOUNTANT MEMBER IT (TP) A NO . 1842/BANG/2016 ASSESSMENT YEAR : 2012 - 13 M/S. MERITOR CVS INDIA (P) LTD., TOWER 1, IT SECTOR, MYLASANDRA, KENGERI HOBLI, RVCE POST, BANGALORE 560 059. PAN: AAFCM 7571E VS. THE INCOME TAX OFFICER, WARD 4(1)(3), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : S HRI C. RAMESH, CA RESPONDENT BY : SHRI PRADEEP KUMAR, C IT(DR)(ITAT ) , BENGALURU. DATE OF HEARING : 22 . 02.2021 DATE OF PRONOUNCEMENT : 10 .0 3 .202 1 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDE R DATED 29.08.2016 PASSED BY THE ASSESSING OFFICER U/S. 143(3) R.W.S. 144C OF THE INCOME-TAX ACT, 1961 [THE ACT] FOR THE ASSESSMENT YEAR 2012-13 . 2. THE ASSESSEE IS A 100% SUBSIDIARY OF M/S. MERITO R HOLDINGS (BARBADOS) LTD. THE ULTIMATE HOLDING COMPANY IS M/ S. MERITOR INC. USA WHICH IS ENGAGED IN THE MANUFACTURE OF AUTOMOTIVE THE FIRST GROUND IS WITH REGARD TO TP ADJUSTMENT OF RS.1,74,41723 ON ACCOUNT OF INCLUSION/EXCLUSION OF COMPARABLES. THE LD. AR SUB MITTED THAT THE FOLLOWING COMPARABLES WERE WRONGLY INCLUDED AND PRAYED THAT T HE SAME MAY BE EXCLUDED FROM THE LIST OF COMPARABLES:- IT(TP)A NO.1842/BANG/2016 PAGE 2 OF 12 (I) GENESYS INTERNATIONAL CORPORATION LTD. (II) INFOSYS LTD. (III) LARSEN & TOUBRO INFOTECH LTD. (IV) MINDTREE LTD. (V) PERSISTENT SYSTEMS LTD. 3. GENESYS INTERNATIONAL CORPORATION LTD. : WITH REGARD TO THIS COMPANY, THE OBJECTION OF THE ASSESSEE IS THAT THIS COMPANY HAS SUPER PROFITS, THE COMPANY PROFIT MARGIN FOR THE YEAR END ED 31.3.2012 WAS AT 50.08% WHICH WAS AT 108.28% FOR THE YEAR ENDED 31.3 .2011. THERE IS A HIGH DEGREE OF FLUCTUATION IN THE PROFIT OF THAT CO MPANY WHICH CANNOT BE COMPARED TO THE ASSESSEES CASE. THEREFORE THE SA ME SHOULD HAVE BEEN EXCLUDED. HE RELIED ON THE ORDER OF THIS TRIBUNAL IN THE CASE OF VERISIGN SERVICES INDIA (P) LTD. 109 TAXMANN.COM 432 (BANG. TRIB.) WHEREIN IT WAS HELD THAT THIS COMPANY WAS FUNCTIONALLY DIFFERENT A ND OUGHT TO BE EXCLUDED FROM THE COMPARABLES. 4. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT THE RE IS NO RULE THAT A COMPANY HAVING HIGH DEGREE OF PROFITS CANNOT BE CON SIDERED AS A COMPARABLE OR IT HAS TO BE EXCLUDED WHILE DETERMINI NG THE ALP. HE SUBMITTED THAT A COMPANY CAN BE EXCLUDED ONLY ON TH E BASIS OF FAR ANALYSIS, BUT NOT MERELY ON THE GROUND OF AMOUNT OF PROFIT/LOSS EARNED BY THE COMPARABLE CASES. HE RELIED ON THE FOLLOWING J UDGMENTS:- (I) THE BANGALORE TRIBUNAL IN THE CASE OF SAP LABS (2010-TII- 44-ITAT-BANG-TP) SELECTED COMPARABLE HAVING MARGIN OF 40.96% (ADCC RESEARCH AND COMPUTING CENTRE LTD.), 35.88% (XCEL VISION TECHNOLOGIES LTD.) AND 30.86% (ZYLOG SYSTEMS LTD.). (II) THE HYDERABAD TRIBUNAL IN THE CASE OF DELOITTE CONSULTING PVT. LTD. CONFIRMED SELECTION OF VISHAL INFORMATION TECHNOLOGY LTD. HAVING MARGIN OF 48.84%. (III) THE ITAT MUMBAI IN THE CASE OF M/S. BP INDIA SERVICES PVT. LTD. (ITA NO.4425/MUM/2010) DID NOT REJECT IT(TP)A NO.1842/BANG/2016 PAGE 3 OF 12 COMPANIES HAVING MARGIN OF 75.6% (DATAMATICS TECHNOLOGIES LTD.) AND 68.7% (HINDUJA TMT LTD.). (IV) IN THE CASE OF EXXON MOBIL, THE ITAT MUMBAI UPHELD ALPHA GEO INDIA LTD. HAVING MARGIN OF 47.79% AND VIMTA LAB HAVING MARGIN OF 57.68%. (V) IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. V. DCIT (2013) 29 TAXMANN.COM 310 THE BANGALORE TRIBUNAL HELD THAT THERE IS NO BAR TO CONSIDER COMP ANIES WITH EITHER ABNORMAL PROFITS OR LOSSES AS COMPARABL E TO TESTED PARTIES AS LONG AS THEY ARE FUNCTIONALLY COM PARABLE. THE EXISTENCE OF ANY ABNORMAL FACTOR WHICH COULD HA VE CAUSED THE HIGH PROFIT MARGIN IS FOR THE TAX PAYER TO DEMONSTRATE. THIS DECISION WAS FOLLOWED IN THE CAS E OF AUTODESK (INDIA) PVT. LTD. V. DCIT IN ITA NO.1108/BANG/2010 AND YODLEE INFOTECH PVT. LTD. V. ITO (2013) 31 TAXMANN.COM 230 (ITAT BANG) . (VI) THE MUMBAI ITAT IN THE CASE OF BP INDIA SERVICES PVT. LTD. IN ITA NO.4425/MUM/2010 AND RUSABH DIAMONDS V. ACIT (TS-91-ITAT-2013-MUM-TP) HELD THAT ONLY PRINCIPLES LAID DOWN UNDER RULE 10B SHOULD BE THE B ASIS FOR COMPARISON AND LOWER OR HIGHER MARGIN IS NOT A FACTOR FOR COMPARABILITY WHICH IS ENDORSED BY THE OECD IN ITS REVISED 2010 GUIDELINES. 5. THE LD. DR SUBMITTED THAT EVEN AS PER LAW, THE E XCLUSION OF SO-CALLED EXTREME RESULT CASES IS NOT CORRECT. AS PER PROVIS O TO SECTION 92C(2) OF THE ACT, WHEN MORE THAN ONE PRICE IS DETERMINED THEN TH E ARITHMETICAL MEAN OF SUCH PRICES SHALL BE THE ARMS LENGTH PRICE (ALP). THEREFORE, WHEN THERE IS A ROBUST SET OF COMPARABLES, SUCH SET OBVIOUSLY CON TAINS COMPARABLES HAVING LOW MARGIN, NORMAL MARGIN OR HIGH MARGIN. T HE ARITHMETIC MEAN OF SUCH PRICES TAKES CARE OF ALL KINDS OF CASES INCLUD ING LOSS OR HIGH PROFIT MAKING, LOW/HIGH TURNOVER LOW OR HIGH END ACTIVITY, ETC. THUS, HE SUBMITTED THAT M/S. GENSYS INTERNATIONAL CORPORATION LTD. WAS RIGHTLY INCLUDED AS A COMPARABLE. IT(TP)A NO.1842/BANG/2016 PAGE 4 OF 12 6. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. A DMITTEDLY, IN THIS CASE THE PROFIT MARGIN OF THE COMPARABLE IS HIGHLY FLUCTUATING AS IN THE YEAR ENDED ON 31.3.2012 IT WAS 50.08% OF THE TURNOVER AN D IN THE EARLIER YEAR ENDED 31.3.2011 IT WAS 108.28%. THE DEGREE OF FLUC TUATION IS NOT DUE TO ANY EXTERNAL FACTORS, IT IS ONLY DUE TO HIGH MARGIN OF PROFIT IN THE BUSINESS OF THE COMPANY. ON THIS REASON IT CANNOT BE EXCLUDED AS RIGHTLY POINTED OUT BY THE LD. DR. BEING SO, WE FIND FORCE IN THE ARGU MENTS OF THE LD. DR AND RELIANCE PLACED BY THE LOWER AUTHORITIES ON VARIOUS JUDGMENTS ALSO SUPPORTS THE REVENUES CASE. 7. ACCORDINGLY, THIS GROUND OF APPEAL BY THE ASSES SEE IS REJECTED. 8. INFOSYS LTD. AND MINDTREE LTD. : THE LD. AR SUBMITTED THESE COMPANIES ARE HAVING HIGH TURNOVER WITH BRAND NAME AND OWN HUGE INTANGIBLES AND CANNOT BE COMPARABLE. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT THE BENEFIT OF BRAND IS NOT RESTRICT ED TO PARENT COMPANY, BUT IT IS AVAILABLE TO ALL ASSOCIATE COMPANIES IF THEY ARE USING THE BRAND NAME. THE ASSESSEE IS A SUBSIDIARY OF M/S. MERITOR HOLDIN GS LT. WHICH IN ITSELF IS A SUBSIDIARY OF M/S. MERITOR INC USA AND CARRIES BRAN D NAME MERITOR WITH IT AND IS THUS EXPECTED TO PROVIDE SERVICES COMMENSURA TE WITH BRAND NAME. THOUGH IT MAY BE A CAPTIVE SERVICE PROVIDER, BUT IT IS SO BECAUSE ITS AE HAS CONSIDERED ITS SERVICES ITS SERVICES OF SUCH HIGH L EVEL SO AS TO NOT TARNISH AES BRAND NAME. SO NATURALLY THE ASSESSEE NEEDS T O BE COMPENSATED APPROPRIATELY BY THE AE AS IT CANNOT BE TREATED AS A ROUTINE SERVICE PROVIDER WITH OUT HARDLY BOTHER ABOUT THE BRAND OF THE AE. THUS, THESE COMPANIES CANNOT BE EXCLUDED FROM THE LIST OF COMPARABLES MER ELY BECAUSE THEY HAVE A BRAND VALUE, AS THE ASSESSEE ALSO STANDS ON THE S AME FOOTING. 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD ON THIS ISSUE. AS RIGHTLY POINTED OUT BY THE LD. A R, THESE COMPANIES WERE IT(TP)A NO.1842/BANG/2016 PAGE 5 OF 12 HELD TO BE NOT COMPARABLE IN THE CASE OF VERISIGN SERVICES INDIA (P) LTD. (SUPRA) WHEREIN THE TRIBUNAL OBSERVED AS UNDER:- A) INFOSYS LTD., WAS EXCLUDED FROM THE LIST OF COM PARABLE COMPANIES BY FOLLOWING THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT V. AGNITY INDIA TECHN OLOGIES (P.) LTD. [2013] 36 TAXMANN.COM 289/219 TAXMAN 26 (DELHI). THE DISCUSSION IS CONTAINED IN PARAGRAPHS 4.5 TO 4.7 OF THE TRIBUNAL'S ORDER. THE TRIBUNAL ACCEPTED THAT INFOSYS LTD. IS A GIANT RISK TAKING COMPANY AND ENGAGED IN DEVELOPMENT AND SALE OF SOFTWARE PRODUCTS AND ALSO OWNS INTANGIBLE ASSETS AND THEREFORE NOT COMPARABLE WITH A SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE A SSESSEE IN THAT CASE. 13. THE CIT(A) HAS IN THE IMPUGNED ORDER HAS OPINE D THAT COMPANIES LIKE MINDTREE LTD., WHICH ARE SIMILAR IN SIZE AND OTHER ASPECTS TO THAT OF INFOSYS LTD., WERE CHOSEN BY THE ASSESSEE AS COMPARABLE COMPANY IN ITS TP STUDY AND THEREFORE THEY CANNOT OBJECT TO INFOSYS LTD., BEING CHOSEN AS COMPARABLE COMPANY. WE ARE OF THE VIEW THAT THIS AR GUMENT CANNOT BE SAID TO BE VALID BECAUSE, WE HAVE TO DEAL WITH ONLY EXCLUSION OF COMPARABLES AND WHEN THE REASONS GIVEN EXCLUSION ARE VALID, THEN SUCH COMPANIES HAVE TO BE EXCLUDED. RESPECTFULLY FOLLOWING THE DECISION OF TH E TRIBUNAL WE HOLD THAT THE AFORESAID 3 COMPANIES BE EXCLUDED FROM THE FINAL LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF ARRIVING AT THE ARITHMETIC MEAN OF COMPARABLE COMPANIES FOR THE PURPOSE OF COMPARISON WITH THE PROFIT MARGINS. 10. ACCORDINGLY, WE DIRECT TO EXCLUDE INFOSYS LTD. AND MINDTREE LTD. FROM THE LIST OF COMPARABLES. 11. LARSEN & TOUBRO INFOTECH LTD.: THE LD. AR SUBMITTED THIS COMPANY HAS VERY HIGH TURNOVER AND IS NOT COMPARABL E. THE LD. DR SUBMITTED THAT APPLICABILITY OF HIGH TURNOVER FILTE R HAS ITSELF BEEN REJECTED BY THE JURISDICTIONAL BENCH OF ITAT, AS DISCUSSED SUPR A ON THE COMPARABILITY OF IT(TP)A NO.1842/BANG/2016 PAGE 6 OF 12 GENESYS INTERNATIONAL CORPORATION LTD. AS SUCH, THI S COMPARABLE CANNOT BE EXCLUDED. 12. WE HAVE HEARD BOTH PARTIES ON THIS ISSUE. THI S COMPANY WAS HELD TO BE NOT COMPARABLE IN THE DECISION OF THIS TRIBUN AL IN THE CASE OF VERISIGN SERVICES INDIA (P) LTD. (SUPRA) . THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ARE AS UNDER:- (B) LARSEN & TOUBRO INFOTECH LTD., WAS EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES BY RELYING ON THE DECI SION OF THE DELHI BENCH OF ITAT IN THE CASE OF SAXO INDIA (P.) LTD. V. ASSTT. CIT [2016] 67 TAXMANN.COM 155 (DELHI - TRIB.) . THE DISCUSSION IS CONTAINED IN PARAGRAPHS 4.8 TO 4.10 OF THE TRIBU NAL'S ORDER. THE TRIBUNAL HELD THAT L & T INFOTECH LTD., WAS A SOFTW ARE PRODUCT COMPANY AND SEGMENTAL INFORMATION ON SWD SERVICES W AS NOT AVAILABLE. THE TRIBUNAL ALSO NOTICED THAT THE APPEA L FILED BY THE REVENUE AGAINST THE TRIBUNAL'S ORDER WAS DISMISSED BY THE HON'BLE DELHI HIGH COURT IN ITA NO.682/2016. 13. ACCORDINGLY, WE DIRECT EXCLUSION OF L&T INFOTEC H FROM THE COMPARABLES. 14. PERSISTENT SYSTEMS LTD . : THE LD. AR SUBMITTED THAT THE COMPANY HAS HIGH TURNOVER. IT IS FURTHER ARGUED BY ASSESSEE THAT THERE WERE MERGERS DURING THE YEAR UNDER CONSIDERATION AND DUE TO THES E EXTRAORDINARY EVENTS THIS COMPANY SHOULD NOT HAVE BEEN ADOPTED AS A COMP ARABLE BY THE TPO. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT SINCE THE APPLICABILITY OF HIGH TURNOVER FILTER HAS ITSELF BEEN REJECTED BY THE JUR ISDICTIONAL BENCH OF ITAT, AS DISCUSSED SUPRA, AS SUCH THIS COMPARABLE CANNOT BE EXCLUDED. AS REGARDS ASSESSEE'S CLAIM THAT THE COMPANY IS HAVING INTANGI BLE ASSETS, THE FINANCIALS CLEARLY SHOW THAT THE SAME IS ON ACCOUNT OF PURCHASE OF SOFTWARE ETC. BY THE COMPANY. FURTHER THE COMPANY IS DEVELOP ING SOFTWARE FOR ITS CUSTOMERS, WHO IN TURN ARE IN BUSINESS OF SOFTWARE PRODUCT DEVELOPMENT AND OUTSOURCING THE WORK OF SOFTWARE DEVELOPMENT TO THIS COMPANY. THUS IT(TP)A NO.1842/BANG/2016 PAGE 7 OF 12 THE ASSESSEE HAS WRONGLY INFERRED THAT THE M/S PERS ISTENT SYSTEMS LTD ITSELF IS IN SOFTWARE PRODUCT DEVELOPMENT. IN FACT, THE ASSESSEE ITSELF IS SIMILARLY PLACED AS IT IS DEVELOPING SOFTWARE FOR I TS AE, WHICH IN TURN IS FINALLY USING IT IN SOFTWARE PRODUCTS BEING MARKETE D BY IT. 15. WE HAVE HEARD BOTH THE PARTIES ON THE ISSUE. T HE TRIBUNAL IN THE CASE OF VERISIGN SERVICES INDIA (P) LTD. (SUPRA) HAS EXCLUDED THIS COMPANY HOLDING AS FOLLOWS:- (C) PERSISTENT SYSTEMS LTD., WAS EXCLUDED FROM TH E LIST OF COMPARABLE COMPANIES ON THE GROUND THAT THIS COMPAN Y WAS A SOFTWARE PRODUCT COMPANY AND SEGMENTAL INFORMATION ON SWD SERVICES WAS NOT AVAILABLE. THE TRIBUNAL IN COMING TO THE ABOVE CONCLUSION REFERRED TO THE DECISION RENDERED BY ITA T DELHI BENCH IN THE CASE OF CASH EDGE INDIA (P.) LTD. V. I TO ITA NO.64/DEL/2015 ORDER DATED 23.9.2015 AND THE DECISI ON OF HON'BLE DELHI HIGH COURT IN THE CASE OF SAXO INDIA PVT. LTD. (SUPRA). THE FINDINGS IN THIS REGARD ARE CONTAINED IN PARAGRAPHS 4.14 TO 4.16 OF ITS ORDER. 16. FOLLOWING THE AFORESAID ORDER OF THE TRIBUNAL, WE DIRECT EXCLUSION OF PERSISTENT SYSTEMS LTD. FROM THE LIST OF COMPARABLE S. 17. THE NEXT ISSUE RAISED BY THE ASSESSEE IS WITH R EGARD TO INCLUSION OF COMPANIES IN THE LIST OF COMPARABLES WHICH ARE AS U NDER:- (I) R S SOFTWARE (INDIA) LTD. (II) AKSHAY SOFTWARE TECHNOLOGIES LTD. (III) THINKSOFT GLOBAL SERVICES (IV) NUCLEUS SOFTWARE EXPORT LTD. 18. R S SOFTWARE (INDIA) LTD .: THIS COMPANY WAS EXCLUDED AS A COMPARABLE BY THE LOWER AUTHORITIES ON THE GROUND T HAT IT WAS ONSITE COMPANY AND FUNCTIONALLY DIFFERENT FROM THE ASSESSE E. 19. BEFORE US, THE ASSESSEE PRAYED FOR ITS INCLUSIO N IN THE LIST OF COMPARABLES. IT(TP)A NO.1842/BANG/2016 PAGE 8 OF 12 20. WE HAVE HEARD THE BOTH THE PARTIES ON THIS ISSU E. AS PER ANNUAL REPORT, THE COMPANY IS HAVING A FOREIGN BRANCH AND DURING THE YEAR ITS TOTAL EXPENDITURE IN FOREIGN CURRENCY WAS RS 146.55 CRORE AS AGAINST TOTAL EXPENDITURE OF THE COMPANY AT RS 214.77 CRORE. THUS FOREIGN BRANCH EXPENSES ARE ABOUT 68% OF THE TOTAL EXPENDITURE. TH IS SHOWS THAT MAJOR WORK OF THE COMPANY WAS ONSITE AND SO THIS COMPANY CANNOT BE CONSIDERED AS FUNCTIONALLY COMPARABLE TO THE ASSESS EE COMPANY, WHICH IS OPERATING OFFSHORE. 21. THIS BENCH OF THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA (P.) LTD . (SUPRA) HELD AS FOLLOWS:- THUS, ASSETS AND RISK PROFILE, PRICING AS WELL AS PREVAILING MARKET CONDITIONS ARE DIFFERENT IN PREDOMINANTLY ON SITE COMPANIES FROM PREDOMINANTLY T)/SHORE COMPANIES LIK E THE TAXPAYERS. SINCE, THE ENTIRE OPERATION OF THE TAX P AYERS ARE TAKING PLACE OFFSHORE I.E., IN INDIA, IT IS BUT NATURAL TH AT IT SHOULD BE COMPARED WITH COMPANIES WITH MAJOR OPERATIONS OFFSH ORE, DUE TO THE REASON THAT THE ECONOMICS AND PROFITABILITY OF ONSITE OPERATIONS ARE DIFFERENT FROM THAT OF OFFSHORE BUSI NESS MODEL. 22. HOWEVER, THE LD. AR CONTENDED THAT THIS COMPANY IS SIMILARLY PLACED AS THAT OF L&T INFOTECH LTD. AND HENCE HAS TO BE EX CLUDED. HOWEVER, IT IS OBSERVED THAT THE OVERSEAS STAFF COSTS ARE RS.947.3 5 CRORE, WHICH IS ABOUT 40% OF THE TOTAL EXPENDITURE OF RS.2340 CRORES. HE NCE THIS CONTENTION IS REJECTED. 23. ACCORDINGLY, WE CONFIRM THE ORDER OF DRP ON THI S ISSUE. 24. AKSHAY SOFTWARE TECHNOLOGIES LTD .: AS REGARDS INCLUSION OF THIS COMPANY SOUGHT BY THE ASSESSEE IN THE COMPARABLES, THE LD. DR SUBMITTED THAT AS PER THE DIRECTOR'S REPORT, THE REVENUE CONS ISTS FROM SOFTWARE SERVICES AND PRODUCT AND NOWHERE IN THE ANNUAL REPO RT THERE IS ANY INDICATION THAT SOFTWARE SERVICES MEAN SOFTWARE DEV ELOPMENT SERVICES. IT(TP)A NO.1842/BANG/2016 PAGE 9 OF 12 FURTHER, SEGMENTAL DETAILS ARE ALSO NOT AVAILABLE A ND IT IS NOT POSSIBLE TO ASCERTAIN SEPARATE PROFITS FROM SALE OF SOFTWARE PR ODUCTS AND SOFTWARE SERVICES. SO ASSESSEE'S CLAIM IS NOT FOUND TO BE CO RRECT THAT THIS COMPANY IS FUNCTIONALLY COMPARABLE. FURTHER, FROM EXAMINATI ON OF THE ANNUAL REPORT IT IS NOTICED THAT THE EXPENDITURE IN FOREIGN CURRENCY IS RS 11.64 CRORE (PAGE 28 OF THE ANNUAL REPORT) AGAINST TOTAL REVENUE OF R S 14.70 CRORE, WHICH MAKES IT CLEAR THAT COMPANY IS PRE-DOMINANTLY FUNCT IONAL ON ON-SITE BASIS AND THEREFORE, CANNOT BE RETAINED AS COMPARABLE TO THE ASSESSEE COMPANY, WHICH IS PRE-DOMINANTLY ENGAGED IN OFF-SHO RE SOFTWARE DEVELOPMENT. HE SUBMITTED THAT THIS VIEW FINDS SUP PORT FROM THE DECISION OF ITAT, BANGALORE IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA (P.) LTD . (SUPRA). THE RELEVANT OBSERVATIONS OF THE TRIBUN AL HAS BEEN REPRODUCED IN THE PRECEDING PARAGRAPH WHILE DEALING WITH INCLUSION OF R S SOFTWARE (INDIA) LTD. 25. WE HAVE HEARD BOTH THE PARTIES. THE COMPANYS TRADING INCOME IS VERY HIGH AS COMPARED TO REGULAR INCOME FROM SOFTWA RE DEVELOPMENT. IT IS ALSO NOTICED THAT THE FOREIGN CURRENCY EXPENDITURE IS VERY HIGH. BEING SO, AKSHAY SOFTWARE TECHNOLOGIES PVT. LTD. WAS RIGHTLY EXCLUDED FROM THE COMPARABLES LIST. THIS GROUND OF ASSESSEE IS THEREF ORE REJECTED. 26. THINKSOFT GLOBAL SERVICES : THE LD. AR PRAYED FOR INCLUSION OF THIS COMPANY AS COMPARABLE. THE LD. DR SUBMITTED THAT T HE COMPANY IS ENGAGED PRIMARILY IN DELIVERING SOFTWARE VALIDATION AND VERIFICATION SERVICES TO THE BANKING AND THE FINANCIAL SERVICES INDUSTRY WORLDWIDE. THE ITAT BANGALORE IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE LTD . (SUPRA) HELD THAT THINKSOFT PROVIDED SOFTWARE TESTING SERVICES WHICH ARE NOT COMPARABLE WITH SOFTWARE DEVELOPMENT SERVICES. SOFTWARE TESTING IS ONLY PART OF SOFTWARE DEVELOPMENT CYCLE AND CAN'T BE EQUATED WITH SOFTWAR E DEVELOPMENT. SO CONSIDERING THIS ASPECT M/S THINKSOFT GLOBAL SERVIC ES LTD. CANNOT BE CONSIDERED AS A COMPARABLE AS IT IS FUNCTIONALLY DI FFERENT. IT(TP)A NO.1842/BANG/2016 PAGE 10 OF 12 27. WE HAVE HEARD THE PARTIES AND CONSIDERED THE MA TERIAL ON RECORD. IN VIEW OF THE DECISION OF THE TRIBUNAL IN TRILOGY E-BUSINESS SOFTWARE LTD . (SUPRA) , WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE DRP AND CONFIRM THE SAME. 28. NUCLEUS SOFTWARE EXPORT LTD .: THE LD. AR SOUGHT INCLUSION OF THIS COMPANY WHICH WAS REJECTED BY THE DRP. THE LD. DR SUBMITTED THAT IT WAS REJECTED BY THE TPO BY OBSERVING THAT IT WAS IN SOFTWARE PRODUCT DEVELOPMENT. IT WAS ARGUED BY THE ASSESSEE THAT THE SAID COMPANY IS IN SOFTWARE DEVELOPMENT, HOWEVER, FROM THE FINANCIALS OF THIS COMPANY IT IS EVIDENT THAT THE SAID COMPANY IS HAVING REVENUE FRO M 'SOFTWARE SERVICES AND PRODUCTS'. NO SEGMENTAL DETAILS OF SOFTWARE SER VICES AND SOFTWARE PRODUCT DEVELOPMENT WERE GIVEN IN THE FINANCIALS. S O THE REJECTION OF THIS COMPANY AS A COMPARABLE BY THE DRP CANNOT BE FAULTE D WITH. 29. AFTER HEARING BOTH THE PARTIES, WE FIND NO INFI RMITY IN THE ORDER OF DRP ON THIS ISSUE AND CONFIRM THE SAME. 30. GROUND NO.4(I) IS WITH REGARD TO REDUCING THE C OMMUNICATION EXPENSES OF RS.73,48,385 AND INSURANCE CHARGES OF R S.1,21,582 FROM THE EXPORT TURNOVER WHILE DETERMINING THE ADJUSTED EXPO RT TURNOVER FOR COMPUTING THE ELIGIBLE DEDUCTION U/S 10AA OF THE AC T. THE DRP FOLLOWING THE JURISDICTIONAL HIGH COURT JUDGMENT IN THE CASE OF CIT V. TATA ELXSI LTD., 349 ITR 98 (KARN) DIRECTED THE AO TO REDUCE THE IMPUGNED EXPENSES BO TH FROM THE EXPORT TURNOVER AS WELL AS THE TOTAL TURNO VER. FURTHER, THE JUDGMENT OF THE HONBLE KARNATAKA HIGH COURT HAS BE EN UPHELD BY THE HONBLE SUPREME COURT IN THE CASE OF CIT V. HCL TECHNOLOGIES LTD. IN CIVIL APPEAL NO.8489-98490 OF 2013 & ORS. DATED 24.04.201 8 . WE THEREFORE UPHOLD THE DIRECTIONS OF THE DRP ON THIS ISSUE. IT(TP)A NO.1842/BANG/2016 PAGE 11 OF 12 31. GROUND NO.4.(II) READS AS FOLLOWS:- THE LEARNED ASSESSING OFFICER ERRED IN QUANTIFYING A DISALLOWANCE OF RS.3,59,439 BY INVOKING THE PROVISI ONS OF SECTION 40(A)(I) OF THE ACT, FOR THE ALLEGED REASON THAT, ON IMPORT OF SOFTWARE TAXES WERE DEDUCTIBLE AT SOURCE U/S. 19 5 OF THE ACT, IGNORING THE POSITION OF LAW THAT, SINCE THE SOFTWA RE WAS PURCHASED FOR USE, THE TRANSACTION WAS IN THE NATUR E OF PURCHASE OF PRODUCT AND THERE WERE NO TAXES DEDUCTIBLE AT SO URCE. 32. THIS ISSUE IS COVERED BY THE LATEST JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF ENGINEERING ANALYSIS CENTRE OF EXCELLENCE (P.) LTD. V. CIT, [2021] 125 TAXMANN.COM 42 (SC) JUDGMENT DATED 02-03-2021, WHEREIN IT WAS HELD THAT TRANSACTION RELATING TO SO FTWARE ARE IN THE NATURE OF SALE AND NOT LICENSE, NO COPYRIGHT OR PART OF ANY C OPYRIGHT IS LICENSED TO THE ASSESSEE. THE NON-RESIDENT OWNER CONTINUES TO HAVE PROPRIETARY RIGHTS IN THE SOFTWARE AND USE OF SOFTWARE BY THE INDIAN COMP ANY IS LIMITED TO MAKING BACK-UP COPY AND REDISTRIBUTION. SO PAYMENT RECEIVED FOR SALE OF COMPUTER SOFTWARE IS BUSINESS INCOME. AS SUCH, SOF TWARE PURCHASED IS IN THE NATURE OF PURCHASE AND SALE OF PRODUCT AND NO T DS IS DEDUCTIBLE. ACCORDINGLY, WE ALLOW THIS GROUND OF APPEAL BY THE ASSESSEE. 33. THE NEXT ISSUE IN GROUND NO.4(III) IS REGARDING DISALLOWANCE OF DEPRECIATION ON SOFTWARE. THIS GROUND IS INFRUCTU OUS IN VIEW OF OUR FINDINGS IN GROUND NO.4(II) AND ACCORDINGLY THE SAME IS DISM ISSED. 34. GROUND NO.4(IV) READS AS FOLLOWS:- (IV) THE LEARNED ASSESSING OFFICER ERRED IN NOT A LLOWING THE EXPENDITURE ON PURCHASE OF SOFTWARE AMOUNTING TO RS .11,28,900/- IGNORING THE FACT THAT, FOR HAVING HELD THAT, THE E XPENDITURE IS CAPITAL IN NATURE AND DEPRECIATION NOT ALLOWABLE, T HE EXPENDITURE SHOULD HAVE BEEN ALLOWED AS REVENUE CONSIDERING THE FACT THAT, ON SUCH PURCHASE OF SOFTWARE TAXES WERE DEDUCTED AT SO URCE. IT(TP)A NO.1842/BANG/2016 PAGE 12 OF 12 35. WE HAVE HEARD BOTH THE PARTIES. AS HELD IN PAR A 32 OF THIS ORDER, THE SOFTWARE EXPENDITURE HAS TO BE TREATED AS REVENUE E XPENDITURE. ACCORDINGLY THERE IS NO QUESTION OF GRANTING ANY DE PRECIATION AND PURCHASE OF SOFTWARE HAS TO BE ALLOWED AS A DEDUCTION, THOU GH THERE WAS NO TDS MADE BY THE ASSESSEE. 36. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS P ARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 10 TH DAY OF MARCH, 2021. SD/- SD/- ( N V VASUDEV A N ) ( CHANDRA POOJARI ) VICE PRESIDENT ACCOUNTANT MEMBER BANGALORE, DATED, THE 10 TH MARCH, 2021. / DESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.