M/s. Samsung R & D Institute India-Bangalore Private Limited, Bangalore V. Deputy Commissioner Of Income Tax, Circle- 12(3), Bangalore

ITA 2228/BANG/2019

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 7897 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 1 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-11-2021
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Assessment Year: 2010-2011
• Appeal Filed On: 17-10-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: T SURYANARAYANA
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; International transaction; Question of law; TDS
• Section: 32; 234B; 40(a)(ia); 133(6); 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ANDSHRI GEORGE GEORGE K, JUDICIAL MEMBER IT(TP)A No.2228/Bang/2019 Assessment year : 2010-11 M/s Samsung R&D Institute India Bangalore Pvt. Ltd., 2870, Phoenix Building, Bagmane Constellation Business Park, Outer Ring Road, Doddanekundi Circle, Marathahalli Post, Bengaluru-560 037. PAN – AAICS 6290 F Vs. The Dy. Commissioner of Income- tax, Circle-12(3), Bengaluru. ASSESSEE REVENUE IT(TP)A No.2225/Bang/2019 Assessment year : 2010-11 The Jt. Commissioner of Income- tax, Special Range-6, Bengaluru. Vs. M/s Samsung R&D Institute India Bangalore Pvt. Ltd., 2870, Phoenix Building, Bagmane Constellation Business Park, Outer Ring Road, Doddanekundi Circle, Marathahalli Post, Bengaluru-560 037. PAN – AAICS 6290 F REVENUE ASSESSEE ITA No.2225 & 2228/Bang/2019 Page 2 of 36 Revenue by : Shri Pradeep Kumar Priyadarshini Besaganni, JCIT (DR) Assessee by : Shri T Suryanarayana, Advocate Date of hearing : 16.11.2021 Date of Pronouncement : 24.11.2021 O R D E R Per Chandra Poojari, Accountant Member These two cross appeals are directed against the order of CIT(A) dated 26/7/2019 2. The assessee has raised following grounds of appeal:- “The grounds mentioned herein by the Assesseeare without prejudice to one another. 1. That on the facts and in law, the order passed by the learned Commissioner of Income-tax (Appeals) -6, Bangalore ['Ld. CIT(A)'], to the extent prejudicial to the Assesseeis bad in law and liable to be quashed. Grounds relating to transfer pricing matters 2. That on the facts and in law, the Ld. CIT(A) erred in upholding the action of the learned Assessing Officer ('Ld. AO')/ learned Transfer Pricing Officer ('Ld. TPO') of rejecting the contemporaneous transfer pricing documentation maintained by the Appellant. 3. That on the facts and in law, the Ld. CIT(A) erred in upholding the action of the Ld. AO/ Ld. TPO in not considering ITA No.2225 & 2228/Bang/2019 Page 3 of 36 the multiple year/prior year data of comparable companies while determining the arm's length price in relation to the Appellant's international transactions with its Associated Enterprises (AEs). 4. That on the facts and in law, the Ld. CIT(A) erred in upholding the action of the Ld. AO/ Ld. TPO in determining the arm's length mark-up/ price using only FY 2009-10 data, which was not available to the Assesseeat the time of complying with the contemporaneous transfer pricing documentation requirements. 5. That on the facts and in law, the Ld. CIT(A) erred in upholding the action of the Ld. TPO of the rejection/modification of certain quantitative and qualitative filters that were applied by the Assesseeand application of certain additional filters to arrive at the set of comparable companies in determining the arm's length price for the international transactions of provision of Software Development ('SWD') services of the Appellant. 6. That on the facts and in law, the Ld. CIT(A) erred in upholding the Ld. TPO's approach of including certain companies as comparable in the final set of comparables selected in the TP Order, which do not satisfy the test of comparability and /or are functionally dissimilar to the SWD services provided by the Appellant: • By disregarding the dissimilarities pointed out by the Appellant; • By disregarding the fact that the information obtained by the Ld. TPO u/s 133(6) for different financial years cannot be a basis for the assessment of the year under appeal; and • By making erroneous observations regarding the Intellectual Property Rights of the Appellant. 7. That on the facts and in law, the Ld. CIT(A) erred in upholding the Ld. TPO's approach of rejecting certain companies as comparable in the final set of comparable ITA No.2225 & 2228/Bang/2019 Page 4 of 36 companies selected in the TP Order, which are functionally similar to the SWD services provided by the Appellant. 8. That on the facts and in law, the Ld. CIT(A) erred in not providing any directions in respect of Appellant's claim of inclusion of Cat Technologies Ltd. in the final set of comparable companies for the SWD segment. 9. That on the facts and in law, the Ld. CIT(A) erred in completely rejecting the working capital adjustment while determining the arm's length price for the SWD services provided by the Assesseewhich was granted by the Ld. AO/ Ld. TPO even though on a restricted basis. 10. That on the facts and in law, the Ld. CIT(A) erred in disregarding the fact that working capital adjustment is an economic adjustment which would enhance the comparability analysis and ought to be carried out for the purposes of comparability analysis. In doing so, the Ld. CIT(A) has erred in completely rejecting the working capital adjustment. 11. That on the facts and in law, the Ld. CIT(A)/Ld. AO/ Ld. TPO erred in ignoring the limited risk nature of services provided by the Assesseeand not granting an appropriate adjustment towards the risk differential, even when the full- fledged entrepreneurial companies are selected as comparables to the Appellant. Grounds relating to other than transfer pricing matters 12. That on the facts and in law, the Ld. CIT(A) erred in confirming the action of the Ld. AO in disallowing depreciation under section 32 of the Act amounting to INR 6,088,697 by applying the provisions of section 40(a)(1)/(ia) of the Act. 13. That on the facts and in law, the Ld. CIT(A) erred in not following the decision of the jurisdictional Bangalore Tribunal in the case of Wipro vs. DCIT (ITA No. 972/Bang/2011). 14. That on the facts and in law, the Ld. CIT(A) erred in holding that the capitalised software on which depreciation ITA No.2225 & 2228/Bang/2019 Page 5 of 36 has been claimed under section 32 of the Act is a revenue expenditure. 15. That on the facts and in law, the Ld. CIT(A) further erred in holding that 'thus the entire amount of purchase of software on which TDS has not been deducted is to be disallowed.' 16. That on the facts and in law, the Ld. CIT(A) erred in upholding the action of the Ld. AO in not granting depreciation on goodwill to the assesseeamounting to INR 12,092,590 under section 32 of Act. 17. That on the facts and in law, the Ld. CIT(A) failed to appreciate that the difference between consideration for purchase of business and value of net assets acquired constitutes a goodwill, which is eligible for depreciation under section 32 of the Act. 18. That on the facts and in law, the Ld. CIT(A) erred in upholding the action of the Ld. AO in levying consequential interest under section 234B of the Act.” 3. The Revenue has raised the following grounds of appeal: “1. The order of the CIT (Appeals) is opposed to law and the facts and circumstances of the case. 2. On the facts and circumstances of the case, Whether the ld.CIT is justified In directing the TPO to exclude the company, M/s. Kals Infotech Ltd., as functionally dissimilar to the assessee without giving any cogent reason for considering the presence of inventories in the Balance Sheet as incontrovertible evidence of the company being engaged in the same of the software products? 3. On the facts and circumstances of the case, Whether the ld.CIT(A) is justified in directing the TPO to include the company M/s. Akshay Technologies Ltd. in the final set of comparables by holding it to be functionally comparable to the ITA No.2225 & 2228/Bang/2019 Page 6 of 36 assessee without undertaking a FAR analysis of the company and without giving a finding on the issue of cherry picking of this company as a comparable? 4. On the facts and circumstances of the case, Whether the ld.CIT(A) is justified in directing the TPO to include the company M/s. LGS Global Limited in the final set of comparables by holding it to be functionally comparable to the assessee without undertaking a FAR analysis of the company and without giving a finding on the comparability issue raised by the TPO in her remand report? 5. On the facts and circumstances of the case, whether the ld.CIT(A) is justified in allowing the assessee's claim of depreciation at 60% on the Servers and network equipment wherein depreciation claim is only allowable to the extent of 15% on the plant and machinery? First we will take assesse’s appeal. The brief facts of the case are that 4. M/s Samsung R&D Institute India-Bangalore Pvt. Ltd., formerly known as formerly known as Samsung India Software Operations Pvt. Ltd is a wholly owned subsidiary of Samsung Electronics Company Limited, Korea. The Assessee is primarily engaged in development of software for Samsung Electronics Company Limited. 5. During the previous year relevant to the assessment year 2010-11, one of the international ITA No.2225 & 2228/Bang/2019 Page 7 of 36 transactions that took place between the Assessee and its AEs was the provision of SWD services for which a TP adjustment of Rs. 29,15,57,492/- was made. 6. The Assessing Officer (“AO”) passed an assessment order dated 22.04.2014 incorporating the aforesaid TP adjustment and recomputing the total income of the Assessee. The AO also made a (i) disallowance under Section 40(a)(ia) of the Act of depreciation claimed on software (ii) disallowance of depreciation on goodwill and (iii) restriction of depreciation on server at 15%. 7. Aggrieved, the Assessee preferred an appeal to the CIT(A), wherein vide the order dated 26.07.2019, the CIT(A) partly allowed the appeal. To the extent aggrieved by the CIT(A)’s order, the Assessee has preferred the present appeal before this Hon’ble Tribunal. To the extent the CIT(A) granted relief to the Assessee, the Revenue has preferred the above appeal before this Hon’ble Tribunal. ASSESSEE’S SUBMISSIONS: A. DETAILS OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE: ITA No.2225 & 2228/Bang/2019 Page 8 of 36 Particulars Amount in Rs. Outcome of TP Order Rendering of software development services 4,760,500,23 6 Adjustment of Rs. 29,15,57,492/- Payment of communication charges 29,450,115 Accepted to be at arm’s length Purchase of fixed assets 20,657,944 Accepted to be at arm’s length Reimbursement of salary, Wages and Bonus 52,510,058 Accepted to be at arm’s length Reimbursement of GERP IT expenses 68,48,819 Accepted to be at arm’s length B. ANALYSIS OF THE TP STUDY OF THE ASSESSEE AND THE TPO: B.1. Net mark-up on cost earned by the Assessee as reflected in the TP Order: Operating Income Rs. 4,063,374,287/- Operating Cost Rs. 3,607,166,221/- Operating Profit (Op. Income – Op. Cost) Rs. 456,208,066/- Operating/Net margin (OP/OC) 13% B.2. Comparison of the TP studies done by the Assessee and TPO: ITA No.2225 & 2228/Bang/2019 Page 9 of 36 Assessee TPO Methodology adopted TNMM TNMM Profit Level Indicator (PLI) OP/TC OP/OC Database used PROWESS & CAPITALINE PLUS PROWESS & CAPITALINE PLUS Comparables selected for software development services 16 11 Period for which data was used Financial Years (‘FYs’) ending during the period April 1, 2007 to March 31, 2010. FY 2009-10 B.3. Filters applied by Assessee in its TP study: Step Description 1. Companies for which data was available as of 19th February 2010. (for the financial years 2007-08, 2008-09 and 2009-10) 2. Companies having positive sales and ratio of other operating income to sales greater than 50% - selected 3. Companies with ratio of research and development ITA No.2225 & 2228/Bang/2019 Page 10 of 36 expenses to sales less than 3 % - selected 4. Companies with ratio of net fixed assets to sales less than 200% - selected 5. Companies that had average sales of less than Rs.1 crore during the time period – rejected 6. Companies with net worth less than zero – rejected 7. Companies with ratio of advertisement, marketing and distribution expenses to sales less than 3% - selected 8. Companies providing software development services – selected 9. Companies with related party transactions exceeding 10% of total revenue – rejected B.4. Comparables selected by Assessee and their arithmetic mean: Sl. No. Name of the company Average NPI (in %) 1. Akshay Software Technologies Ltd. 9% 2. Compulink Systems Ltd. -7% 3. FCS Software Solutions Ltd. 39% 4. Goldstone Technologies Ltd. 12% 5. LGS Global Ltd. 23% 6. Larsen & Toubro Infotech Ltd. 22% 7. Mindtree Ltd. 22% 8. PSI Data Systems Ltd. 5% 9. Polaris Software Lab Ltd. 11% 10. Reliance Infosolutions Pvt Ltd. 1% 11. Sasken Communication 13% ITA No.2225 & 2228/Bang/2019 Page 11 of 36 Technologies Ltd. 12. Synetarios Technologies Ltd. 21% 13. Thinksoft Global Services Ltd. 18% 14. Zensar Obt Technologies Ltd. 19% 15. Crazy Infotech Ltd. 1% 16. Teledata Marine Solutions Ltd. 3% Arithmetical Mean 13% NOTE: Out of the 16 companies selected by the Assessee, the TPO accepted 4 companies highlighted above, viz. Larsen & Toubro Infotech Ltd., Mindtree Ltd., Sasken Communication Technologies Ltd. and Thinksoft Global Services Ltd. and rejected the remaining 12 companies. B.5. Filters applied by the TPO: Step Description 1. Companies for which current year data was available – accepted 2. Companies whose software development service income < Rs. 1 crore – rejected 3. Companies whose software development service revenue is less than 75% of the total operating revenue – rejected 4. Companies which have more than 25% related party transactions of the sales – rejected 5. Companies which have export sales < 75% of the sales– rejected 6. Companies whose employee cost < 25% of their turnover – rejected 7. Companies which have persistent losses for the last three years upto and including financial year ITA No.2225 & 2228/Bang/2019 Page 12 of 36 Step Description 2009-10 - rejected 8. Companies having different financial year ending (i.e. not March 31, 2010) or data of the company which does not fall within 12 month period i.e., 01.04.2009 to 31.03.2010 - rejected 9. Companies that are functionally different – rejected 10. Companies having peculiar economic circumstances – rejected B.6. Comparables selected by TPO and their arithmetic mean: Sl. No. Name of the company Margin Unadj. (%) Margin - WC adjusted (%) 1. ICRA Techno Analytics Ltd. (seg) 24.94 24.10 2. Infosys Ltd 44.98 44.15 3. Kals Information Systems Ltd. (seg) 34.41 27.86 4. Larsen & Toubro Infotech Ltd. 19.33 18.87 5. Mindtree Ltd. (seg) 14.83 12.16 6. Persistent Systems & Solutions Ltd. 15.38 14.57 7. Persistent Systems Ltd 30.35 27.52 8. R S Software (India) Ltd. 10.29 9.27 9. Sasken Communication Technologies 17.36 16.62 10. Tata Elxsi (seg) 20.93 13.38 11. Thinksoft Global Services Ltd. 17.05 15.8 ITA No.2225 & 2228/Bang/2019 Page 13 of 36 Sl. No. Name of the company Margin Unadj. (%) Margin - WC adjusted (%) Arithmetical Mean 22.71 20.63 B.7. Computation of arm’s length price by the TPO and the adjustment made: Arm’s Length Mean Margin 22.71% Less: Working Capital Adjustment* 1.98% Adjusted mean margin of the comparables 20.73% Operating Cost Rs. 360,71,66,221/- Arm’s Length Price – 120.73% of Operating Cost Rs. 435,49,31,779/- Price Received Rs.406,33,74,28 7/- Shortfall being adjustment u/S. 92CA Rs. 29,15,57,492/- *Restricted to 1.98% as against actual adjustment of 2.09%. APPEAL BEFORE THE CIT(A): Briefly, the order passed by the CIT(A) are as follows: • The CIT(A) accepted the contentions of the Assessee and directed inclusion of Akshay Software Technologies Ltd. and LGS Global Ltd.; ITA No.2225 & 2228/Bang/2019 Page 14 of 36 • The CIT(A) accepted the contentions of the Assessee and directed exclusion of Kals Information Systems Ltd.(seg) • Rejecting the contentions of the Assessee, the CIT(A) upheld the selection of the following companies • ICRA Techno Analytics Ltd.(seg) • Infosys Ltd. • Persistent Systems Ltd. • Tata Elxsi Ltd. (seg) • The CIT(A) rejected the contention of the Assessee that working capital adjustment ought to be granted on actuals without there being adhoc upper cap or restriction and directed to delete the entire working capital adjustment granted by the TPO. 8. Now the crux of the argument of the ld.AR is that following comparables are to be excluded. 1. ICRA Techno Analytics Ltd. 2. Infosys Ltd. 3. Persitent systems Ltd., 4. Tata Elxsi Ltd., 5. Cat Technologies Ltd., ITA No.2225 & 2228/Bang/2019 Page 15 of 36 9. ICRA Techno Analytics Ltd. According to the assessee this comparable is functionally different engaged in rendering diverse services and there is no availability of segmental data and also incorrect margin computed by the TPO and he also submitted that this comparable has been excluded in the case of Electronics and Imaging India Pvt. Ltd., in IT(TP)A No.212/Bang/2015 and CO No.94/Bang/2015 dated 24/2/2016 for the asst. year 2010-11 in para 13 as follows:- “14. At the outset, we note that apart from having the related party revenue at 20.94% of the total revenue, this company was also found to be functionally not comparable with software development services segment of the assessee. The DRP has given its finding at pages 13 to 14 as under:- "Having heard the contention, on perusal of the annual report, it is noticed by us that the segmental information is available for two segments i.e., services and sales. However, it is evident from the annual report that the service segment comprises of software development, software consultancy, engineering services, web development, web hosting, etc. for which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude the above company from the comparables. 15. We find that the facts recorded by the DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development & hosting and ITA No.2225 & 2228/Bang/2019 Page 16 of 36 substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE. 10. The ld.DR submitted that ICRA Techno Analytical Ltd., is functionally similar to assessee’s case it is engaged in rendering software development consultancy Engineering Services, web development and used in the revenue recognition appeals stated in the annual report also confirms that revenue is from software development and consultancy and related services and it should be considered as comparables. 11. We have heard both the parties and perused the materials on record. In our opinion, this comparable has been considered as not comparable in the case of Electronics and Imaging India Pvt. Ltd. cited (Supra). Accordingly, we direct the AO /TPO to exclude the same from list of comparables. 12. Infosys Ltd., The ld.AR submitted that this company is functionally different, as it is engaged in product ITA No.2225 & 2228/Bang/2019 Page 17 of 36 development, it has huge turnover and significant brand value, incurs high sales and marketing expenses and focuses heavily on R&D activities. Further it was submitted that in the case of Electronics and Imaging India Pvt. Ltd. cited (Supra), it was considered as not comparable. 13. The ld.DR relied on the order of CIT(A). 14. We have heard both the parties and perused the materials on record. As rightly pointed out by the ld.AR that this company has considered as not comparable in the case of Electronics and Imaging India Pvt. Ltd. cited Supra, wherein it has held as follows:- “17. The assessee objected against the selection of this company on the ground that this company has a big name and brand value and therefore it has a bargaining power. It also contended that the turnover of this company is Rs.21,140 crores, which is 442 times higher than the assessee. 18. The DRP accepted the objections of the assessee and by following the decision of the Delhi 3s of the Tribunal in the case of Agnily India Technologies (P.) Ltd. v. ITO [20153 58 taxmann.com 167/154 lTD 293 (Delhi - Trib.), directed the TPO to exclude this company from the Fm of comparables. ITA No.2225 & 2228/Bang/2019 Page 18 of 36 19. We have heard the Id. DR as well as Id. AR and considered the relevant material on record. We note that in the case of Agnity India Technologies (P.) Ltd. (supra), the Delhi Bench of the Tribunal has considered the comparability of this company and the findings of the Delhi Bench of the Tribunal has been confirmed by the Hon'ble Delhi High Court. The Hon'ble Delhi High Court has observed that this company having brand value as well as intangible assets cannot be compared with an ordinary entity provide captive service. We further note that this company provides end to end business solutions that leverage cutting edge technology thereby enabling clients to enhance business performance. This company also provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management service. In addition, the company offers software product for banking industry. Thus, this company is engaged in diversified services including design as well as technical consultancy, consulting, re- engineering, maintenance, systems integration as well as products for banking industry. 20. In view of the above facts that Infosys Ltd. having a huge brand value and intangibles as well as having bargaining power, the same cannot be compared with the assessee who is providing services to its AE.” Accordingly this is excluded from the list of comparable. 15. Persistent Systems Ltd. The ld.AR submitted that the company is functionally dissimilar, being engaged in software product development and intellectual property led ITA No.2225 & 2228/Bang/2019 Page 19 of 36 business. During the year, the company was involved in acquisition and restructuring. 16. We have heard both the parties and perused the materials on record. This company has been considered as not comparable in the case of Electronics for Imaging India Pvt. Ltd., cited (supra), which is as follows: “24. We have heard the ld.DR as well as ld.AR and considered the relevant material on record. The assessee raised objections against selection of this company on the ground that this company is functionally not comparable as engaged in the product development. The segmental information for services and product is not available. Further, the assessee has also pointed out that there was an acquisition and restructuring during the year under consideration. 25. The DRP has noted the fact that this company has reported the entire receipt from sales and software services and product. Therefore, no segmental information was found to be available for sale of software services and product. Further, the DRP has noted that as per Note I of Schedule 15, this company is predominantly engaged in outsource software development service. Apart from the revenue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by the DRP has not been disputed before us. 26. Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same ITA No.2225 & 2228/Bang/2019 Page 20 of 36 cannot be considered as functionally comparable with the assessee. Further, this company also earns income from outsource product development. In the absence of any segmental data of this company, we do not find any error or illegality in the findings of the DRP that this company cannot be compared with the assessee and the same is directed to be excluded from the set of comparables. (5) Sasken Communication Technologies Ltd. 27. The assessee raised objection that this company has revenue from software services, software products and other services. The DRP has come to the conclusion that this company earned revenue from 3 segments. However, no segmental information is available. Accordingly, the DRP directed the AO to exclude this company from the comparables. 28. We have heard the id. DR as well as Id. AR and considered the relevant material on record. The DRP has reproduced the break-up of revenue in the impugned order as under:- Amount in Rs. Lakhs Year ended March 31, 2010 Year ended March 31, 2019 Software Services 37,736.22 40,531.20 Software products 2,041.00 6,146.43 Other services 372.77 1,297.05 Total revenues 40,150.89 47,974.68 17. Accordingly this company is excluded from the list of comparables. 18. Tata Elxsi 19. The ld.AR submitted that the company is functionally dissimilar, being engaged in software ITA No.2225 & 2228/Bang/2019 Page 21 of 36 product development and intellectual property led business. During the year, the company was involved in acquisition and restructuring. 20. The ld.DR relied on the order of CIT(A). 21. We have heard both the parties and perused the materials on record. This company has been considered as not comparable in the case of Electronics for Imaging India Pvt. Ltd., cited (supra), which is as follows: “30. The assessee has raised objections against this company on the ground that the company is functionally different from the assessee. Though the TPO has considered the software development : services segment of this company as comparable to that of assessee, however, the assessee contended that even within the software segment, this company is engaged in diverse activities. The assessee placed reliance on the information in the annual report under the Directors Report and submitted before the DRP that even under the software development services segment, this company was engaged in various diversified activities including product design service, innovation design, engineering service, visual computing labs, etc. The assessee also placed reliance on the decision of Mumbai Bench of the Tribunal in the case of Telcordia Technologies India (P.) Ltd. v. Asstt. CIT [2012 137 lTD 1/22 taxmann.com 96. 31. The DRP found that this company is not functionally comparable with assessee company as it is engaged in diversified activities even in the software development services. The DRP has followed the decision of the Mumbai ITA No.2225 & 2228/Bang/2019 Page 22 of 36 Bench of the Tribunal in the case of Telcordia Technologies India (P.) Lid (supra). 32. We have heard the Id. DR as well as Id. AR and considered the relevant material on record. We find that this company even in the software development segment is engaged in diversified activities of product design services, innovation design, engineering services, visual computing labs, etc. We further note that in the case of Telcordia Technologies India (P.) Ltd. (supra), the Mumbai Bench of the Tribunal vide its order dated 11. 5.2012 in para 9.7 has held as under:— "7.7 From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable parties." 33. No contrary view has been brought to our notice regarding comparability of this company with that of a pure software development service provider. Accordingly, in view of the decision of the 1umbai Bench of the Tribunal in the case of Telcordia Technologies India (P.) Ltd. (supra), we do not find any reason to interfere with the finding of the DRP.” 22. According to this comparable, we direct to exclude from the list of comparables. ITA No.2225 & 2228/Bang/2019 Page 23 of 36 23. Cat Technologies Ltd., It is submitted that the TPO had excluded the said company for the reason that the details of related party transactions were not available. The CIT(A) has however failed to adjudicate on the inclusion of the said company. 24. In this regard, it is submitted that no related parties transaction have been reported in the annual report of CAT Technologies and therefore it is reasonable to comprehend that there are no related party transactions and therefore CAT Technologies passes the RPT filter applied by the TPO. Further, it is submitted that CAT Technologies passes all the other filters applied by the TPO and is also functionally comparable being engaged in provision of Information Technology services. 25. In view of the above, it is submitted that CAT Technologies ought to be included in the final list of comparables. ITA No.2225 & 2228/Bang/2019 Page 24 of 36 26. He also placed reliance on the order of the tribunal in the case of Cadence Design Systems (I) Pvt. Ltd., in ITA No.6315/Del/2015 vide order dated 2.4.2018, wherein this issue was remitted to the file of AO/TPO with the following observations:- “61. Ld. TPO rejected this company on the ground that it is functionally different and has RPT in excess of 25% of sales. Ld. TPO recorded that this company is involved in a variety of services and in the absence of proper segmental accounts the same cannot be treated as a suitable comparable. Further the taxpayer has taken extracts from the consolidated annual report rather than the standalone annual report relied upon by the TPO. 62. Ld. DRP observed that as per the audit report the company's exclusive business is medical transcription, training software development and consulting services as such this is the only reportable segment. On this ground Ld. DRP refused to interfere with the order of the Ld. TPO. 63. It is argued on behalf of the assessee that this company also provides software development consulting services and there are no equity transactions. It is further submitted by the Ld. AR that this company is accepted by TPO in assessee's own case in AY 2010-11 and there is no change in the buss, of the comparable or the assessee from the previous year. Revenue did not contradict this statement made on behalf of the assessee. In the absence of any proper exploration as to how a good comparable in the previous year b a bad comparable in this year, we find it difficult to sustain the opinion of the authorities below. However whether or not this company passes the RPT it question of fact and the grievance of the assessee before the Ld. DRP was assessee's rebuttal of passing of the RPT filter has not been countered by the Ld.TPO in the impugned order. As could be seen from the order of the ITA No.2225 & 2228/Bang/2019 Page 25 of 36 TPO, is stated that the company is having RPT in excess of 25%, TPO did not advert to the financial of this company. So also the DRP. We, therefore, remand this matter to the file of the TPO to consider the rebuttal of the assessee that refers to the financials of this company and to reach a fresh conclusion on the aspect of this cat technologies Ltd passing or not the RPT filter.” 27. The ld.DR relied on the orders of the lower authorities. 28. We have heard both the parties and perused the materials on record. In our opinion, this has to go back to the file of AO/TPO to verify the related party transaction and if there is no related party transaction, this comparable is to be considered as comparable, while determining ALP of international transactions. With these observations, we remit the issue to the file of AO/TPO for fresh consideration. 29. No other ground argued before us with regard to TP matters by the ld.AR in the assessee’s appeals. Hence, it is not considered, though ld.AR’s submitted to some arguments in its written submissions. ITA No.2225 & 2228/Bang/2019 Page 26 of 36 Corporate tax matters:- 30. The disallowance claimed u/s 40(a)(ia) of the Act on deprecation claimed on purchase of Software. 31. We have heard both the parties and perused the materials on record. In our opinion, we find force in the argument of the ld.AR in view of the judgment of Supreme Court in the case of Engineering Analysis Center of Excellence Pvt. Ltd., Vs. CIT 432 ITR 417, wherein it is held that software purchased from non- resident is rightly capitalized by assessee in its books of account and are entitled for depreciation u/s 32 of the Act and not allowable to deduct TDS. As such, it cannot be denied depreciation on the purchase of software which has been actually capitalized by the assesee and directed to grant rate of depreciation on purchase of software and this been capitalized by the assesee. ITA No.2225 & 2228/Bang/2019 Page 27 of 36 Disallowance of depreciation on goodwill 32. We have heard both the parties and perused the materials on record. Similar issue came up for consideration in assessee’s own case before the Hon’ble Supreme Court in the case of CIT Vs. Simfs Securities Ltd., 348 ITR 302 wherein it is held that “A reading of the words "any other business or commercial rig nature" in clause (b) of Explanation 3 to section 32(1) indicates that good-will would fall under the expression. The principle of ejusdem generis would strictly apply while interpreting the expression which finds place in Explanation 3(b). Goodwill is an asset under Explanation 3(b) to section 32(1) of the Act. Where the Commissioner (Appeals) held that the difference between cost of an asset and the amount paid by the assessee constituted good-will and that the assessee in the process of amalgamation had acquired right in the form of goodwill because of which the market worth of the assessee stood increase.” 33. This finding was upheld by the Appellate Tribunal, and the High Court dismissed the appeal in limine holding there was no substantial question of law. 34. Accordingly depreciation and good will to be granted. This ground of assessee is allowed. ITA No.2225 & 2228/Bang/2019 Page 28 of 36 35. Thus, appeal filed by the assessee is allowed. Revenue’s Appeal : Comparables :- 36. Following comparables has challenged by the revenue in its appeal. 1. LGS Global Limited., 2. KALS Information Systems Ltd., 3. Akshay Software Technologies Ltd., 37. LGS Global Limited We have heard both the parties and perused the materials on record. In assessee’s own case for the asst. year 2009-10 in IT(TP)A No.55/Bang/2015 and IT(TP)A No.60/Bang/2015 vide order dated 3/3/2017 the issue is remitted back to the file of CIT(A) for fresh consideration with following findings. “23. With respect to LGS Global Ltd., the following ground was raised by the Revenue. “On the facts and in the circumstances of the case, the CIT(A) erred in directing the TPO to include M/s LGS Global Ltd, the company which was excluded by eh TPO as the same had failed to pass the TPO’s filter export sales/sales ,75% this filter is also deciding factor for treating a company as a comparable and accordingly erred in including the ITA No.2225 & 2228/Bang/2019 Page 29 of 36 comparable, M/s LGS Global Ltd., in Software Development Segment.” 24. In this regard, the learned DR brought to our notice the order of the TP at page 45 which reads as under:- “As in the case of Aztecsoft, this company also was rejected because, the forex earnings repatriated on export sales was less than 75% of revenues earned during the year. Though export sales were 96% of total sales in the P&L account, the forex earnings repatriated was only 40.61%. If the P&L account of this company is further examined, it is observed that as against total standalone sales of Rs.189 crores, sundry debtors figure stands at Rs.175 crores (including Rs.96.7 crores debtors outstanding for more than six months, ref. Sch.6 to balance sheet). Obviously, the business model of this company is not comparable to that of the taxpayer. Therefore, this company is also not accepted as a comparable.” 25. The learned DR on the basis of the order of the TPO submitted that the TPO has excluded the LGS Global Ltd., on the basis of the business model of the assessee and also on account of the fact that the forex earnings repatriated was only 40.61%. Thus, it was submitted that as forex earnings repatriated was very low, therefore, it was submitted that though the export sales being made, the tax payer was not in a hurry to realize export profits as the forex earnings repatriated appears to be postponed. 26. On the other hand, the learned AR has drawn our attention to page 29 of the CIT(A) order wherein it reads as under:- 12.2. On the basis of this reasoning, which takes into account the decision rendered in the Sony India case, being one of the initial cases on the same issue, of the same Bench of the Hon'ble Tribunal, the action of the TPO with respect to RPT filter is held to be justified. Hence, in summation, I find that the - TPO has provided cogent reasons for rejecting some of ITA No.2225 & 2228/Bang/2019 Page 30 of 36 the assessee's comparables and thus. his / her action of rejecting/introducing his own comparables is upheld .. It was pointed out that one of the assessee's comparable viz .. LGS Global satisfies the TPO's export earning filter. It was stated that the assessee follows a mercantile system of accounting and sale proceeds were realized in the next year. But for accounting purpose, the export revenue was definitely more than 75% .. The TPO is directed to look into this matter and take rectificatory action on his/her satisfaction.” 27. We have heard the rival contentions of parties and have gone through the order passed by the learned CIT(A). It is contended that the learned CIT(A) instead of deciding the issue of exclusion of LGS Global Ltd., has remitted back the issue to the file of the TPO for fresh adjudication. In our view, the learned CIT(A) under the Income-tax Act is required to decide issue at his own level and should not have remitted matter back to the file of the TPO. 28. In the light of above, this issue is sent back to the file of the CIT(A) to decide afresh on the basis of material available with him in accordance with law.” 38. Following the same, we remit this issue to the file of CIT(A) for fresh consideration. 39. This ground of Revenue is partly allowed. 40. KALS Information Systems Ltd. It is dealt in the case of Electronics for Imaging India Pvt. Ltd., cited supra, wherein in para 22 and 23 of the order, it is held as under:- ITA No.2225 & 2228/Bang/2019 Page 31 of 36 41. The DRP has directed the AO to exclude this company from the list of comparables by taking note of the fact that there were inventories in the books of accounts of this company which shows that this company is in the software product business. Further, by following the decision of this Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. v. Dy. CIT [2013] 140 lTD 540/29 taxmann.com 310 (Bang. - Trib.), this company was found to be not comparable with that of the assessee. 42. We have heard the ld.DR as well as ld.AR and considered the relevant material on record. The Id. DR has not disputed the fact that comparability of this company has been examined by this Tribunal in a series of decisions including in the case of Trilogy e- business Software India (P.) Ltd. (supra). We further note that in the balance sheet of this company as on 31.3.2010, there are inventories of Rs. 60,47,977. Therefore, when this company is in the business of software products, the same cannot be compared with a pure software development services provider. ITA No.2225 & 2228/Bang/2019 Page 32 of 36 Accordingly, we do not find any error or illegality in the impugned findings of the DRP. 43. Accordingly, this comparable to be included in the list of comparables. 44. Akshay Software Technologies Ltd : We have heard both the parties and perused the materials of record. We find that the Coordinating Bench of the Tribunal in the case of M/s Novell Software Development India Pvt. Ltd., in IT(TPA) No.281/Band/2015 dealt as under:- “• Akshay Software Technologies Ltd: The company is functionally comparable to the assessee. Originally, the TPO proposed to reject the said company as a comparable on the ground that there was no related party disclosure for FY 2009- 10(Page 269 of the paperbook). The assessee had objected to the same stating that on the basis of the annual report of the company, the related party transactions would only be 4.33% and that therefore, it ought to be included in the list of final comparables (Page 307 of the paper book). However, in the TP order, the TPO rejected the said company on the basis that 90% of its export revenues for the year were from Dubai operations, whereas the assessee earns 100% of its revenues from India. On the basis that the company and the assessee operated in different geographical areas, the TPO excluded the said company. The assessee submits that the company passes all the filters applied by the TPO and, therefore, the exclusion ITA No.2225 & 2228/Bang/2019 Page 33 of 36 of the company solely on the basis that its operations lie in different geographical areas, which was not at all a filter applied by the TPO, is wholly arbitrary and thus the company ought to be included in final list of comparables. In fact, in the assessee's own case for the immediately preceding assessment year, Akshay Software Technologies Ltd. ('Akshay' for short) has been accepted by the TPO and confirmed by the CIT(A) as being comparable to the Assessee. In addition, Akshay is consistently figuring in the final list of comparables in the cases of several other similarly placed assesses for the same assessment year in question. Further, in Arowana Consulting Ltd. v.ITO in IT(TP)A No.235/Bang/2015, this Hon'ble Tribunal vide its order dated 29.06.2015 for AY 2010-11 directed that Akshay be included in the final list of comparables. 19. We find that the Coordinating Bench of the Tribunal in the case of Arowana Consulting Ltd., Vs ITO in IT(TP)A No.235/ Bang2015 has directed that Akshay Software Technologies Ltd is to be included as comparable. 20. Hence, we direct the TPO to include the same in the list of comparables. 45. Accordingly, this ground raised by the Revenue is rejected. 46. Corporate Tax Disallowance of deprecation on server and networking equipment by reclassifying the same as plant and machinery ITA No.2225 & 2228/Bang/2019 Page 34 of 36 47. This issue came up for consideration before this Tribunal in assessee’s own case for the asst. year 2009- 10, wherein the Tribunal decided the issue in favour of the assessee in granting the depreciation @ 60% of turnover and net working equipment. Accordingly, this ground of appeal is decided in favour of the assessee and against the Revenue;. 48. The appeal of the Revenue is partly allowed. 49. In the result, both the appeal of the assessee and the appeal of the Revenue are partly allowed. Order pronounced in the open court on 24 th Nov, 2021. Sd/- Sd/- (GEORGE GEORGE K) ( CHANDRA POOJARI) Judicial Member Accountant Member Bangalore, Dated, 24 th Nov, 2021 / vms / ITA No.2225 & 2228/Bang/2019 Page 35 of 36 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. ITA No.2225 & 2228/Bang/2019 Page 36 of 36 1. Date of Dictation ............................................. 2. Date on which the typed draft is placed before the dictating Member ............................. 3. Date on which the approved draft comes to Sr.P.S ................................... 4. Date on which the fair order is placed before the dictating Member ............................... 5. Date on which the fair order comes back to the Sr. P.S. ....................... 6. Date of uploading the order on website................................... 7. If not uploaded, furnish the reason for doing so ................................ 8. Date on which the file goes to the Bench Clerk ....................... 9. Date on which order goes for Xerox & endorsement.......................................... 10. Date on which the file goes to the Head Clerk ......................... 11. The date on which the file goes to the Assistant Registrar for signature on the order ..................................... 12. The date on which the file goes to dispatch section for dispatch of the Tribunal Order ............................... 13. Date of Despatch of Order ................................