M/s. Infineon Technologies India Pvt Ltd, Bengaluru V. Deputy Commissioner of Income tax, Circle-3(1)(1), Bengaluru

ITA 2870/BANG/2017

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 5556 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 3 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-03-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Assessment Year: 2013-2014
• Appeal Filed On: 25-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUMER SINGH MEENA; ASSESSEES BUSINESS PROMOTION
• Assessee Lawyers: INVOKING PROVISIONS OF SUBSECTION OF
• Keywords: Depreciation; Transfer pricing; International transaction; Additional depreciation; TDS
• Section: 37; 92C; 143(3); 40(a)(ia); 133(6); 13; 22; 92CA

Judgement Text

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.2870/Bang/2017 Assessment Year: 2013-14 M/s. Infineon Technologies India Pvt. Ltd. 9 th Floor Prestige Thirulakshmi No.11 M.G. Road Bengaluru 560 001 PAN NO : AABCS6967N Vs. Deputy Commissioner of Income-tax Circle-3(1)(1) Bengaluru APPELLANT RESPONDENT Appellant by : Shri K.R. Vasudevan, A.R. Respondent by : Shri Sumer Singh Meena, D.R. Date of Hearing : 13.01.2022 Date of Pronouncement : 31.03.2022 O R D E R PER BEENA PILLAI, JUDICIAL MEMBER: Present appeal is filed by assessee against the order dated 16/10/2017 passed by the Ld.DCIT under section 143(3) r.w. section 144C(13) for assessment year 2013-14 on following grounds of appeal: “The grounds mentioned hereinafter are without prejudice to one another. IT(TP)A No.2870/Bang/2017 Page 2 of 32 A. Transfer Pricing 1. The learned Assessing Officer ("learned AO"), learned Transfer Pricing Officer ("learned TPO") ark! the Honourable Dispute Resolution Panel ("Hon'ble DRP") grossly erred in adjusting the transfer price by INR 6,15,17,368/- with respect to the international transactions rendered by the taxpayer u/s 92CA of the Income-tax Act, 1961 ("the Act"). 2. The learned AO/learned TPO/Hon'ble DRP erred in rejecting the Transfer Pricing ("TP") documentation maintained by the Appellant by invoking provisions of Sub-Section (3) of Section 92C of the Act. 3. The learned AO/learned TPO/Hon'ble DRP erred in rejecting comparability analysis undertaken in the TP documentation and in conducting a fresh comparability analysis by introducing various filters for the purpose of determining the Arm's Length Price ("ALP") of the international transaction pertaining to software development services. 4. The learned AO/learned TPO/Hon'ble DRP erred in not considering the previous two years' financial data of the comparable companies while determining the ALP. 5. The learned AO/ learned TPO erred in undertaking an inconsistent approach of considering gain/ loss on account of foreign exchange fluctuation as non-operating in nature while computing the operating profit on operating cost in the case of the Appellant and on the other hand, considering the same as operating in nature while computing the operating profit on operating cost of the comparable companies, though the Hon'ble DRP mentioned that a consistent approach is to be undertaken. 6. The learned AO/learned TPO/Hon'ble DRP erred in applying different4inancial year ending filter while selecting the comparable companies, thereby not considering the fact that the relevant data for the concerned financial year could be deduced from the corresponding financials. 7. The learned AO/learned TPO/Hon'ble DRP erred in applying export earning filter of 75% instead of 25% of the total sales, leading to a narrower set of comparable companies. 8. The Learned AO/learned TPO/Hon’ble DRP erred in collating the information that are not publicly available using powers under Section 133(6) of the Act. 9. The learned AO/learned TPO/Hon'ble DRP has grossly erred in not rejecting the following companies from the list of comparable companies: a) CG-Valoftware & Exports Ltd. b) ICRA Techno Analytics Ltd. c) Larsen and Toubro Ltd. d) Petsistent Systenis Ltd. IT(TP)A No.2870/Bang/2017 Page 3 of 32 10. The learned AO/learned TPO/Hon'ble DRP has grossly erred in rej cting companies that ought to have been included'as comparables: a) Acropetal Technologies Ltd. b) Akshay Software Technologies Pvt. Ltd. c) Cigniti Technologies d) Helios & Matheson Information Technology Ltd. e) CTIL Ltd. f) KALS Information Systems Ltd. g) Evoke Technologies Pvt. Ltd. h) Sasken Communication Technologies Ltd. i) Spry Resources India Ltd. j) Bells Softech Ltd. k) Sankhya Infotech Ltd. 1) CAT Technologies Ltd. 11. The learned AO/learned TPO/Hon'ble DRP has erred in not considering provision for doubtful debt as operating in nature while computing the margins of the comparable companies. 12. The learned AO/learned TPO/Hon'ble DRP erred in not considering the fact that the Appellant does not have any working capital risk as it does not have any finance cost, therefore, no negative working capital adjustment should be made. 13. The learned AO/learned TPO/Hon'ble DRP erred in not allowing appropriate adjustment towards the risk differential existing between the Appellant vis-à-vis independent comparable companies. B. Corporate Tax 14. Disallowance of expenditure claimed under Section 40(a)(ia) of the Act:  The Learned AO and the Hon'ble DRP has erred in disallowing an amount of Rs. 204,051 under section 40(a)(ia) of the Act.  The Learned AO and the Hon'ble DRP has inadvertently ignored the fact that the said amount of Rs. 204,051 represents the reversal of excess provision which was disallowed under section 40(a)(ia) of the Act for AY 2012- 13.  The Learned AO has failed to appreciate that non grant of deduction of Rs. 204,051 would result in a double disallowance of the said provision.  The Learned AO and the Hon'ble DRP has erred in not considering the submissions made and the explanations provided during the proceedings that the said amount of Rs. 204,051 represents the reversal of excess provision which was disallowed under section 40(a)(ia) of the Act for AY 2012-13. IT(TP)A No.2870/Bang/2017 Page 4 of 32 15. Disallowance of Interest on delayed deposit of Tax Deducted at Source  The Learned AO and the Hon'ble DPR has erred in disallowing interest on delayed deposit of Tax Deducted at Source TDS1 amounting to Rs. 16,351.  The Learned AO and the Hon'ble DRP has failed to appreciate that interest on delayed payment of TDS is connected with the business of the assessee.  The Learned AO and the Hon'ble DRP has erred in not allowing a deduction for delayed payment of TDS under section 37 of the Income-tax Act, 1961. 16. Disallowance of depreciation on software expenses The Learned AO and the Hon'ble DRP has erred in adding back a sum of Rs. 179,022 as excess depreciation claimed under section 32 of the Act. The Learned AO and the Hon’ble DRP has erred in limiting the allowance for depreciation on purchase of software to 25% of the cost as against the depreciation rate of 60% permitted under the Income-tax Rules, 1962 (Rules).  The Learned AO and the Hon'ble DRP has failed to appreciate that the software purchased cannot function without the computer; being an integral part of the computer is therefore eligible for depreciation as such.  The Learned AO and the Hon'ble DRP has failed to appreciate that the Assessee does not have any right to commercially exploit the license in the software and also that the same cannot be classified as a license. The appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. 2. Brief facts of the case are as under: The assessee filed its return of income on 29/11/2013 declaring total income of Rs.11,67,68,230/-. The case was selected for scrutiny and statutory notices were issued to assessee, in response to which representative of assessee appeared before the Ld.AO and filed requisite details as called for. The Ld.AO form the details filed by assessee observed that assessee had international transactions exceeding Rs.15 cores and accordingly the case was referred to the Ld.TPO for determining the ALP of the transaction. IT(TP)A No.2870/Bang/2017 Page 5 of 32 On receipt of the reference, the Ld.TPO called for the details of the international transactions in Form 3CEB. The Ld.TPO observed that assessee is a 100% subsidiary of Infineon Technologies Asia pacific Ltd. Singapore. He also observed that the assessee functions as a software development centre of Infineon's Group and plays a vital role in software development. ITIPL currently employs professionals working in the area of technology development for Automotive, Chip Card and Security, Industrial Multi- Market and Wireless & Wire line communication domains. TIPL, a 100% export oriented unit (EOU), registered with the Software Technology Park of India (STPI) provides marketing support services to its parent Company. ITIPL provides marketing support services to 'Infineon Singapore. 3. The details of the market support services provided by Infineon India are as follows. a. Marketing, promotional and after-sales services to Infineon Singapore's customers in India. These services are in nature of administration and coordination of orders from customers to Infineon Singapore; b. Support to Infineon group's customers in India or outside India in field of technical problems and design-in activities; c. Sales support to Infineon group's distributors appointed in India including coordination between Infineon group and distributors for delivery issue and payments. 4. As per the Transfer Pricing (TP) document furnished for the A.Y.2013-14, the taxpayer company has entered into the IT(TP)A No.2870/Bang/2017 Page 6 of 32 following international transactions with its Associated Enterprises (AEs): International Transaction Amount in INR Software development services 701437360 Marketing support services 83879553 Technical support services 3523261 Reimbursement of expenses 17272456 Buy-back of shares 270000000 Recovery of expenses 1878563 Trade receivables 370266108 Trade payables 9002024 Receivables 1878563 Payables 3523261 5. The Ld.TPO noted that assessee used TNMM as most appropriate method to bench mark the software development & Marketing support services to the AE. Assessee used OP/OC as PLI and computed its margin for both the segments as under: Description SWD Services Technical Support Services Total Total Operating Revenue 701437360 83879554 785316913 Total Operating expenses 60724639 76953719 684208358 Operating profit 94182720 6925835 101108555 OP/OC 15.51% 9.00% In respect of Marketing support services, no adverse inference was drawn by the Ld.TPO and held the transaction to be at arms length. 6. In respect of SWD segment, the Ld.TPO noted that assessee selected following 11 comparables having average margin at 12.45%. SI. No. Company Name Average PLI 1 Akshay Software Technologies Ltd. 5.66% 2 R S Software (India) Ltd. 16.45% 3 Spry Resources India 21 01% 4 Cigniti Technologies Ltd. 8.35% 5 Persistent System and Solution Ltd. 16.55% 6 Kals Information Systems Ltd. 9.95% 7 Helios & Matheson Information Technology Ltd. 15.16% 8 Evoke Technologies Ltd. 10.45% IT(TP)A No.2870/Bang/2017 Page 7 of 32 9 Acropetal Technologies Ltd. 11.03% 10 Sasken Communication Technologies Ltd. 5.56% 11 Mindtree Ltd. 16 79% Mean 12.45% 7. The Ld.TPO rejected the transfer pricing study by assessee wherein internal CUP was used to bench mark the international transaction. The Ld.TPO applied various filters and shortlisted following comparables. The Ld.TPO used TNMM as most appropriate method and OP/OC as PLI to compute the average margin of 20.9%. SI. No. Company Name Unadjusted OP/OC 1 C G—V A K Software & Exports Ltd. 20.54% 2 I C R A Techno Analytics Ltd. 17.10% 3 Larsen & Tourbo Infotech Ltd. 26.06% 4 Mind Tree Ltd. (Seg.) 18.19% 5 Persistent Systems Ltd. 28.27% 6 R S Software (India) Ltd. 17.41% 7 Tech Mahindra Ltd. (Seg.) 18.72% AVERAGE MARGIN 20.90% 8. The Ld. TPO considered the foreign exchange gain/loss to be non-operating income. The Ld. TPO also computed negative working capital at (-)4.44%The Ld. TPO proposed the adjustment at Rs.5,96,75,040/- being the shortfall. On receipt of the transfer pricing order, the Ld.AO passed the draft assessment order. In the daft assessment order, he further made following disallowances: Income as per Return of Income Rs.11,67,68,230 Add: Disallowable u/s.40(a)(ia) Rs.2,04,051 Add: Interest on delayed payment of TDS Rs.16,351 Add: Depreciation Rs.1,79,022 Add: TP adjustment Rs.5,96,75,040 Total Assessed Income Rs.17,68,42,694 IT(TP)A No.2870/Bang/2017 Page 8 of 32 Against the draft assessment order, assessee preferred objections before the DRP. The DRP upheld the adjustment proposed by the Ld.TPO in toto. On receipt of the DRP direction, the Ld.AO passed the final assessment order against which the assessee is in appeal before this Tribunal. 9. At the outset the Ld.AR submitted that assessee whish to contest the broad issues raised in Ground no.5, 9(restricting his arguments to 3 comparables for exclusion), 12 and 14 -16 under corporate tax grounds raised under the heading Ground B. A written submission has been filed by the assessee in this regards dated 13/01/21. 10. We are therefore restricting the adjudication of issues only to Grounds Ground no.5, 9(restricting his arguments to 3 comparables for exclusion), 12 and 14-17. Remaining grounds are therefore not adjudicated and are left open to assessee to raise it in an appropriate situation. the Ld.AR referred to application dated 18/01/2021 under Rule 11 raising Additional ground No.17, which reads as under: Reproduce the additional ground. “17. The Learned AO/learned TPO/Hon’ble DRP has erred in not applying an upper limit on turnover while selecting comparable companies.” 11. In support the Ld.AR submitted that the additional ground raised are fundamental to the appeal and no new facts needs to be looked into for its consideration. We have considered the submissions advanced by both sides in light of records placed before us. IT(TP)A No.2870/Bang/2017 Page 9 of 32 Accordingly the additional ground raised by assessee stands allowed. 12. Ground no. 5 is raised by assessee for considering the foreign exchange fluctuation as non operating in nature. The Ld.AR submitted that the Ld.AO/TPO treated the foreign exchange fluctuation as non operating in nature while computing the margin of the assessee where as he treated such fluctuation as operating in nature for computing the margin of the comparables. The DRP directed the Ld.AO to take a consistent approach. 13. The limited prayer made by the Ld.AR was to a direction to the Ld.AO/TPO to apply the principle of treating foreign exchange fluctuation as operating in nature under both situations, when there is a loss as well as when there is a gain and to apply same principle to determine the profit margins of the assessee and the comparable companies. The Ld.Sr.DR did not object for the submission made by the Ld.AR. We have perused the submissions advanced by both sides in light of records placed before us. 14. The limited prayer so made, in our view is in accordance with the settled legal position. The Ld.TPO is therefore directed to compute the profit margins of assessee and the comparable company by applying same principle as prayed for by both sides. Accordingly this ground raised by the assessee stands allowed. IT(TP)A No.2870/Bang/2017 Page 10 of 32 15. Ground No 9 is raised by assessee seeking exclusion of following comparables:  ICRA Techno Analytics Ltd.  L&T  Persistent Systems  Tech Mahindra It is submitted by the Ld.AR that CG-VAK Software & Exports Ltd though is raised for exclusion, the same is not disputed by assessee at this stage. It is submitted that for such reason, CG- VAK Software & Exports Ltd has not been considered in the Synopsis dated 13/01/2021, which has been relied by the Ld.AR at the time of argument. Therefore we restrict to only three comparables listed herein above. 16. Before we undertake comparability analysis, it is sine qua non to understand the FAR of assessee. Functions: Software Development Services The assessee provides software development to the AEs (Primarily to Infineon Singapore).Following are the functions performed by assessee:  Requirement Analysis  Conceptualization of Designs  Development or Coding AEs are the legal owner of any IP created in the process of the software development process.  Testing  Bug-fixing  Quality Assurance IT(TP)A No.2870/Bang/2017 Page 11 of 32 Infineon Singapore is responsible for the final testing and quality control of the final software module or solutions.  Documentation and localization  Post implementation support or maintenance Infineon Singapore is responsible for the integration of the module, developed by the assessee into the final product or solution developed by Infineon Singapore. The assessee provides assistance (wherever required) to Infineon Singapore in the integration process.  Human Resource The Assessee identifies the skill sets required for the various activities and recruits people accordingly.  Undertaking General Administrative activities The assessee also has to undertake several administrative responsibilities for running its day to day business. The Company is responsible for identifying its own resource requirement and accordingly recruits its employees. The prime responsibility of training the employees also vests with the assessee. Marketing Support Services The assessee provides marketing support functions to Infineon Singapore. Following are the functions performed by assessee under this segment: The primary functions performed by ITIPL and Infineon Singapore are summarized below: Strategic Management Functions Infineon Singapore is responsible for all top management functions in connection-with business strategy, treasury, legal IT(TP)A No.2870/Bang/2017 Page 12 of 32 and regulatory affairs and for designing policy with respect to operations (including ITIPL operations). ITIPL does not perform any strategic functions. It primarily performs tactical functions relating to the day-to-day management of its business Corporate Services Assessee is responsible for human resources, financial and routine administration; it is responsible for managing its own cash flows, accounts payable, accounts receivables, employee management, management information system and training, hiring employees and statutory compliance. Assessee drafts its policies within the broad framework provided Infineon Singapore, and it receives support from Infineon Singapore in terms of guidance to implement those policies Conceptualisation of Services Rendered by assessee Infineon Singapore is primarily responsible for conceptualising service goals and determining the scope of work and activities to be performed by assessee. However, the assessee's participation in this process is limited. Business Promotion Assessee provides marketing support services to Infineon Singapore. Its activities are limited to marketing activities to identify potential', customers by creating awareness of the products and services rendered and managed by Infineon Singapore, as well as to educate users on the benefits and features of those products and services., Infineon Singapore provides literature and other material like brochures and promotional material for assessee's business promotion activities. IT(TP)A No.2870/Bang/2017 Page 13 of 32 Price Negotiations, Contractual Agreements and Fulfillment with Customers Once a potential customer is identified, Infineon Singapore is responsible for negotiating the contracts, time frame and scope of services. Infineon Singapore subsequently enter into contracts with the customer. Assessee does not have the authority to decide the ultimate prices or conclude contracts on behalf of Infineon Singapore. Delivery of Product Infineon Singapore is responsible for product/service delivery to the customer as well as for the quality of products or services rendered. The assessee is not responsible for the delivery or quality of products and services sold. Their activities will be limited to facilitation and co-ordination between Infineon Singapore and customers. Post-Sales Support Services Assessee educates customers on the basic functionality and effective usage of the products being offered for sale. For other technical assistance and troubleshooting, Infineon Singapore provides post-sales support services directly to the customer. Development of promotional material Infineon Singapore develops promotional materials in the nature of product brochures, etc. Assessee distributes these promotional materials for marketing the products in the Indian market. IT(TP)A No.2870/Bang/2017 Page 14 of 32 Assets: The Assessee only owns tangible assets that are necessary to runs its business. It is thus submitted that assessee uses the following tangible assets for its business operations  Leasehold improvement;  Computer hardware; and  Office equipment. Risk assumed: The assessee has to meet the quality of service requirements of Infineon Singapore. If any changes were required, the assessee would perform the work on a cost plus basis. As the assessee is compensated on a cost plus basis, the impact of service level quality risk lies with Infineon Singapore. The assessee does not provide warranty after delivery of service; hence, it does not bear any warranty risk. Contract Risk Contract risk arises when a company fails to perform its services or supplies goods that do not adhere to the standards, terms and conditions agreed with its customers. Infineon Singapore/AEs enter into contract with customers directly for providing the products. Hence, AEs bear the contract risk while rendering the services or supplying the goods. The assessee does not bear any contract risk. Credit Risk Credit risk arises when services are rendered to customers on credit terms and the customers fail to make payment. IT(TP)A No.2870/Bang/2017 Page 15 of 32 The assessee does not assume any financial risk for the services it provides as the payment is assured and the risk involved is negligible. The credit risk remains with the Infineon Singapore. Technological Obsolescence Risk Technological obsolescence risk arises if the market in which the company operates is sensitive to the introduction of new products and technologies. Hence, in that case, business units may face loss of potential revenues due to inefficiencies arising from obsolete infrastructure and tools as well as obsolescence of manufacturing processes. The risk of technological obsolescence is common to any company in the software industry and is borne by the assessee also. However, given that the assessee is compensated on a cost plus basis, this risk is negligible as costs of technological upgrades or obsolescence would be covered in the cost base considered for the application of cost plus mark-up. Foreign Exchange Fluctuation Risk This risk relates to the potential impact on profits when the transaction currency is different from the reporting currency and arises because of fluctuation in foreign exchange rates. The assessee charges its Infineon Singapore with all operating costs incurred in the provision of software development services along with a mark-up thereon. The invoice is raised in foreign currency. Hence, the assessee is exposed to the potential risk of foreign currency fluctuation during the period from issuance of invoice till the time of actual receipt of payment from the Infineon Singapore. IT(TP)A No.2870/Bang/2017 Page 16 of 32 Infineon Singapore is also exposed to the risk of devaluation of Indian currency. Therefore, both the Infineon Singapore and the assessee are exposed to foreign exchange fluctuation risk. Intangible Property Right Risk Assessee does not incur any risk related to the IPR. Risk of Attrition of Manpower The assessee is responsible for identifying resources, recruiting, training, and aligning them to suitable roles/positions in the organisation. The Company, therefore, bears the risk of attrition and other factors affecting productivity and efficiency. However, assessee's risk is minimal as it is compensated on a cost plus basis for its services. Characterisation The functional analysis serves as a foundation to characterise entities for the purposes of inter-company transfer pricing. Based on facts presented in the above FAR analysis, the assessee can be characterised as a captive service provider that assumes lower than the normal risks associated with the business of providing software development. Based on the above we undertake the exclusion/inclusion of the comparables alleged by assessee as under. 17. Persistant Systems Ltd. The Ld.AR submitted that this company is functionally not similar to assessee as it is engaged in software products, services and technology innovation. The company focuses on next generation technology centered on four main themes- Cloud computing, Analytics, Social enterprise and Enterprise Mobility. Persistent also focuses on establishing a strong IP portfolio and IT(TP)A No.2870/Bang/2017 Page 17 of 32 the IP led business of the company saw a significant boost during the year under consideration due to two product acquisitions by its subsidiaries. Further, during the year under consideration, Persistent also concluded a contract to take over IBM's TNPM product road map, which would help the company strengthen its position in relation to the IP led business. 18. The Ld.AR submitted that this company is engaged in product engineering services, platforms and solutions, IP and related business, which is functionally different from assessee's case and it has earned revenue from R&D activities. Persistent Systems Limited also owns intellectual properties. Further, segmental data is not available as seen from the Notes forming part of financial statements under the head "Revenue from operations (net)", placed at paper book page No.151 and it has net income from sale of software services as discussed in earlier year. It is also to be noted that Persistent Systems Limited is not considered as a comparable by various orders of the Tribunal. In the case of NXP India Pvt. Ltd. vs. DCIT reported in (2020)116 taxmann.com 421, the coordinate bench of this Tribunal observed as under:- The assessee objected for the exclusion of this company by the lower authorities in the tally of comparables by arguing that it is engaged in OPD and there is a difference in OPD and IT services and that the assessee is having revenue from other sources and no segmental data is available. It was also submitted that in the assessment year 2012- 2013, it is an abnormal year of operation and it is owning various intangibles. For this purpose, he relied on the order of the Bangalore Bench of the Tribunal in the case of NXPSemiconductor India (P.) Ltd. v. Dy. CIT [IT Appeal No. 1634 (Bang.) of 2014, dated 22-7- 2015]. 6.1 We have carefully gone through the order of the coordinate Bench in the case of NXPSemiconductor India (P.) Ltd. (supra) for the assessment year 2009-2010, wherein it was observed that Persystent Systems IT(TP)A No.2870/Bang/2017 Page 18 of 32 Limited was engaged in product development and product design and analysis services is functionally different from a pure software service provider and therefore, excluded it from the list of comparables for software development services. The same view was taken in the case of Saxo India (P.) Ltd. v. Asstt. CIT [2016] 67 taxmann.com 155 (Delhi - Trib.), by observing that Persystent Systems Limited is engaged in running software development services as well as sale of software products. Albeit the percentage of software products in the total revenue is less, as has been noted by the TPO, and also there is no precise information about the contribution made by such small sale of software products to the total profits of the company. As no segmental information is available in respect of this company and the figures have been adopted by the TPO at entity level, it was directed to exclude Persystent Systems Limited from the list of comparables. In the present case also, it is noticed that Persystent Systems Limited is engaged in software products development. There is a difference between the outsourced software product development and IT services, which is evident from page nos. 973 and 974 of the paper book, as under:— "Outsourced Software Product Development (OPD) is different from IT services. Unlike a typical IT services project, where requirements are fixed while time and money are variable, a software product development project starts with fixed time and money, thus leaving requirements as the only variable. Essentially, the product development team's task is to produce the best set of requirements within a fixed time and budget. Persistent Systems has emerged as a leader in the OPD segment - a segment which is fast growing. OPD and outsourced IT services: the difference. How is OPD different from outsourced IT services is an oft asked question. In IT services, projects start with well- defined requirements, and vendors use time and money as variables to arrive at a reasonable cost estimate for the project. After completion, the project goes into maintenance mode. In product development, requirements are less clearly defined. Instead, most product developers are given ship-dates for the product that are typically determined by external factors. Once the ship-dates are identified, the budgets for the product are frozen. In product development projects, all requirements can never be completely fulfilled in a particular version. As a result, most product companies plan multiple product versions for their product. Every team member must contribute not only to building features for the current release but must also contribute enhancements and provide feedback for future releases of the product." 6.2 Persystent Systems Limited having revenue of 8103.64 Million from software services and other income of 323.76 million from income from other sources. Assessment year 2012-2013 is an abnormal year of operation to Persystent Systems Limited, which is evident from the annual report placed on record by the assessee in its paper book. Further, Persystent Systems Limited is having intangibles to the tune of IT(TP)A No.2870/Bang/2017 Page 19 of 32 2402.67 million as evident from its balance sheet ended on 31.03.2012. Being so, it is not comparable to assessee's case. We, therefore, direct the TPO to exclude Persystent Systems Limited from the list of comparables. Accordingly, we direct the Ld.TPO to exclude the said company from the list of comparables, with the similar directions given in the above order of the Tribunal (supra). 19. Larsen & Toubro Infotech Ltd The Ld.AR relied on the order of the co-ordinate Bench of this Tribunal in the case of NXP India Pvt.Ltd reported in (2019) 116 taxmann.com 421, wherein the Bench followed the decision by coordinate bench in case of Metric Steam Infotech (India) (P.) Ltd. v. Dy. CIT in IT(TP)A No.1418 & 2735 /Bang/2017, by order dated 27-2-2019, wherein the Tribunal held as under:— "11. As far as L&T Infotech Ltd. and Persistent Systems Ltd. are concerned, our attention was drawn to the decision of ITAT Hyderabad Bench in the case of M/s. EPAM Systems (I) P. Ltd. v. ACIT, ITA No.2122/Hyd/2017 for AY 2013-14, order dated 20-11-2017. Vide para 12 of the decision, the Tribunal took the view that Persistent Systems Ltd. was into software products and software solutions and no segmental details were available and therefore the profit margin in the software development services segment could not be compared with the assessee's profit margin. As far as L&T Infotech Ltd. is concerned, the Tribunal vide para 17 of the aforesaid order came to a similar conclusion to hold that L&T Infotech should not be regarded as a comparable company. In the light of judicial precedents which remain uncontroverted, we are of the view that the aforesaid two comparable companies should be excluded from the list of comparable companies. " 20. It was also brought to our notice that in earlier year, Larsen & Toubro Infotech Ltd., has incurred expenditure on "cost of brought out items for resale at Rs.27,10,89,274 for which he drew our attention to the financial statement of Larsen & Toubro Infotech Limited placed at paper book page No.277, which is absent in the case of present assessee. He also submitted that it has huge intangible assets and brand value in software at IT(TP)A No.2870/Bang/2017 Page 20 of 32 Rs.143,61,95,196 and it has intangible asset in the form of business rights to the tune of Rs.9,80,50,000/- as shown in the Fixed Assets as on 31.03.2013 placed at paper book page No.274. Being so, in our opinion, it cannot be compared with the assessee's case. 21. The Ld.AR relied on following decision in support, wherein case of a contract service provider like assessee this comparable was excluded:  Applied Materials India Pvt. Ltd. v. DCIT by order dated 13.05.2020 in IT(TP) A No. 2687/Bang/2017  EMC Software and Services India Pvt. Ltd. v. JCIT (Order dated 18.12.2019 passed in IT(TP)A No. 3375/Bang/2018 for AY 2014-15,  EPAM Systems India (P.) Ltd. v. ACIT [2018] 100 taxmann.com 335. Accordingly, we direct the Ld.TPO to exclude the same from the final list of comparables. 22. C G VAK Software & Exports Limited The Ld.AR submitted that this company should be excluded as it is engaged in software development and sale of products which involves high degree of R & D expenditure and to demonstrate the same, he drew our attention to the paper book Vol. I page Nos.26 submitted that the nature of the business of software development involves inbuilt, constant Research and Development as a part of its process of manufacturing (development). The company is developing applications engines, re-usable codes and libraries as a part of its R & D activities. Further, it has intangible assets as shown in the financial statement as on 31.03.2013 at Rs.3,03,83,536 and it is also engaged in outsource product development, as is evident from the attached notes forming part of the accounts. The Ld.AR IT(TP)A No.2870/Bang/2017 Page 21 of 32 submitted that, this company was not considered as a comparable in the case of EPAM Systems India (P.) Ltd. v. Asstt. CITI reported in (2018) 100 taxmann.com 335, the Tribunal held as under:— "16. Having regard to the rival contentions and the material on record, we find that the assessee has raised its objections before 10 the TPO but he held that it is functionally similar. We have gone through the annual reports of CGVAK Software & Exports Ltd and find that the said company is having revenue from both software services and BPO services but there is no segmental data with regard to each of these transactions. Therefore, as held by the Coordinate Bench of the Tribunal in a number of cases (cited supra), we hold that this company cannot be taken as a comparable to the assessee-company. Accordingly, we direct the TPO to exclude this company from the final list of comparables. " 23. She submitted that in the case of ION Trading India (P.) Ltd. v. ITO reported in (2016) 70 taxmann.com 349 Hon’ble Delhi Tribunal, held as under:- "21. We have considered the submission of the Id. counsel for the assessee and have considered the argument of the ld. DR that the assessee is not producing any product, however, we find that CG-Vak Software and Exports Limited is not only into computer software but it is a product manufacturer too. Since assessee is not into product manufacturing and the segmental details cannot be bifurcated from the financial details, we find that the assessee and the CG-Vak Software and Exports Limited are not comparables. Therefore, we are inclined to uphold the orders of the authorities below in rejecting this company as a comparable. We direct accordingly. " In view of above reasons, we hold that the said company cannot be considered for inclusion in the list of comparables. We, therefore, direct the Ld.TPO to exclude the said company from the list of comparables. 24. Tech Mahindra The Assessee is seeking exclusion of this comparable for not fulfilling the turnover filter. The Ld.AR submitted that the turnover of the assessee company during the year was Rs.70.14 crores and hence it falls under the category of companies having turnover in the range of 1crore to 200crores. IT(TP)A No.2870/Bang/2017 Page 22 of 32 However the turnover of the comparable sought for exclusion is more than 200crores. It is thus submitted by the Ld.AR that these comparables cannot be considered as good comparable companies. In support, the Ld.AR placed his reliance on the decision of by co-ordinate bench of this Tribunal in case of Autodesk India (P.) Ltd. v. Dy. CIT (2018) 96 taxmann.com 263. On the contrary, the Ld.CIT.DR relied on orders passed by authorities below. We have perused submissions advanced by both sides in light of records placed before us. 25. We note that coordinate bench of this Tribunal for assessment year 2013-14 in case of Evolving Systems Network India (P.) Ltd. v. Asstt. CIT reported in (2021) 130 taxmann.com 212 held as under: '9. As far as excluding the companies on the basis of turnover is concerned, the issue has been settled in several decisions of the Tribunal and has been elaborately discussed by this Tribunal in the case of AutodeskIndia (P.) Ltd. v. Dy. CIT [2018] 96 taxmann.com 263 (Bang. - Trib). The Tribunal in this decision after review of entire case laws on the subject, considered the question, whether companies having turnover more than 200 crores upto 500 crores has to 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. The substantial question of law (Question No. 1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or f CIT dear relied on orders passed I authority is below luctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case IT(TP)A No.2870/Bang/2017 Page 23 of 32 of CIT v. Pentair Water India (P.) Ltd. Tax Appeal No. 18 of 2015 judgment dated 16-9-2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee 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 not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5- 8-2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India (P.) Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co- ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (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 decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for 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 issue of IT(TP)A No.2870/Bang/2017 Page 24 of 32 application of turnoverfilter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra)." 10. Respectfully following the aforesaid decision, we hold that the aforesaid five com-panies should be excluded from the list of comparable companies. We hold and direct accordingly. The learned DR however pointed out that the Assessee did not raise this issue of turnoverfilter before AO and raised it before DRP in which the turnover limit of Rs. 1000 crores alone is mentioned. In our opinion, this will not be very material, as the turnoverfilter of Rs. 200 crores has been applied in several cases by this Tribunal. The Assessee cannot be denied the right to seek its exclusion before the Tribunal and in this regard the learned counsel for Assessee has rightly placed reliance on the decision of the Special Bench of the Hon'ble Tribunal in the case of Dy. CIT v. Quark Systems (P.) Ltd. [2010] 38 SOT 307 (CHD - Trib.) for the proposition that the Assessee cannot be precluded from seeking exclusion of a company selected by it in its TP study, when the company is otherwise not comparable to the Assessee. We therefore direct exclusion of the aforesaid 5 companies from the list of comparable companies.' 26. We further know that Hon'ble Karnataka High Court in case of Acusis Software India (P.) Ltd. v. ITO (2018) 98 taxmann.com 183, has also upheld application of tolerance range of turnover of 10 times on either side of an assessee's turnover by observing as under: '14. The findings of the learned Tribunal as regards the comparable namely, Mercury Outsourcing Management Ltd., which too have been excluded by the Tribunal are quoted below for ready reference:— "(ii) Mercury Outsourcing Management Ltd. 13.1 The learned Authorised Representative has submitted that the TPO has rejected this company on the similar reasoning of diminishing revenue and abnormal cost. 13.2 On the other hand, the learned DR has submitted that this company is incurring persistent losses and further the turnover of this company is less than Rs. 1 Crore and therefore it does not satisfy the filter of turnover applied by the TPO. 13.3 We have considered the rival submissions as well as the relevant material on record. At the outset, we note that turnover of this company in the ITES segment is only Rs. 45.33 lakhs which is any case does not satisfy any filter of turnover in comparison to the assessee's turnover more than Rs. 27 Crores. Even if we apply the tolerance range of turnover of 10 times on both sides of the assessee's turnover then the company which is having less than Rs. 2.7 Crores of turnover will be outside the said range of IT(TP)A No.2870/Bang/2017 Page 25 of 32 10 times. Accordingly, we are of the view that this company which is having only Rs. 45.33 lakhs turnover cannot be considered as a good comparable to the assessee". 15. From the aforesaid findings of the learned Tribunal, we are satisfied that the reasons assigned by the learned Tribunal in excluding the aforesaid company as comparable is also reasonable and the same deserves to be accepted by us. It is analysed by the learned Tribunal in extenso which arrived at a decision that the company which is having only Rs. 45.33 lakhs turnover cannot be considered as comparable to the Assessee-company whose turnover is more than Rs. 27 Crores.' Even going by the above observation, and considering 10 times to 1/10 of the turnover the alleged comparable is much more than the turnover of assessee. We note that, assessee before Hon'ble Karnataka High Court as well as in the decision by coordinate bench of this Tribunal hereinabove, were captive service provider like assessee before us. Respectfully following the same we direct the Ld.TPO to exclude the comparable's alleged hereinabove for exclusion Accordingly Ground No.9 raised by assessee stands partly allowed. 27. Ground No.11: This ground is raised by assessee for not considering provision for doubtful debt as operating in each of while computing the margins of the comparable companies. The Ld.AR submitted that these provisions are created in relation to rendering of services and should be considered as part of operating costs. It is submitted that these are closely linked with the business operations and constitute operating expenses. In support of this contention Ld.AR relied on the decision of coordinate bench of this Tribunal in case of Outsource Partners International (P) Ltd vs ACIT reported in (2017) 79 taxman.com 74. On the contrary the Ld.Sr.DR relied on orders passed by authorities below. IT(TP)A No.2870/Bang/2017 Page 26 of 32 We have perused submissions advanced by both sides in light of records placed before us. 28. There is no dispute with the revenue that these provisions are not related to the trading activity of assessee. Coordinate bench of this Tribunal in various decisions has considered such operating items to be in the nature of operating expenses for computing margins of the comparable companies. Reliance is also pleased increase of Techbooks International (P) Ltd vs DCIT reported in (2015) 63 taxman.com 114 by Hon’ble Delhi Tribunal. We accordingly, direct the Ld.AO/TPO to treat such closely linked expenses with the business operations as operating expenses. Accordingly Ground no.11 raised assessee stands allowed. 29. Ground no. 12 This ground is raised by assessee with regard to negative working capital adjustment carried out by the Ld.TPO which was confirmed by the DRP. It is the plea of the assessee that though the TPO has observed that the assessee has a healthy margin, the Ld.TPO has erred in making an adjustment towards working capital and the DRP further erred in upholding the same. 30. It was submitted that working capital adjustment is made for the time value of money lost when credit time is given to the customers. The assessee however does not bear any risk and has no working capital contingencies. The assessee has not incurred any expenses for meeting the working capital requirement. The assessee is running the business without any working capital risk as compared to the comparables. The assessee does not bear any market risk as the services are provided only to the AE. IT(TP)A No.2870/Bang/2017 Page 27 of 32 Therefore, requirement for adjustment of negative working capital does not arise. 31. The Ld.AR placed reliance on Tivo Tech (P.) Ltd. v. DCIT reported in (2020) 117 taxmann.com 259, Lam Research India (P.) Ltd. vs. DCIT in ITA Nos.1473&1385/Bang./2014, by order dated 30/4/2015 and DCIT v. Software AG Bangalore Technologies (P.) Ltd. in ITA No.1628 of 2014, by order dated 31/3/2016 passed by the coordinate bench of this Tribunal, where it has been held that negative working capital adjustment shall not be made. We have considered the rival submissions. We find that in the case of Lam Research India (P.) Ltd.(supra) and Software AG Bangalore Technologies (P.) Ltd. (supra) passed by this Tribunal, it has been held that negative working capital adjustment shall not be made in case of a captive service provider as there is no risk and it is compensated on a total cost plus basis. Accordingly Ground No.12 raised by assessee stands allowed for statistical purposes. 32. Ground No.14 is raised by assessee alleging disallowance of expenditure claimed under section 40(a)(ia) of the Act. It is submitted that assessee had soma to disallow provision for project consultation charges amounting to ₹1,09,79,733/- under section 40(a)(ia) of the act for non-deduction of tax at source in the year under consideration. Subsequently, in the next assessment year being assessment year 2013-14 the said entire provision was reversed on receipt of final invoice and tax was deducted at source on the actual amount that was charged in the invoice. IT(TP)A No.2870/Bang/2017 Page 28 of 32 33. The Ld.AO disallowed the claim of reversal of the provision in excess of the actual value of the invoice received for the reason that no taxes were withheld. The DRP upheld the order of the Ld.AO. 34. Before this Tribunal assessee’s submitted that the entire provision was disallowed under section 40 (a) (ia) of the Act, during the year under consideration, and in the subsequent year when the final invoice was received TDS was deducted on the actual amount charged in the invoice and the excess provision was reversed. The loan they are submitted that the amount disallowed has already been offered to tax and therefore disallowance of the excess provision amounts to double taxation during the year under consideration. On the contrary, the Ld.Sr.DR relied on orders passed by authorities below. We have perused submissions advanced by both sides in light of records placed before us. 35. Admittedly assessee had not claimed any benefit in regards to the excess provision as the entire provision has been disallowed by the assessee under section 40(a)(ia) of the Act. Therefore mere passing of the book entries, which are reversed in the subsequent year on actual payment on which tax has been deduced at source, would not give rise to an obligation to deduct tax at source by the assessee, as clearly, there is no debt that can be said to be acknowledged by the assessee. Imposition of an obligation to deduct tax at source in these circumstances would amount to enforcing payments from one person towards a tax liability of another, even where the person does not acknowledge IT(TP)A No.2870/Bang/2017 Page 29 of 32 the actual sum payable. This is contrary to the scheme of provisions relating to collection of tax at source under the Act. Accordingly we direct the Ld.AO to delete the disallowance made in respect of the excess provision made. Accordingly Ground no.14 raised by assessee stands allowed. 36. Ground no. 15 is raised by assessee is in respect of the disallowance of interest on delayed deposit of tax deducted at source. Ld.AR submitted that during the year under consideration assessee incurred amount of ₹16,351/- towards interest on delayed deposit of tax deducted at source. The Ld.AO disallowed the interest on delayed deposit of tax deducted at source for following 2 reasons:  that such expenditure is not incurred in connection with preserving and promoting the business of the appellant  that it is not deductible expenses under section 37 of the act and accordingly any interest payable for default of tedious payment cannot be allowed. 37. On the contrary the Ld.Sr.DR submitted that the interest on delayed payment is in the nature of penalty and therefore the disallowance has been rightly made. 38. We have perused submissions advanced by both sides in light of records placed before us. Assessee in the written submission is relied on following decision: 1. CIT vs. Eli Lilly & Co. (India) (P.) Ltd (178 TAXMAN 505) (SC) 2. CIT vs. Oriental Insurance Co. Ltd (183 TAXMAN 186) (Karnataka HC) 3. CIT vs. Majestic Hotel Ltd (155 TAXMAN 447) (Delhi HC) 4. CIT vs. Prem Nath Motors (P.) Ltd (120 TAXMAN 584) (Delhi HC) 5. CIT vs. Select Holidays Resorts Ltd. (207 CTR 234) (Delhi HC) IT(TP)A No.2870/Bang/2017 Page 30 of 32 6. K Ramabrahmam & Sons (P) Ltd (88 ITD 48) (Visakhapatnam ITAT) 7. Walchandnagar Industries Ltd (74 TTJ 965) (Pune ITAT) 8. Manav Greys Exim (P) Ltd (75 TTJ 115) (Mumbai ITAT) 9. Sood Enterprises (41 ITD 234) (Delhi ITAT) In the above decisions interest paid under section 201(1A) is held to be compensatory nature and not considered to be penal character. Accordingly we direct the Ld.AO to delete the addition made on this issue. Accordingly Ground no.15 raised by assessee stands allowed. 39. Ground No.16 is in respect of disallowance of depreciation and software expenses. The Ld.AR submitted that assessee during the year had disallowed ₹7,43,893/- as capital expenses debited to profit and loss account in its return of income. He submitted that the software purchased was capitalise and depreciation was claimed at the rate specified for the block computers including computer software. 40. The Ld.AO restricted the depreciation on software purchased at 25% as against 60% as claimed for the reason that, the intangible asset is eligible for depreciation at a lower rate. The Ld.AO was of the opinion that the computer software that are eligible for depreciation at 60% are such software, that is embedded in the computer and comes along with the computer. The DRP upheld such view of the Ld.AO. Aggrieved by the addition made by the Ld.AO, assessee filed appeal before this Tribunal. IT(TP)A No.2870/Bang/2017 Page 31 of 32 41. The Ld.AR placed reliance on the decision of Hon’ble Special Bench Delhi Tribunal in case of Amway India Enterprises reported at 111 ITD 112 and the decision of coordinate bench of the Tribunal in case of IBM India (P.) Ltd., reported 83 ITR(T) 24 (2020) and decision of Infosys Ltd in IT(TP)A.No. 102 and 233/B/2013 wherein computer software was also included along with computers eligible for depreciation at 60%. The Ld.AR also submitted that the decision of Hon’ble Special Bench Delhi Tribunal in case of Amway India Enterprises On the contrary the Ld.SR.DR relied on orders passed by authorities below. We have perused submissions advanced by both sides in light of records placed before us. 42. We note that assessee is already claiming 60% depreciation on the computers which are used for the purpose of business and in rendering of software development services to its associated enterprises. We note that the Ld.AO granted depreciation as per the provisions u/s. 43(3) read that Rule 5, as well as appendix-1. 43. In our view the assets eligible for additional depreciation must be plant or machinery. Also that such plant or machinery should not be installed in any office premises or residential accommodation. We note that the development activity carried on by the assessee cannot be considered to be a manufacturing activity. Accordingly, relying on the decision of Hon'ble Bombay High Court in case of CIT v. IBM World Trade Corpn., reported in (1981) 130 ITR 739, we do not IT(TP)A No.2870/Bang/2017 Page 32 of 32 find any infirmity in the disallowance of additional depreciation to assessee. Accordingly Ground no.16 raised by assessee stands dismissed. In the result the appeal filed by assessee stands allowed partly. Order pronounced in the open court on 31 st March, 2022 Sd/- (B.R. BASKARAN) ACCOUNTANT MEMBER Sd/- (BEENA PILLAI) JUDICIAL MEMBER Bangalore, Dated 31 st March, 2022. 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.