Altran Technologies India Pvt Ltd, Bengaluru V. Deputy Commissioner of Income tax, Circle-1(1)(1), Bengaluru

ITA 2904/BANG/2017

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 7447 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 2 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-03-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Assessment Year: 2013-2014
• Appeal Filed On: 27-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Additional evidence; TDS
• Section: 143(3); 142(1); 40(a)(ia); 133(6); 144C; 143(2); 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH : BANGALORE BEFORE SHRI. B.R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A No. 2904/Bang/2017 Assessment Year : 2013-14 M/s. Altran Technologies India Pvt. Ltd., C/o Ernst & Young LLP, Ground & 1 st Floor, ‘A’ Wing, DivyaSree Chambers, #11, O’ Shaughnessy Road, Langford Gardens, Bangalore – 560 025. PAN: AAACA7125R Vs. The Deputy Commissioner of Income Tax, Circle – 1 (1)(1), Bangalore. APPELLANT RESPONDENT Assessee by : Shri Nageswar Rao, Advocate Revenue by : Shri Pradeep Kumar, CIT-DR Date of Hearing : 27-12-2021 Date of Pronouncement : 07-03-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the final assessment order dated 31/10/2017 passed by the Ld.DCIT, Circle – 1(1)(1), Bangalore for assessment year 2013-14 on following grounds of appeal: “Based on the facts and circumstances of the case and in law, Altran Technologies India Private Limited (the 'Appellant') respectfully craves leave to prefer an appeal against the order passed by the learned Assessing Officer (hereinafter referred to as the 'Id. AO') under section 143(3) read with section 144C of the Income-tax Act, 1961 (the 'Act') pursuant to the directions issued by the Hon'ble Dispute Resolution Panel (`DRP') on the following grounds: Page 2 of 22 IT(TP)A No. 2904/Bang/2017 General 1. The order of the Id. AO and directions of the Hon'ble DRP are based on incorrect interpretation of law and therefore are bad in law. On the facts and in the circumstances of the case and in law and based on the directions of the Hon'ble DRP, the learned AO has erred in assessing the total income of the Appellant at I NR 66,884,046 as against the returned income of NIL computed by the Appellant. Transfer pricing grounds 2. Ld. AO/ transfer pricing officer ('TP0')/ DRP have erred, in wrongly characterising the nature of services rendered to the associated enterprises (`AE') as software development services. 3. Ld. AO/ TPO have erred, in law and in facts, in not accepting segmental details provided for AE and non-AE transactions. 4. Ld. AO/ TPO/ DRP have erred, in law and in facts, by rejecting the transfer pricing (`TP') documentation maintained by the Appellant in relation to the international transaction of provision of engineering consulting/ design services and by not accepting the economic analysis based on the comparable uncontrolled price (`CUP') method undertaken by the Appellant in accordance with the provisions of the Act read with the Rules. 5. Ld. AO/ TPO/ DRP have erred in applying the Transactional Net Margin Method (1-NMM'), and the search process carried out is also not in accordance with law. Further the Id. AO/ TPO/ DRP have erred in basing their conclusions on irrelevant factors ignoring the functions. assets and risk (FAR') analysis of the Appellant. 6. Ld. AO/ TPO have erred, in law and in facts, by determining the arm's length margin/ price using only financial year 2012-13 data, which was not available to the Appellant at the time of complying with the TP documentation requirements. The Hon'ble DRP has erred in facts by stating that the Appellant has failed to establish how the use of multiple-year data will result in more reliable results, and has disregarded the fact that conducting a search in databases after the due date for maintaining the TP documentation for the year would result in data that was not available to the Appellant at the time of preparing the TP documentation. 7. Ld. AO/ TPO/ DRP have erred, in law and in facts, by applying different financial year filter i.e. by rejecting comparable companies having financial year different from that of the Appellant and/ or companies whose financial Page 3 of 22 IT(TP)A No. 2904/Bang/2017 statements were for a period other than the 12-month period of April 01, 2012 to March 31, 2013. 8. Ld. AO/ TPO has erred in law and in facts by using information received on exercising powers under section 133(6) to accept/ reject companies as corn parables. 9. Ld. AO/ TPO has erred, in law and in facts, by applying the foreign exchange earnings filter of less than 75% of turnover. The Hon'ble DRP has erred in law by failing to pass any directions in this regard. 10. Ld. TPO / AO / DRP has erred, in law and in facts, by regarding foreign exchange fluctuation to be operating in nature in the computation of margins of the companies identified as comparables. 11. Without prejudice to the Appellant's contention that the CUP method adopted by the Appellant in its TP documentation is the most appropriate method to benchmark its international transaction of provision of engineering consulting/ design services to AEs, the Id. AO/ TPO/ DRP have erred in their manner of applying the TNMM in determining the arm's length nature of the said international transaction. 12. Without prejudice to the contention that the Appellant is not engaged in software development services, Id. AO/ TPO/ DRP have erred, in law and in facts, by undertaking a fresh search beyond the due date of maintaining TP documentation, by erroneously computing the margins of certain companies taken by the TPO to be engaged in software development, by accepting certain companies that are not comparable to the Appellant and by rejecting certain comparables proposed by the Appellant. 13. Without prejudice to the contention that the Appellant is not engaged in software development services, Id. AO/ TPO/ DRP have erred in accepting ICRA Techno Analytics Ltd., Larsen & Toubro Infotech Ltd, Persistent Systems Limited, Tech Mahindra Ltd. (seg) as comparable companies applying unreasonable comparability criteria. 14. Without prejudice to the contention that the Appellant is not engaged in software development services. Id. AO/ TPO/ DRP have erred in rejecting Akshay Software Technologies Ltd., Sasken Communication Technologies and Acropetal Technologies Ltd. as comparable companies. 15. Without prejudice to the contention that the Appellant is not engaged in software development services. Hon'ble DRP has erred in upholding Persistent Systems Limited and excluding Acropetal Technologies Ltd. on factually incorrect presumptions. 16. Without prejudice to the contention that the Appellant is not engaged in software development services. Id. AO/ Page 4 of 22 IT(TP)A No. 2904/Bang/2017 TPO/ DRP have erred, in law and in facts, by accepting/ rejecting companies based on unreasonable comparability criteria and also accepted certain comparables being functionally different to that of the Appellant. The Appellant craves leave to contest the selection of all comparables (whether or not mentioned specifically herein above) included by TPO or Hon'ble DRP in comparable set and upheld by Hon'ble DRP at the time of hearing. 17. Ld. AO/ TPO/ DRP have erred, in law and in facts. by not making suitable adjustments to account for the differences in the risk profile of the Appellant vis-a-vis that of the comparables. 18. Ld. AO/ TPO have erred, in law and in facts. by computing the working capital adjustment with incorrect numbers. 19. Ld. AO has erred in law by initiating penalty proceedings under the Act. Corporation taxation matters 20. Ld. AO/ DRP have erred, in law and in facts, by not granting allowance of tax depreciation amounting to INR 6,666,090 claimed on computer software under the provisions of section 40(a)(ia) of the Act. The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law.” 2. Brief facts of the case are as under: The assessee is a company and filed its return of income on 30/11/2013 declaring income of Rs.13,81,550/-.The case was selected for scrutiny and notice under section 143(2) and 142(1) was issued. In response to the statutory notices, the representatives of assessee appeared before the Ld.AO and filed requisite details as called for. The Ld.AO noted that assessee had international transaction exceeding Rs. 15 crores. Accordingly, reference was made to the Ld.TPO to compute the ALP of the international transactions. Page 5 of 22 IT(TP)A No. 2904/Bang/2017 On receipt of the reference, the Ld.TPO called for economic details in Form 3CEB. From the details filed by the assessee, the Ld.TPO observed that assessee had following international transactions with its associated enterprise: Particulars Amount (Rs.) Payment of royalty 59,532 Revenue from services 336,827,840 Project expenses 859,759 Consultation Services 45,89,891 Management Fees 329,513 Accounts Receivable 85,890,729 Accounts Payable 51,691,129 3. The Ld.TPO observed that assessee had AE as well as non AE transaction and earned the revenue from services at Rs.40,49,91,632/-. The details are as under: Particulars AE Non-AE Total (Rs. / %) Operating Revenue 33,68,27,840 6,81,63,783 40,49,91,623 Operating Cost (exchange loss & interest) 30,18,84,362 11,04,11,920 41,22,96,281 Operating Profit 3,49,43,478 -4,22,48,137 -73,04,658 OP/OC% 11.58% -38.26% -1.77% 4. The Ld.TPO observed that assessee earned a profit of 11.58 % under the AE segment whereas under the Non AE segment there was a loss of 38.26%. The Ld.AO was of the opinion that as the services rendered by assessee to the AE and non AE segment , there was a vide variation in the profit margines which was not acceptable. The Ld.TPO called on assessee to submit to explain the difference. 5. The assessee vide reply dated 01/09/2016 submitted that thre was a stiff competition to the assessee under the non AE segment in the market, that lead to the loss. This was not substantiated Page 6 of 22 IT(TP)A No. 2904/Bang/2017 by the assessee and therefore the Ld.TPO recomputed the margins of the assessee under AE and non AE segment as under: Particulars AE (82.74%) Non-AE (17.26%) Value (Rs. / %) Operating Revenue 33,68,27,840 6,81,63,783 40,49,91,623 Operating Cost (exchange loss & interest) 3,41,903,782 7,13,22,931 413,226,713 Finance Cost 763602 159291 922893 Less: Loss on sale of fixed assets 6237 1301 7538 Operating Cost 34,11,33,943 7,11,62,339 412296282 Operating Profit 43,06,103 29,98,556 OP/OC% (1.26) (4.21) 6. The Ld.TPO rejected the transfer pricing study by assessee wherein internal CUP was used to bench mark the international transaction. The Ld.TPO thus 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%. Sl. No. Name of the taxpayer OP/OC 1 CG-VAK Software Exports Ltd 20.54% 2 1 C R A Techno Analytics Ltd. 17.10% 3 Larsen & Toubro Infotech Ltd. 26.06% 4 Mindtree Ltd. (Seg) 18.19% 5 Persistent Systems Ltd. 28.27% 6 R S Software (India) Pvt Ltd 17.41% 7 Tech Mahindra Ltd (Seg) 18.72% Unadjusted average margin 20.90% 7. The Ld.TPO considered the foreign exchange gain/loss to be operating income. The Ld.TPO proposed the adjustment at Rs.6,01,83,842/- 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 Page 7 of 22 IT(TP)A No. 2904/Bang/2017 made disallowance of Rs.66,66,090/- being the depreciation on software. 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. 8. At the outset the Ld.AR submitted that assessee whish to contest the broad issues raised in Ground no.3, 13, 14 and 20 among the grounds of appeal raised. A written submission has been filed by the assessee in this regards dated 08/11/21 which is taken on record. We are therefore restricting the adjudication of issues only to Grounds Ground no.3, 13, 14 and 20. 9. At the outset, the Ld.AR referred to application under Rule 11 raising Additional ground No.21, which reads as under: “In addition to the grounds of objections raised before the Hon'ble Bench, the petitioner hereby wishes to submit the following additional ground. Ground No 21: Without prejudice to the other grounds, the learned AO/TPO/DRP have failed to appreciate the fact that even in the segmental financials of the Appellant as redrawn by the learned TPO, the operating loss in the AE segment is lower than that in the non-AE segment, i.e., the profitability of Appellant is higher in the AE segment than in the non-AE segment. The Petitioner submits that the above additional ground is being raised by way of abundant caution. The additional ground raises issues which are fundamental to the appeal and the non-admission and non-adjudication of the same would result in an incomplete appreciation and adjudication of the matter. The Petitioner submits that the failure to raise this ground at an earlier stage is neither wilful nor wanton but due to the reasons stated above. No prejudice would be caused to the Respondent by reason of Page 8 of 22 IT(TP)A No. 2904/Bang/2017 the above additional ground being admitted and adjudicated and accordingly the balance of convenience is in favour of such an order being passed by this Hon'ble Tribunal.” 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. 10. We may clarify that the assessee has filed a synopsis on 08/11/21 wherein the summary of arguments in respect of the issues alleged in the present appeal has been summarized. Therein, the date on which Application for admission of additional ground is filed mentioned as 29/09/2020 in the written submission dated 08.11.2021. However on carefully going through the record, we note that the application for admission of Additional ground no.21 is dated 15/07/2019, which is filed on 29.09.2020. Accordingly we are considering the application dated 15/07/2019 that is placed on the record. 11. We note that the issue raised in the additional ground is alternative to the issue raised under grounds 3,13 & 14 in the main ground of appeal. We therefore admit the issue raised in the additional ground no. 21. Accordingly application dated 15/07/2019 stands allowed. 12. The assessee has also raised application dated 25/06/2020, under Rule 29 seeking admission of additional evidence. It is submitted that the additional evidence pertain to a certificate issued by the CA to establish the authenticity of segmental financial details placed by assessee before the Ld.TPO. It is Page 9 of 22 IT(TP)A No. 2904/Bang/2017 submitted that the certificate has been given by an independent CA. The Ld.AR submitted that these details are relevant as the same was rejected by the Ld.AO/TPO on the ground that the segments were not audited and separate books of accounts were not prepared. We have considered the submissions advanced by both sides in light of records placed before us. We note that the additional evidence only supports the segmental details already placed on record before the authorities below. We also note that this evidence is necessary to adjudicate the issue raised by assessee in Grounds, 3. Accordingly the additional evidence filed stands admitted. 13. Ground No.3 During the transfer pricing assessment proceedings, the assessee submitted that internal TNMM should be used for benchmarking the service transaction and had submitted the segmental financial details before TPO vide submission dated 01 September 2016. It is submitted that assessee’s margins in AE and non-AE segment, are 11.58% and -38.26% respectively. However, the Ld.TPO rejected said segmental details stating that no separate books of accounts are prepared for these segments and the segmentals are not audited. Subsequently. TPO had re-drawn segmentals of Appellant allocating the expenses in the ratio of revenue between AE and non-AE segment and applied external TNMM for benchmarking transaction considering the segmentals re-drawn by him. DRP upheld the approach of the Ld.TPO. Page 10 of 22 IT(TP)A No. 2904/Bang/2017 It is submitted that margins earned by assessee in the AE segment (11.58%) is higher than margins earned by assessee in the non-AE segment (-38.26%). Accordingly, the Ld.AR submitted that the transaction of assessee with its AE towards the services provided are at arm's length. Further, without prejudice to the other grounds of appeal the Ld.AR submitted that, even if external TNMM is applied, assessee’s margin may be considered as per the segmentals certified by the independent Chartered Accountant. We have considered the submissions advanced by both sides in light of records placed before us. 14. We note that the additional evidence filed by assessee is in support of the segmental details and the margin earned under AE and non AE segment. These are audited by a CA and deserved to be considered. We therefore remand this issue to the Ld.AO to verify the details in the additional evidence and to consider the same in accordance with law. The Ld.TPO is directed to consider the internal TNMM if satisfied. In the event internal TNMM is not acceptable, the margins computed by the assessee as per CA certificate may be taken for bench marking the transaction. Needless to say that proper opportunity of being heard must be granted to assessee. Accordingly this ground raised by assessee stands allowed for statistical purposes. 15. Ground No 13 is raised by assessee seeking exclusion of following comparables: 1. Larsen & Toubro Infotech Ltd. 2. Persistent Systems Ltd. Page 11 of 22 IT(TP)A No. 2904/Bang/2017 3. Tech Mahindra Ltd. It is submitted by the Ld.AR that ICRA Techno Analytics though is raised for exclusion, the same is not disputed by assessee at this stage. It is submitted that for such reason, ICRA Techno Analytics has not been considered in the Synopsis dated 08/11/2021, which has been relied by the Ld.AR at the time of argument. Therefore we restrict to only three comparables listed herein above. 16. Ground No.14 is raised by assessee seeking inclusion of following comparables: 1. Akshay Software Technologies Ltd. 2. Sasken Communication Technologies 17. Before we undertake comparability analysis, it is sine qua non to understand the FAR of assessee. Functions: Altran India provides engineering design services to the Altran Group Companies. Altran India provides following engineering services:  Product Lifecycle Management  Mechanical Engineering  Embedded & Critical Systems  Information Systems In relation to the above services, the AEs enter into a contract with the end customer. Thereafter, the AEs sub-contract different tasks such as engineering design, procurement, commissioning, etc_ to different Altran group companies depending on their core competency. The final service provided Page 12 of 22 IT(TP)A No. 2904/Bang/2017 to the end-user generally requires integration of different services subcontracted to different Altran group companies The engineering design activities. sub-contracted to Altran India, are thus part of the total contract awarded to AEs by the enc customer. The decision to subcontract work to Altran India or any other AEs is dependent on the quantum of work available for sub- contracting, existing / projected capacity. the available expertise. cost etc. of each project. The tasks are performed through the use of specific engineenng software tools for layout. design calculations. drawing preparation, specification and datasheet generation, etc. These software tools may even be shared with the AEs / client and work may be performed simultaneously at different locations. All work carried out by Altran India is required to meet the quality standards and schedule specified by the ultimate customer Altran India also provides engineering design services to unrelated third parties in India. Altran India undertakes routine, support functions that are the part of normal course of business and are indispensable in the conomic environment, namely: Strategic Policies: All long-term policies are developed and formulated by Altran India with the consensus of AEs. The company's management takes care of corporate communications. and dealing with customer, associate companies. etc. Finance and Accounting, IT and Legal: Altran India is responsible for day-to-day-financial matters and dealing with local tax and Page 13 of 22 IT(TP)A No. 2904/Bang/2017 regulatory issues. Altran India is also responsible for maintaining its premises, IT infrastructure, etc. Human Resource Management: Recruitment, soft skills training. employees' evaluation related functions are performed by the Altran India. Assets: Assessee only owns tangible assets that are necessary to runs its business. Risk assumed: Only foreign exchange risk and man power risk Characterisation: The functional analysis serves as a foundation to characterize entities for purposes of inter-company transfer pricing. Based on the facts as presented in the above analysis of functions performed, assets employed and risks borne, it is possible to characterize Altran India as a service provider that assumes normal risks. Based on the above we undertake the exclusion/inclusion of the comparables alleged by assessee as under. 18. For Exclusion: It is submitted by the Ld.AR as under: 1. L&T- The Ld.AR submitted that the authorities below failed to appreciate that this company is into product development and that it has generated huge IPR, brand etc. 2. Persistent Systems – It is submitted that this company had acquisition during the year and growth in IP driven revenue is huge. 3. Tech Mahindra (Segmental) – It is submitted that this company fails the Related Party Transactions ("RPT") filter as applied by the Ld. TPO and there are significant intangibles owned by the company due to which it should be excluded from the final list of comparables. Page 14 of 22 IT(TP)A No. 2904/Bang/2017 The Ld.AR submitted that detailed contentions for exclusion of above mentioned comparables are provided in decisions of Coordinate Bench in the case of Microsoft Research Lab India Pvt. Ltd. vs. ACIT in IT(TP)A No. 2079/Bang/2019 by order dated 27.02.2020 and MetricStream Infotech (India) Pvt. Ltd. vs. DCIT in IT(TP)A Nos. 1418 & 2735/Bang/2017 by order dated 27.02.2019 for same assessment year, i.e. AY 2013-14. On the contrary, the Ld.DR relied on orders passed by Ld.AO/TPO. We have perused the submissions advanced by both sides in light of records placed before us. 19. We refer to the decision of Microsoft research Lab India Ltd. (supra), wherein L& T and Persistent have been considered as under: “7. At the time of hearing, the learned Authorised Representative has restricted his arguments in respect of Ground Nos.4, 5 & 6 for exclusion of two comparables.(i) L & T Infotech Limited and(ii) Persistent Systems Limited. The learned Authorized Representative submitted that the comparables are functionally dissimilar and supported his arguments with judicial decisions and voluminous Paper Book and prayed for allowing the appeal. Contra, the learned Departmental Representative relied on the orders of lower authorities and filed written submissions. 8. We heard the rival submissions and perused the material on record. The learned Authorized Representative submitted that the comparable M/s L & T InfoTech Limited was included by the TPO, irrespective of the fact that the company owns large intangibles and functionally dissimilar and in development of software products and no segmental information is available. The LAR submitted that the comparable was excluded by the co-ordinate bench of the Tribunal in the case of Alcatel Lucent India Ltd. Vs. Addl. CIT (ITA No.6979/Del/2017 Dt.9.5.2019). We find the co-ordinate bench of the Tribunal for the Asst. Year 2013-14 has dealt and excluded the comparable observing at page 13 to 15 para 2 which is as under under : “ 2. Larson and Toubro (Infotech) Ltd Page 15 of 22 IT(TP)A No. 2904/Bang/2017 (i) The learned counsel submitted that company is engaged in sale of services and products and segment information in relation to service is not available and thus being functionally dissimilar, the company might be excluded. The Ld. counsel also submitted that TPO himself has accepted that the company deals in products. The learned counsel also submitted that the company owns significant intangibles, incurs substantial effort in building and maintaining brand “L & T” and has earned supernormal profit during the year. The learned counsel submitted that company has been rejected by the Tribunal in assessee’s own case for assessment year 2011-12 and 2012-13. In assessment year 2011-12 the decision of the Tribunal has been upheld by the Hon’ble Delhi High Court. Further, the learned counsel submitted that the company has been rejected by the learned DRP in assessment year 2014-15. (ii) The learned DR, on the other hand, relied on the finding of the lower authorities and submitted that the assessee has not demonstrated as how the ownership of intangibles will impact the profit margin. (iii) We have heard the rival submissions of the parties. The learned DRP retained the comparable on the ground that the assessee failed to demonstrate or adduce evidence to show that how objections raised regarding the research and development, IP/intangibles ownership has impacted the margins and how it can automatically become the basis for adjustment. The learned DRP also relied on the direction of the DRP for assessment year 2012-13, where the company has been accepted as a valid comparable. But, we find that the lower authorities have not examined properly the functional dissimilarity of the company. The learned DR could not controvert what that the company is engaged in sale of products along with the services. We find that on page 44 of the learned TPO’s order, he himself has mentioned that the company was engaged in sales of the the products namely “AccuRUSI” and “ Unitrax”. Further on perusal of the profit and loss account, we find that operating expenses includes cost of bought out items for resale which amounts to Rs.27,10,89,274/-and there is no separate bifurcations of the revenue from sale of these bought out items. In view of these observations, it is evident that the revenue of the company declared during the year under consideration include sale of products. As no separate segment of software development being available, the company at entity level, cannot be considered as functionally similar to the CSD Segment of assessee. In view of the functional dissimilarity of the company with the CSD Segment of Page 16 of 22 IT(TP)A No. 2904/Bang/2017 assessee, we direct the Ld. AO/TPO to exclude the company from the set of the final comparables.” Similarly, the ld. AR prayed for exclusion of M/s Persistent Systems Limited due to functional dissimilarity. Further engaged in development of the products and no segmental information is available. We found this comparable was excluded from the final set of comparables in the case of Alcatel Lucent India Ltd. Vs. Addl.CIT (supra) dealt at page 18 & 19 Para 4 which is read as under: “ 4. Persistent Systems Ltd. (i) The learned counsel submitted that company earns income from royalty fee and is engaged in development of products. He submitted that Hon’ble Andhra Pradesh High Court in the case of CIT Vs Intoto software India Private Limited (ITA 233 of 2014) has held the company as engaged in both product and development of the software development services and therefore cannot be compared to a software development service provider. The learned counsel submitted that the company incurs significant R&D expenditure which resulted in global patents and the company owns significant intangibles which have either been developed or have been acquired from 3rd parties as part of inorganic growth strategy. The learned counsel also submitted that the company has been rejected by the Tribunal in assessee’s own case for assessment year 2011- 12 and assessment year 2012-13. The decision of the Tribunal of rejecting the company has been upheld by the Hon’ble Delhi High Court in assessment year 2011-12 . In view of the above, the learned counsel submitted that the company might be excluded from the final set of the comparables. (ii) The learned DR, on the other hand, relied on the order of the lower authorities and submitted that under that TNMM a small variations in vertical activity might be accepted. (iii) We have heard the rival submission and perused the relevant material on record. The learned TPO observed that the company delivers services across all stage of the product life-cycle, which enables them to work with a wide range of customers and allow them to develop, enhance and deploy their customer software products. The learned DRP further relied on the its direction for assessment year 2011-12 and 2012-13, where it has been approved as a valid comparable. As far as direction of the DRP for assessment year 2011-12 and 2012-13 is concerned, the Tribunal has already reversed the finding in the order in ITA No.6586/Del/2015 for assessment year 2011-12 and ITA No. 1112/Del./2017 for assessment Page 17 of 22 IT(TP)A No. 2904/Bang/2017 year 2012-13. The Tribunal in assessment year 2012-13 held the company as functionally different from the assessee. In the year under consideration, also we find from the pages 214, 222, 302, 345 and 347 of the compendium of the Annual Report that the company has earned income from royalty fee and engaged in development of the products. We are of the view that a company engaged in development of the software products cannot be compared with the assessee who is engaged in contract software development services. Accordingly, we direct the Ld. AO/TPO to exclude the company from the final set of the comparables.” We considering the facts and circumstances, and the ratio of decision of coordinate bench of the tribunal, the comparables are functionally different. Accordingly we direct the TPO to exclude these two comparables i.e. i) L & T Infotech Limited and ii) Persistent Systems Limited form the final list of comparables for determination of ALP and partly allow the grounds of appeal of the assessee. 9. In the result, the assessee’s appeal is partly allowed.” In so far as Tech Mahindra is concerned, the comparable has been considered by coordinate bench in case of Metric Stream Infotech India Pvt.Ltd (supra) as under: “12. As far as Tech Mahindra Ltd. is concerned, the assessee made a specific prayer before the DRP that the related party transaction (RPT) of this company was more than 25%. Our attention was drawn to page 641 of the assessee's PB, which is objections filed by the assessee before the DRP wherein the following submission was made:- "The assessee would like to submit that Tech Mahindra fails the RPT filter applied by your good self. The working for the same is provided below for your reference: Related Party Transaction Net Sales Related Party Transaction /Net Sales 25,739,000,000 60,019,000,000 42.88% (Source: AR 2012-13 0 pg. 69, 70 & 71) Hence, the company fails the RPT filter applied by the TPO and hence should be rejected." 13. The DRP, however, has not considered this submission, but has confirmed the order of TPO. We are of the view that it would be just and proper to set aside the order of DRP on this issue and remand the issue to AO/TPO for consideration of the contention of the assessee Page 18 of 22 IT(TP)A No. 2904/Bang/2017 with regard to the exclusion of this company by application of RPT filter.” Respectfully following the same we remand this comparable to the Ld.AO/TPO to consider the comparable in light of the above direction. Accordingly this ground of assessee stands allowed. 20. Ground no.14. Assessee is seeking inclusion of Akshay Software Technologies Ltd. and Sasken Communication Technologies We note that coordinate bench in case of Metric Stream Infotech India Pvt.Ltd (supra) considered Akshay Software Technologies Ltd. as under: “16. Apart from the above, the assessee also seeks to include Akshay Software Technologies Ltd. in the list of comparable companies. As far as this company is concerned, our attention was drawn to the annual accounts of this company which is at pages 742-753 of assessee's PB. This company was excluded on the ground that in response to notice u/s. 133(6) of the Act, this company had mentioned that it was engaged in providing professional services, procurement, installation, implementation, support & maintenance of ERP products and services. Since the above services were not in the nature of software development, the TPO considered this company as not comparable. The ld. Counsel for the assessee drew our attention to pages 742 to 743 of the assessee's PB which contains the financial statements of this company. Our attention was drawn to Note No.20 to the financial statements wherein income from software services forms more than 98% of assessee's total revenue. Further in Note 29 to the financial statements, export of software services is shown at Rs.18.65 crores out of the total revenue from operations of Rs.19.94 crores. Pointing out to the above details, the ld. Counsel for the assessee submitted that this company is actually in software development services. It was submitted that in AY 2009-10 in assessee's own case, this company was accepted as a comparable. 17. The ld. DR, on the other hand, had pointed out that when the company itself has accepted that it is providing ERP products and services, it cannot be said that this company was in software development services. He relied on para 15.3 of the DRP's order in which the DRP has given the following findings:- Page 19 of 22 IT(TP)A No. 2904/Bang/2017 "15.3 As regards assessee's argument that ERP systems are software systems and as such the same should be considered as software development, the same is devoid of any merit. For determining the functionality of a company, it needs to be determined as to what is the exact nature of functions. In case a company is in Software Development, it would not matter as to what kind of customer it serves as the broad range of services remain the same and that is the development of software. Further, it will not matter whether the company develops complete software for its client e.g. develops a final product as per demand of the client or develops only some software modules, as per the requirements of its client, the function remains same. However, a company needs to be considered in the business of Software Products, if it is itself developing and selling the products developed by it as then it owns the TPR of the product and exploits it by selling the product/software license to different customers. In the case of M/s. Akshay, as discussed supra, it is operating in multiple segments including software products, however segmental data of the same is not available. For ERP products, its annual report refers to 'support and maintenance' and there isn't any detail about the nature of this activity as to whether the assessee is into software development activities relating to ERP or just offering IT enabled services in relation to the said product. The reliance of the assessee on "Rangachary Report" is also misplaced as the issue under consideration is "Software Development services" and the same has not been defined therein. Further purpose of the said report was to 'Review Taxation of Development Center and the IT Sector' and not to define 'Software Development', `IT enabled services', other IT services etc. for the purposes of defining the functionality for carrying out TP studies. The report discusses entire IT sector and the services which would come within its purview rather than what is software development services and what is not. So, these objections of the assessee do not have any merit. Considering above, the objection of the assessee is not accepted." 18. In the rejoinder, the ld. Counsel for the assessee submitted that every implementation of ERP also includes development of ERP for a client and has to be regarded as software development services. 19. We have considered the rival submissions and we are of the view that the reasons assigned by the DRP for regarding this company as not comparable are correct and does not call for any interference. When the nature of services are doubtful, it is always better to exclude a company from the list of comparable companies. In that view of the matter, we uphold the order of DRP and dismiss the relevant ground of appeal of the assessee.” Page 20 of 22 IT(TP)A No. 2904/Bang/2017 Respectfully following the above we uphold the exclusion of this comparable. As regards Sasken, from the Annual records, it is evident that this comparables own huge intangibles and have many subsidiaries all over the world. It is also evident that this comparables are into development of product unlike assessee that is a captive service provider. Under such circumstances we do not consider such a giant company to be functionally comparable with assessee. Respectfully following the above we uphold the exclusion of this comparable. Accordingly this ground of assessee stands dismissed. 21. Ground No.20 is raised by assessee against the disallowance u/s.40(a)(ia) in respect of depreciation claimed on the software purchased. The assessee during the year under consideration, purchased software hat was put to use during the year. The assessee computed the depreciation on addition of the software at Rs.66,66,090/- as an allowable deduction while computing its income from business. The Ld.AO noticed that on the purchase of software, the assessee had not deducted tax at source. The Ld.AO was therefore of the view that provisions of section 40(a)(ia) of the Act were applicable and claim for depreciation was to be disallowed u/s. 40(a)(ia). According to the Ld.AO, the amount paid towards purchase of software was in the nature of royalty within the meaning of Explanation 2 to section 9(1)(vi) and therefore was liable to provisions of TDS. The Ld.AO thus disallowed the claim of depreciation by the assessee. Page 21 of 22 IT(TP)A No. 2904/Bang/2017 Aggrieved by the order of the Ld.AO, the assessee raised the issue before the Ld.CIT(A). The Ld.CIT(A) after considering the submissions of assessee up held the addition by the Ld.AO. Aggrieved by the order of the CIT(Appeals), the assessee raised the issue before this Tribunal. 22. It is submitted by the Ld.AR that identical issue arose before the Coordinate bench of this Tribunal in case of DCIT vs. WS Atkins reported in (2015) 61 taxmann.com 372. This Tribunal observed and held as under: “13. We have heard the submissions of the ld. DR, who reiterated the stand of the Revenue as contained in ground No.5. In our view, the issue raised by the Revenue in the ground of appeal is no longer res integra and has been considered and decided by the ITAT Delhi Bench in the case of SMS Demag Pvt. Ltd. v. DCIT, 132 TTJ 498 and Sonic Biochem Extractions Pvt. Ltd., (2013) 23 ITR (Trib) 447 ITAT Mum. In Sonic Biochem Extractions Pvt. Ltd. (supra), identical issue was considered and decided by the Mumbai Tribunal. Following were the relevant observations:- “The assessee purchased software, capitalised the payment to the computers account as the software came along with the hardware of computers and claimed depreciation. On the ground that purchase of software is essentially purchase of copyright which attracts tax deduction at source under section 194J, the Assessing Officer invoked the provisions of section 40(a)(ia) and disallowed the depreciation claimed. The Commissioner (Appeals), confirmed the action of the Assessing Officer on the ground that the purchase of software amounted to acquisition of intangible asset and therefore, the payment was royalty and disallowable. On appeal: Held, (i) that mere purchase of software, a copyrighted article, for utilisation of computers cannot be considered as purchase of copyright and royalty. The assessee did not acquire any rights for making copies, selling or acquiring which generally could be considered within the definition of “royalty’. Explanation 2 to section 9(1)(vi) cannot be applied to purchase of a copyrighted software, which does not involve any commercial exploitation thereof. The assessee simply purchased software delivered along with computer hardware for utilization in the day-to-day business.” Page 22 of 22 IT(TP)A No. 2904/Bang/2017 14. Respectfully following the aforesaid decision of the Tribunal, we uphold the order of the CIT(Appeals) and dismiss the ground raised by the Revenue.” 23. In the present facts the assessee purchased the software and capitalised it during the year under consideration on which the depreciation was claimed. It is not the case of revenue that assessee has purchased a copyrighted article. And that assessee acquired any right to make copies and sell the same. Under such circumstances since there is no involvement of commercial exploitation of the software, the purchase cannot be construed to be categorised as royalty under Explanation 2 to section 9(1)(vi). Respectfully following the above view in case of DCIT vs. WS Atkins(supra), we direct the Ld.AO to allow the claim of depreciation to assessee. Accordingly this ground raised by assessee stands allowed. In the result the appeal filed by assessee stands partly allowed. Order pronounced in the open court on 07 th March, 2022. Sd/- Sd/- (B.R. BASKARAN) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 07 th March, 2022. /MS / Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order Assistant Registrar, ITAT, Bangalore