M/s Sunquest Information Systems (India) Prvate Limited, Bangalore V. DCIT, Bangalore

ITA 552/BANG/2015

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 8920 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 8 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-12-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 01-04-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C H SUNDAR RAO
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Non-deduction of tax; Notional interest; Commercial expediency
• Section: 143(3); 92B; 40(a)(ia); 133(6); 195; 32; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A BEFORE SHRI N.V VASUDEVAN, VICE PRESIDENT SHRI JASON P BOAZ, ACCOUNTANT MEMBER IT(TP)A NO.552/BANG/2015 ASSESSMENT YEAR : 2010-11 M/S SUNQUEST INFORMATION SYSTEMS (INDIA) PVT. LTD., 3 RD FLOOR, INDRAPRASTHA EQUINOX, NO.23, 100 FT. INNER RING ROAD, EJIPURA, BENGALURU. PAN AAEC S 2754 E VS. THE DY. COMMISSIONER OF INCOME-TAX, CIRCLE-6(1)(1), BENGALURU. APPLICANT RESPONDENT APPLICANT BY : SHRI SHARATH RAO, C.A RESPONDENT BY : SHRI C.H SUNDAR RAO, CIT DATE OF HEARING : 28.11.2018 DATE OF PRONOUNCEMENT : 21.12.2018 O R D E R PER SHRI N.V.VASUDEVAN, JUDICIAL MEMBER : THIS APPEAL BY THE ASSESSEE IS AGAINST THE FINAL O RDER OF ASSESSMENT DATED 30/1/2015 PASSED U/S 143(3) R.W.S 144C(13) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT) BY DC IT, CIRCLE- 6(1)(1), BANGALORE RELATING TO ASST. YEAR 2010-11. IT(TP)A NO.552/B/15 2 2. THOUGH THE ASSESSEE HAS RAISED SEVERAL GROUNDS O F APPEAL, THE GROUNDS THAT WERE PRESSED FOR ADJUDICATION WERE GROUNDS NOS. 9, 11 AND 15 WHICH RELATES TO DETERMINATION OF ARMS LENGTH PRICE (ALP) IN RESPECT OF INTERNATIONAL TRANSACTION BETWE EN THE ASSESSEE AND ITS ASSOCIATED ENTERPRISE (AE) AND GROUND NO.16 WHICH RELATES TO DISALLOWANCE U/S.40(A)(IA) OF THE ACT AND ALL OT HER GROUNDS AND ADDITIONAL GROUNDS WERE NOT PRESSED FOR ADJUDICATIO N. 3. AS FAR AS GROUND NOS.9, 11 AND 15 ARE CONCERNED THESE GROUNDS READ AS FOLLOWS:- 9. THE LEARNED AO ERRED IN ADOPTING A THRESHOLD OF 0% FOR APPLYING THE RELATED PARTY FILTER ('RPT') A S PER THE DIRECTIONS OF THE HON'BLE DRP AND THEREBY ERRED IN REJECTING THE FUNCTIONAL COMPARABLE COMPANIES. 11. THE LEARNED AO/LEARNED TPO ERRED IN INCLUDING COMPANIES THAT DO NOT SATISFY THE TEST OF COMPARABILITY. SPECIFICALLY, THE FOLLOWING COMPANY SHOULD HAVE BEEN REJECTED: 15. THE LEARNED AO/LEARNED TPO ERRED IN RE- CHARACTERIZING THE DEBTORS OUTSTANDING FROM THE AE AS LOANS EXTENDED TO THE AE AND THEREBY ERRED IN COMPUTING NOTIONAL INTEREST ON THE OUTSTANDING BALANCE FROM THE AE. WHILE DOING SO, THE LEARNED AO/LEARNED TPO ERRED: 15.1 BY NOT APPRECIATING THAT THE DEBTS WERE OUTSTANDING WITH THE AE PURELY BECAUSE OF GENUINE BUSINESS REASONS AND IT WAS NOT WITH A MALAFIDE INTENTION TO EXTEND INDIRECT CREDIT PERIOD TO THE DEBTORS. IT(TP)A NO.552/B/15 3 15.2 IN COMPUTING THE NOTIONAL INTEREST ON THE OUTSTANDING BALANCES FROM THE AE BY ADOPTING AN ADHOC THRESHOLD OF 3 MONTHS AS THE ARM'S LENGTH BENCHMARK FOR MAKING THE TRANSFER PRICING ADJUSTMENT. 15.3 WITHOUT PREJUDICE, BY NOT COMPUTING NOTIONAL INTEREST ONLY FOR THE PERIOD EXCEEDING THE THRESHOL D INTEREST FREE PERIOD OF 3 MONTHS CONSIDERED BY THE LEARNED TPO. 15.4 BY ADOPTING AN INTEREST RATE OF 11.25% (BEING THE PRIME LENDING RATE) WITHOUT GIVING ANY COGENT REASON FOR ADOPTING THE SAME. 4. AS ALREADY STATED THESE GROUNDS RELATE TO DETERM INATION OF ARMS LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANS ACTION ENTERED INTO BY THE ASSESSEE WITH SUNQUEST INFORMATION SYSTEMS I NC (SUNQUEST US). THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSI NESS OF RENDERING SOFTWARE DEVELOPMENT SERVICES. IT IS WHOL LY OWNED SUBSIDIARY OF SUNQUEST US. THE ASSESSEE HAD ENTERE D INTO A MASTER SOFTWARE DEVELOPMENT AGREEMENT WITH MISYS PHYSICIAN S SYSTEMS L.L.C DATED 25/5/2005 FOR RENDERING SOFTWARE DEVELO PMENT SERVICES. SUBSEQUENTLY ANOTHER AGREEMENT WAS ENTER ED INTO WITH MISYS HOSPITAL SYSTEMS INC. WHICH WAS SUCCESSOR IN INTEREST OF MISYS PHYSICIANS SYSTEMS L.L.C. MISYS HOSPITAL IN C WAS RENAMED AS SUNQUEST INFORMATION SYSTEMS INC (SUNQUE ST US). AS PER THE AGREEMENT, THE ASSESSEE DEVELOPS, CREATES, TESTS AND DELIVERS PROGRAMMING MATERIALS WITHIN THE DOMAIN OF SOFTWARE IT(TP)A NO.552/B/15 4 DEVELOPMENT SERVICES. THE ASSESSEE IS COMPENSATED ON A COST PLUS BASIS. 5. AS PER THE PROVISION OF SEC. 92 OF THE INCOME-TA X ACT, INCOME ARISING OUT OF INTERNATIONAL TRANSACTION HAS TO BE DETERMINED HAVING REGARD TO ARMS LENGTH PRICE. IT IS NOT IN DI SPUTE THAT TRANSACTION OF RENDERING SOFTWARE DEVELOPMENT SERVI CES BY THE ASSESSEE TO ITS WHOLLY OWNED HOLDING COMPANY IS AN INTERNATIONAL TRANSACTION AND THE PRICE RECEIVED IN RESPECT OF TH E SAID TRANSACTION SHOULD SATISFY THE TEST OF ARMS LENGTH PRICE (ALP) AS IS REQUIRED BY THE PROVISIONS OF SEC. 92 OF THE ACT. 6. THE ASSESSEE RECEIVED A SUM OF RS.18,84,11,397/- FOR RENDERING SOFTWARE DEVELOPMENT SERVICES FROM ITS AS SOCIATED ENTERPRISE (A.E). THE ASSESEE HAD CHOSEN PROFIT LE VEL INDICATOR (PLI) FOR THE PURPOSE OF COMPARISON OF ITS PROFIT M ARGIN WITH OTHER COMPARABLE COMPANIES AS OPERATING PROFIT ON COST (O P/OC). THE OP/OC OF THE ASSESEE WAS 12.60% AS PER THE FOLLOWIN G TABLE. (RS.) OPERATING REVENUES * 18,84,11,397 OPERATING EXPENSES ** 16,73,16,260 OPERATING (PROFIT)/LOSS 2,10,95,137 OP PROFIT ON COST % 12.60% * EXCLUDING OTHER INCOME, FOR FOREX PLUS MARKUP IT(TP)A NO.552/B/15 5 ** EXCLUDING INTEREST & FOREX LOSS 7. IN SUPPORT OF ASSESSEES CLAIM THAT THE PRICE RE CEIVED IN THE INTERNATIONAL TRANSACTION IS AT ARMS LENGTH. THE AS SESSEE FILED TRASNFER PRICING ANALYSIS SELECTING 21 COMPANIES AS COMPARABLE WITH THE ASSESSEE IN TERMS OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED (FAR) AND THE ARITHMETIC MEAN OF PROFIT MARGIN OF THOSE COMPANIES WAS WITHIN THE PRO FIT MARGINS EARNED BY THE ASSESSEE IN THE INTERNATIONAL TRANSAC TION. 8. THE TPO TO WHOM THE DETERMINATION OF ALP WAS RE FERRED BY THE AO U/S 92CA OF THE ACT, REJECTED 14 OF THOSE COMPARABLE COMPANIES CHOSEN BY THE ASSESSEE AND ACCEPTED 7 COM PARABLE COMPANIES CHOSEN BY THE ASSESEE. THE TPO ON HIS OWN ADDED 4 MORE COMPARABLE COMPANIES WHICH RESULTED IN FINAL S ET OF 11 COMPARABLE COMPANIES. THE ARITHMETIC MEAN OF PROF IT MARGIN OF 11 COMPARABLE COMPANIES AFTER PROVIDING FOR WORKING CAPITAL ADJUSTMENT WAS AS FOLLOWS:- IT(TP)A NO.552/B/15 6 9. THE TPO COMPUTED THE ARMS LENGTH PRICE AND THE A DDITION TO BE MADE TO THE TOTAL INCOME ON ACCOUNT OF ADJUSTMEN T OF ALP AS FOLLOWS:- 10.4 COMPUTATION OF ARMS LENGTH PRICE THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. PLEASE SEE ANNEXURE B FOR DETAILS OF COMPUTATION OF PLI OF THE COMPARABLES. BASED ON THIS, THE ARMS LENGTH PRICE OF THE SERVICES RENDERED BY THE TAXPAYER TO ITS AE(S) IS COMPUTED AS UNDER: IT(TP)A NO.552/B/15 7 10. THE ADDITIONS SUGGESTED BY THE TPO WERE INCORPO RATED BY THE AO IN THE DRAFT ORDER OF ASSESSMENT. AGAINST T HE ADDITIONS SO MADE, THE ASSESSEE FILED OBJECTIONS BEFORE THE DIS PUTE RESOLUTION PANEL (DRP). THE DRP EXCLUDED 6 OUT OF THE 11 COMP ANIES FINALLY CHOSEN BY THE TPO BY APPLYING THE TURNOVER FILTER W HEREBY COMPANIES WHOSE TURNOVER WAS MORE THAN RS.200 CRORE S WERE EXCLUDED AS NOT COMPARABLE WITH THE ASSESSEE. THE DRP ACCEPTED CLAIM OF THE ASSESSEE THAT COMPANIES WHOSE TURNOVER WAS MORE THAN 200 CRORES HAVE TO BE REGARDED AS BIG COMPANI ES NOT COMPARABLE WITH THE ASSESSEE AND WHOSE TURNOVER WAS RS.18.84 CRORES. THE 6 COMPANIES THAT WERE EXCLUDED BY APPL YING TURNOVER FILTER WERE :- 1) INFOSYS LTD., 2) L&T INFOTECH LTD., 3) MIND TREE 4) PERSISTENT SYSTEMS PVT. LTD., 5) TATA ELXSI LTD., 6) SASKEN COMMUNICATION TECHNOLOGIES LTD., IT(TP)A NO.552/B/15 8 11. THE DRP APPLIED THE RELATED PARTY TRANSACTION ( RPT) FILTER I.E IT EXCLUDED COMPANIES WHICH HAD TRANSACTIONS WI TH RELATED PARTIES. THE THRESHOLD LIMIT APPLIED BY THE DRP ON ACCOUNT OF RPT FILER WAS 0%. BY APPLYING RPT FILTER 3 MORE COMPAN IES GOT EXCLUDE NAMELY ICRA TECHNO ANALYTICS LTD., PERSIST ENT SYSTEMS AND SOLUTIONS LTD., AND THINK SOFT GLOBAL SERVICES LTD. 12. IT CAN BE MENTIONED HERE THAT IN ASSESSEES OWN CASE FOR ASST. YEAR 2005-06, BANGALORE ITAT, IN THE DECISION REPOR TED IN (2015) 61 TAXMAN.COM 81 (BANGALORE TRIB.), TOOK THE VIEW T HAT THRESH HOLD LIMIT OF RELATED PARTY TRANSACTION FOR EXCLUSION AS NOT COMPARABLE SHOULD BE 15% OF THE TURNOVER OF THE COMPARABLE COM PANIES. IN OTHER WORDS IF THE COMPARABLE COMPANY CHOSEN HAD TR ANSACTIONS OF 15% OF MORE OF ITS SALES WITH RELATED PARTIES, THEN THOSE COMPANIES WERE TO BE REGARDED AS NOT COMPARABLE COMPANIES. I N THE PRESENT CASE, THE 3 COMPANIES EXCLUDED HAD RPT TRANSACTION WHICH WERE ICRA TECHNO ANALYTICS LTD., 14.95% OF SALES PERSIS TENT SYSTEMS AND SOLUTION LTD., 5.39% OF SALES AND THINK SOFT GL OBAL SERVICES LTD. 11.01% OF ITS SALES. IT IS THE PLEA OF THE ASS ESSEE IN GROUND NO. 9 THAT THE AFORESAID 3 COMPANIES SHOULD BE CONSIDER ED AS COMPARABLE COMPANIES BECAUSE THE RPT TRANSACTIONS A RE BELOW THE THRESHOLD LIMIT OF 15% OF SALES. 13. THE LD. DR ON THE OTHER HAND SUBMITTED THAT IN SOME OF THE DECISIONS RENDERED BY THE BANGALORE BENCH OF ITAT T HRESHOLD LIMIT OF 25% OF SALES WAS APPLIED TO EXCLUDE COMPANIES ON ACCOUNT OF IT(TP)A NO.552/B/15 9 RPT FILTER AND THEREFORE BY EXCLUSION OF THE AFORES AID 3 COMPANIES SHOULD BE APPLIED IN THAT EVENT, THE 3 COMPANIES WI LL GET EXCLUDED. 14. THE LD. COUNSEL FOR THE ASSESEE ON THE HAND POI NTED OUT THAT THE BANGALORE ITAT IN THE CASE OF AUTODESK INDIA PV T. LTD., VS. DCIT (2018) 96 TAXMANN.COM 263 (BANGALORE - TRIB.) AFTER CONSIDERING THE APPLICATION OF RPT FILTER AT 15% AN D 28% HELD AS FOLLOWS:- IN GROUND NO.4 (E) OF THE GROUNDS OF APPEAL, THE ASSESSEE SEEKS EXCLUSION OF GEOMETRIC SOFTWARE SOLUTIONS CO. LTD; AND FOURSOFT LTD. FROM THE LIST OF COMPARABLE COMPANIES AS THESE COMPANIES HAVE RELATED PARTY TRANSACTION (RPT) OF MORE THAN 15%. LEARNED DR DREW OUR ATTENTION TO THE DECISION OF TH E HON'BLE ITAT BANGALORE B BENCH IN THE CASE OF ROBERT BOSCH ENGINEERING AND BUSINESS SOLUTIONS LTD. (SUPRA) WHEREIN THE TRIBUNAL IN PARAGRAPH 8 HAS OBSERVED 25% TO 15% RPT FILTER HAS TO BE APPLIED DEPENDING ON AVAILABILITY OF COMPARABLES. HIS SUBMISSION WAS THEREFORE THAT COMPANIES WITH RPT OF 25% OR MORE ALONE SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES CHOSEN BY THE TPO AND THE ACTION OF THE CIT(A) IN EXCLUDING COMPARABLE COMPANIES EVEN IN A CASE WHERE THERE ARE SINGLE AND INSIGNIFICANT RPT WAS NOT CORRECT. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, POINTED OUT THAT THIS TRIBUNAL, IN THE EASES OF 2417 CUSTOMER (P.) LTD. V. DY. CIT [2012] 28 TAXRNANN.COM 258/[2013] 140 ITD 344 (PUNJ.) SONY INDIA (F) LTD. V. DV. CIT [2008]114 LTD 448 (DELHI) AND VARIOUS OTHER CASES, HAS TAKEN A VIEW THAT COMPARABLES HAVING RPT OF UPTO 15% OF TOTAL REVENUES CAN BE CONSIDERED AS COMPARABLE IT(TP)A NO.552/B/15 10 COMPANY. WE HAVE CONSIDERED THE RIVAL SUBMISSION. IT IS NO DOUBT TRUE THAT IN THE CASE OF ROBERT BOSC H (SUPRA) THIS TRIBUNAL HAS HELD THAT RPT FILTER CAN BE IN THE RANGE OF 25% TO 15% OF THE TOTAL RECEIPTS FR OM SOFTWARE DEVELOPMENT SERVICES, DEPENDING ON AVAILABILITY OF COMPARABLE COMPANIES. IT IS NO BODY 'S EASE THAT THERE IS DEARTH OF COMPARABLE COMPANIES IN SOFTWARE DEVELOPMENT SERVICES INDUSTRY. THEREFORE IT WOULD BE SAFE TO FOLLOW THE RULING OF THIS TRIBUNAL IN THE CASES OF 2417 CUSTOMER (P.) LTD. (SUPRA), SONY INDIA (P.) LTD. (SUPRA) WHEREIN A VIE W HAS BEEN TAKEN THAT COMPARABLE COMPANIES HAVING RPT OF UPTO 15% OF TOTAL REVENUES CAN BE CONSIDERED AS COMPARABLE COMPANIES. IN VIEW THEREOF, THE PLEA OF THE ASSESSEE REQUIRES TO BE ACCEPTED. THE TPO/AO ARE DIRECTED TO ADOPT A THRESHOLD LIMIT OF 15% OF THE TOTAL REVENUE ATTRIBUTABLE TO RELATED PARTY TRANSACTION AS GROUND FOR REJECTING COMPARABLE COMPANIES. CONSEQUENTLY, IT IS HELD THAT COMPANIES HAVING RPT UPTO 15% OF THE TOTAL REVENUES CAN BE INCLUDED. 15. WE HAVE CONSIDERED THE RIVAL SUBMISSION AND WE ARE OF THE VIEW THAT APPLICATION OF RPT FILER AT 15% OF THE SA LES WOULD BE APPROPRIATE IN THE GIVEN FACTS AND CIRCUMSTANCES O F THE CASE AND AS LAID DOWN IN THE CASE OF AUTO DESK INDIA PVT. LTD., (SUPRA), WE HOLD ACCORDINGLY AND DIRECT TO INCLUSION OF 3 COMPA NIES WHICH WERE EXCLUDED BY APPLICATION OF RPT FILTER BY THE D RP. 16. THE 2 COMPANIES OUT OF THE 11 COMPANIES CHOSEN AS FINAL COMPARABLE COMPANIES BY THE TPO WHICH REMAIN AFTER THE ORDER OF THE DRP WERE KALS INFORMATION SYSTEMS LTD., AND RS SOFTWARE (INDIA) LTD. THE ASSESSEE SEEKS TO EXCLUDE KALS IN FORMATION - IT(TP)A NO.552/B/15 11 SYSTEMS LTD., FROM THE LIST OF COMPARABLE COMPANIES ON THE GROUNDS THAT THIS COMPANY WAS NOT FUNCTIONALLY COMP ARABLE AS IT WAS ENGAGED IN DEVELOPING SOFTWARE PRODUCTS AND WAS NOT A PURE SOFTWARE DEVELOPMENT SERVICES COMPANY. ON COMPARABI LITY OF THIS COMPANY, THE TPO HAS GIVEN THE FOLLOWING FINDING IN HIS ORDER. IT(TP)A NO.552/B/15 12 17. THE DRP CONCURRED WITH THE VIEW OF THE AO ON TH E FOLLOWING GROUNDS:- 9.2 THE TAXPAYER'S PRINCIPAL OBJECTION REGARDING THIS COMPARABLE IS THAT IT IS ENGAGED IN SOFTWARE DEVELOPMENT AND ALSO SALE OF PRODUCTS FOR WHICH NO SEGMENTAL INFORMATION IS AVAILABLE AND, THEREFORE, NEEDS TO BE EXCLUDED FROM THE COMPARABLE S. TO SUPPORT THIS CONTENTION, RELIANCE WAS PLACED ON VARIOUS JUDICIAL PRONOUNCEMENTS, INCLUDING THE DECISION OF THE HON'BLE ITAT, BANGALORE IN THE CASE OF TRILOGY E BUSINESS SOFTWARE INDIA PVT. LTD VS. DCIT (ITA NBO.1201/BANG/2010) WHICH HAS BEEN CITED IN THE LATER JUDGMENTS OF THE BANGALORE ITAT IN THE CA SE OF CURAM SOFTWARE INTERNATIONAL PVT. LTD. VS. ITO (ITA NO.1280/BANG/2012) AS WELL AS IN THE APPELLANT 'S OWN MATTER IN ITA NO.1538/BANG/2012. ADDITIONALLY, THE DISCUSSION AROUND THIS COMPANY IN THE CASE OF NETTHAWK NETWORKS INDIA PRIVATE LTD. VS. ITO (ITA NO.7633/M/2012) WAS ALSO CITED. 9.3 THE OBJECTIONS AND ARGUMENTS OF THE TAXPAYER HAVE BEEN CONSIDERED AND THE ORDER OF THE HON'BLE ITAT BANGALORE IN THE CASE OF M/S TRILOGY E BUSINES S SOFTWARE INDIA PVT. LTD (SUPRA) PERUSED. AT PARA-46 OF THIS ORDER, THE HON'BLE ITAT CONSIDERED THE DECISIO N IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED AND IN PARA-47 HELD AS FOLLOWS 'WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE, WE FIND THAT THE TPO HAS DRAWN CONCLUSIONS ON THE BASIS OF THE INFORMATION OBTAINED BY ISSUE OF NOTICE U/S 133(6) OF THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IT(TP)A NO.552/B/15 13 IS CONTRARY TO THE ANNUAL REPORT OF THE COMPANY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21-06-2010 TO THE TPO. WE ALSO FIND THAT THE DECISION REFERRED BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD THAT THE COMPANY WAS DEVELOPING SOFTWARE PRODUCT AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFORE, ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPARABLE'. 9.4 IT IS CLEAR FROM THE ORDER OF THE HON'BLE ITAT IN THE CASE OF TRILOGY (SUPRA) THAT RELIEF WAS ALLOWED ON THE GROUND THAT THE INFORMATION GATHERED U/S 133(6) BY THE TPO WAS NOT IN CONFORMITY WITH THE ANNUAL REPORT ACCORDING TO WHICH THE COMPANY WAS NOT PURELY OR MAINLY A SOFTWARE DEVELOPMENT SERVICE PROVIDER IN T HAT PARTICULAR ASSESSMENT YEAR. FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, IT IS EVIDENT FROM THE PROFIT AND LOSS ACCOUNT AND BALANCE SHEET OF THE COMPANY THAT IT WAS ENGAGED ONLY IN THE SOFTWARE DEVELOPMENT SERVIC E SEGMENT. IN VIEW OF THE STATUTORY MANDATE FOR CONDUCTING COMPARABILITY ANALYSIS TAKING INTO ACCOU NT ONLY CONTEMPORANEOUS EVIDENCE (RULE 10D(4) THE JUDICIAL DECISIONS AS ABOVE WHICH PERTAIN TO AY 200 6 ARE NOT APPLICABLE HERE. DURING THE AY 2010-11 IT I S CLEAR THAT THERE IS NO OTHER ACTIVITY OTHER THAN TH E SOFTWARE DEVELOPMENT. THEREFORE, THE TPO'S INCLUSIO N OF THIS COMPANY AS A COMPARABLE IS FOUND TO BE IN ORDER. THE TAXPAYER'S OBJECTIONS ARE NOT ACCEPTABLE . 18. ON EXCLUSION OF THE AFORESAID COMPANY, WE FIND THAT THE PLEA OF THE ASSESSEE IS THAT THIS COMPANY WAS SOFTWARE P RODUCT COMPANY AND IN THIS REGARD A SNAPSHOT OF THE WEB SI TE OF THE COMPANY WHEREIN A CAPTION THAT THIS COMPANY WAS CUS TOMIZED IT(TP)A NO.552/B/15 14 PRODUCT MANUFACTURING COMPANY IS FOUND. SCHEDULE-X IV TO THE ANNUAL ACCOUNTS IS ALSO BEING REFERRED TO BY THE AS SESSEE, WHEREIN IT IS MENTIONED THAT THIS COMPANY IS ENGAGED IN DEV ELOPMENT OF SOFTWARE AND SOFTWARE PRODUCTS. ANOTHER CIRCUMSTAN CES POINTED OUT BY THE ASSESSEE IS THAT THIS COMPANY HAS SIGNIF ICANT INVENTORY. ON THE ABOVE CIRCUMSTANCES, THE ASSESSEE WANTS TO S AY THAT THIS COMPANY IS SOFTWARE PRODUCT COMPANY. WE ARE OF THE VIEW THAT THESE ARE THE INFERENCES WHICH ARE DRAWN BY THE ASS ESSEE AND CANNOT BE THE BASIS TO CONCLUDE THAT THIS COMPANY I S A SOFTWARE PRODUCT COMPANY. WE ARE OF THE VIEW THAT IN THE GI VEN FACTS AND CIRCUMSTANCES OF THE CASE, IT IS JUST AN APPROPRIAT E TO SET ASIDE THE MATTER TO THE TPO ON THE QUESTION REGARDING THIS CO MPANY AS COMPARABLE COMPANY AND DIRECTING THE TPO TO EXERCIS E HIS POWER U/S 133(6) OF THE ACT TO FIND OUT WHETHER THIS COMP ANY IS PRODUCT COMPANY AND ALSO SEGMENTAL MARGIN, IF IT IS A PROD UCT COMPANY AS WELL AS SOFTWARE DEVELOPMENT SERVICES COMPANY. AFT ER AFFORDING OPPORTUNITY OF BEING HERD TO THE ASSESEE, THE TPO W ILL CONSIDER THE COMPARABILITY OF THIS COMPANY WITH THAT OF THE ASSE SSEE. 19. THE NEXT GRIEVANCE OF THE ASSESSEE IS REPRODUCE D IN GROUND NO.15. 20. AS FAR AS AFORESAID GRIEVANCE PROJECTED BY THE ASSESSEE IS CONCERNED, THE TPO NOTICED THAT THE ASSESSEE WAS AL LOWING SUBSTANTIAL CREDIT PERIOD FOR PAYMENT TO THE AE. IN THESE CIRCUMSTANCES, THE TPO MADE AN ADDITION OF RS.52,73 ,0325/- IT(TP)A NO.552/B/15 15 TREATING THE EXTENDED CREDIT PERIOD GIVEN BY THE AS SESSEE TO AE AS INTERNATIONAL TRANSACTION. FOLLOWING WERE RELEVANT OBSERVATIONS OF THE TPO IN THE ORDER OF ASSESSMENT. INTEREST ON SUNDRY DEBTORS OUTSTANDING FOR MORE THAN 3 MONTHS : THE TAXPAYER HAS SHOWN RECEIVABLES OF RS.16,82 CRORE FROM ITS AE. A NOTICE WAS ISSUED TO THE TAXPAYER TO SHOW CAUSE WHY INTEREST SHOULD NOT BE CHARGED ON AMOUNT OUTSTANDING FOR MORE THAN 3 MONTHS AS BEING IN THE NATURE OF EXTENDED CREDIT PERIOD. THE TAXPAYER FILED ITS RESPONSE VIDE LETTER DATED 31/10/13 THE TAXPAYER HAS SUBMITTED THAT DEBT S ARE OUTSTANDING WITH THE AE PURELY BECAUSE OF BUSINESS REASONS AND THAT THIS WAS A COMMON BUSINESS PRACTICE PREVAILING IN THE INDUSTRY. THE TAXPAYER HAS SUBMITTED THAT THERE WAS NO INTENTION TO EXTEND CREDIT PERIOD TO ITS AE. HOWEVER, ONCE TH E NORMAL PERIOD OF CREDIT THAT IS EXTENDED TO A DEBTO R LAPSES, THEN THE EXTENDED PERIOD OF CREDIT ALLOWED TO THE DEBTORS TAKES ON THE HUE OF A FINANCIAL TRANSACTION AND CAN NO LONGER BE STATED TO BE A DEBTOR TRANSACTION. THE TRANSACTION WILL NOW HAVE T O BE CONSIDERED AS A LOAN GIVEN AND NOT AN OUTSTANDING DEBT. IN VIEW OF THIS, IT IS CONCLUDED IN NORMAL MARKET CONDITIONS, NO THIRD PARTY WOULD BE WILLING TO EXTEND CREDIT FOR MORE THAN THE ACCEPTED PERIOD. IN THE EVENT OF EXTENDED CREDIT PERIOD, AN INDEPENDENT PARTY WOULD EXPECT TO BE COMPENSATED IN RETURN. ACCORDINGLY, THE TPO IS OF THE VIEW THAT FOR DEBTS OUTSTANDING FOR MORE THAN 3 MONTHS WHICH IS THE ACCEPTED NORMAL WAITING PERIOD FOR ANY CREDI T IN THE OPEN MARKET, INTEREST AT MARKET RATE SHOULD BE CHARGED ON THE DEBTS OUTSTANDING AMOUNTING TO RS.7,15,52,695/- FOR MORE THAN 3 MONTHS IN THE BOOKS OF THE TAXPAYER. FOR THIS PURPOSE, THE PRIME LENDING RATE OF SBI FOR THE YEAR BEING 11.25% IS BEING ADOPTED FOR CALCULATING THE INTEREST OUGHT TO IT(TP)A NO.552/B/15 16 BE CHARGED ,USING CUP METHOD AND THE SBI PLR IS TAKEN AS THE ARMS LENGTH RATE. THE CALCULATION IS GIVEN BELOW: THE INTEREST CHARGEABLE OF RS.52,73,325/- IS ADJUSTMENT UNDER SECTION 92CA OF THE IT ACT IN RESP ECT OF EXTENDED CREDIT TERMS TO THE DEBTORS. 21. ON APPEAL BY THE ASSESSEE, THE DRP CONFIRMED TH E ACTION OF THE AO. THE ASSESSEE HAD SUBMITTED THE DETAILS OF THE RECEIVABLES FROM ITS AE BEFORE THE TPO AS FOLLOW: 7.2 IT WAS SUBMITTED THAT THE DEBTORS OUTSTANDING WITH THE AE WERE PURE1Y BECAUSE OF BUSINESS AND COMMERCIAL EXPEDIENCY AND THERE WAS NO MALAFIDE INTENTION TO EXTEND INDIRECT CREDIT PERIOD TO THE A E. THE TPO, HOWEVER, COMPUTED NOTIONAL INTEREST AT THE RATE OF 11.25% (BEING THE SBI PRIME LENDING RATE) F OR THE OUTSTANDING RECEIVABLES FROM AE BEYOND 3 THE TAXPAYER HAS GRIEVED THIS TREATMENT AND CITED THE DECISION OF THE HON'BLE MUMBAI ITAT IN CASE OF EVONIK DEGUSSA INDIA P. LTD.V/S ASSTT. COMMISSIONER OF INCOME TAX-OSD CIRCLE-3(1) (ITA NO. 7653/MUM./2011) WHERE IT WAS HELD THAT THE T.P. IT(TP)A NO.552/B/15 17 ADJUSTMENT CANNOT BE MADE ON HYPOTHETICAL AND NOTIONAL BASIS UNTIL AND UNLESS THERE IS SOME MATER IAL ON RECORD THAT THERE HAS BEEN UNDER CHARGING OF REA L INCOME, IT WAS ALSO POINTED OUT BY THE TAXPAYER THA T THE TPO HAD NOT GIVEN ANY BASIS FOR ARRIVING AT A THRESHOLD OF THREE MONTH FOR COMPUTING THE NOTIONAL INTEREST. 7.3 THE TAXPAYER'S OBJECTIONS AS ABOVE HAVE BEEN CONSIDERED ALONG WITH THE JUDICIAL DECISION CITED. THE DECISION WAS GIVEN IN THE CONTEXT OF THE CASE WHERE THE TAXPAYER HAD NO INTEREST LIABILITY AND NO EXTERNAL BORROWING. IN THE CASE OF MASTEK LTD VS ADDL. CIT (2012) 21 TAXMANN.COM 173 THE HON'BLE ITAT AHMADABAD REQUIRED VERIFICATION OF WHETHER THE AES ARE RECOVERING INTEREST FROM THIRD PARTIES FOR LATE RECOVERIES BEFORE CONSIDERING ANY LEVY OF INTEREST BY THE TAXPAYER FOR DELAYED PAYMENT. THE TPO'S RATIONA LE FOR THE ADDITION IN HER ORDER AS ELABORATED AS PAGE 29 IS THAT ONCE THE NORMAL PERIOD OF CREDIT OF THREE M ONTHS EXTENDED TO A DEBTOR LAPSES, THEN THE EXTENDED PERI OD OF CREDIT TAKES ON THE COLOR OF A FINANCIAL TRANSAC TION AND CAN NO LONGER BE TREATED AS A MERE DEBTOR TRANSACTION. WE ARE IN AGREEMENT WITH THE LOGIC OF TPO WHICH HAS BEEN ADOPTED BY SPECIFICALLY CITING T HE CUP METHOD. HOWEVER, THE TPO IS DIRECTED TO VERIFY WHETHER THE AE IS RECOVERING INTEREST FROM THIRD PARTIES FOR LATE RECOVERY AND IF THIS IS FOUND TO E XIST THE INTEREST ON EXTENDED CREDIT PERIOD CAN REASONABLE. ON CONTRARY FACTS THE TPO'S ADJUSTMENT CANNOT BE SUSTAINED. 22. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT ALLOWING CREDIT PERIOD CANNOT BE CONSIDERED AS AN INTERNATI ONAL TRANSACTION AND IN THIS REGARD RELIED ON THE DECISION OF THE IT AT BANGALORE BENCH IN THE CASE OF AVNET INDIA PVT. LTD., VS. DCI T (2016) 65 IT(TP)A NO.552/B/15 18 TAXMANN.COM 187 (BANGALORE TRIB.), WHEREIN THE TR IBUNAL HELD AS FOLLOWS:- WE HAVE HEARD THE RIVAL SUBMISSIONS. THE ASSESSEE COMPANY REPORTED INTERNATIONAL TRANSACTIONS IN ITS TP REPORT. ON A REFERENCE BY THE AO, THE LEARNED TPO ACCEPTED THAT THE PRICE CHARGED BY THE ASSESSEE COMPANY ON THESE TRANSACTIONS ARE AT ARM'S LENGTH. HOWEVER, THE TPO MADE ADJUSTMENTS ON ACCOUNT OF NOTIONAL INTEREST FOR THE EXCESS PERIOD ALLOWED BY THE ASSESSEE- COMPANY TO ITS AE FOR REALIZATION OF ITS DUES. THE TPO APPLIED 14% OF INTEREST ON THE OUTSTANDING AMOUNT OF RS. THE LEARNED DRP ALSO HAD ALSO CONCURR ED WITH THE FINDING OF LEARNED TPO. THERE IS NO DISPUT E THAT THE TRANSACTION IN QUESTION FALLS WITHIN THE A MBIT OF INTERNATIONAL TRANSACTIONS U/S 92B OF THE IT ACT. HOWEVER, THIS TRANSACTION IS NOT AN INDEPENDENT TRANSACTION. IT IS AN INTEGRAL PART OF TRANSACTION OF SALE MADE TO THE AE AND THEREFORE, IT HAS TO BE CONSIDER ED ALONGWITH THE MAIN TRANSACTION. THE SIMILAR ISSUE H AD COME UP FOR CONSIDERATION BEFORE THE CO-ORDINATE BENCH OF MUMBAI IN THE CASE OF GOLDSTAR JEWELLERY L TD. (SUPRA), WHEREIN IT WAS OBSERVED AS UNDER; HOWEVER, THIS TRANSACTION OF ALLOWING THE CREDIT PERIOD TO AE ON REALIZATION OF SALE PROCEEDS IS NOT AN INDEPENDENT INTERNATIONAL TRANSACTION BUT IT IS CLOSELY LINKED OR CONTINUOUS TRANSACTION ALONG WITH SALE TRANSACTION TO THE AE. THE CREDIT PERIOD ALLOWED TO THE ARTY DEPENDS UPON VARIOUS FACTORS WHICH ALSO INCLUDES THE PRICE CHARGED BY THE ASSESSEE FROM PURCHASER. THEREFORE, THE CREDIT PERIOD EXTENDED BY THE ASSESSEE TO THE AE CANNOT BE EXAMINED INDEPENDENTLY BUT HAS TO BE CONSIDERED ALONG WITH THE MAIN INTERNATIONAL TRANSACTION BEING SALE TO THE AE. AS PER RULE 1 OA(D) IF A NUMBER OF TRANSACTIONS ARE CLOSELY LINKED OR CONTINUOUS IN NATURE AND ARISING FROM A CONTINUOUS TRANSACTIONS IT(TP)A NO.552/B/15 19 OF SUPPLY OF AMENITY OR SERVICES THE TRANSACTIONS I S TREATED AS CLOSELY LINKED TRANSACTIONS FOR THE PURPOSE OF TRANSFER PRICING AND, THEREFORE, THE AGGREGATE AND CLUBBING OF CLOSELY LINKED TRANSACTION ARE PERMITTED UNDER SAID RULE. THIS CONCEPT OF AGGREGATION OF THE TRANSACTION WHICH IS CLOSELY LIKED IS ALSO SUPPORTED BY OCED TRANSFER PRICING GUIDELINES. IN ORDER TO EXAMINE WHETHER THE NUMBER OF TRANSACTIONS ARE CLOSELY LINKED OR CONTINUOUS SO AS TO AGGREGATE FOR THE PURPOSE OF EVALUATION WHAT IS TO BE CONSIDERED IS THAT ONE TRANSACTION IS FOLLOW-ON OF THE EARLIER TRANSACTION AND THEN THE SUBSEQUENT TRANSACTION IS CARRIED OUT AND DEPENDENT WHOLLY OR SUBSTANTIALLY ON THE EARLIER TRANSACTION. IN OTHER WORDS, IF TWO TRANSACTIONS ARE SO CLOSELY LIKED THAT DETERMINATIO N OF PRICE OF ONE TRANSACTION IS DEPENDENT ON THE OTHER TRANSACTION THEN FOR THE PURPOSE OF DETERMINING THE ALP, THE CLOSELY LINKED TRANSACTION SHOULD BE AGGREGATED AND CLUBBED TOGETHER. WHEN THE TRANSACTION ARE INFLUENCED BY EACH OTHER AND PARTICULARLY IN DETERMINING THE PRICE AND PROFIT INVOLVED IN THE TRANSACTION THEN THOSE TRANSACTIONS CAN SAFELY BE REGARDED AS CLOSELY LINED TRANSACTIONS. IN THE CASE IN HAND, THE CREDIT PERIO D EXTENDED TO THE AE IS A DIRECT RESULT OF SALE TRANSACTION. THEREFORE, NO QUESTION OF CREDIT PERIO D ALLOWED TO THE AE FOR REALIZATION OF SALE PROCEEDS WITHOUT HAVING SALE TO AE. THE CREDIT PERIOD EXTENDED TO THE AE CANNOT BE TREATED AS A TRANSACTION STAND ALONE WITHOUT CONSIDERING THE MAIN TRANSACTION OF SALE. THE SALE PRICE OF THE PRODUCT OR SERVICE DETERMINED BETWEEN THE PARTIES IS ALWAYS INFLUENCED BY THE CREDIT PERIOD ALLOWED B Y THE SELLER. THEREFORE, THE TRANSACTION OF SALE TO T HE AE AND CREDIT PERIOD ALLOWED IN REALIZATION OF SALE PROCEEDS ARE CLOSELY LINKED AS THEY ARE INTER LINKE D AND THE TERMS AND CONDITIONS OF SALE AS WELL AS THE IT(TP)A NO.552/B/15 20 PRICE ARE DETERMINED BASED ON THE TOTALITY OF THE TRANSACTION AND NOT ON INDIVIDUAL AND SEPARATE TRANSACTION. THE APPROACH OF THE TPO AND DRP IN ANALYZING THE CREDIT PERIOD ALLOWED BY THE ASSESSEE TO THE AE WITHOUT CONSIDERING THE MAIN INTERNATIONAL TRANSACTION BEING SALE TO THE AE WILL GIVE DISTORTED RESULT BY DISREGARDING THE PRICE CHARGED BY THE ASSESSEE FROM AE. THOUGH EXTRA PERIOD ALLOWED FOR REALIZATION OF SALE PROCEEDS FROM THE AE IS AN INTERNATIONAL TRANSACTION, HOWEVER, FOR THE PURPOSE OF DETERMINING THE ALP, THE SAME HAS TO BE CLUBBED OR AGGREGATED WITH THE SALE TRANSACTIONS WITH THE AE. EVEN BY CONSIDERING IT AS AN INDEPENDENT TRANSACTION THE SAME HAS TO BE COMPARED WITH THE INTERNAL CUP AVAILABLE IN THE SHAPE OF THE CREDIT ALLOWED BY THE ASSESSEE TO NON- AE. WHEN THE ASSESSEE IS NOT MAKING ANY DIFFERENCE FOR NOT CHARGING THE INTEREST FROM AE AS WELL AS NON- AE THEN THE ONLY DIFFERENCE BETWEEN THE TWO CAN BE CONSIDERED IS THE AVERAGE PERIOD ALLOWED ALONG WITH OUTSTANDING AMOUNT. IF THE AVERAGE PERIOD MULTIPLIED BY THE OUTSTANDING AMOUNT OF THE AE IS AT ARM'S LENGTH IN COMPARISON TO THE AVERAGE PERIOD OF REALIZATION AND MULTIPLIED BY THE OUTSTANDING FROM NON-AES THEN NO ADJUSTMENT CAN BE MADE BEING THE TRANSACTION IS AT ARM'S LENGTH. THE THIRD ASPECT OF THE ISSUE IS THAT THE ARM'S LEN GTH INTEREST FOR MAKING THE ADJUSTMENT. BOTH THE TPO AND THE DRP HAS TAKEN INTO CONSIDERATION THE LENDING RATES, HOWEVER, THIS IS NOT A TRANSACTION O F LOAN OR ADVANCE TO THE AE BUT IT IS ONLY AN EXCESS PERIOD ALLOWED FOR REALIZATION OF SALES PROCEEDS FROM THE AE. THEREFORE, THE ARM'S LENGTH INTEREST I N ANY CASE WOULD BE THE AVERAGE COST OF THE TOTAL FUN D AVAILABLE TO THE ASSESSEE AND NOT THE RATE AT WHICH A LOAN IS AVAILABLE. ACCORDINGLY, WE DIRECT THE AO/TPO TO RE-DO THE EXERCISE OF DETERMINATION OF THE ALP IN TERMS OF ABOVE OBSERVATION'. IT(TP)A NO.552/B/15 21 RESPECTFULLY FOLLOWING THE ABOVE DECISION, WE HOLD THAT THERE CAN BE NO SEPARATE INTERNATIONAL TRANSAC TION OF 'INTEREST' IN THE INTERNATIONAL TRANSACTION OF S ALE. EARLY OR LATE REALIZATION OF SALE PROCEEDS IS ONLY INCIDENTAL TO TRANSACTION OF SALE, BUT NOT A SEPARA TE TRANSACTION IN NATURE. SINCE WE HOLD THAT THE IMPUG NED TRANSACTION OF INTEREST ON DELAYED REALIZATION OF S ALE PROCEEDS IS NOT INTERNATIONAL TRANSACTION, IT IS NO T NECESSARY TO ADJUDICATE UPON THE ADDITIONAL GR9INDS RAISED BY THE ASSESSEE COMPANY. HENCE, THE APPEAL I S TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 23. THE LD. DR ON THE OTHER HAND RELIED ON THE ORDE R OF THE DRP. 24. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND ARE OF THE VIEW THAT THE PLEA OF THE ASSESSEE HAS TO BE ACCEPTED AS HELD BY THE BANGALORE BENCH IN THE CASE OF AVNET INDIA PVT. LTD ., (SUPRA) THAT GIVING A CREDIT PERIOD CANNOT BE CONSIDERED AS AN I NDEPENDENT TRANSACTION. IT IS A INTEGRAL PART OF TRANSACTION OF RENDERING OF SOFTWARE DEVELOPMENT SERVICES BY THE ASSESSEE TO IT S AE AND HAS TO BE CONSIDERED AS PART OF THE INTERNATIONAL TRANSACT ION OF SOFTWARE DEVELOPMENT SERVICES. THE DECISION OF MUMBAI BENCH OF TRIBUNAL IN THE CASE OF GOLDSTAR JEWELLERY LTD., VS . JCIT 68 SOT 259 (MUMB.) URO SUPPORTS THE PLEA OF THE ASSESSEE. FOLLOWING THE AFORESAID DECISION, WE HOLD THAT THERE CAN BE N O SEPARATE DETERMINATION OF ALP OF INTERNATIONAL TRANSACTION O F REALIZATION OF SALE PROCEEDS WITH EXTENDED CREDIT PERIOD AS IT IS ONLY INCIDENTAL TO TRANSACTION OF SALE. THE ADDITION MADE BY THE TPO AND CONFIRMED IT(TP)A NO.552/B/15 22 BY THE DRP CANNOT BE SUSTAINED AND THE SAME IS DIRE CTED TO BE DELETED. 25. GROUND NO.16 IS ALLOWED. 26. THE NEXT GROUND THAT REMAINS FOR ADJUDICATION I S GROUND NO.16 WHICH READS AS FOLLOWS:- 16. DISALLOWANCE OF DEPRECIATION ON SOFTWARE EXPEN SES UNDER SECTION 40(A)(IA) READ WITH SECTION 194J OF T HE ACT. 1 6. 1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE C ASE, THE LEARNED AO HAS ERRED IN DISALLOWING THE DEPRECIATION CLAIMED ON PURCHASE OF COMPUTER SOFTWARE BY THE ASSESSEE AMOUNTING TO RS. 1,039,590 /- ON ACCOUNT OF NON-DEDUCTION OF TAXES AT SOURCE. 16.2 THE LEARNED AO HAS ERRED IN NOT APPRECIATING T HE FACT THAT THE VENDORS PROVIDING THE SOFTWARE TO THE ASSESSEE HAVE LEVIED VALUE ADDED TAX ('VAT') CONSIDERING THE SOFTWARE AS A 'GOOD' 16.3 THE LEARNED AO HAS ERRED IN HOLDING THAT THE PAYMENT TOWARDS PURCHASE OF OFF THE SHELF COMPUTER SOFTWARE COMES WITHIN THE PURVIEW OF ROYALTY' AS DEFINED IN EXPLANATION 2 TO SECTION 9(1)(VI) OF THE ACT AND ARE LIABLE TO TAX DEDUCTION AT SOURCE. 16.4 WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED AO HAS ERRED IN HOLDING THAT THE ASSESSEE HAS CAPITALI ZED SUCH EXPENDITURE AND THEREFORE DEPRECIATION CLAIMED ON THE SAME TO BE DISALLOWED. 27. THE FACTS WITH REGARD TO GROUND NO.16 ARE THAT THE ASSESSEE ACQUIRED COMPUTER SOFTWARE AND LICENCE AND THE TOT AL COST OF SUCH PURCHASE WAS RS.10,39,0590/- WERE CAPITALIZED IN TH E BOOKS OF IT(TP)A NO.552/B/15 23 ACCOUNT UNDER THE HEAD COMPUTER & SOFTWARE. THE ASSESSEE CLAIMED THE DEPRECIATION AT 60% ON COMPUTER SOFTWAR E. THE AO NOTICED THAT WHILE MAKING PAYMENT FOR THE PURCHASE OF SOFTWARE AND LICENCE, THE ASSESSEE DID NOT DEDUCTED TAX AT S OURCE. ACCORDING TO THE AO, ASSESSEE OUGHT TO HAVE BEEN DEDUCTED TAX AT SOURCE U/S 194J OF THE ACT IN RESPECT OF SUCH PURCHASES SINCE THE ASSESSEE HAS NOT DEDUCTED TAX AT SOURCE, THE AO WAS VIEW THAT PR OVISION OF SEC. 40A(IA) OF THE ACT WILL BE ATTRACTED. HE WAS OF TH E VIEW THAT DEPRECIATION CLAIMED ON PURCHASE OF SOFTWARE AND LI CENSE BY THE ASSESSEE SHOULD BE DISALLOWED U/S 40A(IA) OF THE AC T. THE AO ACCORDINGLY DISALLOWED THE DEPRECIATION TO THE EXTE NT OF RS.1,039,590/- AND THE DRP CONFIRMED THE ACTION OF THE AO. 28. AGGRIEVED BY THE ORDER OF THE DRP, THE ASSESSE E HAS RAISED GROUND NO.16 BEFORE OF THE TRIBUNAL. 29. THE ISSUE RAISED BY THE ASSESSEE IN THE AFORESA ID GROUND OF APPEAL IS NO LONGER RES INTEGRA AND HAS BEEN DECIDED BY THE ITAT, BANGALORE IN THE CASE OF M/S WINTAC LTD., VS. DCIT IN ITA NO. 834/BANG/2016 ORDER DATED 13/4/2017. IN THE AF ORESAID DECISION, THE TRIBUNAL TOOK THE FOLLOWING VIEW. 7. AS IT IS CLEAR FROM THE ABOVE DECISION THAT THE TRIBUNAL HAS DISCUSSED AND ANALYSED THE PROVISIONS OF SECTION 40(A)(I) IN DETAIL IN THE CONTEXT OF DISALL OWANCE OF DEPRECIATION. THE LEARNED D.R. HAS SUBMITTED THA T ONCE THE ASSESSEE HAS VIOLATED THE PROVISIONS OF SE CTION IT(TP)A NO.552/B/15 24 195, THEN, EVEN THE EXPENDITURE IS CAPITALIZED BY T HE ASSESSEE, THE PROVISIONS OF SECTION 40(A)(I) ARE APPLICABLE FOR DISALLOWANCE OF DEPRECIATION ON SUCH CAPITALIZED EXPENDITURE. WE DO NOT AGREE WITH THE CONTENTION OF THE LEARNED D.R, BECAUSE A REMEDY FOR VIOLATION OF PROVISIONS OF SECTION 195 IS AVAILABLE WITH THE ASSESSING OFFICER UNDER SECTION 201 & 201A OF T HE ACT. THE PROVISIONS OF SECTION 40(A) IS ONLY AN ADDITIONAL MEASURE TO ENFORCE THE COMPLIANCE OF CHAPTER XVIJB OF THE ACT, BY DISALLOWING AN EXPENDITURE WHICH IS OTHERWISE ALLOWABLE UNDER THE PROVISIONS OF THE ACT. THEREFORE, THE QUESTION OF DISALLOWANCE UNDER SECTION 40(A) ARISES ONLY WHEN A N EXPENDITURE IS CLAIMED BY THE ASSESSEE WITHOUT DEDUCTING THE TAX AT SOURCE AS PER THE PROVISIONS O F CHAPTER-XVIIB OF THE ACT, 1961. IN THE CASE ON HAND , WHEN THE ASSESSEE HAS NOT CLAIMED, THE SAID PAYMENT AS AN EXPENDITURE THEN THE QUESTION OF DISALLOWANCE UN DER SECTION 40(A)(I) DOES NOT ARISE. THE ONLY REMEDY WH ICH MIGHT HAVE BEEN RESORTED TO BY THE ASSESSING OFFICE R IS THE ACTION UNDER SECTION 201 AND 201A OF 12 IT(I.T) A NO.1512/BANG/2010 ITA NO.834/BANG/2016 THE ACT. A SIMILAR VIEW HAS BEEN TAKEN BY THE DELHI BENCH OF T HE TRIBUNAL IN THE CASE OF SMS DEMANG (P) LTD. (SUPRA) IN PARA 8 AS UNDER :- '8. AS REGARDS THE CLAIM OF ASSESSEE FOR DEPRECIATION ON ASSETS CAPITALIZED, DEPRECIATION CANNOT BE DISALLOWED ON THE GROUND THAT AT THE TIME OF REMITTANCE, NO TAX WAS DEDUCTED AT SOURCE. PROVISIONS OF SECTION 40(A)(I) ARE NOT APPLICABLE FOR CLAIM FOR DEDUCTION UNDER SECTION 32 OF THE ACT. ACCORDINGLY, IN OUR CONSIDERED OPINION, THE AU WAS NOT JUSTIFIED IN DISALLOWING 50 PERCENT OF DEPRECIATION ON THE GROUND THAT PROVISIONS OF SECTION 40(A)(I) WERE APPLICABLE. HOWEVER, THE AU WILL VERIFY THE FACT WHETHER THE ASSETS IN RESPECT OF WHICH EXPENDITURE HAS BEEN IT(TP)A NO.552/B/15 25 CAPITALIZED HAVE BEEN USED IN BUSINESS FOR PERIOD MORE THAN 180 DAYS. IF THE ASSETS HAVE BEEN USED FOR MORE THAN 180 DAYS, THE AU WILL ALLOW FULL DEPRECIATION, AS CLAIMED BY THE ASSESSEE. THE AU IS DIRECTED ACCORDINGLY'. THEREFORE, IN THE FACTS AND CIRCUMSTANCES OF THE CA SE AS WELL AS BY FOLLOWING THE DECISIONS OF THE CO-ORDINA TE BENCHES OF THE ITAT, WE ARE OF THE OPINION THAT ONC E THE ASSESSEE HAS CAPITALIZED THE PAYMENT IN QUESTION TH OUGH THE ASSESSEE HAS NOT DEDUCTED THE TAX AT SOURCE ON SUCH PAYMENT, SECTION 40(A)(I) CANNOT BE INVOKED FOR DISALLOWANCE OF DEPRECIATION. ACCORDINGLY, WE SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND THE ADDITION MADE BY THE ASSESSING OFFICER IS DELETED. 30. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL REFERRED TO ABOVE, WE HOLD THAT DISALLOWANCE U/S 40A(IA) OF THE ACT CANNOT BE SUSTAINED AND THE SAME IS DIRECTED TO BE DELETED . 31. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS P ARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST DECEMBER, 2018 . SD/- SD/- (JASON P BOAZ) (N.V VASUDEVAN) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE DATED : 21/12/2018 VMS IT(TP)A NO.552/B/15 26 COPY TO :1. THE ASSESSEE 2. THE REVENUE 3.THE CIT CONCERNED. 4.THE CIT(A) CONCERNED. 5.DR 6.GF BY ORDER ASST. REGISTRAR, ITAT, BANGALORE. IT(TP)A NO.552/B/15 27 1. DATE OF DICTATION 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER . 3. DATE ON WHICH THE APPROVED DRAFT COMES TO SR. P.S... 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER .. 5. DATE ON WHICH THE FAIR OR DER COMES BACK TO THE SR. P.S. .. 6. DATE OF UPLOADING THE ORDER ON WEBSITE.. 7. IF NOT UPLOADED, FURNISH THE REASON FOR DOING SO .. 8. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 9. DATE ON WHICH ORDER GOES FOR XEROX & ENDORSEMENT.. 10. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 11. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER . 12. THE DATE ON WHICH THE FILE GOES TO DISPATCH SEC TION FOR DISPATCH OF THE TRIBUNAL ORDER . 13. DATE OF DESPATCH OF ORDER. ..