No.- ITA No.1672/Del./2014

SHRI R.S. SYAL, ACCOUNTANT MEMBER and SHRI KULDIP SINGH, JUDICIAL MEMBER

For The Shri S.D. Kapila, R.R. Maurya and Sanjay Kumar, Advocates and Shri Pankaj Rohta, CA
For The Revenue : Shri Neeraj Kumar, Senior DR

ORDER

KULDIP SINGH, JUDICIAL MEMBER :-The Appellant, ST-Ericsson India Pvt. Ltd. (hereinafter referred to as ‘the assessee company’) by filing the present appeal sought to set aside the impugned order dated 16/18.01.2014, passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2009-10 on the grounds inter alia that :-

“1. The order passed by the learned Joint Director of Income Tax, Transfer Pricing-II (2},New Delhi ("the TPO"), draft and final assessment order passed by Additional Commissioner of Income Tax, Range - 9, New Delhi ("the AO") pursuant to the directions of the Hon'ble Dispute Resolution Panel - III ("the DRP"), are in bad in law and void ad-initio.

2. The AO following the order of the TPO and DRP has erred in law and on the facts of the case in determining the total income of the Appellant at Rs. 213,195,622/- as against returned income of Rs. 122,498,921/- and thereby made an upward adjustment of INR 90,696,701/-. Part I - Transfer Pricing Grounds

3. That on facts of the case and in law, the DRP/ TPO/AO have erred in rejecting certain companies and adding certain companies to the final set of alleged comparable companies on an ad-hoc basis, thereby resorting to cherry picking of comparable companies for benchmarking the international transaction pertaining to IC design and software development services ("impugned transaction").

4. That on facts of the case and in law, the DRP erred and vitiated the principle of natural justice by not giving due cognizance to the detailed analysis and technical arguments submitted by the Appellant in respect of certain companies inter-alia ICRA Techno Analytics Private Limited, Indus Networks Limited, Quintegra Solutions Limited, SIP Technologies and Exports Limited, Blue Star Infotech Limited and K PIT Cummins Infosystems Limited.

5. That on facts of the case and in law, the DRP and TPO/AO have erred by failing to make appropriate adjustments to account for differences in working capital employed by the Appellant vis-a-vis alleged comparable companies.

6. That on facts of the case and in law, the DRP/TPO/AO have failed to consider the foreign exchange gain/loss as operating in nature and consequently treated it as non-operating item while calculating the operating margin of the Appellant as well of the alleged comparable companies.

7. That on facts of the case and in law, the DRP has grossly erred in giving a direction to rectify the arithmetical errors in the computation of the operating margins of alleged comparable companies in compliance with the Income Tax Act ("the Act"). Further, the TPO has made errors while computing the operating margin of the Appellant and the alleged comparable companies.

8. That on facts of the case and in law, the DRP/ TPO/AO have erred in conducting a fresh economic analysis by using arbitrary filters for identifying companies comparable to the Appellant. The arbitrary filters applied by the TPO and confirmed by the DRP/AO inter-alia include the following:

• Rejecting companies having turnover less than INR 5 Crores;
• Rejecting companies having different accounting year than that of the Appellant;
• Rejecting companies having export revenue less than 75 percent of the operating revenue.
• Rejection of companies identified by the Appellant on account of having peculiar economic circumstances which are not in line with the industry trend - companies which showed diminishing revenue trend;
• Rejecting companies having employee cost. greater than 25 percent of the operating cost; and

9. That on facts of the case and in law, the DRP/TPO/AO have erred in law and in facts by rejecting companies namely Maars Software International Limited and Zylog Systems Limited on account of having significant onsite revenue as a comparability criteria.

10. That on facts of the case and in law, the DRP/TPO/AO have erred in law and in facts by selecting certain companies which are earning super normal profits as comparable to the Appellant.
11. That on facts and in law, the DRP and TPO/AO have failed to make appropriate adjustments to account for varying risk profiles of the Appellant vis-a-vis the alleged comparables and in the process inter-alia neglected the Indian transfer pricing regulations, international guidelines on transfer pricing and judicial precedence.

12. That on facts and in law, the DRP and TPO/AO have erred by not considering that the adjustment to the arm's length price, if any, should be limited to the lower end of the 5 percent range as the Appellant has the right to exercise this option under the second proviso to section 92C(2) of the Act.

13. That on facts of the case and in law, the DRP/TPO/AO have erred in using single year data for financial year (“FY") 2008-09 of alleged comparable companies without considering the fact that the same was not available to the Appellant at the time of complying with the transfer pricing documentation requirements and disregarding the Appellant's claim for use of multiple year data for computing the arm's length price.

14. That on facts and in law, the DRP/AO has erred in confirming that TPO has discharged his statutory onus by establishing that the conditions specified in clause (a) to (d) of Section 92C (3) of the Act have been satisfied before disregarding the arm's length price determined by the Appellant and proceeding to determine the arm's length price. Part II - Corporate Tax Grounds

15. That the DRP and AO has erred on facts and in law in treating the software expenses amounting to Rs. 384,651 as capital in nature.

15.1. That the ORP and AO has erred in law and in facts, in proposing that expenditure on training of employees amounting to Rs. 3,809,220 leads to enduring benefit to the Appellant and is capital in nature.

15.2. Without prejudice to the above and assuming without accepting that the above revenue expenditure is to be capitalized, the DRP and AO has erred in not allowing depreciation on the same.

16. The DRP and AO has erred on facts and in law in not granting depreciation on goodwill amounting to Rs. 13,893,062 which was claimed by the Appellant during the course of assessment proceedings in accordance with the decision of Hon'ble Supreme Court in the case of Smifs Securities Ltd. Part III - General Grounds

17. That on facts of the case and in law, the AO has erred in levying interest under section 234B, 234C and 2340 of the Act while completely disregarding the provisions of the Act and the judicial precedence in this regard.

18. That on facts of the case and in law, the AO has grossly erred in initiating penalty proceedings under section 271(1)(c) of the Act.”

2. Briefly stated facts of this case are : assessee, ST-Ericsson India Pvt. Ltd. is engaged into IC (Integrated Circuit) design development, verification, maintenance and Software Development related to communication devices. In other words, the assessee is a contract IC design and software development services provider, remunerated on a cost plus mark-up basis for carrying out services towards integrated design development, verification and maintenance of software development. Assessee renders these services only to ST-Ericsson (STE Group) in accordance with the guidelines provided by the STE Group.

3. During the year under assessment, the assessee entered into following international transaction with its Associated Enterprises (AE) :-

4. Assessee by adopting Transactional Net Margin Method (TNMM) as the most appropriate method with Operating Profit / Operating Cost (OP/OC) as PLI benchmarked its international transaction relating to software development services by selecting 20 comparables with the average working capital adjusted PLI of 3.11% and risk adjusted margin of (-) 9.06% as against the operating profit margin of the assessee company of 11.17% and held its transaction at arms length.

5. TPO, on the basis of TP study put forth by the assessee and after applying filters, finally selected 17 comparables having the average OP/TC of 25.40%, out of which 10 comparables were out of assessee’s 20 comparables and 7 were identified by the TPO himself. On the basis of 17 comparables identified by the ld. TPO having average OP/TC at 25.40% proposed to determine the adjustment at Rs. 10,12,17,069/-.

6. Assessee filed objections before the ld. DRP raising objections for introducing wrong filters; for wrong inclusion of 7 comparables and wrong exclusion of 2 comparables and against denying the working capital adjustment to the assessee. However, the ld. DRP upheld the order passed by the TPO except excluding 1 comparable, namely, Bodhtree Consulting Limited. On the basis of directions issued by ld. DRP, the ld. TPO drawn the final set of comparables for benchmarking the assessee’s international transaction and by recording the operating margin (OP/TC) of these comparables which are as under :-

And thereby computing the ALP of the assessee with average OP/OC margin of the aforesaid 16 comparables at 22.90% as under:-

7. Feeling aggrieved, the assessee has come up before the Tribunal by way of filing the present appeal.

8. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.

GROUNDS NO.1 & 2
9. Grounds No.1 & 2 are general and academic in nature, hence need no specific adjudication. Ground No.7 is not pressed.

GROUND NO.5
10. Ld. AR for the assessee contended that the assessee is entitled for working capital adjustment to account for differences in working capital employed by the assessee vis-à-vis comparable companies and relied upon United Health Group Information Services (P.) Ltd. vs. ACIT – (2014) 50 taxmann.com 177 (Delhi – Trib.) and Marubeni-Itochu Steel India (P.) Ltd. vs. DCIT – (2016) 67 taxmann.com 52 (Delhi – Trib.).

11. However, on the other hand, ld. Senior DR for the Revenue relied upon the detailed reasons given by ld. TPO and DRP for denying the working capital adjustment to the assessee company.

12. The ld. TPO denied the working capital adjustment to the assessee for the reasons inter alia that there used to be unreliable and inadequate data in case of comparable company; that working capital adjustment can be given on the basis of daily or at least monthly average payables, receivables and inventory and not on the basis of year end figures; that the issue of working capital is relevant when there is a situation of inventory remaining tied up or receivable being held up; that out of the three components of working capital i.e. payables, receivables and inventory, only one component is effected on account of transactions with AE viz. receivables. Ld. DRP has upheld the order passed by TPO regarding working capital adjustment by and large on the same ground taken by the TPO.

13. Identical issue has already been dealt with by the ITAT, Delhi Bench-I in the cases cited as United Health Group Information Services (P.) Ltd. and Marubeni-Itochu Steel India (P.) Ltd. (supra). Operative part dealing with the issue in question in Marubeni-Itochu Steel India (P.) Ltd. (supra) is reproduced for ready perusal as under :-

“16.1 Ground no. 5 relates to non-granting of working capital adjustment. The assessee requested the TPO to allow working capital adjustment, which was refused. The ld. CIT(A) too, did not concur with the submissions advanced on behalf of the assessee in this regard.

16.2 We are not inclined to accept, in principle, the view canvassed by the authorities below that the assessee cannot be allowed a working capital adjustment. Such an adjustment is restricted to inventory, trade receivables and trade payables. If a company carries high trade receivables, it would mean that it is allowing its customers relatively longer period to pay their amounts, which will result into higher interest cost and the resultant low net profit. Similarly, by carrying high trade payables, a company benefits from a relatively longer period available to it for paying back to its suppliers, which reduces the interest cost and increases profits. In order to neutralize differences on account of inventory, trade payables and trade receivables, it becomes essential to allow working capital adjustment for bringing the case of the assessee at par with other functionally comparable entities. We, therefore, agree in principle with the grant of working capital adjustment.”

14. Keeping in view the facts and circumstances of the case and the fact that the identical issue has already been dealt with by the coordinate Bench, we are of the considered view that the working capital adjustment is required to be provided for bringing the comparables and the assessee at par for benchmarking the international transactions otherwise rationale behind the comparability for the purpose of benchmarking would get frustrated. However, in order to provide the working capital adjustment to the assessee vis-à-vis comparables, assessee shall provide the complete audit pertaining to the working capital deployed to identify the difference to the margins earned by the assessee and the comparables. And the assessee shall also be at liberty to bring on record the evidence to demonstrate the difference in working capital deployed for working out further difference in the margin earned by assessee vis-à-vis comparables. So, we set aside the order passed by TPO/DRP denying the working capital adjustment to the assessee to decide afresh by the TPO by providing an opportunity of being heard to the assessee.

GROUND NO.6
15. Ld. TPO as well as ld. DRP have treated foreign exchange gain/loss as non-operating in nature by relying upon Notification of CBDT issued on 18.09.2013, which is a notification on ‘Safe Harbour Rules’. Ld. DRP has categorically held as under :-

“However, the position has changed since the notification of CBDT issued on 18.09.2013. This is the notification on 'Safe Harbour Rules'. Rule 10TA(j)(k) and (l) define the concept of "operating expense", "operating revenue" and "operating profit" respectively. According to this Rule, loss or income arising on account of foreign currency fluctuations are excluded from the calculation of "operating expense" and "operating income" respectively. Therefore, the TPO was correct in excluding forex items from the calculation of operating profit. This objection of the assessee is rejected.”

16. However, as is apparent from the date of Notification of the Rule relied upon by the ld. DRP dated 18.09.2013, the same is not applicable to the case of the assessee which is qua Assessment Year 2009-10. This identical issue has also been dealt with by the coordinate Bench of the Tribunal in case cited as Westfalia Separator India (P.) Ltd. vs. ACIT – (2014) 52 taxmann.com 381 (Delhi – Trib.) by making following observations :-

“4.8 The ld. AR relied on Rule 10T(j) to contend that loss arising on account of foreign currency fluctuations cannot be included in the operating expense. We are not persuaded to give any mileage to the ld. AR on this count for the simple reason that Rule 10T is a part of Safe harbor rules notified on 18.09.2013 which are not applicable to the assessment year under consideration.”

17. So, in view of the matter, order passed by TPO/DRP in not considering the foreign exchange gain / loss as operating in nature is not tenable in the eyes of law, hence hereby set aside. Ld. TPO is directed to treat the foreign exchange gain / loss as operating in nature in calculating the operating margin of the assessee as well as final comparable companies. So, ground no.6 is determined in favour of the assessee.

GROUNDS NO.3, 4, 8, 9, 10, 11, 12, 13 & 14
18. First of all, assessee challenged the filters applied by TPO/DRP in choosing the comparable companies inter alia that :-

(i) Turnover filter of > Rs. 5 crores
(ii) RPT filter of > 25% of sales
(iii) Employees cost < 25% of total cost

19. We would like to discuss the objections raised by assessee for applying the aforesaid filters by the TPO/DRP specifically while discussing the inclusion and exclusion of the comparables from the final list of comparable adopted by the TPO for benchmarking the international transactions.

20. The ld. DR for the Revenue, at the very outset, contended that before going into the selection or rejection of the comparables for benchmarking the international transaction by TPO, first of all the issue that since the TPO has not benchmarked the international transaction with proper FAR analysis, the matter is required to be restored to the TPO for fresh benchmarking in the light of the FAR of the assessee who is a high end service provider.

21. First of all, we would like to examine the issue as to whether the ld. DR for the Revenue is empowered to depart from the view taken by the ld. TPO in deciding the nature of the services being provided by the assessee vis-à-vis comparables without filing the appeal before the Tribunal.

22. Undisputedly, the assessee is engaged in IC design and software development related to the communication devises. Assessee is a contract IC design and software development services provider which is remunerated on a cost plus mark-up basis for carrying out services towards integrated design development, verification, maintenance and software development and is rendering these services only to ST-Ericsson (STE Group).

23. The ld. DR for the assessee contended that the assessee is not into software development rather assessee is engaged in development, verification and maintenance and integrated service design and software development to communication services which is a high end job which can only be benchmarked qua international transaction with proper FAR analysis and further contended that the error committed by TPO cannot be perpetuated.

24. Bare perusal of the profile of the assessee company and Agreement dated 03.08.2008 entered into between the assessee and STE Group apparently goes to prove that the assessee is a designer and not a software developer. In other words, the assessee is a IC Designer, so cannot be a software developer as is categorically mentioned in para 2 of the Agreement (supra). Ld. DR for the Revenue also relied upon the judgment cited as CIT vs. Jansampark Advertising & Marketing (P.) Ltd – (2015) 56 taxmann.com 286 (Delhi) and ITO vs. Smt. Gurinder Kaur – 288 ITR 207.

25. However, on the other hand, ld. AR raised first objection that since Revenue has not filed any appeal against the findings returned by the TPO qua nature of the services being provided by the assessee, the Revenue is not entitled to rack up this issue at this stage nor the Revenue is entitled to take shelter under Rule 27 of the Income-tax (Appellate Tribunal) Rules, 1963 and relied upon the judgment of the Hon’ble Apex Court in case of Commissioner of Customs, Mumbai vs. Toyo Engineering India Ltd. - (2006) 7 SCC 592.

26. In Toyo Engineering India Limited (supra), the Hon’ble Apex Court has held that in case, plea is not raised before adjudicating authority and the first appellate authority, such new plea cannot be taken before the Appellate Tribunal. So, when undisputedly this plea has not been taken by the Revenue before the First Appellate Authority, the same cannot be allowed to raise before the Tribunal.

27. Furthermore, coordinate Bench of the Tribunal in Case of ACIT vs. Techbooks Electronics Pvt. Ltd. - (2016) 65 TAXMAN 241 (Del) also examined the identical issue and arrived at the conclusion that even Rule 27 of ITAT Rules does not come to the rescue of the ld. DR for challenging the correctness of the order of AO/TPO in appeal before the Tribunal because, in such case, when Revenue is otherwise debarred from filing cross appeal or cross objection on a particular point and in case, no right to file appeal or cross objection is available to the Respondent on a particular point then the Revenue cannot be allowed to take shelter under Rule 27 indirectly.

28. Identical issue has also been dealt with by the Hon’ble Delhi High Court in case of CIT, Central II vs. Divine Infracon Pvt. Ltd. in ITA 771/2014 and Divine Infracon Pvt. Ltd. vs. CIT, Central II in ITA 185/2015 order dated 13.08.2015, the operative part of which is extracted as under for ready perusal :-

“11. The aforesaid passages were referred to by a Division bench of this Court in CIT vs. Edward Keventer (Successors) Pvt. Ltd (supra) and the Court further reiterated the principle that a party who has not appealed cannot be permitted to raise a ground, which will work adversely to the appellant.

12. Indisputably, the Revenue could also not take recourse to Rule 27 of the Income Tax (Appellate Tribunal) Rules, 1963. By virtue of the said Rule, a respondent before the Tribunal can support the decision appealed against not only on the grounds decided in favour of the respondent but also on grounds decided against it. However, Rule 27 of the said Rules would not extend to permitting the respondent to expand the scope of an appeal and assail the decision on issues, which are not subject matter of the appeal. In CIT vs. Edward Keventer (Successors) Pvt. Ltd (supra), this court had reiterated that “it would not be open to a respondent to travel outside the scope of the subject matter of the appeal under the guise of invoking r 27.”

29. In the given circumstances, the judgment cited as in cases of CIT vs. Jansampark Advertising & Marketing (P.) Ltd and ITO vs. Smt. Gurinder Kaur (supra) relied upon by the ld. DR are not applicable to the facts and circumstances of the case. 30. So, we are of the considered view that the assessee being a hardware designer, a captive service provider involved at the design and development stage only with a limited scope of work and is not involved in the process of conceptualization of any products or works and works only on the specification provided by the STE Group for the implementation of IC design, its maintenance, verification and software development. So, the role of STE is that of a contract captive design centre and as such, the findings of the TPO in this regard cannot be interfered with.

31. Now, we would like to examine the exclusion or inclusion of the comparables challenged by the assessee for benchmarking the international transactions one by one.

32. To cut short the argument, the ld. AR for the assessee contended that he challenges the inclusion of CAT Technologies, Infosys Technology Ltd., Tata Consultancy Services Limited, Tata Elexi Limited and Thirdware Solutions and sought their exclusion from the final list of comparables.

COMPARABLES SOUGHT TO BE EXCLUDED :
CAT TECHNOLOGIES
33. Assessee sought the exclusion of this company for want of functionally comparability, it being engaged in providing integrating solution in the domain area of HR BPO. Assessee also challenged its exclusion as comparable on the ground that the company admits 1 transaction with 5 of its subsidiaries/associates but does not quantify it and in the absence of quantitative details, it cannot be said that it passes the RPT filter.

34. TPO, however, retained this company as comparable on the ground that substantive income is from the software development and consulting and income from training and medical transcription (BPO) is minimal, which fact is quite apparent from Schedule IX forming part of the profit & loss account, available at page 770 of the Paper Book Vol.-II. However, TPO has computed at entity level.

35. However, during the course of argument, the ld. AR for the assessee stated that this company may be retained as a comparable after disposing of the objection as to RPT filters. So, in the given circumstances, we restore this issue to the TPO to decide afresh after inclusion of this comparable by disposing the objection as to RPT filters for benchmarking the international transactions after providing an opportunity of being heard to the assessee.

INFOSYS TECHNOLOGIES LTD.
36. Assessee challenged the inclusion of this comparable on ground of functional disparity; that Infosys Technologies Limited is into selling software product; that it incurred substantial R&D expenditure and is developing intangibles; that this comparable’s risk profile is different which affects its profitability. However, TPO overruled all the objections and included the same in the final list of comparables by relying upon the decision rendered by ITAT, Delhi in case of ST Micro (2011-TII-63-ITAT-DEL-TP).

37. Assessee in order to highlight the dissimilarities between the assessee company and Infosys Technologies Limited and TCS, referred to the chart “Annexure 1” annexed with its synopsis which has not been controverted by the Revenue, which is reproduced as under for ready perusal :-

38. Keeping in view the reserved surplus, current liabilities, expenditure on research development, expenditure on sales promotion and brand building of Infosys Technologies Limited visà- vis ST Ericsson company having surplus of Rs. 7523 crores as against Rs. 3.77 crores of the assessee and similarly, Infosys Technologies Ltd has expenditure of Rs. 267 crores on its R&D which would certainly affect its profitability and is a highly risk taking company whereas the assessee company being a captive service provider is remunerated on a cost plus mark up basis for rendering services only to STE Group.

39. Hon’ble High Court in case cited as CIT vs. Agnity India Technologies Pvt. Ltd. – (2013) 219 Taxman 26 (Delhi) upheld the decision rendered by the Tribunal by making following observations :-
“3. Before the TPO, the respondent-assessee was asked to re-work the list of comparables and the same was reduced to 20. TPO also directed inclusion of Infosys Technologies Ltd. in the said list. The TPO in the final analysis has taken the comparables as under:-

4. One of the companies which was included by the TPO was Satyam Computer Services Ltd. Dispute Resolution Panel excluded the said company from the comparables for obvious reasons.

5. The tribunal has observed that the assessee was not comparable with Infosys Technologies Ltd., as Infosys Technologies Ltd. was a large and bigger company in the area of development of software and, therefore, the profits earned cannot be a bench marked or equated with the respondent, to determine the results declared by the respondent-assessee. In paragraph 3.3 the tribunal has referred to the difference between the respondent-assessee and Infosys Technologies Ltd. For the sake of convenience, we are reproducing the same:-

6. Learned counsel for the Revenue has submitted that the tribunal after recording the aforesaid table has not affirmed or given any finding on the differences. This is partly correct as the tribunal has stated that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondent - assessee was a captive unit of the parent company and assumed only a limited risk. It has also stated that Infosys Technologies Ltd. cannot be compared with the respondent-assessee as seen from the financial data etc. to the two companies mentioned earlier in the order i.e. the chart. In the grounds of appeal the Revenue has not been able to controvert or deny the data and differences mentioned in the tabulated form. The chart has not been controverted.”

40. So following the decision rendered by Hon’ble jurisdictional High Court in CIT vs. Agnity India Technologies Pvt. Ltd. (supra) wherein on the basis of high risk profile, nature of services, number of employees, ownership of branded products and giant status of the company, Infosys Technologies Ltd. was excluded from the list of comparables and as such, in the instant case, this is not a valid comparable.

41. Moreover, ld. DRP-II, Delhi for AY 2011-12 in assessee’s own case in the same set of facts and circumstances ordered to exclude this company from the list of comparables vide order dated 07.08.2015, available at page 2618 of the Paper Book Vol.VII. So, by applying the rule of consistency, this company is also required to be excluded from the final list of comparables for benchmarking the international transaction.

TATA CONSULTANCY SERVICES LTD. (TCS)
42. Assessee raised objections for inclusion of this comparable on the grounds inter alia that it is functionally incomparable being into IT infrastructure services, business process outsourcing, IT enabled services, engineering and industrial services; that this comparable has super normal profit; that this company also engaged in sale of equipment and software license to the tune of Rs. 1,031.02 crores. However, TPO overruled the objections raised by assessee on the ground that this comparable is part of set of several comparables which contains even low margin cases and thus retained this comparable in the final list of comparables for benchmarking the international transactions.

43. This comparable was ordered to be excluded from the list of comparables by ITAT, Delhi Bench I-2 in Sony Mobile Communications International AB vs. DDIT – (2016) 69 taxmann.com 404 (Delhi – Trib.) by following the decision of ITAT, Mumbai Bench in case of Petro Araldite (P.) Ltd. vs. Dy.CIT – (2013) 144 ITD 625, in the identical set of facts and circumstances, on the ground that acquisition and merger etc. has taken place and this company has total income of Rs. 21535.75 crores and sale of equipment and software licence at Rs. 668.25 crores, thus cannot be considered as a comparable with the assessee.

44. Again, keeping in view the fact that TCS is having reserve and surplus to the tune of Rs. 13,248 crores having operating income to the tune of Rs. 5,139 crores, expenditure on research and development to the tune of Rs. 42.31 crores and is a highly risk taking company as against meager surplus and operating profit of the assessee company, we do not find it valid comparable. Moreover, the assessee company is a captive service provider being remunerated on a cost plus mark-up basis for rendering services to only STE Group. In other words, TCS is a giant company having huge profit and cannot be retained as a comparable for benchmarking the international transaction. So, we order to exclude this company as a comparable.

TATA ELXSI LIMITED
45. Assessee raised objection before the TPO/DRP that this company is not a valid comparable as this is an IT enabled and software product company. TPO/DRP overruled this objection by observing that it can easily be included in the list of comparable as it is providing software services and only verticals are different.

46. From the annual report of this company, available at page 1465 to 1540 of the Paper Book, we can easily make out that this company is into software development services, product design services, innovation design engineering services, system integration and support services. But the TPO has taken software development services only for the purpose of comparability with the assessee. However, perusal of the detail segment goes to prove that design and development of hardware is also included in the software services. In other words, Tata Elexi Ltd. is into software produce as is evident from the annual report and as such, cannot be taken as a valid comparable. So, we order to exclude this company from the final list of comparables.

THIRDWARE SOLUTIONS LIMITED
47. This is again TPO’s own comparable and assessee sought to exclude this company from the list of comparables on the ground of non-comparable services i.e application implementation, management and development services. TPO rejected objections raised by the assessee by observing that software development, implementation and support services are various sub-segments of software development services only and require employment of software engineers and retained this company as a comparable for benchmarking international transactions.

48. However, perusal of the annual report of this company, available at page 1735 to 1782 of the Paper Book Vol.IV, goes to prove that the substantial revenue of this company is from sales and operating sales of licence; software services, export from SEZ unit, export from STPI unit and revenue from subscription. It is also apparently clear that software services segment accounts for Rs. 8.91 crores out of the total sales of Rs. 77 crores whereas segmental results are not available. So, when this company’s substantial revenue is from other various business segments like sale of licence, software services and segmental results are not available, this company cannot be a valid comparable for benchmarking the international transaction, hence ordered to be excluded.

COMPARABLE SOUGHT TO BE INCLUDED :
49. Ld. AR to cut short his argument sought to include only one comparable for benchmarking the international transaction ie. SIP Technologies & Exports Ltd.

SIP TECHNOLOGIES & EXPORTS LTD.
50. TPO has rejected this company as a comparable on the ground that this company fails export sales filter and employee cost filter as the company has turnover of Rs. 1.25 crores.

51. However, ld. AR contended that the TPO has erred in holding that the company has failed employee cost > 25% of operative cost and the export filter more than 75% of operative revenue. Ld. AR drew our attention to the P&L account and relevant scheduled 10, 11, 12, 13 and Notes which apparently shows that employee cost to the total cost is 38% and the entire revenue of this company is in foreign exchange form the export of software development services. Assessee tabulated the P&L account in response to the queries raised by TPO which is extracted below from the synopsis filed by the assessee as under :-

52. From the perusal of the aforesaid table based upon P&L account and relevant schedule and Notes, it becomes apparently clear that employee cost filter and export ratio are 38.25% and 100% respectively sufficient to pass the filters applied by the TPO.

53. So far as question of low turnover of a company to be accepted as comparable is concerned, it is settled principle of law that turnover should not be the sole criteria to choose a particular company for comparability rather functional similarity is a fundamental requirement. Reliance in this regard is placed on the judgment cited as Chrys Capital – (2015) 376 ITR 183 and CIT vs. Mckinsy Knowledge Centre India Pvt. Ltd. – ITA No.217/2014 order dated 27.03.2015.

54. Since this company passes employee cost ratio and export cost ratio filter employed by the TPO, the turnover filters cannot be a ground for rejection of this comparable as discussed in the preceding para, so we hereby order to include this company in the list of comparable.

GROUNDS NO.15, 15.1 & 15.2
55. Assessee in the profit and loss account has debited an amount of Rs. 3,84,651/- being expenditure on time based licences. AO treated the software time based licence expenses of Rs. 3,84,651/- as capital in nature and thereby disallowed the same. However, the AO allowed the assessee to depreciation thereon @ 60% which is Rs. 2,30,791/- and added back the remaining amount of Rs. 1,53,860/- to the returned income. DRP also affirmed the decision rendered by AO.
56. Ld. AR for the assessee contended that since one time revenue expenditure has been incurred by the assessee the same cannot be deferred and relied upon the judgment of Hon’ble Delhi High Court in case of Director of Income-tax vs. Infrasoft Ltd. – (2013) 39 taxmann.com 88 (Delhi). However, on the other hand, ld. DR for the revenue by relying upon the order passed by AO/DRP contended that since 60% depreciation has already been given to the assessee, the contention of the assessee is not sustainable.

57. Assessee has brought on record that assessee has incurred an amount of Rs. 3,84,651/- for running the licence only and annual maintenance charges for operating, trouble shooting of the software and not for purchase/acquisition of the software and the period for running of these licences / AMC was mostly one year or less than one year.

58. In the given circumstances, when the aforesaid fixed licences were rented for a limited period only which is less than one year, no enduring benefit accrues to the assessee nor any ownership right vests in the assessee. Issue in controversy has already been dealt with by the Hon’ble jurisdictional High Court in Director of Income-tax vs. Infrasoft Ltd. (supra), the ratio of which is that :-

“what is transferred is neither the copyright in the software nor the use of the copyright in software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the right in the copyright which is too for only limited period.”

59. So, these expenses, to our mind, are in the nature of revenue expenses incurred for the purpose of business. Moreover, one time expenditure to purchase time based software licenses cannot be deferred and as such, are revenue expenses to run the business. So, the AO is directed to re-examine the issue accordingly and as such, this ground is determined in favour of the assessee.

60. Assessee debited an amount of Rs. 38,09,220/- in his profit & loss account on account of training expenses and claimed the same as revenue expenditure. However, AO being not satisfied with the explanation given by the assessee came to the conclusion that these expenses have been incurred for providing various training which is in the nature of giving enduring benefit to the assessee and treated the same as capital expenditure and then added to the income of the assessee.

61. However, ld. AR for the assessee contended that the payment of training expenses is in the nature of revenue expenses and relied upon the decision rendered by Hon’ble High Court of Delhi in judgment cited as Commissioner of Income-tax-II vs. Munjal Showa Ltd. – (2010) 329 ITR 449 (Delhi).

62. The ratio of the judgment in case of Commissioner of Income-tax-II vs. Munjal Showa Ltd. (supra) rendered by Hon’ble Delhi High Court is that :-

“when the training of the personnel of the assessee was imperative to run the business and is in the nature of technical support to the assessee it will certainly enhance the profit of the company on which it will pay the taxes, such expenditure cannot be treated as capital in nature rather they are revenue in nature.”

63. We are of the considered view that in the light of the judgment in case of Commissioner of Income-tax-II vs. Munjal Showa Ltd. (supra), the AO is directed to re-examine the issue afresh after providing an opportunity of being heard to the assessee.

GROUND NO.16
64. Assessee claimed depreciation on goodwill amounting to Rs. 1,38,93,062/- during the course of assessment proceedings by relying upon decisions rendered by Hon’ble Supreme Court in case of Smifs Securities Ltd. – (TS-639-SC-2012) (Supreme Court) but the AO remained silent on this issue.

65. However, DRP by applying the decisions rendered by Hon’ble Supreme Court in Goetze (India) Ltd. – (2006) 284 ITR 323 (SC) rejected the claim of the assessee on the ground that assessee did not claim such depreciation on goodwill in its return of income. However, it has not been disputed by both the ld. Representatives of the parties that the judgment cited as Goetze (India) Ltd. as relied upon by DRP is not applicable to the facts and circumstances of the case and when the issue has been raised during assessment proceedings, though no depreciation was claimed in the return of income, AO was duty bound to decide this issue. So, we hereby restore this ground to the AO to decide afresh after providing an opportunity of being heard to the assessee. Accordingly, this ground is determined in favour of the assessee.

GROUND NO.17
66. Ground no.17 needs no adjudication as the same is consequential in nature.

GROUND NO.18
67. Ground No.18 is premature, hence needs no adjudication.

68. In view of what has been discussed above, the present appeal filed by the assessee is allowed for statistical purposes.