M/S. ABB GLOBAL INDUSTRIES AND SERVICES PRIVATE LIMITED (EARLIER KNOWN AS ABB GLOBAL INDUSTRIES AND SERVICES LIMITED),BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(1), BANGALORE

ORDER

PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the final assessment order dated 30.10.2019 passed by the Ld.DCIT, Circle – 1(1)(1), Bangalore for A.Y. 2015-16 on following grounds of appeal: “The grounds stated here under are independent of, and without prejudice to one another:

2. Transfer Pricing Grounds 2.1 Assessment and reference to Transfer Pricing Officer are bad in law a) The transfer pricing order u/s 92CA [TP Order] issued by the Deputy Commissioner of Income Tax - Circle 1(1) ['DCIT' or 'TPO], is bad on facts and in law and is in violation of the principles of natural justice. b) Without prejudice to the above, the order issued by the learned ITO is bad in law insofar as the fact that the learned ITO did not issue to the Appellant a show cause notice, as per proviso to section 92C(3) of the Act. c) The ITO has erred in law in making a reference to the Transfer Pricing Officer [TPO] inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The ITO also erred in not following the provision contained in section 92CA(1) of the Act. 2.2 Rejection of aggregation of transaction approach followed by the Appellant a) The learned TPO erred, in law and in fact, by rejecting the benchmarking analysis undertaken by the Appellant and the comparable identified by the Appellant in its transfer pricing documentation report maintained, for the determination of the Arm's Length Price [ALP] in connection with the impugned international transaction of software development/IT support services and holding that the Appellant's international transaction is not at arm's length. b) The TPO erred on facts and in law in rejecting the benchmarking analysis of Intra group services such as Trademark fees and BA Management fees ('CHAMS') prepared by Appellant by aggregating with the IT support services and Global sourcing segments using TNMM as the most appropriate method in the TP study report. c) On the facts and in the circumstances of the case and in law, the TPO erred in law and in facts, by ignoring that Page 3 of 15 IT(TP)A No. 3/Bang/2020 ABB Global Industries and Services Pvt. Ltd.

Intra group services were required by the Company for its functioning and accordingly relates to its operations. These expenses were part of the P&L and has been aggregated for the purpose of benchmarking by the Appellant. 2.3 Selection of CUP method for Trademark fees by the TPO is bad in law a) The TPO erred on facts and in law in concluding that there is no commercial sense in using the trademarks or paying for it as the Appellant is a captive service provider catering only to the requirements of its group companies. b) On the facts and in the circumstances of the case and in law, the TPO erred in determination of Arm's length price at Nil using CUP method saying that an independent entity in a comparable situation would not pay any amount for the use of trademark rights. Therefore, the entire amount of Trademark fees of INR 2,83,55,861/- is treated as an adjustment. 2.4 Selection of CUP method for BA Management fees by the TPO is bad in law a) The TPO erred on facts and in law in concluding that there is no benefit received from services performed by AEs to the Appellant and the Appellant also failed to provide cost-benefit analysis to justify the payments made. b) On the facts and in the circumstances of the case and in law, the TPO erred in determination of ALP at NIL using CUP method saying that an independent entity in a comparable situation would not pay any amount for the services without any cost benefit analysis. Therefore, the entire amount of fees of INR 6,68,42,717/- is treated as an adjustment. 2.5 Interest on delayed Trade Receivables a) The TPO, have erred in law and in facts, by making an addition of INR 3,03,40,367/- to the total income of the Appellant on account of interest on delayed receivables. b) The TPO erred on facts and in law in rejecting the contention of Appellant that the receivables were resulted out of international transactions undertaken by the Appellant with its AEs and is subsumed within the arm's length price determination of the principal transactions itself under IT support services and Global sourcing segments using TNMM as the most appropriate method in the TP study report. The TPO also erred on facts and in Page 4 of 15 IT(TP)A No. 3/Bang/2020 ABB Global Industries and Services Pvt. Ltd. law treating outstanding receivables as a separate international transaction as per provisions of section 92B of the Act. 2.6 Treatment of provision no longer required as non- operating income for computing margin a) The TPO erred on facts in treating 'provisions no longer required written back' amounting to INR 2,00,00,000/- as a non-operating income though the provisions when originally made in earlier years were considered operating in nature while computing the Net cost plus (NCP) margins, as the same relates to the business operations of the Appellant.

3. Corporate Tax Grounds 3.1 Disallowance of INR 29,12,394/- depreciation u/s 40(a)(i) in respect of software purchases capitalized b) The Learned AO has erred in law by holding that the payment made to various vendors for purchase of software (software was capitalized in the appellant's accounts), amounts to royalty in terms of section 9(1)(vi) of the Act and therefore, tax was required to be deducted at source on the said payment. c) The learned AO has erred in law by holding that since tax was not deducted at source from the payment made towards purchase of software, tax depreciation claimed on computer software, amounting to INR 29,12,394/- is not allowable as a deduction under section 40(a)(ia) of the Act. d) The learned AO failed to appreciate the fact that the question of disallowance under section 40(a)(ia) does not arise when the assessee has not claimed the said payment as an expenditure. 3.2 Non-grant of depreciation allowance on software expense a) On the facts and in the circumstances of the case, the Learned AO erred in law and in fact in not granting the depreciation allowance of INR 22,43,838/- on the software expenses which were held as capital expenses in the earlier assessment years b) The Learned AO failed to appreciate the fact that, once an expense is treated as capital expenses, the depreciation allowance to be allowed on the same mandatorily and also failed to appreciate the fact that the effect of the Page 5 of 15 IT(TP)A No. 3/Bang/2020 ABB Global Industries and Services Pvt. Ltd. depreciation on the software expenses were duly given in the earlier assessment years 3.3 Initiation of Penalty Proceedings The Learned Assessing Officer erred in initiating penalty proceedings under section 271(1)(c) read with section 274 of the Act.”

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Page 8 of 15 IT(TP)A No. 3/Bang/2020 ABB Global Industries and Services Pvt. Ltd. Page 9 of 15 IT(TP)A No. 3/Bang/2020 ABB Global Industries and Services Pvt. Ltd. 5.1 It is the submission of the Ld. AR that, the interest on receivables with the non-AEs may also be accepted to be at arm’s Page 10 of 15 IT(TP)A No. 3/Bang/2020 ABB Global Industries and Services Pvt. Ltd. length on the same principle. She places reliance on the decision of Coordinate Bench of this Tribunal in case of Dell International Services India Pvt. Ltd. vs. JCIT reported in (2022) 138 taxmann.com 554 in support of her contention. 5.2 On the contrary, the Ld. DR submitted that, the AE with which MAP resolution is entered, is located in Switzerland and the margin earned by the assessee with the AE based in Switzerland was at 19.46%. It is submitted by the Ld. DR that out of Rs.3,03,40,367/- adjusted towards interest on delayed receivables only a sum of Rs.1,47,86,222/- was attributable to the Switzerland AE. The balance entirely is attributable to the non-AE parties. He submitted that no details regarding the geographic locations of the non-AE are available and therefore the adjustment deserves to be sustained. We have perused the submissions advanced by both sides in the light of records placed before us. 5.3 We note that the Ld.TPO did not make any distinction between the AE and non-AE transactions while computing interest on delayed receivables in the 92CA order passed. The margin accepted by the competent authority under MAP in respect of the Switzerland AE transaction has to be therefore regarded at arm’s length for the non-AE transaction. Apart from the objection raised from the Ld. DR, recorded hereinabove, he has not been able to point out any infirmity in the submissions raised by way of any documents by the Ld.AR. In such circumstances, as observed by Coordinate Bench of this Tribunal Page 11 of 15 IT(TP)A No. 3/Bang/2020 ABB Global Industries and Services Pvt. Ltd. in case of Dell International Services India Pvt. Ltd. vs. JCIT (supra), margin accepted in MAP for the AE transaction has to be accepted for non-AE transaction also. We therefore delete the adjustment made by the revenue in respect of interest on receivables from the non-AE transactions. Accordingly, the additional ground raised by assessee stands allowed. In view of the above, other grounds raised by assessee on the transfer pricing adjustments is allowed to be withdrawn based on the MAP resolution.

6. The Ld.AR submitted that Ground No. 2.6 raised by assessee is not pressed and therefore do not require adjudication.

7. In respect of Ground No. 3.1, the Ld.AR submitted that, the Ld. AO disallowed depreciation on purchases of software under section 40(a)(i) of the Act. 7.1 It is the submission of the Ld.AR that the assessee had capitalised the software and had claimed depreciation, which went unnoticed by the Ld.AO. The Ld.AR however submitted that, the Ld. AO wrongly held the payment made towards purchases of software was in the nature of royalty in terms of Explanation to Section 9(1)(vi), on which the TDS was to be deducted u/s. 195 of the Act. 7.2 The Ld.AR at the outset vehemently submitted that, the expenditure was never claimed as revenue expenditure and Page 12 of 15 IT(TP)A No. 3/Bang/2020 ABB Global Industries and Services Pvt. Ltd. therefore depreciation could not be disallowed by invoking provisions of section 40(a)(i). He placed reliance on the decision of Hon’ble Karnataka High Court in case of PCIT vs. Tally Solutions Pvt. Ltd. reported in (2021) 123 taxmann.com 21.

7.3 On the contrary, the Ld. DR relied on the orders passed by authorities below.

7.4 We have perused the submissions advanced by both sides in the light of records placed before us.

“9. We have considered the submissions made by learned counsel for the parties and have perused the record. Before proceeding further, it is apposite to take note of relevant extract of Section 40 of the Act, which is reproduced below for the facility of reference: Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head" Profits and gains of business or profession",- (a) in the case of any assessee- (ia) thirty per cent of any sum payable to a resident], on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139 : Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, thirty per cent of such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid :

Page 13 of 15 IT(TP)A No. 3/Bang/2020 ABB Global Industries and Services Pvt. Ltd. Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso. Explanation.-For the purposes of this sub-clause,- (i) ,, (vi) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; 10. Thus, from close scrutiny of Section 40(a)(i) of the Act, it is axiomatic that an amount payable towards interest, royalty, fee for technical services or other sums chargeable under this Act shall not be deducted while computing the income under the head profit and gain of business or profession on which tax is deductible at source; but such tax has not been deducted. The expression 'amount payable' which is otherwise an allowable deduction refers to the expenditure incurred for the purpose of business of the assessee and therefore, the said expenditure is a deductible claim. Thus, Section 40 refers to the outgoing amount chargeable under this At and subject to TDS under Chapter XVII-B. The deduction under Section 32 is not in respect of the amount paid or payable which is subjected to TDS; but is a statutory deduction on an asset which is otherwise eligible for deduction of depreciation. Section 40(a)(i) and (ia) of the Act provides for disallowance only in respect of expenditure, which is revenue in nature, therefore, the provision does not apply to a case of the assessee whose claim is for depreciation, which is not in the nature of expenditure but an allowance. The depreciation is not an outgoing expenditure and therefore, provisions of Section 40(a)(i) and (ia) of the Act are not applicable. In the absence of any requirement of law for making deduction of tax out of expenditure, which has been capitalized and no amount was claimed as revenue expenditure, no disallowance under Section 40(a)(i) and (ia) of the Act would be made. It is also pertinent to note that depreciation is a statutory deduction available to the assessee on a asset, which is wholly or partly owned by the assessee and used for business or profession. The depreciation is an allowance and not an expenditure, loss or trading liability. The Commissioner of Income Tax Page 14 of 15 IT(TP)A No. 3/Bang/2020 ABB Global Industries and Services Pvt. Ltd.

(Appeals) has held that the payment has been made by the assessee for an outright purchase of Intellectual Property Rights and not towards royalty and therefore, the provision of Section 40(a)(ia) of the Act is not attracted in respect of a claim for depreciation. The aforesaid finding has rightly been affirmed by the tribunal. The findings recorded by the Commissioner of Income Tax (Appeals) as well as the tribunal cannot be termed as perverse. In view of preceding analysis, the substantial question of law framed by a bench of this court is answered against the revenue and in favour of the assessee.” Respectfully following the above view, we direct the deletion of disallowance made by the Ld.AO in respect of the depreciation u/s. 40(a)(i). Accordingly this ground raised by assessee stands allowed.

9.1 The Ld. AR submitted that DRP had directed the Ld. AO to verify the claim of assessee and to carry out necessary rectification. He referred to para 2.10.1 of the DRP direction that reads as under: “2.10 Ground of objection No. 10: Objection No. 10.1: The learned AO has erred in law and in fact in not allowing the depreciation impact of INR 2,243,838/- on the software expenditure which were held as capital in nature in the AY 2010-11 and 2011-12. 2.10.1 Having considered the submissions, we consider it appropriate to direct the AO to verify and carry out rectification, if found necessary.” 9.2 It is submitted that the Ld. AO has not carried out necessary verification and has simply made the addition by disallowing the depreciation in the hands of the assessee. We therefore direct Page 15 of 15 IT(TP)A No. 3/Bang/2020 ABB Global Industries and Services Pvt. Ltd. the Ld. AO to follow the directions of the DRP and to pass necessary orders in accordance with law. Accordingly this ground raised by assessee stands allowed for statistical purposes.

10. Ground No. 3.3 is premature at this stage and therefore do not require adjudication. In the result, the appeal filed by the assessee stands allowed as indicated hereinabove. Order pronounced in the open court on 17th March, 2023.