M/S HONEYWELL TECHNOLOGY SOLUTIONS LAB PRIVATE LIMITED ,BANGALORE vs. JOINT COMMISSIONER OF INCOME TAX SPECIAL RANGE-3 , BANGALORE

PER LAXMI PRASAD SAHU, ACCOUNTANT MEMBER:

This appeal filed by the assessee is against the order of CIT(A)-3, Bangalore dated 18.07.2018 for the assessment year 2012-13 with the following grounds of appeal:-

1.The aforementioned order of the learned CIT(A) with respect to transfer pricing adjustment, disallowance of deduction claimed under section 80JJAA of the Act, disallowance of software expenditure, and disallowance of payment of legal and professional expenditure is based on incorrect interpretation of law and therefore, is bad in law, and hence, liable to be modified. Disallowance of deduction claimed under section 80JJAA of the Act 2. The learned CIT(A) has erred, in law and in facts, in confirming the disallowance under section 80JJAA of the Act amounting to 23,20,36,444.

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Page 2 of 42 3. The learned CIT(A) has erred, in law and in facts, in concluding that the Appellant does not satisfy the conditions for claiming deduction under section 80JJAA of the Act. 4. The learned CIT(A) has erred, in law and in facts, in concluding that deduction under section 80JJAA of the Act is available only for those workmen who have completed 300 days during the particular previous year relevant to the assessment year for which deduction is being claimed. The learned CIT(A) ought to have appreciated that the section is a beneficial provision for advancement of employment in the industries and the same must be construed liberally, thereby the deduction must be available for the workmen who have completed 300 days in a year. 5. Notwithstanding and without prejudice to Ground No. 4, the learned CIT(A) has erred, in law and in facts, in concluding that the employees who have not completed 300 days in this particular previous year should not be considered as a regular workman in the subsequent year as well. The learned CIT(A) ought to have appreciated that the benefit of hiring new workmen should be available in subsequent year for claim of deduction under section 80JJAA of the Act on the basis that such workmen are employed for 300 days. 6. Notwithstanding and without prejudice to Ground No. 4 and 5, the learned CIT(A) has erred in not appreciating that employees employed in the relevant assessment year who had not completed 300 days in that year should be considered for computing deduction under section 80JJAA in the subsequent year when he completes 300 days. 7. The learned CIT(A) has erred in facts, by contending that the appointment letters have not been submitted, without appreciating the fact that the same were duly submitted. 8. The learned CIT(A) has erred, in law and in facts, in concluding that the deduction under section 80JJAA of the Act is available only on additional wages paid to new regular workmen over and above 100 workmen employed during the year and such deduction is not available for initial 100 workmen. Disallowance of expense on annual maintenance contract and software 9. The learned CIT(A) has erred, in law and in facts, in disallowing Annual Maintenance Contract ("AMC") expenses of Rs. 11,28,69,585 and software expenses of Rs. 1,48,08,126 under section 40(a)(i)I 40(a)(ia) of the Act on account of non-deduction of tax at source. 10. The learned CIT(A) has erred, in law and in facts, in not granting the benefit of second proviso to section 40(a)(ia) read with first proviso to section 201(1) of the Act with respect to Rs. 18,86,916 in relation to AMC expenses where the vendors have filed their tax returns in India. 11. The learned CIT(A) has erred, in law and in facts, in concluding that software purchases to the extent of Rs. 1,92,57,172 whose shelf life is more than 2 years should be treated as capital in nature. The learned CIT(A) ought to have appreciated that such software are not perpetual in nature, software do not result in any enduring benefit and are not part of any

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Page 3 of 42 "profit making apparatus" and hence, such software expenses are revenue in nature. 12. The learned CIT(A) has erred, in law and in facts, in mentioning that software expenses on which taxes have not been withheld needs to be disallowed under section 40(a)(i) of the Act. The learned CIT(A) ought to have appreciated that that the payments made by the Appellant towards purchase of software is not covered within the meaning of 'royalty'! 'royalties' under the applicable Double Taxation Avoidance Agreement ("DTAA") and hence, the Appellant was not under the obligation to withhold taxes. 13. The learned CIT(A) has erred, in law and in facts, in mentioning that AMC expenses on which taxes have not been withheld needs to be disallowed under section 40(a)(i) of the Act. The learned CIT(A) ought to have appreciated that the payments made by the Appellant towards AMC expenses is not taxable under the applicable DTAA and hence, the Appellant was not under the obligation to withhold taxes. 14. Notwithstanding and without prejudice to Ground No. 12 and 13, the learned CIT(A) has erred in law in not considering that law does not compel a man to do what he cannot possibly perform. The learned CIT(A) ought to have appreciated that it was impossible for Appellant to deduct the tax on payments due to retrospective amendment in the Act and recover the same from the vendors since the payments have already been made before the amendment was introduced in the Act. 15. The learned CIT(A) has erred in law in mentioning that software expenditure needs to be disallowed as prior period expenditure if the invoice relates to earlier year without appreciating that the expenditure has to be accounted on accrual basis irrespective of the year in which invoice has been raised. Disallowance of legal and professional fee 16. The learned CIT(A) has erred in law and in facts, in upholding the disallowance of Rs. 46,05,273 made by the learned assessing officer ("AG") under section 40(a)(i) of the Act on account of non-withholding of taxes under section 195 of the Act. 17. The learned CIT(A) has erred in facts, in contending that no documentary evidences were produced in relation to the services provided by non-resident partnership firms, without appreciating the fact that sample invoices were duly submitted. The learned CIT(A) further erred in contending that no service agreement and other documents were provided without requesting for the same. 18. The learned CIT(A) erred in not appreciating that the payment for legal and professional fee is not taxable in terms of the Act as well as the India USA DTAA, and thereby does not warrant any withholding tax under section 195 of the Act.

Transfer pricing 19. The learned AG I Transfer Pricing Officer ('TPO") / CIT(A) have erred in making/confirming an adjustment to the arm's length price with

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Page 4 of 42 respect to the Information Technology enabled Services ("ITeS") transaction entered into by the Appellant with its associated enterprise. 20. The learned AG / TPO / CIT(A) have erred, in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules, and conducting a fresh economic analysis for the determination of the arm's length price ("ALP") in connection with the impugned international transaction and holding that the Appellant's international transaction relating to provision of ITeS is not at arm's length. 21. The learned AO I TPO / CIT(A) have erred, in law and in facts, by determining the arm's length margin/ price using only FY 2011-12 data which was not entirely available with the Appellant at the time of complying with the transfer pricing documentation requirements. 22. The learned TPO I AG I CIT(A) have erred, in law and in facts, by accepting/rejecting certain companies based on unreasonable comparable criteria. 22.1 Appellant's contention for rejection of comparable companies selected by learned TRO lAO / CIT(A) The Appellant submits that the companies provided below should be rejected on following grounds:

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Page 5 of 42 22.2 Appellant's contention for acceptance of comparable company rejected by learned Cl T(A) The learned CIT(A) have erred, in law and in facts, by suo-moto rejecting the company "Informed Technologies Limited" based on unreasonable comparable criteria and irrelevant grounds. The Appellant craves leave to contest selection of other comparables (whether or not mentioned specifically herein above), and whether or not included by the Appellant or the learned TPO or Hon'ble CIT(A) in comparable set and upheld by Hon'ble CIT(A) at the time of hearing. 23. The learned TPO I AO have erred, in law and in facts, by incorrectly computing the working capital adjustment benefit. 24. The learned AO I TPO I CIT(A) have erred, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-à-vis the comparables. 25. The learned AO I TPO I CIT(A) have erred, in law and in facts, in computing the ALP without giving benefit of +1-5 percent under the proviso to section 920(2) of the Act. Each of the above grounds is independent and without prejudice to the other grounds of appeal preferred by the Appellant.”

On the facts and in the circumstances of the case and in law: 26. The learned AO/ TPO erred, in law and in fact, by applying only the lower turnover filter of less than INR 1 crore as a comparability criterion and not applying a higher threshold limit for turnover filter; 27. The Appellant additionally craves leave to select an additional comparable company, Crystal Voxx Private Limited that is engaged in provision of BPO services and hence functionally comparable to the Information Technology enabled Services segment of the Appellant The Appellant craves leave to add, alter, amend, vary, omit or substitute the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law.”

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However, the transfer pricing document furnished by the taxpayer on 08/10/2014 in response to the notice u/s 92CA issued on 20/08/2014 stated that the taxpayer had entered into international transaction being provision of software development services to its associated enterprises along with other transactions. 6) The transfer pricing study had benchmarked the international transaction pertain to software development services of Rs 1492,82,63,132/

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Page 8 of 42 using the TNMM method. For this the taxpayer had selected 11 comparable after conducting a search based on the functional profile of the taxpayer and applying certain qualitative and quantitative filters.(Jhe profit margin of the taxpayer was 19.70% for the segment. However, there was no separate benchmarking of the international transactions pertain to the information technology enabled services which had revenue of Ks 767804892/ as mentioned in the profit and loss account. 7) During the course of proceedings u/s 92CA the authorised representative was asked as to why there was no separate benchmarking for the information technology enabled services. In response the authorised representative filed a letter dt 06/01/2016 wherein it was mentioned that the revenue from Information Technology Enabled Services provided to its associated enterprises was minimal in comparison to the revenue from information technology services(software development services) ie 5% of total revenue, hence no separate segment reporting in the balance sheet was made . On the same line there was no separate benchmarking done in the transfer study report. 8) Further the taxpayer relied on OECD transfer pricing guidelines wherein it is mentioned that there was no separate benchmarking required to be made in a scenario where the transactions are closely linked or continuous that they cannot be evaluated addition on a separate basis.

9) The contentions of the taxpayer are placed on record and is disposed as below. The taxpayer has stated that no separate benchmarking was done for the information technology enabled services income on the ground that the contribution of segment to the total revenue was minimal ie 5% only. 10) Secondly as per AS 17 and provisions of Companies Act 1956 on issue of segment reporting the threshold limit for separate segment reporting is at 10% of total revenue. Hence no separate benchmarking was done for Information Technology Enabled Services Income. The justifications of the taxpayer are not acceptable for the following reasons: • As per sec 92(1) of income tax act 1961 any income arising from an international transaction shall be computed having regard to the arm's length price. • The arm's length price of international transaction is to be computed by the most appropriate method having regard to the nature of transaction or class of transactions or class of associated persons or functions performed by such persons. • In the given case the taxpayer has adopted the Transactional Net Margin method for benchmarking the revenue earned from provision of services to its associated enterprises. • The taxpayer in the profit & loss account and audited balance sheet has reported income from two segments: A) Provision of software development of Rs 1412,54,00,000/ B) Income from IT Enabled Services of Rs 76,78,00,000/ as given in schedule 17 of the audited financial report for the FY 2011-12.

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Page 9 of 42 • It is well established that Information Technology Services (Software Development Services) are totally different from information technology enabled services. • The functions performed in Information Technology Services is different from functions performed in Information Technology Enabled Services. • The assets employed for Information Technology Services is different from the functions performed in Information Technology Enabled services. • The risks assumed in Information Technology Services is different from risks assumed Information Technology Enabled Services. • The rules governing determining the arm's length is different and dependent or governed by the provisions of the accounting standards or companies act. 11) The taxpayer was given the opportunity to establish that the provision of IT Enabled Services were in relation to and integrated to the services provided in the Information Technology services whose revenues have been offered as iiieutue fot the financial year. The taxpayer did not furnish any evidence to prove that the it enabled services provided were an extension or part of the same contracts from which the revenues from information technology services( software development services) were earned during the year. 12) Hence the TPO holds that the revenue earned from information technology enabled services cannot he aggregated with the revenue earned from provision of information technology services. Accordingly, the revenues from IT Enabled Services have to be benchmarked separately and asked the taxpayer to file the documents pertain to information technology enabled services. 13) The taxpayer filed the documents on 07/01/2016 wherein the income from in enabled services were segregated. and benchmarked separately. The taxpayer had adopted the TNMM method and benchmarked the, profit margin earned against the average margins of 5 Comparable companies based on a search conducted on public database like prowess and capital line 14) On 08/01/2016, the taxpayer was issued a detailed show-cause notice. This notice contained the TPO remarks on the filters adopted by the taxpayer, filters applied by the TPO, the search process adopted by the TPO, the accept/reject matrix of companies considered by the TPO. The tax payer was also furnished the computation of operating margins in respect of final proposed comparable by the Department. The taxpayer was also informed of the reasons for rejection of companies in each case. The final list of comparable considered by the TPO was also furnished to the taxpayer. 15) The taxpayer furnished its response to the show cause notice vide its letter dated 14/01/2016. The submissions and the objections of the taxpayer are dealt with in the following paras. 16. DETERMINATION OF ARM'S LENGTH PRICE BY THE TAXPAYER IN ITS TP STUDY: The arm's length price of the international transactions in ITES segment provided to the associated enterprises (AE) is determined by applying transactional net margin method (TNMM), stating to be the most

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Page 10 of 42 appropriate method in the facts and circumstances of the case. The operating profit to total cost ratio is taken as the profit level indicator (PLI) in TNMM analysis. 17. REJECTION OF THE TAXPAYER'S TP STUDY In the case of tax payer, the TPO is mainly concerned about whether the information or data used in the computation of the arm's length price is reliable and correct. It is clear from the provisions of Sec. 92C(3)(c) read with Sec. 92CA that on the basis of material or information or documents in the possession of TPO, if he is of the opinion that the information or data used in computation of the arm's length price is not reliable or correct, the TPO may proceed to determine the arm's length price in relation to the international transactions in accordance with Sec. 92C(1) and 92C(2) on the basis of such material or information or document available with him. The following pertinent defects have been found in the TP analysis carried on by the tax payer. 1. As per Rule 1013(4), it is mandatory to the use the current financial year data i.e. the financial year in which the international transactions took place (FY 2011-12) but the taxpayer has computed the 3 year average of the data for the last three years. The taxpayer has selected cases even where no current year data is available and has based its analysis on earlier year's data. 2. The taxpayer has used the earlier year data pertaining to the FYs 2009-10,2010-11 besides the current year ending 2012 wherever available but no reasons are given as to how the earlier year data has influence over the price either of the taxpayer or of the comparable so to attract the proviso to Rule 1013(4). 3. The assessee has not used export revenue > 75% of sales as a filter. The assessee is engaged in the provision of ITES services to its Associated Enter rises situated outside India. Since the revenue is arising out of export sales, comparing the assessee company with a company providing services primarily within India will not be appropriate margins of companies engaged in domestic sales and those engaged in export sales would be different. The level of competition within the country and those prevailing in international market are different. Therefore, it is important to have a filter to eliminate companies which are predominantly engaged in the provision of services within India. 4. The assessee company has not applied employee cost filter (ratio of employee cost to sales >25%). ITES industry is primarily engaged in provision of services through personnel implying that the industry is manpower intensive. Therefore, it is appropriate to have employee cost filter to eliminate those companies which are not directly providing ITES services but are outsourcing the same.

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TP adjustment u/s 92CA – 5,97,86,356/- Capitalization of software expenses after allowing depreciation on capitali- zed expenses – Rs.6,51,10,329/- Disallowance of software expenses u/s 40a/40a(ia) - Rs.11,28,69,584/- Disallowance of legal professional fees paid to the partnership firms outside India – Rs.46,05,273/- Disallowance of deduction u/s 80JJAA – Rs.23,20,36,444/-

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Page 14 of 42 2018 wherein it is clarified that an assesses whose employee completes 300 days in a second year would also be entitled to a deduction for three years therefrom. Thus he submits that the amendment having been brought into force in the year 2018 the present matter relating to the year 2007-2008, the said curative or clarificatoty amendment would not come to the rescue of the Assessee and as such, the finding of the Tribunal in this regard is required to be set aside. 16.13. We are unable to agree with such a submission- the amendment of the year 2018 though claimed curative by Sri. Aravind, we are of the considered opinion that the same is more an explanatory amendment or a clarificatory amendment which clarifies the methodology of applying Section 80JJ-AA of the Act. If the submission of Sri. K. V. Aravind is accepted, then no employer/assessee would be able to fulfil the requirement of employing its labour/assessee prior to 5th June of that assessment year so as to claim the benefit of Section 80JJ-AA. Such a narrow and pedantic approach is impermissible. It also being on account of the fact that Section 80JJ-AA relating to deductions under Chapter is an incentive and, therefore, has to be read liberally. In this aspect, we are also supported by the decision of the Apex Court in Mavilayi Service co-operative Bank Ltd's case (supra), wherein the Apex Court has held that a benevolent provision has to be read liberally and reasonably and if there is an ambiguity in favour of the Assessee. 16.14. The Apex Court in the case Vatika Township (P.) Ltd. (supra) has also held similarly, in that if there is a benefit conferred by legislation, the said benefit being legislative's object, there would be a presumption that such a legislation would operate with retrospective effect by giving a purposive construction. Thus the clarificatory amendment of the year 2018 can also be said to apply retrospectively for the benefit of the Assessee even though the Revenue contends that there was no provision in the year 2007 permitting the Assessee to avail the benefit of deduction when the employee works for a period of 300 days in consecutive years. 16.15. In view thereof, the substantial question No.1 is answered by holding that the software professional/engineer is a workman within the meaning of Section 2(s) of ID Act, so long as such a software professional does not discharge supervisory functions, the benefit of Section 80JJ-AA can be claimed by an employer/assessee even if the employee were not to complete This aspect has now been clarified in the Finance Act, 2018 by adding a second proviso to the definition of additional employee in Explanation (ii) to Sec.80JJAA of the Act. Even prior to such curative or clarificatory amendment, we are of the view that the claim for deduction u1s.80JJAA of the Act cannot be and ought not to have been disallowed on this ground. We therefore direct that the deduction claimed by the Assessee should be allowed." (emphasis supplied).

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Page 15 of 42 We also enclose herewith the order giving effect to the Honourable ITAT order passed by the AO for AY 2010-11. In the said order, the AO has once again denied the claim of the Appellant solely on the ground that the department has moved to Supreme Court against the decision of High Court in Texas Instruments India (P.) Ltd (supra). In view of the above, we humbly request your Honours to specifically adjudicate Ground No. 4, 5, and 6 and oblige.”

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Page 16 of 42 Texas Instruments India P Ltd (ITA No.141/2020 dated 21.4.2021). Both the parties agreed that this issue may be restored to the file of the assessing officer for examining it afresh in the light of decision rendered by Hon’ble jurisdictional High Court, referred above. For the sake of convenience, we extract below the decision rendered by the Hon’ble High Court in the above said case:- “16. Answer to Substantial Question No.1: Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in setting aside the disallowance of Rs.7,57,22,069 made under section 80JJAA of the Act by holding that the employees in software industry are covered by definition of 'Workman' in Explanation 3 (iii) to section 80JJAA of the Act read with section 2(s) of the Industrial Dispute Act and employees who have worked for 300 days in a previous are eligible for the purpose of deduction under section 80JJAA in the succeeding year if he completes 300 days in such succeeding year without appreciating that person working in software industry cannot be said to be 'Workman' for the purpose of section 80JJAA of the Act and conditions prescribed for claiming said deduction are not satisfied by Assessee? 16.1. The Assessee had claimed deduction under Section 80JJ-AA of the Act on account of the payments made to the employees hired by the Assessee in the previous year even though they had not completed 300 days of service in that year since they continued on the rolls of the Assessee in the next year totalling up to more than 300 days as required under section 80JJ-AA of the Act. The issue raised by the Revenue is that the employees of the Assessee would not come within the purview of the definition of workman under Section 2(2) of the Industrial Disputes Act, 1947 (for short 'ID Act') and that since the employee has not completed 300 days of employment in the previous year, no deduction could be claimed by the Assessee.

16.2. As regards the first contention of the Revenue, the same does not require much examination by this Court inasmuch as at the first instance; the Assessing Officer had held that the Assessee's employees would not come within the purview of workman under Section 2(s) of the I.D. Act and disallowed the claim, on an appeal filed by the Assessee, the Commissioner, Income-tax (Appeals) CIT(A) accepted the Assessee's contention and held that the Assessee's employee would come within the purview of Section 2(s) of the ID Act. This aspect was not challenged by the Revenue, although the Revenue had filed an appeal against the order of the CIT(A). Having accepted the said finding of the CIT(A) and not having filed any appeal, the Revenue cannot now seek to challenge the said finding in the present appeal. 16.3. Section 2(s) of the ID Act is reproduced hereunder for easy reference: "workman" means any person (including an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or

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Page 17 of 42 reward, whether the terms of employment be express or implied, and for the purposes of any proceeding under this Act in relation to an industrial dispute, includes any such person who has been dismissed, discharged or retrenched in connection with, or as a consequence of, that dispute, or whose dismissal, discharge or retrenchment has led to that dispute, but does not include any such person-. 4 (i) who is subject to the Air Force Act, 1950 (45 of 1950), or the Army Act, 1950 (46 of 1950), or the Navy Act, 1957 (62 of 1957); or (ii) who is employed in the police service or as an officer or other employee of a prison, or (iii) who is employed mainly in a managerial or administrative capacity; or (iv) who, being employed in a supervisory capacity, draws wages exceeding one thousand six hundred rupees per mensem or exercises, either by the nature of the duties attached to the office or by reason of the powers vested in him, functions mainly of a managerial nature. 16.4. In terms of section 2(s) of the ID Act, the definition of a workman is very wide inasmuch as the said definition would cover any person who has the technical knowledge, self skilled in an industry. It cannot be disputed that the Assessee's business is an industry. It also cannot be disputed that the employees of the Assessee are technical persons skilled in software development and, as such, engaged by the Assessee to render services in the industry being run by the Assessee. Thus the software engineer would also come within the purview and ambit of workman under Section 2(s) of the ID Act so long as such a person does not take a supervisory role. The software engineer per se would be a workman; a software engineer rendering supervisory work would not be a workman. In the present case, it is not the case of the Revenue that the persons employed by the Assessee are rendering any supervisory work or assistance. Admittedly, the said persons have been engaged for the purpose of software development, and as such, they are to be regarded as a workman in terms of Section2 (s) of the ID Act. 16.5. The Apex Court has in the case of Devinder Singh's (supra) categorically held that when a person is employed in an industry for hire or reward for doing manual, unskilled, skilled, operational, technical or clerical work, such a person would satisfy the requirement and would fall within the definition of the 'workman'. In the present case, a software engineer is a skilled person, a technical person who is engaged by the employer for hire or reward. Therefore, all the said persons would satisfy the requirement of being a workman in terms of Section 2(s) of the I.D. Act. In our considered view, the concept of the workman has undergone a drastic change and is no longer restricted to a blue collared person but even extends to whitecollared person. A couple of decades ago, an industry would have meant only a factory, but today industry includes software and hardware industry, popularly known as the Information technology industry. Thus the undertaking of the Assessee being an industrial undertaking, the persons employed by the Assessee on this count also

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Page 18 of 42 would satisfy the requirement of a workman under Section 2(s) of the ID Act. 16.7. Sri. Aravind, learned Senior Panel counsel of the Revenue, has strenuously argued that the period of 300 days in a year I.T.A. NO.141 OF 2020 c/w I.T.A. NO.151 OF 2020 would mean 300 days in the financial year alone, not in the calendar year or otherwise. He has submitted that if the period of 300 days is not satisfied, no such deduction could be allowed. 16.8. Admittedly, the provisions concerned, i.e. Section 80JJ-AA, comes under Chapter-VI-A of the IT Act, which deals with deductions in certain income; this deduction is issued and or permitted as an incentive to the Assessee on fulfilling certain criteria as required under the various provisions under Chapter-VI-A. The incentive of the deduction provided under Section 80JJ-AA is with an intention to encourage the Assessee to employ more and more people, provide employment and, in lieu thereof, permit the employer/assessee to deduct certain amounts from the income when the returns are filed. It is with this object, purport and intent of section 80JJ-AA of the Act that the present facts and circumstances would have to be considered. It is also required for the Assessing Officer, CITA, Income- tax Appellate Tribunal, as also any other officer to always interpret and or apply the provisions of the Act, taking into consideration the intent and purport of the said provision. 16.9. The meaning or interpretation now sought to be given by Sri. Aravind, learned Senior Panel counsel is that only if the employee were employed for a period of 300 days in a particular financial year, only then deductions could be claimed, if not the deductions could not be claimed even though such employee has been employed for 300 continuous days or more. 16.10. We would disagree with the said contention. What is required is for a person to be employed for a period of 300 days continuously. There is no such criteria made out for a person to be employed in any particular year or otherwise. If such a restrictive interpretation is given, then any person employed post 5th June of a particular year would not entitle the Assessee to claim any deduction. Thus in order to claim the benefit under Section 80JJ-AA, an employer would have to hire the workmen before 5th June of that year. As a corollary, since the Assessee would not get any benefit if the workmen were engaged post 5th June, the employer/Assessee may not even employ anyone post 5th June, which would militate against the purpose and intent of Section ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 6 80JJ-AA, which is the encourage creation of new employment opportunities. 16.11. The Income-tax Appellate Tribunal, while considering a similar situation as in Bosch Limited (supra) held that so long as the workman employed for 300 days, even if the said period is split into two blocks, i.e. the assessment year or financial year, the Assessee would be entitled to the benefit of Section 80JJ-AA in the next

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Page 19 of 42 assessment year and so on so forthwith for a period of three years. The Income-tax Appellate Tribunal, having held to that effect, in our considered opinion, it would not be open for the Revenue to now contend otherwise, more so since the said order has attained finality on account of the Revenue not having filed an appeal. 16.12. It is sought to be contended by Sri. K V Aravind, learned Senior Panel counsel that the fact that such an interpretation could not be given is established by the curative amendment carried out in the year 2018 wherein it is clarified that an assesses whose employee completes 300 days in a second year would also be entitled to a deduction for three years therefrom. Thus he submits that the amendment having been brought into force in the year 2018 the present matter relating to the year 2007-2008, the said curative or clarificatory amendment would not come to the rescue of the Assessee and as such, the finding of the Tribunal in this regard is required to be set aside. 16.13. We are unable to agree with such a submission- the amendment of the year 2018 though claimed curative by Sri. Aravind, we are of the considered opinion that the same is more an explanatory amendment or a clarificatory amendment which clarifies the methodology of applying Section 80JJ-AA of the Act. If the submission of Sri. K.V.Aravind is accepted, then no employer/assessee would be able to fulfil the requirement of employing its labour/assessee prior to 5th June of that assessment year so as to claim the benefit of Section 80JJ-AA. Such a narrow and pedantic approach is impermissible. It also being on account of the fact that Section 80JJ-AA relating to deductions under Chapter is an incentive and, therefore, has to be read liberally. In this aspect, we are also supported by the decision of the Apex Court in Mavilayi Service co- operative Bank Ltd's case (supra), wherein the Apex Court has held that a benevolent provision has to be read liberally and reasonably and if there is an ambiguity in favour of the Assessee. 16.14. The Apex Court in the case Vatika Township (P.) Ltd. (supra) has also held similarly, in that if there is a benefit conferred by legislation, the said benefit being legislative's object, there would be a presumption that such a legislation would operate with retrospective effect by giving a purposive construction. Thus the clarificatory amendment of the year 2018 can also be said to apply retrospectively for the benefit of the Assessee even though the Revenue contends that there was no provision in the year 2007 permitting the Assessee to avail the benefit of deduction when the employee works for a period of 300 days in consecutive years. 16.15. In view thereof, the substantial question No.1 is answered by holding that the software professional/engineer is a workman within the meaning of Section 2(s) of ID Act, so long as such a software professional does not discharge supervisory functions, the benefit of Section 80JJ-AA can be claimed by an employer/assessee even if the employee were not to complete 300 days in a particular assessment

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Page 20 of 42 year but in the subsequent year so long as there is continuity of employment, the Assessee could continue to claim further benefit in the next two years as provided in under Section 80JJ-AA of the Act. 16.16. Accordingly, we answer Question No.1 by holding that a software engineer in a software industry is a workman within the meaning of Section 2(s) of the Industrial Disputes Act so long as the Software engineer does not discharge any supervisory role. 16.17. The period of 300 days as mentioned under Section 80JJAA of the Act could be taken into consideration both in the previous year and the succeeding year for the purpose of availing benefit under Section 80JJAA. It is not required that the workman works for entire 300 days in the previous year. 16.18. Hence, in the facts and circumstances of the case, the software engineer being workman having satisfied the period of 300 days, the assessee is entitled to claim deduction under Section 80JJAA.” Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO for examining this issue afresh. The assessee is free to raise all contentions and accordingly all contentions on this issue is left open.

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Page 21 of 42 4. Schwegaman Lundberg Woessner Kluth 75,36,920 ---------------- 4,73,18,208 ==========

The AO noticed that the assessee has not deducted tax at source from the above said payments. The assessee submitted that the above said payments were made to foreign legal firms, which are firm of individuals in connection with services rendered by them in USA in connection with preparation of tax return, tax reconciliation calculation, application for tax identification numbers, submission of documents etc. It was submitted that the services were provided outside India and they have been consumed outside India. Hence the services rendered by them do not have any nexus in India. Accordingly, it was submitted that the payments are not taxable in the hands of recipients in terms of Article 15 of the IndiaUSA DTAA. Accordingly it was submitted that the assessee is not liable to deduct tax at source from these payments. The AO did not accept the explanations given by the assessee. He also observed that the assessee company could not furnish any agreement or any type of proof in support of its claim. He also took the view that the assessee is taking contradictory stands, i.e., initially, the assessee claimed that the payments were given for providing independent personal services and later it changed its stand and submitted that the services were rendered outside India. 7.1 Before Ld CIT(A), the assessee reiterated that the services were provided outside India and the said services were consumed outside India. It was also contended that the said services cannot be considered as “Fee for Technical Services” or “Fee for included Services”. It also relied upon Article 15 of India – USA DTAA and contended that the services provided by individual or firm of individuals would not attract TDS. 7.2 However, the Ld CIT(A) took the view that the assessee had not disputed that the nature of payments was FTS/FIS and it is making contrary contention only before him on the ground ‘make available’ test fails in availing these services. With regard to the submission of the assessee that the services were availed to help its employees working in abroad on projects/assignments in connection with tax compliances in USA, the Ld CIT(A) took the view that it is an afterthought. He also expressed the view that the assessee has not provided exact nature of services provided by each of the service providers. The assessee had submitted a proof in respect of only one concern M/s Deloitte Tax LLP to show that it is a firm of individuals and did not furnish any document in respect of other three concerns. The certificate furnished was rejected by Ld CIT(A) holding that the self-certificate cannot be accepted. Accordingly, the Ld CIT(A) rejected these contentions.

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Page 22 of 42 7.3 The assessee also contended the income has not accrued in India in the hands of these recipients. Further, these non-resident concerns do not have permanent establishment (PE) in India as such provisions of Section 9 of the Act were not attracted. However, the Ld CIT(A) held that the fees for technical services payable to a resident in India would be income deemed to arise in India except where FTS is payable in respect of any right, property or information used or services is utilised for the purpose of a business or profession carried on by such person outside India or making or earning any income from any source outside India. He also referred to the Explanation given under sec. 9(2) and observed that the said Explanation was inserted to undo the ratios laid down by the Hon’ble Supreme court in the case of Ishikawajima Harima Heavy Industries Ltd (288 ITR 408) and Jindal Thermal Power Company Ltd (321 ITR 31)(Kar). Accordingly, the Ld CIT(A) held that (a) the non-residents have provided technical services to the assessee company and therefore, the payments are “fee for technical services” liable for deduction of tax at source. (b) With regard to Article 15 of India-USA DTAA, the Ld CIT(A) held that the assessee has not brought anything on record to show that the payments were made to individual or firm of individuals except for one document related to M/s Deloitte. However, it was self- certified document and hence cannot be considered as sufficient. (c) the Article 15 covers payments for performance of services in “Other contracting state” (here India). However, in the instant case, the assessee himself has admitted that the services were performed in USA. Hence Article 15 is not applicable here. Accordingly, the Ld CIT(A) confirmed the disallowance made by the AO. 7.4 We heard rival contentions on this issue and perused the record. The facts relating to this issue, as submitted by the assessee, are that the employees of the assessee have been sent to USA for undertaking projects online. The assessee is required to comply with the requirements of tax laws of USA in respect of these employees. Hence it has availed the services of the above said professional firms for complying with those requirements and the payments were made to the above said professional firms towards legal and professional fees. As submitted by the assessee before the tax authorities, the assessee has availed these services outside India and further these services have been used outside India. The assessee did not deduct tax at source from these payments. The assessee has raised many contentions with regard to its liability to deduct tax at source from these payments. 7.5 The assessee has contended that, as per Article 15 of India - USA DTAA, these are independent personal services and hence not taxable in India. Since it is not taxable in India in the hands of recipients, there is no liability to deduct tax at source u/s 195 of the Act. Article 15 of DTAA read as under:- INDEPENDENT PERSONAL SERVICES

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Page 23 of 42 “1. Income derived by a person who is individual or firm of individuals (other than a company) who is resident of a Contracting State from the performance in other Contracting Stateof professional services or other independent activities of a similar character shall be taxable only in the first mentioned State except in the following circumstances……… ” We noticed that the Ld CIT(A) has expressed the view that the Article 15 shall be applicable only if the services are rendered in other contracting State by the professional, i.e., a professional resident of USA should have performed in other Contracting State, i.e., the professionals of USA should have performed services in India. However, in the instant case, the professionals of USA have performed services in USA only. Accordingly, the Ld CIT(A) has held that Article 15 is not applicable to the facts of the present case. 7.6 The Ld CIT(A) has, however, taken the view that the services rendered by these professionals fall under the category of “Fee for Technical services” u/s 9(1)(vii) of the Act. In view of Explanation given u/s 9(2), the Ld CIT(A) took the view that the payment is taxable in the hands of the recipients, even if they do not have residence of place of business in India. 7.7 We heard the parties on this issue and perused the record. Since the Ld CIT(A) has held that the impugned payment would be hit by sec. 9(1)(vii) of the Act, it is required to be examined as to whether the impugned payments would fall under the category of “Fee for technical services” in terms of sec. 9(1)(vii) of the Act or not. Section 9 of the Act lists out income which are “deemed to accrue or rise in India”. Section 9(1)(vii) of the Act reads as under:- “9(1)(vii) income by way of fees for technical services payable by— (a) the Government ; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government. Explanation 1.—For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. Explanation 2.—For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include

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Page 24 of 42 consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". (2) Notwithstanding anything contained in sub-section (1), any pension payable outside India to a person residing permanently outside India shall not be deemed to accrue or arise in India, if the pension is payable to a person referred to in article 314 of the Constitution or to a person who, having been appointed before the 15th day of August, 1947, to be a Judge of the Federal Court or of a High Court within the meaning of the Government of India Act, 1935, continues to serve on or after the commencement of the Constitution as a Judge in India. Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non- resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the nonresident, whether or not,— (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India.” The Ld CIT(A) has expressed the following view:- “10.5 A perusal of the above provisions shows that where fees for technical services (FTS) is payable by a person who is resident of India, it would be a deemed income arising in India, within the meaning of section 9(1), irrespective of whether the recipient of such income is a resident or non-resident of India except where FTS is payable in respect of any right, property or information used or services utilized for the purpose of a business or profession carried on by such person outside India or making or earning any income from any source outside India….” 10.6 In the case under consideration the non-residents have provided technical services to the appellant company. Therefore, the payment made towards these technical services is undisputedly fee for technical services as stipulated in Section 9(1)(vii) of the Income tax Act, liable for deduction of tax at source.” 7.8 The contention of the Ld A.R is that the assessee has availed only “legal and professional services” from some professional firms and it will not fall under the category of “Fee for technical services” defined in sec. 9(1)(vii) of the Act, since the professional service will not fall under the category of “managerial or technical or consultancy service” mentioned in the definition of the expression “Fee for Technical services” given in Explanation 2 to sec. 9(1)(vii). In this regard, the Ld A.R placed her reliance on the decision rendered by Delhi bench of Tribunal in the case of Sh. Chander Mohal Lall vs. ACIT (ITA No.1869/Del/2019 dated 09-12- 2021). 7.9 We heard Ld D.R on this issue and perused the record. The Delhi bench of Tribunal in the case of Sh. Chander Mohan Lall (supra) has that the professional fee paid to non-resident attorneys for rendering various professional services in their respective foreign jurisdiction will not fall under the category of “Fee for technical services”. The relevant discussions made by the Delhi bench are extracted below:-

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Page 25 of 42 “11. The learned counsel for the assessee submitted, out of the total disallowance of Rs.65,94,145/-, the payment made towards reimbursement of amount recovered on behalf of the client in litigation, payment of official fee, payment for publication and trade fair services has to be deleted at the threshold itself as such payments do not attract the provisions of section 195 of the Act. Proceeding further, he submitted, the payments are not in the nature of Fees for Technical Services (FTS), hence, cannot be considered to be income chargeable to tax in India. Drawing our attention to section 9(1)(vii) of the Act, he submitted, the provision is applicable only to the payment made towards FTS. He submitted, payment made by the assessee to foreign attorneys/lawyers are not in the nature of FTS but are fees for professional services. He submitted, technical service is distinct from professional service. To emphasize further, he submitted, as per Explanation 2 to section 9(1)(vii) of the Act, FTS has been defined to mean consideration paid for rendering of any managerial, technical or consultancy services. He submitted, section 44AA of the Act, clearly distinguishes profession from business and as per the said provision, legal and technical consultancy are distinct from each other. Further, drawing our attention to section 194J of the Act, he submitted, professional and technical services have been treated as two separate categories. In this context, he drew our attention to clauses (a) and (b) of Explanation to section 194J of the Act. He submitted, even section 194J has prescribed two different rates for TDS for professional services and technical services. Thus, he submitted, the payment made by the assessee not being in the nature of FTS, there is no liability to deduct tax at source. 12. Without prejudice, he submitted, even assuming that the payment made to foreign attorneys are in the nature of FTS, then also such payment are not chargeable to tax under clause (b) of section 9(1)(vii) of the Act, as, the payments were made to foreign attorneys for utilizing their services outside India and for the purpose of earning income from a source outside India. Therefore, such income cannot be deemed to accrue or arise in India. 13. Without prejudice, he submitted, in terms of DTAAs entered with certain countries, payments received by the nonresidents are in the nature of business income, hence, not liable to tax in India under the respective DTAAs in absence of a fixed place of business or PE in India. Thus, he submitted, there being no obligation on the assessee to deduct tax at source under section 195 of the Act, no disallowance under section 40(a)(i) can be made. Further, he submitted, only because the assessee was unable to furnish the TRC in respect of some of the payees, the Assessing Officer has disallowed part of expenditure. He submitted, non-furnishing of TRCs cannot be the sole reason for disallowing assessee’s claim when the genuineness of the expenditure is not doubted. He submitted, since, the assessee has no control over issuance of TRC by foreign jurisdiction, the disallowance should not have been made, when all other evidences including Outward Telegraphic Transfer Application Form, invoices,

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Page 26 of 42 etc. were furnished. He submitted, at no stage, the departmental authorities have examined the applicability of respective DTAAs qua the payments made. He submitted, since the beneficial provisions of DTAA would override the domestic laws in terms of section 90(2) of the Act, there is no obligation on the assessee to deduct tax at source on the payments made. In support, learned counsel relied upon the following decisions:- i. CIT vs. Dunlop Rubber Co. Ltd.: (1983) 142 ITR 493 (Cal) ii. …………………. ………………. 14. Strongly relying upon the observations of the Assessing Officer and learned Commissioner (Appeals), the learned Departmental Representative submitted, undisputedly, the payer is located in India and carries on his ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 22 profession in India. He submitted, while carrying out his profession, the assessee has utilized the services of foreign attorneys to whom, payments have been made. Therefore, the payment made to the non- residents is income deemed to accrue and arise in India. He submitted, in many cases, the non-residents, to whom payments have been made, are residents of countries which do not have DTAA with India. Therefore, in absence of any DTAA, the income is chargeable to tax in India, as per the Act. He submitted, even in respect of payees situated in countries with whom India has entered into DTAA, the assessee failed to furnish TRCs. Therefore, the disallowance made is justified. 15. We have considered rival submissions in the light of the decisions relied upon and perused the material available on record. Facts on record reveal that out of the total payments of Rs.1,89,44,688/- to certain non-resident persons/entities towards legal/professional fees, the Assessing Officer has allowed an amount of Rs.1,23,50,544/-. In other words, he has disallowed Rs.65,94,144/- under section 40(a)(i) of the Act for failure to deduct tax at source under section 195 of the Act. Further, it is evident, the aforesaid disallowance was made solely for the reason that assessee failed to furnish TRCs of the nonresidents to whom such payments were made. In the synopsis filed before us, learned counsel for the assessee has furnished the details of payments made, as under:- ………………… 17. In so far as the balance amount of Rs.48,52,693/- is concerned, undisputedly, they represent professional fee paid to non- resident attorneys for various professional services rendered by them in the respective foreign jurisdictions. Therefore, the foremost crucial issue requiring examination is, whether the payment made to the non- residents is “chargeable under the provisions of the Act” so as to attract the provisions of section 195 of the Act. On a reading of section 5 of the Act, which defines the scope of total income, it would be very much clear that the following categories of income shall be included in the total income:- (i) income received in India; (ii) income deemed to be received in India; (iii) income which accrues or arises in India; or (iv) income which is deemed to accrue or arise in India. 18. In the facts of the present appeal, undisputedly, the non-resident attorneys have rendered their professional services outside India in relation to

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Page 27 of 42 following: (i) Filing of application for grant/registration of IPR; (ii) Filing of Form/responses/petitions in relation to activity leading to or in the process of grant/registration; (iii) Maintenance of such grant/registration or services in relation thereto, as required under law, such as, towards annuity payment, renewal fee, restoration of patent, etc. (iv) Undertaking compliances for effecting charge in the ownership/address etc. of such intellectual property. ITA No. 2890/Bang/2018 M/s Honeywell Technolgoy Solutions Pvt. Ltd. 23 Thus, the nature of services rendered by the non-resident attorneys in their countries of residence make it clear that the payments received by them cannot be treated as income received in India, or deemed to be received in India, or income which accrues or arises in India. Therefore, the only category, if at all, under which the payments can be chargeable to tax is, income deemed to accrue or arise in India. For this purpose, we have to look at the provisions contained under section 9 of the Act. A reading of section 9, as a whole, including, the Explanation under sub-section (2) to section 9 would make it clear that income by way of interest, royalty and FTS shall be deemed to accrue or arise in India, irrespective of the fact, whether the non- resident has a residence or place of business or business connection in India or it has rendered services in India. 19. Factually, the payments made to non-resident attorneys are neither in the nature of interest, nor in the nature of royalty. This is not even the case of the Revenue as well. Therefore, it has to be seen, whether the payment made comes within the ambit of FTS. Explanation 2 to Section 9(1)(vii) defines FTS to mean any consideration received for any managerial, technical or consultancy services, including provision of services by technical or other personnel. In the facts of the present case, undisputedly, the payments to non-resident attorneys are purely for providing legal/professional services. On careful examination of various provisions of the Act brought to our notice by learned counsel for the assessee, we are convinced that the domestic law provisions recognize legal/professional services and FTS as two distinct and separate categories. 20. Therefore, payments made to non-resident attorneys cannot be regarded as FTS under section 9(1)(vii) of the Act. Further, a conjoint reading of section 40(a)(i) and 40(a)(ia) brings out a clear distinction between FTS and fees for professional services. Though, section 40(a)(ia) encompasses, both, FTS and fees for professional services, however, section 40(a)(i) is applicable only in case of failure to deduct tax on payments made for FTS. As rightly submitted by learned counsel for the assessee, this could be for the reason that payment of legal/professional fee to a non-resident does not accrue or arise in India or is not deemed to accrue or arise in India as per section 5 and section 9 of the Act. It is relevant to observe, in the case of NQA Quality Systems Registrar Ltd. Vs. DCIT (supra), the coordinate Bench has held that professional services are a category distinct from

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Page 28 of 42 technical services. Similar view has been expressed in the following decisions as well: (i) ONGC Vs. DCIT (supra) (ii) Deloitte Haskins & Sells Vs. ACIT (supra) No contrary decision has been brought to our notice by learned Departmental Representative. In view of the aforesaid, we hold that the payments made to non-resident attorneys being not in the nature of FTS, there was no obligation on the assessee to deduct tax at source. 21. At this stage, we must observe, learned Departmental Representative has submitted before us that the payments made by the assessee being in the nature of FTS are taxable by applying the source rule. In our view, even assuming that payments made by the assessee come within the ambit of section 9(1)(vii) of the Act, nonetheless, the exception provided under clause (b) to Section 9(1)(vii) would apply. We have already examined the nature of services provided by the foreign attorneys. It is a fact that Indian/overseas clients engage the assessee for availing certain services. In turn, assessee engages the foreign attorneys to perform certain services which are required to be performed in foreign jurisdictions. There is no privity of contract between the assessee’s clients and foreign attorneys. In fact, the clients are no way concerned, whether the assessee does the work himself or engages others. Thus, the source of income of the assessee through services rendered by non- resident attorneys in foreign jurisdictions is located outside India. That being the case, exception provided in clause (b) of section 9(1)(vii) would apply. Hence, the payments are not taxable as FTS. 22. In any case of the matter, the departmental authorities have disallowed a part of the expenditure for the only reason that assessee failed to furnish the TRC of the payees. The departmental authorities have not at all examined the taxability of payments under the applicable DTAAs. 23. Be that as it may, on overall analysis of facts and applicable statutory provisions as well as keeping in view the ratio laid down in the decisions cited before us, we hold that the payments made to foreign attorneys are not chargeable to tax under the provisions of the Act, in terms of section 195 of the Act. Therefore, the assessee was not required to withhold tax on the payments made. Accordingly, we delete the disallowance made under section 40(a)(i) of the Act. 24. In the result, the appeal of the assessee is allowed, as indicated above. 7.10 In the instant case, the assessee has availed legal and professional services in USA. In the above said case, it has been held that the “professional services would not fall under the category of “Fee for technical services” within the meaning of sec. 9(1)(vii) of the Act. Following the same, we hold that the view taken by Ld CIT(A) cannot be sustained. 7.11 We noticed earlier that the services were rendered in USA by these non-residents and the payments have been received by them outside India. Further, their services have been used outside India.

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Page 29 of 42 Hence these payments does not constitute income under the Indian Income tax Act, 1961 u/s 5 of the Act and we have held that it is not deemed to accrue in India u/s 9(1)(vii) of the Act. Hence this income is not taxable in India in the hands of non-residents and hence the question of deducting tax at source u/s 195 of the Act does not arise here. Accordingly, the disallowance made u/s 40(a)(i) is liable to be deleted. Under Sec. 90(2) of the Act, the provisions of the Income tax Act are required to be applied only if they are more beneficial to the assessee. We noticed that under the Income tax Act, this receipt is not taxable in India in the hands of non-residents. Hence, the provisions of Income tax Act are more beneficial to the non-residents. In this view of the matter, there is no necessity to refer to the provisions of India-USA DTAA. In any case, we notice that, in order to bring the impugned payments within the Article 12 of India- USA DTAA, the services should have been “made available” technical knowledge etc to the assessee herein. In the instant case, the assessee has only availed professional services of non-residents in connection with tax compliances and the technical knowledge has not been “made available”. Since the make available clause fails, the impugned payments cannot be taxed as Fee for Included services under Article 12 of the India-USA DTAA. In this view of the matter, there is no necessity to refer to Article 15 also. 7.13 Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance of legal and professional fees made u/s 40(a)(i) of the Act. 8. The assessee has raised an additional ground, wherein it has claimed”

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Page 30 of 42 21. On the claim of expenses u/s 37(1) of education cess and secondary higher education cess on income-tax was paid during year, in view of the amendment brought in by Finance Act 2022 making it mandatory to disallow the claim of educational cess as deducting the additional ground No.26 and 26.1 raised on this issue is dismissed. Accordingly this additional ground of the assessee is dismissed.

Transfer Pricing 23. The assessee has raised ground No.19 to 25 regarding transfer pricing issue and he has also filed additional ground Nos.26 to 27 as additional ground. The ground No.26 has been filed twice out of which one in respect of deduction of education cess and secondary higher education cess which has been decided as per para No.21 supra.

“Further to our submission on corporate tax grounds, please find our submission in relation to transfer pricing grounds: HTSL is engaged in provision of information technology ('IT') and IT enabled services to its group companies. It provides services in the nature of global financial services (general accounting, etc.), global collection and treasury services (Account receivables), Global contact center (Procurement/ customer support, etc), HR (employee data management, payroll processing) (Low end BPO services). The main issue in case of AY 2012-13 is selection of comparable companies. The final list of comparable companies, post the order of Commissioner of Income-tax (Appeals) [CIT(A)")], is provided below:

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Page 31 of 42

Appellants Contention: 1. Exclusion of companies accepted by the TPO/ CIT(A): The Appellant wishes to rely on the decision rendered by the Hon'ble Bench members in case of M/s Micro focus Software India Private Limited (ITA No. 368113ang12017) in relation to selection of comparables. The Honble ITAT's observations with respect to certain comparable companies which the Appellant wishes to exclude have been provided below: .. 1.1 lnfosys BPO Ltd, Excel Infoway Ltd and TCS E-Serve Ltd: The Hon'ble ITAT relied on the decision rendered in case of CGI Information Systems & Management Consultants P Ltd (supra) which in turn relied on the Hon'ble Delhi ITAT's decision in case of Baxter (I) (P) Ltd vs. A CIT (2017) (85 taxmann.com 285 (Delhi-Trib.) for exclusion of the following three comparable companies. a) Infosys BPO Ltd: According to the Hon'ble ITAT, Infosys BPO Ltd., is not comparable with a company providing ITES because of brand value and extraordinary events in the previous year relevant to AY 201213 viz., acquisition of an Australia based company which had effect on its profits Hence the same should be excluded. b) Excel Infoway Ltd: Hon'ble ITAT observed that, there was an abnormal volatility of revenue of this company from 2009-10 to 2014-15 and therefore this company cannot be considered as comparable. c) TCS E-Serve Ltd: It was observed that, the company was engaged in software development services and the segmental details between IT enabled services and software development services were not there in the annual report. Moreover, from the annual report it was also observed that its brand value was also considerable, which added to it profitability sustainability. As compared to which the activities of the Appellant are very low-end services on which profit margin is derived by it was quite reasonable. Similar views were taken by the Hon'ble Bangalore ITAT in the following cases:

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Page 32 of 42 . MIs Societe Generale Global Solution vs DCIT [IT(TP)A No. 22971Bang12016] . MIs Kodiak Networks India Pvt Ltd vs ACIT[IT(TP)A No. 2841Bang12017] . CGI Information Systems & Management Consultants P Ltd (IT(TP)A No. 5861Bang12015 & 1831Ban g/201 7 1.2 BNR Udyog Ltd: Following the decision rendered in case of M/s Zyme Solutions P Ltd [IT(TP)A No 1661/Bang/2016], the Hon'ble ITAT observed as that the company (BNR Udyog ltd) was carrying out medical transcription, medical billing and coding whereas the Assessee was a captive service provider. Accordingly, the same should also be excluded from the final list of comparable companies Similar views were taken by different courts in the following cases: . MIs Kodiak Networks India Pvt Ltd vs ACIT[IT(TP)A No. 2841Bang12017] 0 BT e-Serv India Private Limited [ITA No. 6690 (Delhi) of 2016] 1 .. 2 2. Inclusion of company rejected by the CIT(A): 2.1. Informed Technologies Private Limited 3 Following the decision rendered in case of CGI Information Systems & Management Consultants P Ltd (supra), the Hon'ble ITAT observed as that the company should be included if it is functionally comparable and should not be reject on the basis of unreasonable comparable criteria. The relevant extract of the ITAT order is provided below: 4 "We are of the view that this company should be included in the list of comparable companies because it is not disputed by the DRP that this company is functionally comparable and that in the past A Ys this company was regarded as a comparable company and generally regarded as comparable company providing ITES." 5 Accordingly, Informed Technologies Private Limited should also be included in the final list of comparable companies. 6 3. Additional comparable company: 3.1. Crystal Voxx Private Limited 7 The company is engaged in provision of BPO services and during the FY 2011-12, 100% revenue has been earned from provision of BPO services. In this regard, the Appellant wishes to rely on the decision rendered by the Hon'ble Bench member in case of FNF India Private Limited [lT(TP)A No. 195/Bang/2016 & 459/Bang/2017]. The relevant extract of the ITAT order is provided below: 8 "In ground No. 13, the Assessee has prayed for inclusion of Crystal Voxx Ltd. as a comparable company. This company was not regarded as comparable company with the Assessee by the DRP for the reasons given in Para 2.15 of its order i.e., for the reason that in the financial results, the Auditors have mentioned that this company was predominantly a Business Process Outsourcing

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Page 33 of 42 (BPO) company and therefore this company cannot be said to be an ITES company. The learned counsel for the Assessee brought to our notice that in the very same note, the auditors have also mentioned that the only reportable segment was BPO. Therefore this company was a BPO company and the results of the BPO which is the only segment ought to have weighed in the mind of the TPO to include this company as a comparable company. 9 25. We have considered the submission of the learned counsel for the Assessee and are of the view that the plea raised by the Assessee is correct and the TPO ought to have regarded this company as comparable company because the only reportable segment of this company was BPO. We direct the TPO to include this company as a comparable company." 10 Accordingly, Crystal Voxx Private Limited should also be included in the final list of comparable companies. 11 Conclusion: 12 Considering the above, the revised set of comparable companies will be as follows:

Since the operating margin of HTSL for AY 2012-13, i.e. 19.62%, is higher than the arithmetic mean of operating margins of comparable companies, the entire TP adjustment if INR 8,47,56,617 should be deleted.”

Infosys BPO 25. In the case of Infosys BPO the ld.AR of the assessee contested that there was extraordinary events occurred during the year and it is also functionally different as well as the company does not possess turnover filter as applied by the TPO and upheld by the CIT(A). The turnover is more than 10 times of the assessee’s business in this segment.

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Page 34 of 42 1) M/s Societe Generale Global Solutions Vs. DCIT [IT(TP)A no.2297/Bang/2016] 2) M/s Kodiak Networks India Pvt. Ltd., Vs. ACIT [IT(TP)A No.284/Bang/2017] 3) CGI Information Systems & Management Consultants Pvt. Ltd., [IT(TP)A No.586/Bang/2015 & 183/Bang/2017

“This year on January 4, 2012 we acquired an Australian Based Company, M/s Portland Group Pvt. Ltd. This acquisition has enhanced our delivery presence in high end S&P space in Asia Pacific region. Our company also added a delivery center in Atlanta, Unites States in addition to the existing delivery centre of M/s McCamish Systems, LLC which was acquired in the year 2009.”

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Page 35 of 42 No.77 of factual PB). It is an Exceptional year of Operation and the company has recorded a steep decrease of 85.45% in profits in FY 2011- 12, hence constituting exceptional year of operation (pg. 775 PB). It is also Functionally different and Diversified the business into new areas of construction, development of property,. Real estate etc. (pg. 778 PB)

30.1. The ld.DR relied on the order of the lower authorities. The ld.DR further submitted that the AR of the assessee could not controvert the findings recorded by the lower authorities and the case law relied by the ld.AR is not applicable in the present facts on hand.

30.2 After going through the documents and considering the entire submissions from both the sides, this company’s turnover is volatility. The current year turnover is 8 crores approx. whereas previous year turnover is 20.36 crores. The ld.AR of the assessee has relied on the judgment of CGI Information Systems and Management Consultant Pvt. Ltd., the decision of the coordinate bench of the Bengluru in IT(TP)A No.586/Bang/2015 and 83/Bang/2017 vide order dated 11-04-2018, this company has not been considered as comparable for the following reasons, which is as under:- We have considered the rival submissions. In the case of Baxter (I) (P.) Ltd., (supra) the Delhi ITAT Bench considered comparability of the aforesaid three companies with a company engaged in providing ITBS such as the Assessee. The functional profile of the Assessee and the Assessee in the case of Baxter (I) (P.) Ltd. (supra) are identical inasmuch as 7 out of the 10 companies chosen by the TPO in the case of the Assessee were chosen as comparable in the case of Baxter (I) (P.) Ltd. (supra). The Tribunal held on the comparability of the three companies Infosys BPO Ltd., TCS E-service Ltd. and Excel Infoway Ltd., as follows: • (i) In paragraph 23 of its order the Tribunal held that Infosys BPO Ltd., is not comparable with a company providing ITES because of brand value and extraordinary events in the previous year relevant to AY 2012-13 viz., acquisition of an Australia based company which had effect on its profits. • (ii) In paragraphs 24 & 25 of its order the Tribunal held Excel Infoway Ltd., as not comparable because of consistent diminishing

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Page 36 of 42 revenue. The figures of diminution revenue are given in paragraph 24 of its order. • (iii) In paragraphs 21 & 22 of its order the Tribunal held that Excel Infoway Ltd., was liable to be excluded because it was also engaged in the business of software testing, Verification and validation of software at the time of implementation and data centre management activities. 46.. Respectfully, following the decision of the Tribunal we hold that the aforesaid 3 companies be excluded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of comparison with the profit margins.

30.3 Respectfully following the above judgment of the coordinate bench of the Tribunal, we hold that this company should be excluded from the final list of comparable companies. For the calculation of profit margin.

TCS E-serve Ltd.,

As far as ground Nos.9 and 10 of the revised grounds of appeal is concerned, the learned Counsel for the assessee brought to our notice the decision of the Hon'ble ITAT, Bangalore Bench in IT(TP)A No.2297/Bang/2016 for Assessment Year 2012- 13 in the case of M/s. Societe Generale Global Solution Global Centre Pvt. Ltd., order dated 22.02.2019. In the aforesaid case, the assessee was a company engaged in the business of providing ITeS to its AE and the comparables chosen in the case of the assessee in this appeal were also chosen as comparable in the case of the aforesaid assessee. On the comparability of Infosys BPO Ltd., and TCS e-Serve Ltd., the Hon'ble Tribunal held as follows:

"13. On the segmentation of exclusion of Infosys BPO Ltd., the learned AR submitted that the turnover of said company is Rs.1316.75 crores and functionally not comparable to the assessee-company and has brand profits and owns significant intangibles to the extent of 7.55% and erroneous margin computation. The learned AR supported his argument of exclusion on the brand profit segment that the company is functionally not comparable as it owns brand intangibles and incurred huge advertisement expenditure of Rs.5.54 IT(TP)A No.308/Bang/2017 crores and marketing expenses of Rs.1.54 crores for brand building and referred to pages 930 and 931 of the paper-book. Similarly, peculiar

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Page 37 of 42 economic circumstances being acquisition of 100% stake in Portland Group during the year and the forex is treated as non-operating and referred to page 932 of the paper-book and the turnover higher Rs.1316.75 crores which is outside 10 times range. Learned AR emphasized that Infosys BPO was excluded by the Tribunal considering the brand value and extraordinary event during the year and referred to paras.45 & 46 of the order of Tribunal in the case of CGI Information Systems & Management Consultants (P) Ltd. (supra) which reads as under: 45. We have considered the rival submissions. In the case of Baxter (I) (P.) Ltd., (supra) the Delhi ITAT Bench considered comparability of the aforesaid three companies with a company engaged in providing ITBS such as the Assessee. The functional profile of the Assessee and the Assessee in the case of Baxter (I) (P.) Ltd. (supra) are identical inasmuch as 7 out of the 10 companies chosen by the TPO in the case of the Assessee were chosen as comparable in the case of Baxter (I) (P.) Ltd. (supra). The Tribunal held on the comparability of the three companies Infosys BPO Ltd., TCS E-service Ltd. and Excel Infoway Ltd., as follows: (i) In paragraph 23 of its order the Tribunal held that Infosys BPO Ltd., is not comparable with a company providing ITES because of brand value and extraordinary events in the previous year relevant to AY 2012-13 viz., acquisition of an Australia based company which had effect on its profits. (ii) In paragraphs 24 & 25 of its order the Tribunal held Excel Infoway Ltd., as not comparable because of consistent diminishing revenue. The figures of diminution revenue are given in paragraph 24 of its order. (iii) In paragraphs 21 & 22 of its order the Tribunal held that Excel Infoway Ltd., was liable to be excluded because it was also engaged in the business of software testing, Verification and validation of software at the time of implementation and data centre management activities. 46. Respectfully, following the decision of the Tribunal we hold that the aforesaid 3 companies be excluded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of comparison with the profit margins." 14. The learned AR supported his argument with the decision of the Delhi Tribunal in the case of Baxter India Pvt Ltd. vs. ACIT (85 taxmann.com 285) para.16 which reads as under: IT(TP)A No.308/Bang/2017 "16. Coming to Infosys BPO Ltd. he submitted that this company also should be rejected from the list of comparables. He submitted that the TPO rejected the contention of the assessee stating that the company is engaged in ITES and hence functionally comparable. The TPO further mentioned that the Annual Report does not mention anything in regard to brand deriving its profitability. According to the TPO, the brand in service industry may derive revenue but does not affect the profitability. Ld. counsel for the assessee submitted that Infosys BPO Ltd. is functionally not comparable since the services are in the niche areas. He submitted that this company fails the TPO's own filter of rejecting companies with peculiar circumstances, since this company has acquired the Australian based company M/s. Portland Group Pty Ltd. during the financial year 2011-12. Further, the turnover of this company is more than 111 times than that of the assessee company and it has a presence of brand. Referring to the decision of the Bangalore Bench of the Tribunal in the case of Swiss Re Global Business Solutions India Pvt. Ltd. (supra) for assessment year 2012-13, he submitted that this company was examined by the Tribunal and the Tribunal directed the Assessing Officer/TPO to exclude Infosys BPO Ltd. on account of high turnover. Referring to the decision of Delhi Bench of the Tribunal in the case of Actis Global Services Pvt. Ltd. (supra), he submitted that Infosys BPO Ltd. was directed to be excluded from the list of comparables on the ground of huge turnover. Further, it was also held that Infosys BPO Ltd. cannot be considered as comparable to a captive service provider. Similar view has also been taken by the Mumbai

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Page 38 of 42 Bench of the Tribunal in the case of Maersk Global Service Centers (India) (P.) Ltd. v. ITO [IT Appeal No. 1082 (Mum.) of 2015, dated 29- 7-2016] for assessment year 2010-11. This company was directed to be excluded on the ground that this belongs to Infosys Group thereby carries the goodwill and brand value of the group and it has got high turnover, apart from being functionally different from that company. He accordingly requested that Infosys BPO Ltd. should be rejected." We found the submissions of the assessee are supported with the judicial decisions and are applicable to the assessee- company for excluding Infosys BPO Ltd., from the list of comparables selected. Accordingly, we direct the TPO/AO to exclude company Infosys BPO Ltd., for determination of ALP.

"14. So far as the TCS e-Serve Ltd. is concerned, he submitted that the TPO rejected the contention of the assessee stating that the company is engaged in ITES and high turnover does not have any correlation with the profitability. He submitted that this company was rejected as a comparable in assessee's own case for assessment year 2011-12 on the ground of absence of segmental information and considerable brand value. He submitted that the TCS e-Serve Ltd. is functionally different. The company is engaged in ITES and software development services. Further, the segmental information between ITES and software development services are not available. The company has presence of brand and the services are provided pre-dominantly to Citi Group company. So far as the employee base is concerned, TCS e-Serve Ltd. has more than 296 times of that of the assessee's employee base. The turnover is greater than 133 times of the assessee. Incomparable size of operations, abnormal profitability trend and super normal profits are the other grounds for rejection of TCS e-Serve Ltd. as a comparable. He submitted that this company was examined by the Delhi Bench of the Tribunal in assessee's own case in ITA No. 345/Del/2016 and company was excluded from the list of comparables while computing the average margin of comparables. 14.1 Referring to the decision of the Bangalore Bench of the Tribunal in the case of Swiss Re Global Business Solutions India (P.) Ltd. v. Dy. CIT [IT (TP) Appeal No. 2315 (Bang.) of 2016, dated 13-4-2017] for the assessment year 2012-13, he submitted that the Tribunal had directed the Assessing Officer/TPO to exclude TCS e-Serve Ltd. from the list of comparables on account of high turnover."

IT(TP)A No.308/Bang/2017

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Page 39 of 42 11. We have considered the rival submissions and are of the view that exclusion of Infosys BPO was on the basis that the said company has huge brand value and had extraordinary events of acquisition during the previous year relevant to Assessment Year 2013-14 which had an effect on this profits. Therefore, the exclusion of this company has nothing to do with the company rendering high end services. As far as the comparability of the company being TCS e-Serve is concerned, this company was also excluded on the basis that it was engaged in software testing, verification and validation of software and also on the basis that it had huge turnover and was engaged in providing KPO services. We are, therefore, of the view that based on the precedents cited, these two companies are to be excluded from the list of comparable companies. We hold and direct accordingly.

31.1. Respectfully following the judgment, we direct the TPO/AO to exclude this company as comparable.

BNR Udyog Ltd., (Seg) (Medical Transcription)

Informed Technologies Pvt. Ltd.,

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Page 40 of 42 services and the financial statements has also been provided and it has been incorporated in his written synopsis. He has also relied on the decision of the coordinate bench of this Tribunal in the case of FNP India Pvt. Ltd., in IT(TP)A No.195/Bang/2016 & 459/Bang/2017.on perusal of this company. Considering the prayer of the assessee, we direct we direct AO/TPO to consider this as comparable if it passes necessary filters applied by the TPO in the original proceedings. and if the AO/TPO finds that it is a good comparable for the assessee company then it may be considered as good comparable.

Ground No.26

Sd/- Sd/- (N.V. Vasudevan) (Laxmi Prasad Sahu) Vice President Accountant Member

Bangalore, Dated 26th August, 2022. Vms

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Page 41 of 42 Copy to:

Asst. Registrar, ITAT, Bangalore.

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Page 42 of 42 1. Date of Dictation ………………………………………

Date on which the approved draft comes to Sr. P. S 3. .…………………………….