M/S MAXIM INDIA INTERGRATED CIRCUIT DESIGN PVT LTD ,BANGALORE vs. THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-4(1)(2), BANGALORE

PER B.R. BASKARAN, ACCOUNTANT MEMBER:

The assessee has filed this appeal challenging the assessment order passed by the assessing officer for the assessment year 2013- 14 u/s 143(3) r.w.s. 144C of the Income-tax Act,1961 ['the Act' for short] in pursuance of directions issued by Ld Dispute Resolution Panel (DRP).

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Page 2 of 29 (a) Disallowance of additional depreciation (Ground no.2) (b) Disallowance made u/s 40(a)(i) of the Act (Ground no.3) (c) Transfer pricing adjustment made (Ground no.4 to 15) (d) Disallowance of MAT credit (Ground no.16) (e) Charging of interest u/s 234C of the Act (Ground no.17)

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Page 3 of 29 reimbursements receivable from AE and reimbursements payable to AE.

Operating Working Sl.No. Name of the company Margin Capital on Cost adjusted Margin 1 CG-VAK Software & Exports Limited 20.54% 19.32% (Segment) 2 ICRA Techno Analytics Ltd. 17.10% 12.42% 3 Larsen & Toubro Infotech Ltd. 26.06% 24.74% 4 Mindtree Ltd. (seg) 18.19% 16.73% 5 Persistent Systems Ltd. 28.27% 26.09% 6 R.S. Software (India) Ltd. 17.41% 17.69% 7 Tech Mahindra Ltd. (Segmental) 18.72% 17.39% Arithmetic Mean 20.90% 19.20%

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Page 4 of 29 The average margin of comparable companies worked out to 20.90%. The TPO granted working capital adjustment of 1.70% and accordingly arrived at adjusted margin of 19.20%. Accordingly, he made transfer pricing adjustment of Rs.2,40,04,279/-. Accordingly, the AO passed the draft assessment order by making addition of transfer pricing adjustment referred above.

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Page 5 of 29 (c) Persistent systems Ltd - 996.75 crores (d) Tech Mahindra Ltd (seg.) - 5595.70 crores He submitted that the turnover of the assessee company during the year was Rs.40.28 crores and hence it falls under the category of companies having turnover in the range of One crore to 200 crores. However the turnover of above said companies is more than 200 crores and hence they cannot be considered as good comparable companies. In support of this proposition, the Ld A.R placed his reliance on the decision rendered by co-ordinate bench in the case of Tavant Technologies India P Ltd (IT(TP)A No.1700/Bang/2017 dated 21-08-2020).

“14. As far as ground No.6.5 is concerned, the question boils down on application of turnover filter in choosing comparable companies. As far as excluding the companies on the basis of turnover is concerned, the issue has been settled in several decisions of the Tribunal and has been elaborately discussed by this Tribunal in the case of Autodesk India Pvt. Ltd. v. DCIT in IT(TP)A No.540 & 541/Bang/2013, order dated 06.07.2018. The Tribunal in this decision after review of entire case laws on the subject, considered the question, whether companies having

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Page 6 of 29 turnover more than 200 crores upto 500 crores has to be regarded as one category and those companies cannot be regarded as comparables with companies having turnover of less than 200 crores, the Tribunal held as follows:-

"17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt. Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee.

17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt. Ltd. (supra) are to be regarded as per-incurium as these decisions ignore a binding co- ordinate bench decision. In this

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Page 7 of 29 regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chris capital Investment (supra). We have already held that the decision rendered in the case of Chris capital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra)."

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Page 8 of 29 expenditure. The Ld A.R submitted that the co-ordinate bench has held this expenditure as operational in nature in the case of Brocade Communications Systems (P) Ltd vs. DCIT (2020)(117 taxmann.com 439)(Bang.). On the contrary, the Ld D.R submitted that the provision for bad and doubtful debts is not an ascertained liability and hence it cannot be considered to be operational in nature. He placed his reliance on the decision rendered by Mumbai bench of Tribunal in the case of Telcordia Technologies India P Ltd (22 taxmann.com 96/137 ITO 1) and Thyssen Krupp Industries Pvt Ltd (2013)(33 taxmann.com 107).

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Page 9 of 29 In the case of Rolls-Royce India (P) Ltd (supra), the nature of “Provision for doubtful debts was discussed as under:- “51. As regards provision for doubtful debts, ld. counsel submitted that provision for doubtful debts are a part of the operating activities of a business. The accounting standards issued by the ICAI require that accounting policies must be governed by the principles of "prudence". Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only the basic estimate in the light of available information. Para 6 of Accounting Standard-l defines accrual as the assumption that revenues and costs are accrued, i.e., recognized as they are earned or incurred and recorded in the financial statements of the period to which they relate. 52. Thus, going with the abovementioned facts and statutory provisions, when the making of provisions is very much in the interest of business to show the true and fair view and statutorily required, it cannot be said that such provisions are of non-operating nature. Such provisions are made to comply with the requirements of statute. 53. The learned TPO treated provision for doubtful debts as non-operating referring to the Safe Harbour Rules notified by CBDT, which are not applicable for the year under consideration as mentioned above. 54. Ld. CIT(DR) relied on the order of TPO. 55. As regards the treatment of provision of doubtful debts also, we find that the reasoning given by ld. TPO cannot be accepted because he has primarily relied on safe harbor rule for treating this as non-operating expenditure. We find considerable force in the submission of ld. counsel for the assessee, considered earlier, that provision for doubtful debts is a provision which is to be made as a part of the operating activities of business governed by the principles of prudence. We, accordingly, direct that this provision be treated as part of operating expenditure and treatment be made accordingly, because, in any view of the matter, the safe harbor rule is not applicable for the current year under consideration. In the result, this ground is allowed.” 15. Before us, the Ld D.R placed his reliance on the decision rendered by Mumbai bench of Tribunal in the case of Thyssen Krupp Industries Ltd (supra). We notice that the assessee has claimed that the Provision for doubtful debts as non-operating in nature, which was not accepted by the TPO. The Tribunal accepted the submission of the assessee and accordingly it has held that it is a non-operating in nature. Thus, we notice that the above said

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Page 10 of 29 decision has been rendered by the Mumbai bench of Tribunal in a different context. In the case of Telcordia Technologies India P Ltd, the Tribunal has made following observations in respect of Provision for doubtful debts, while considering the company named M/s R Systems International Ltd:-

“While working out the operating profit, only items of receipts and expenditure, which have direct relation for determining the profit has to be taken into account. Operating profit has to be seen in a comparable transaction under comparable circumstances. The profit level indicators are derived from uncontrolled party engaged in similar business activity under similar circumstances which is the measure of arm's length result. If the assessee's business transactions do not have accretion of doubtful debts and doubtful advances, such an adjustment has to be made in the comparability analysis of the comparable party to determine the arms length price. Thus, both these expenses have been rightly excluded by the TPO to work out the operating profit of the comparable party and accordingly the operating profit ratio of the said entity has been rightly taken by the TPO.”

Thus, we notice that the above said decision was also rendered in a different context. However, there should not be any dispute that if the provision for doubtful debts is taken as operating expenses in the hands of the assessee, then the said expenditure has to be taken so in the case of comparable companies also.

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Page 11 of 29 However, the Ld DRP directed the TPO to disallow the working capital adjustment allowed by him, mainly on the reasoning that the average working capital will not show actual working capital employed during the year.

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Page 12 of 29 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely ;— (a) to (b)** ** ** (e) transactional net margin method, by which,— (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction); (f) ** ** ** (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:-—

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Page 13 of 29 (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction]if— (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 11. A reading of Rule 10B(l)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. 12. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council

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Page 14 of 29 of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: ♦ None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or ♦ Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 13. In Paragraphs 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment has been explained as follows: "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where

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Page 15 of 29 the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: ♦ A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) ♦ This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts to suppliers." 14. Examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures, (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because

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Page 16 of 29 that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT (A) also placed reliance on a decision of Chennai ITAT in of Mobis India Ltd. v. Dy. CIT [2013] the case 38 taxmann.com 231/[2014] 61 SOT 40. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT (A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO v. E Value Serve.com [2016] 75 taxmann.com 195 (Delhi - Trib.). has held that

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Page 17 of 29 insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT (A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 & 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT (A). We may also further add that in terms of Rule 10B(1)(e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT (A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT (A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose

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Page 18 of 29 of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows: "(3) An uncontrolled transaction shall be comparable to an international transaction if— (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly.”

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Page 19 of 29 22. We shall now take up the corporate grounds urged by the assessee. In ground no.2, the assessee is contesting denial of additional depreciation on computers amounting to Rs.12,47,351/- claimed u/s 32(1)(iia) of the Act.

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Page 20 of 29 the Act in addition to the words “articles or things” whenever benefit was intended to be extended to such business also. In addition to above the proviso to the section requires that the plant or machinery should not be installed in any office premises or any residential accommodation. This further strengthens the interpretation of this section that it is not meant for those in the business of computer software as assessee is operating from an office premises and not from a factory, which is meant for production or manufacture of article or thing. So the objection of the assessee is not accepted.”

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Page 21 of 29 or plant installed upto 31.3.1990 in an industrial undertaking for the purpose of construction, manufacture or production of any article or thing not being an article or thing specified in the list in Eleventh Schedule. In that context, a question arose as to whether computers installed for the purpose of data processing would be eligible for Investment allowance or not. The Ahmedabad bench of Tribunal has held in the case of Startronics & Enterprises (P) Ltd (1995)(82 Taxman 87) that data processing and print-out was production or an article or thing as contemplated u/s 32A(2) of the Act. Accordingly it was held by the Tribunal that the assessee would be eligible for investment allowance in respect of computers installed for such purposes. The above said decision of the Tribunal was challenged by the revenue by filing appeal before the Hon'ble High Court of Gujarat. The Hon'ble High Court held in the very same case reported in (2007)(165 Taxman 153)(Guj) that the assessee company engaged in the business of data processing, system designing and software development and supply would be eligible for investment allowance in respect of computers installed in its office premises. In the very same decision, the Hon'ble Gujarat High Court held that the computers used for data processing and software development purposes is eligible for additional depreciation u/s 32(1)(iia) of the Act, as per the provisions then existing. The relevant discussions made and decision rendered by Hon'ble Gujarat High Court are extracted below:-

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Page 22 of 29 office premises or in the residential accommodation, then, no deduction shall be allowed under Clause (iia) of Section 32(1). Section 32(1)(iia), with its proviso, for the purposes of this case, would read as under: 32. (1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of Section 34, be allowed- (i) xxxxxx (ii) xxxxxx (iia) in the case of any new machinery or plant (other than ships and aircraft) which has been installed after the 31st day of March, 1980, but before the 1st day of April, 1985, a further sum equal to one-half of the amount admissible under Clause (ii) (exclusive of extra allowance for double or multiple shift working of the machinery or plant and the extra allowance in respect of machinery or plant installed in any premises used as a hotel) in respect of the previous year in which such machinery or plant is installed or, if the machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year: Provided that no deduction shall be allowed under this clause in respect of- (a) any machinery or plant installed in any office premises or any residential accommodation; x x x x x x x

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Page 23 of 29 7. It is submitted that even if the computers and data processing machines are taken to be plant and machinery and are entitled to investment allowance, because of their location in the office, additional depreciation would not be allowable. Thrust of the argument is on the words "office premises". 8. The submission is that the computers and the data processing machines are always kept in the office and in this case, when the computers and the data processing machines are used in the office, then, the additional depreciation would not be allowable. 9. It is to be noted that the words "office premises" have not been defined in the IT Act. The word "office" would partake its character with the activities carried on in the said premises. In a given case, a doctor's clinic would be his office, but, would also be his clinic and if he installs a computer or some machine for the purposes of pathology, then, his office would be taken to be an industrial premises for the purposes of depreciation and investment allowance. In a given case, a computer kept in the office of a manager for his personal use or for some other purpose, then, such computer would not be entitled to investment allowance and/or additional depreciation. In the present case, the words "office premises" though would be covering office but, industrial premises would not come within office premises if the said premises are used for data processing. In the present case, undisputedly, the office premises are used as industrial premises for production of the data processors. The submission of the learned Counsel is based on a narrow interpretation of the words "office premises", which we are unable to concede. 10. In view of the above referred discussion, question No. 1 deserves to be answered against the interest of the Revenue. Consequently, question Nos. 2 and 3 will also

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Page 24 of 29 have to be answered against the interest of the Revenue. The reference stands disposed of. No costs.” 28. We have heard rival contentions and perused the record. The additional depreciation is allowable as per the provisions of sec.32(1)(iia) of the Act and it reads as under:-

(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing or in the business of generation or generation and distribution of power, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii) : Provided that no deduction shall be allowed in respect of— (A) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or (B) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house; or (C) any office appliances or road transport vehicles; or (D) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and gains of business or profession" of any one previous year;

A careful perusal of the above said provision would show that the additional depreciation prescribed u/s 32(1)(iia) is admissible to an assessee engaged in the business of manufacture or production of any article or thing etc. Hence, in order to claim this additional depreciation, an assessee should first satisfy the condition that he is engaged in the business of manufacture or production of any article or thing.

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Page 25 of 29 (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure.

The expression “manufacture or production of an article or thing” was examined by Hon'ble Supreme Court in the context of sec.80HH of the Act in the case of N C Budharaj & Co.(1993)(204 ITR 412) and the relevant discussions made in the above said decision are extracted below:-

The word 'production' has a wider connotation than the word 'manufacture'. While every manufacture can be characterised as production, every production need not amount to manufacture. The meaning of the expression 'manufacture' was considered by this Court in Dy. CST v. Pio Food Packers [1980] 46 STC 63 among other decisions. In the said decision, the test evolved for determining whether manufacture can be said to have taken place is, whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognised in the trade as a new and distinct commodity. Pathak, J., as he then was, stated the test in the following words : ". . . Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place. . . ." (p. 65) The word 'production' or 'produce' when used in juxta-position with the word 'manufacture' takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods. The next word to be considered is 'articles', occurring in the said clause. What does it mean? The word is not defined in the Act or the Rules. It must, therefore, be understood in its normal connotation - the sense in which it is understood in commercial world. It is equally well to keep in mind the context since a word takes its colour from the context. The word 'articles' is preceded by words 'it has begun or begins to manufacture or produce'. Can we say that the word 'articles' in the said clause comprehends and takes within its

IT(TP)A No.1573/Bang/2017 M/s. Maxim India Integrated Circuit Design Pvt. Ltd., Bengaluru

Page 26 of 29 ambit a dam - a bridge, a building, a road, a canal and so on? We find it difficult to say so. 30. The assessee herein is engaged in software development services. The question here is whether the said activity will fall under the definition of “manufacture or production” given above? The Ld DRP has expressed the view that the assessee is engaged in the business of development of computer software and it cannot be equated with the manufacture or production of article or thing. Ld DRP further observed that the words “computer software” have been used in different sections of the Act in addition to the words “articles or things”, whenever benefit was intended to be extended to such business also. He submitted that the legislature has not intended to include development of software under the category of manufacture or production of article or thing. We also notice that sec.10A uses the expression ‘profits and gains are derived by an undertaking from the export of articles or things or computer software”. Sec. 10AA uses the expression “profits derived from the export of articles or things or services (including computer software). Similar expression has been used in sec.10B also. The newly inserted provision, viz., sec.115BAB allows concessional rate of tax to a domestic company engaged in the manufacture or production of an article or thing. This section specifically excludes “software development” activity from its ambit.

IT(TP)A No.1573/Bang/2017 M/s. Maxim India Integrated Circuit Design Pvt. Ltd., Bengaluru

Page 27 of 29 manufacture or production of any article or thing… The Tribunal and the Hon'ble Gujarat High Court accepted the contentions of the assessee that data processing and print out would be a “thing” produced by the assessee. In that context, it was further held that the assessee would be eligible to claim additional depreciation as per the provisions then existing.

IT(TP)A No.1573/Bang/2017 M/s. Maxim India Integrated Circuit Design Pvt. Ltd., Bengaluru

Page 28 of 29 engaged in the business of manufacture or production of an article or thing. We have agreed with the view expressed by Ld DRP that the development of computer software would not fall under that category, for the reasons discussed above. Accordingly, we hold that the assessee would not be entitled to Additional Depreciation prescribed u/s 32(1)(iia) of the Act. Accordingly, we confirm the order passed by Ld DRP.

IT(TP)A No.1573/Bang/2017 M/s. Maxim India Integrated Circuit Design Pvt. Ltd., Bengaluru

Page 29 of 29 by us earlier, the AO has not made addition of above said payments in the final assessment order. Hence this addition does not arise out of the impugned final assessment order. Accordingly, we decline to admit this ground.

Order pronounced in the open court on 2nd Nov, 2020

Sd/- Sd/- (Beena Pillai) (B.R. Baskaran) Judicial Member Accountant Member

Bangalore, Dated 2nd Nov, 2020. VG/SPS Copy to:

Asst. Registrar, ITAT, Bangalore