DCIT, BANGALORE vs. M/S TIMKEN ENGINEERING & RESEARCH INDIA PVT. LTD.,, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER AND SHRI LALIET KUMAR, JUDICIAL MEMBER

Assessment Appeal No. Appellant Respondent Year IT(TP)A No. M/s. Timken Engineering & 1339/Bang/ Research India Pvt. Ltd., 2006-07 2010 Sy.No. (S) 39,41(P)&42 (P), The Deputy Commissioner of Electronic City, Phase II, Income Tax, Doddathogur Village, Circle 12 (4), IT(TP)A No. Begur Hobli Taluk, 604/Bang/2 2007-08 Bangalore. Bangalore South District, 012 Bangalore – 560 100. PAN: AABCT2265L IT(TP)A No. M/s. Timken Engineering & 686/Bang/2 2007-08 Research India Pvt. Ltd., 012 Sy.No. (S)39, 41(P) & 42 (P), The Deputy Commissioner Electronic City, Phase II, of Income Tax, Doddathogur Village, IT(TP)A No. Circle 12 (4), Begur Hobli Taluk, Bangalore. 469/Bang/2 2008-09 Bangalore South District, 013 Bangalore – 560 100. PAN: AABCT2265L M/s. Timken Engineering & Research India Private Limited, Sy.No. (S) 39, 41(P) & 42 The Deputy Commissioner of IT(TP)A No. (P), Income Tax, 335/Bang/2 Electronic City, Phase II, 2008-09 Circle 12 (4), 013 Doddathogur Village, Bangalore. Begur Hobli Taluk, Bangalore South District, Bangalore – 560 100. PAN: AABCT2265L Assessee by : Shri Aliasger Rampurawala, CA Revenue by : Shri B.K. Panda, CIT (DR) Date of hearing : 06.05.2019 Date of Pronouncement : 10.05.2019

O R D E R Per Bench Out of this bench of five appeals, one appeal for Assessment Year 2006-07 is by the assessee and there are two cross appeals for each of two Assessment Years 2007-08 and 2008-09 filed by the assessee and

IT(TP)A Nos. 1339/Bang/2010, 604 & 686/Bang/2012, 335 & 469/Bang/2013 Page 2 of 22 revenue. In Assessment Year 2006-07, the appeal of the assessee is directed against the assessment order dated 15.09.2010 passed by the AO u/s. 143(3) r.w.s. 144C of the IT Act as per the directions of the DRP. For Assessment Year 2007-08, the appeal of the assessee and revenue are directed against the order of ld. CIT(A)-IV, Bangalore dated 12.03.2012 and for Assessment Year 2008-09, the cross appeals are directed against the order of ld. CIT(A)-IV, Bangalore dated 10.01.2013. All these appeals were heard together and are being disposed of by way of this common order for the sake of convenience. 2. First we take up the appeal of the assessee for Assessment Year 2006-07. As per the revised and additional grounds of appeal filed by the assessee, there are 24 grounds of appeal including additional ground no. 24. The same read as under. (In conformity with Rule 8 of Income-tax Appellate Tribunal Rules. 1963) 1. That the learned Assessing Officer ('AO') and the learned Dispute Resolution Panel('Panel') erred in upholding the rejection of Transfer Pricing (TP) documentation bythe learned Additional Director of Income-tax (Transfer Pricing Officer - II) ('TPO')and thereby erred in not appreciating that the Appellant had prepared the TPdocumentation bona fide and in good faith and conducted the comparable analysisbased on the detailed Functional, Asset and Risk analysis performed with duediligence and the data available at the time of conducting the comparability analysis.[corresponding to ground 1] 2. That the learned AO and the learned Panel erred both in facts and law in confirmingthe action of the learned TPO, thereby enhancing the transfer price by INR60,464,651(consisting of INR 37,514,814 in respect of Software DevelopmentServices segment, INR 16,138,576 in respect of IT enabled Servicessegment, andINR 6,811,261 in respect of Contract R&D Services segment) and holding thatthe international transactions of the Appellant with its associated enterprises ('AEs')do not satisfy the arm's length principle envisaged under the Act. [correspondingto ground 2] 3. That the learned AO and the learned Panel erred both in facts and law in notconsidering the submission and evidences put forward by the Appellant during thecourse of assessment proceedings before the learned TPO and the learned Panelwith regards to the wrong

IT(TP)A Nos. 1339/Bang/2010, 604 & 686/Bang/2012, 335 & 469/Bang/2013 Page 3 of 22 computation of margins of below mentioned comparablecompanies selected by the learned TPO, and in selectively agreeing to amend themargins of one of the comparable companies viz. Megasoft Limited.[corresponding to ground2.1] S.No. IT Services segment R&D Services segment Artefact Software & Geometric Software 1. Finance Limited (Seg) Limited(Seg) Accel Transmatics Dolphin Medical 2. Limited (Seg) Services Limited Neeman Medical Igate Global Limited 3. International (Asia) (Seg) Limited 4. That the learned AO and the learned Panel erred both in facts and law in upholdingthe act of the learned TPO of collecting selective information of the companies byexercising power granted to him under section 133(6) of the Act, that was notavailable to the Appellant in the public domain and relying on the same forcomparability purposes in denial of natural justice to be observed in the assessmentproceedings. [corresponding to ground 2.2] 5. That the learned AO and the learned Panel erred both in facts and law indisregarding application of multiple year/ prior year data as used by the Appellant inthe TP documentation and holding that current year (i.e. Financial Year 2005-06)data for comparable companies should be used despite the fact that the same wasnot necessarily available to the Appellant at the time of preparing the TPdocumentation, and in doing so have grossly erred in interpreting the requirementof 'contemporaneous' data in the Rules to necessarily imply current year/ singleyear (i.e. FY 2005-06) data and expecting the Appellant to perform act ofimpossibility in terms of being able to use data subsequently available (i.e. duringaudit proceedings). [corresponding to ground 2.3, 2.3.1 & 2.3.2] 6. That the learned AO and the learned Panel erred both in facts and law in upholdingthe rejection of comparability analysis of the Appellant in the TP documentation andconfirming the comparability analysis as adopted by the learned TPO in the TPOrder by applying additional filters (i.e. RPT filter of 25% instead of 15% asapplied by the Appellant) and introduction of the below mentioned companiesas comparables that are either functionally dissimilar or have differing asset base and risk profile, and also 'rejection of other potentially comparable companies. [corresponding to ground 3] Companies included in the final set ought to be rejected

IT(TP)A Nos. 1339/Bang/2010, 604 & 686/Bang/2012, 335 & 469/Bang/2013 Page 4 of 22 IT Enabled Services R&DServices S.No. IT Services segment segment segment Datamatics Geologging 1. Aztec Software Financial Industries Limited Services Limited Limited(Seg) Geometric Vishal Information Vimta Labs 2. SoftwareLimited Technologies Limited (Seg) Limited 3. Infosys Limited Goldstone Infratech - Limited(Seg) Flextronics 4. KALS Info Systems Software - Limited Systems Limited(Seg) 5. Tata Elxi - - Limited(Seg) 6. Accel Transmatics - - Limited(Seg) 7. Flextronics Software - - Systems Limited(Seg) 8. Megasoft Limited - - Comparable companies excluded from the final set ought to be accepted Nittany 1. Goldstone Tech ADS OutsourcingServices Limited DiagnosticsLimited Pvt. Limited Agrima 2. Computech Intl Quantum e- Consultants Limited(Seg) ServicesLimited Intl Limited Central 3. ICRA Indus Networks MinePlanning & TechnoAnalytics(Seg) Limited Design Institute Limited Companies included in the final set failing the RPTfilter of more than15% Aztec Software 1. Limited - - - RPT 17.79% Geometric SoftwareLimited 2. - - (Seg) - RPT 19.34% Accel Transmatics 3. Limited(Seg) - - - RPT 37.45% 7. That the learned AO and the learned Panel erred in ignoring the limited risk natureof the services provided by the Appellant as detailed

IT(TP)A Nos. 1339/Bang/2010, 604 & 686/Bang/2012, 335 & 469/Bang/2013 Page 5 of 22 in the TP documentation and inupholding the conclusion of the learned TPO that no adjustment on account of riskdifferential is required while determining the Arm's Length Price of theinternational transactions of the Appellant, but for selectively providing anadjustment towards differences in the working capital position between theAppellant and the entrepreneurial comparable companies only in the softwaredevelopment and IT enabled services segment and not in Contract R&DServices segment. [corresponding to ground 4] 8. Concluding that the amended proviso to section 92C(2) of the Income-tax Act, 1962('the Act') under Finance (No 2) Act, 2009, would be applicable for Assessment Year2006-07 and in not appreciating that even if the arms' length price falls outside the5% tolerance band, the adjustment would have to be reckoned after allowing thebenefit of +/ - 5% variation as provided in proviso to Section 92C(2) of the Act, whiledetermining the arms' length price. [corresponding to ground 5] 9. That the Learned Assessing Officer erred in not allowing full deduction claimedunder section 10B of the Act for the entire profit of the undertaking amounting toINR15,114,000. [corresponding to ground 6] 10. That the Learned Assessing Officer erred .in treating telecommunication expenses ofINR 12,866,261; freight charges of INR 824,428 and insurance charges of INR2,470,891 as being expenditure attributable to delivery of computer software outsideIndia while computing deduction under section 10B of the Act without anyjustification, while ignoring the appellant's submissions. [corresponding toground 7] 11. That the Learned Assessing Officer erred in treating travel and conveyance of INR10,424,981; salaries of INR 9,135,780; telephone & telex, fax charges of INR5,098,102 as being expenditure incurred in foreign exchange attributable toproviding technical services outside India while computing deduction under section 10B of the Act without any justification, while ignoring the appellant's submissions.[corresponding to ground 8] 12. Without prejudice to the above, the Learned Assessing Officer erred in consideringincorrect figures relating to telecommunication charges and freight charges whilecomputing claim of deduction under section 10B of the Act. [corresponding toground 9] 13. Without prejudice to the above, the Learned Assessing Officer erred in consideringtelecommunication expenses to the extent of INR 5,098,102 twice while excludingthe same from export turnover while computing deduction under section 10B of theAct. [corresponding to

IT(TP)A Nos. 1339/Bang/2010, 604 & 686/Bang/2012, 335 & 469/Bang/2013 Page 6 of 22 ground 10] 14. Without prejudice to the above, the Learned Assessing Officer erred in reducing thealleged telecommunication expenses of INR 12,866,261; freight charges of INR824,428; insurance charges of INR 2,470,891; and expenditure incurred in foreigncurrency viz., travel and conveyance of INR 10,424,981; salaries of INR 9,135,780;telephone & telex, fax charges of INR 5,098,102 only from 'export turnover' and notfrom 'total turnover' while computing the deduction under section 10B of the Act.[corresponding to ground 11] 15. Without prejudice to the above, the Learned Assessing Officer should have followedjudicial discipline by respecting the decisions, on the issue of parity betweenadjustments to the numerator and denominator while computing the deductionunder section 10B of the Act, of the Special Bench of the Income-tax AppellateTribunal ('Tribunal'), Chennai in the case of Sak Soft Limited and of thejurisdictional Bangalore Tribunal in case of Tata Elxsi Limited and several cases,which were brought to his notice by the Appellant. [corresponding to ground 12] 16. That the Learned Assessing Officer erred in not following the order passed in theAppellant's own case by the Commissioner of Income-tax (Appeals) for theassessment year 2004-05, to the extent favourable to the Appellant, on the subjectof deduction of software expenses and adjustment to claim of deduction undersection 10B of the Act. [corresponding to ground 13] 17. That the Learned Assessing Officer erred in not applying the principles of section80HHE to section 10B of the Act and not considering, therefore, the judicialprecedents on the said matter. [corresponding to ground 14] 18. That the Learned Assessing Officer erred in denying the claim under section 37(1) ofthe Act for payments made towards purchase of software amounting to INR3,692,961 without considering the submissions made by the appellant, by treatingthe same as capital expenditure. [corresponding to ground 15] 19. That the Learned Assessing Officer erred in denying the claim under section 37(1) ofthe Act for advances written off amounting to INR 928,529 without considering thesubmissions made by the appellant. [corresponding to ground 16] 20. That the Learned Assessing Officer erred in denying the claim under section 37(1) ofthe Act for payments made towards purchase of bearing assembly amounting to INR1,129,313 by treating the same as capital expenditure. [corresponding to ground17]

IT(TP)A Nos. 1339/Bang/2010, 604 & 686/Bang/2012, 335 & 469/Bang/2013 Page 7 of 22

IT Enabled R&D S.No. IT Services segment Servicessegment Servicessegment Alphageo 1. Persistent Systems Maple eSolutions (India) Limited Limited Limited R Systems Allsec Technologies Engineers India 2. InternationalLimited Limited Limited(Seg) (Seg) Asit C Mehta Financial Services 3. Bodhtree Limited (Earlier IDC (India) ConsultingLimited known as Nucleus Limited Netsoft and GIS India Limited) Spanco 4. - - Limited(Seg) Apex Knowledge 5. - SolutionsPvt. - Limited R Systems 6. - InternationalLimited - (Seg) 3. As per letter dated 03.12.2018 submitted by the assessee and available on record, it is submitted by the assessee that assessee is withdrawing the

IT(TP)A Nos. 1339/Bang/2010, 604 & 686/Bang/2012, 335 & 469/Bang/2013 Page 8 of 22 grounds of appeal in respect of transfer pricing issue because transfer pricing issue has been resolved in MAP and assessee has accepted the MAP resolution. It is submitted in this letter that ground nos. 1 to 8 and 24 are being withdrawn. Accordingly, these grounds are rejected as withdrawn. 4. Now we have to decide ground nos. 9 to 23 only. 5. On the date of hearing, the ld. AR of assessee has submitted a chart containing the arguments in respect of these ground nos. 9 to 23 and in this chart also, it is submitted by ld. AR of assessee that the assessee has withdrawn ground nos. 1 to 8 and 24. Regarding ground nos. 9 to 17, it is submitted that the issue involved in these grounds is covered in favour of the assessee by the judgment of Hon'ble Karnataka High Court rendered in the case of CIT Vs. Tata Elxsi Ltd. as reported in 349 ITR 98 and also by the judgment of Hon’ble Apex Court rendered in the case of CIT vs. HCL Technologies Ltd. as reported in [2018] 404 ITR 719 (SC). In reply the ld. DR of revenue had nothing to say. 6. We have considered the submissions of ld. AR of assessee. We find that in these grounds, the issue raised by assessee is this that AO has erred in treating telecommunication expenses of Rs. 1,28,66,261/-, freight charges of Rs. 8,24,428/- and insurance charges of Rs. 24,70,891/- as being expenditure attributable to delivery of computer software outside India while computing deduction u/s. 10B of IT Act. However, the main grievance of the assessee as per ground no. 14 is this that the AO has reduced these expenses from export turnover only and not reduced the same from total turnover while computing deduction allowable to assessee u/s. 10B of IT Act. In course of hearing and in the chart, there is no argument on any other aspect. By now, this is settled position of law as per these two judgments cited before us being the judgment of Hon'ble Karnataka High Court rendered in the case of CIT Vs. Tata Elxsi Ltd. (supra) and the judgment of Hon’ble Apex Court rendered in the case of CIT vs. HCL Technologies Ltd. (supra) that total turnover is sum total of export turnover and domestic turnover and therefore, if an amount is reduced from export

IT(TP)A Nos. 1339/Bang/2010, 604 & 686/Bang/2012, 335 & 469/Bang/2013 Page 9 of 22 turnover then the total turnover also goes down by the same amount automatically. Respectfully following these two judgments, we direct the AO to decide the issue afresh regarding allowability of deduction to assessee u/s. 10B of IT Act by reducing the same expenses from total turnover also which has been reduced by AO from export turnover for the purpose of computing deduction allowable to assessee u/s. 10B of IT Act. These grounds are disposed of accordingly. 7. As per ground no. 18 raised, the issue in dispute is this that the AO is not justified in disallowing the claim towards purchase of software amounting to Rs. 36,92,961/- by treating the same as capital expenditure. As per the chart submitted before us, this is the submission of ld. AR of assessee that in assessee’s own case for Assessment Year 2004-05 in ITA No. 974/Bang/2008 and for Assessment Year 2005-06 in ITA No. 656/Bang/2011, this issue has been restored back to the file of AO to verify whether the computer software is capital or revenue in the light of the criteria laid down by the special bench of the tribunal in the case of Amway India Enterprises Vs. DCIT as reported in 111 ITD 112 (Del SB). In course of hearing, it was pointed out by the bench that after this decision of Special Bench of the Tribunal cited by ld. AR of assessee, there is judgment of Hon’ble Karnataka High Court rendered in the case of CIT vs. M/s Wipro Limited in ITA No.507 of 2002 dated 25.08.2010 and as per the same, similar issue was decided against the assessee. In reply, learned AR of the assessee had nothing to say. Learned DR of the revenue supported the order of CIT (A) and he placed reliance on the same judgment of Hon’ble Karnataka High Court pointed out by the bench as noted above. Respectfully following this judgment, this issue is decided against the assessee and this ground of the assessee is rejected. 8. Regarding ground no. 19 in respect of disallowance of Rs. 9,28,529/- for claim of advances written off, he submitted in the chart that this ground is not pressed and accordingly this ground is rejected as not pressed. 9. As per ground no. 20, this is the claim of the assessee that the AO erred in denying the claim u/s. 37(1) of the Act for payments made towards

IT(TP)A Nos. 1339/Bang/2010, 604 & 686/Bang/2012, 335 & 469/Bang/2013 Page 10 of 22 purchase of bearing assembly amounting to Rs. 11,29,313/- by treating the same as capital expenditure. In the chart submitted by ld. AR of assessee, it is submitted that Timken US sends samples of bearings for the purpose of testing to the assessee and the assessee does testing on the bearings and the purchase of bearing is in the nature of a consumable item required for the purpose of testing in the laboratory and the same does not provide any enduring benefit and hence, the same is revenue in nature. Reliance has been placed on the following judicial pronouncements. a) PCIT vs. Banco Aluminium Ltd (ITA No. 943 of 2017)(Guj) b) CIT vs. Aditya Ferro Alloys (P) Ltd (36 ITR 490 (Mad) c) CIT vs. ADI Artech Transducers (P) Ltd. (ITA Nos. 505 to 507 of 2013)(Guj) 10. In course of hearing, the bench wanted to know about the decision of DRP on this issue. The ld. AR of assessee submitted that the decision of DRP is contained on page no. 26 of the DRP directions. He submitted that the order of DRP is very cryptic without any reasoning. The ld. DR of revenue supported the orders of authorities below. 11. We have considered the rival submissions. First of all, we reproduce the relevant finding of DRP from page nos. 25 and 26 of the DRP directions. The same are as under. “Objection No. 3 - Capital Expenditure - Rs.13,78,603/- 1. The AO is not justified in proposing to treat the payment to the architect forobtaining stability certificate for the factory building as capital in nature and therebyproposing an addition to the total income. 2. Without prejudice to the above objection, the AO should have considered allowingdepreciation on the software expenditure alleged to be capital in nature. Regarding payment of architect's fees, the Counsels submitted that architect's certificate isrequired for layout plan of building. This is an annual requirement under the Factories Act.The Counsels have also produced certificates for earlier three years as proof of the same.Since this is an annual requirement, it should be allowed as a revenue expenditure. Regarding expenditure on purchase of ball bearing assembly Rs.13,23,603/-, the Counselssubmitted that the expenditure was disallowed without giving an assessee an opportunity ofbeing heard.

IT(TP)A Nos. 1339/Bang/2010, 604 & 686/Bang/2012, 335 & 469/Bang/2013 Page 11 of 22 The expenses relate to the following- Nature of expenses Amount (in Rs.) Purchase of ball bearings of Peer make and seal master make 1,98,087 for competitor analysis Purchase of oil drum, bearing 8,33,438 assembly,electro limit gauge Purchase of bearing cup 8,018 Purchase of bearing assembly 85,928 Purchase of tapered roller bearing, bearing assembly, 2,03,132 electrol imit gauge blocks and transducer conditioner sangamo In view of the facts brought to our notice, the expenditure of Rs.50,000/- paid towardsarchitect's fees is being directed to be allowed as a revenue expenditure. (ii) Regarding purchase of ball bearing assembly, Wehave examined the nature of items purchased for the so called ball bearing assembly, It is the opinion of the Panel is that the entire expenditure is in the nature of capitalexpenditure, The proposed disallowance by the AO stands approved. However, the AO is directed to allow depreciation on the same.” 12. From the above Paras reproduced from the order of DRP, it is seen that in respect of disallowance out of purchase of ball bearing assembly of Rs. 13,28,603/- this was the submission of assessee before DRP that the expenditure was disallowed without giving assessee an opportunity of being heard. As per the direction of DRP also, it is seen that the direction of DRP is very cryptic without any reasoning. Under these facts, we feel it proper to restore this matter back to the file of DRP for fresh decision by way of a speaking and reasoned order after providing adequate opportunity of being heard to both sides. This ground is allowed for statistical purposes. 13. In the remaining grounds, it is seen that ground nos. 21 and 22 are consequential grounds for which no separate adjudication is called for. Ground no. 23 is a general ground requiring no separate adjudication. 14. In the result, the appeal filed by the assessee for Assessment Year 2006-07 is partly allowed for statistical purposes in the terms indicated above.

IT(TP)A Nos. 1339/Bang/2010, 604 & 686/Bang/2012, 335 & 469/Bang/2013 Page 12 of 22 15. Now we take up the cross appeals for Assessment Year 2007-08. For this year also, the assessee has submitted letter dated 13.12.2018 in which it is stated that because of MAP resolution, the assessee has withdrawn the grounds of appeal in respect of transfer pricing issues and only the remaining grounds are to be decided. For this year also, the ld. AR of assessee has submitted a chart and in this chart also, it is submitted by ld. AR of assessee that ground nos. 1 to 4 and additional ground nos. 1 and 2 are being withdrawn because these grounds involve transfer pricing issues and regarding revenue’s appeal, it is submitted that ground nos. 4 to 11 in revenue’s appeal are regarding TP issue and since TP issue has attained finality as per MAP resolution, the TP grounds as per revenue’s appeal are also to be rejected. Accordingly these grounds are rejected. 16. Regarding ground nos. 5a & 5b, it is submitted by ld. AR of assessee that issue involved in this ground is regarding software expenses of Rs. 44,87,282/- by treating the same as capital expenditure and this ground may be decided on similar line as per ground no. 18 in Assessment Year 2006- 07. The ld. DR of revenue supported the orders of authorities below. As per Para no. 7 above, ground no. 18 raised by assessee in Assessment Year 2006-07 was rejected and hence, in the present year also, these grounds of assessee are rejected on similar line. 17. Regarding ground no. 6, it is submitted by ld. AR of assessee in the chart that this ground is regarding interest u/s. 234B and 234C and hence, this ground is consequential in nature and ground no. 7 of assessee’s appeal is not pressed and accordingly it is held that for ground no. 6, no separate adjudication is called for and ground no. 7 is rejected as not pressed. 18. Now we decide the grounds of appeal in revenue’s appeal for Assessment Year 2007-08. The grounds raised by the revenue in this year are as under. “1. The order of the learned CIT(A) is opposed to law and facts of the case. 2. On the facts and in the circumstances of the case the learned CIT(A) erred inholding that insurance amounting to Rs 17,45,086, telecommunicationexpenses amounting to Rs 22,78,339, freight expenses amounting to Rs1,85,38,887 and expenditure incurred in

IT(TP)A Nos. 1339/Bang/2010, 604 & 686/Bang/2012, 335 & 469/Bang/2013 Page 13 of 22 foreign currency towards salary of Rs1,11,46,836, telephone charges of Rs 99,33,16, and fax charges of Rs85,52,465 attributable to delivery of software has to be excluded from the totalturnover as well, for computation of deduction u/s 10A of the Act whereas suchexclusion is permitted to arrive at the export turnover only as per the Act andtotal turnover has not been defined in the section. 3. The CIT(A) ought to have appreciated that the decision of Hon'ble High Courtof Karnataka on the issue of computing deduction u/s 10A by excluding theabove expenses from export turnover as well, has not reached finality in viewof the pending SLP before the Hon'ble Supreme Court. 4. On the facts and in the circumstances of the case the learned CIT(A) erred inholding that the assessee is eligible for a standard deduction of 5% from theArm's Length price under the provisio to Section 92C(2) of the Act. 5. On the facts and in the circumstances of the case the learned CIT (A) erred inrejecting the companies M/s Oil Field Instrumentation India Ltd & M/s Celestial labs Ltd as com parables to R&D Service Segment of taxpayer. 6. On the facts and in the circumstances of the case the learned CIT(A) erred inholding that the TPO ought to have excluded comparables having any relatedparty transactions, not only those with more than 25% related partytransactions of sales. 7. The CIT(A) erred in holding that the size, turnover & brand of the company aredeciding factors for treating a company as a comparable, and accordinglyerred in excluding M/s Infosys technologies Ltd & M/s Wipro Ltd (Seg.) insoftware development segment and Infosys BPO Ltd and Wipro Ltd (seg.) inITES segment as comparables. 8. The Ld. CIT(A) erred in holding that profit on cost of more than 50%. of the comparable company(ies) is abnormal without giving reasons how functionsdischarged, assets deployed and risks assumed of such companies weredifferent from the appellant company. 9. On the facts and in the circumstances of the case the learned CIT(A) erred inholding that M/s Celestial labs Ltd, M/s Flextronics Software Systems Ltd andM/s Tata Elxsi Ltd in SWD segment and M/s Eclerx Services Ltd & M/sMoldtek technologies Ltd in ITES segments being functionally different, cannotbe taken as comparables. 10. For these and other grounds that may be urged at the time of hearing,it is prayed that the order of the CIT(A) in so far as it relates to the abovegrounds may be reversed and that of the Assessing Officer

IT(TP)A Nos. 1339/Bang/2010, 604 & 686/Bang/2012, 335 & 469/Bang/2013 Page 14 of 22 may be restored. 11. The appellant craves leave to add, alter, amend and / or delete any ofthe grounds mentioned above.” 19. Ground no. 1 is general. Regarding ground nos. 2 and 3, the ld. DR of revenue supported the assessment order whereas the ld. AR of assessee supported the order of CIT(A) and he submitted that this issue is now squarely covered in favour of the assessee by the judgment of Hon'ble Karnataka High Court rendered in the case of CIT Vs. Tata Elxsi Ltd. (supra) and the judgment of Hon’ble Apex Court rendered in the case of CIT vs. HCL Technologies Ltd. (supra). Respectfully following these two judgments, we decline to interfere in the order of CIT(A) on this issue. Accordingly, these grounds are rejected. The remaining grounds in the revenue’s appeal are regarding TP issue. Since the TP issue has attained finality as per MAP resolution, these grounds of appeal do not survive and hence, accordingly rejected. 20. In the result, the appeal of the assessee as well as well as the appeal of the revenue is dismissed. 21. Now we take up the grounds of appeal of the assessee and revenue for Assessment Year 2008-09. For this year also, the assessee has submitted a letter dated 13.12.2018 in which it is stated that the assessee is withdrawing all the grounds in respect of TP issues because the TP issue has been resolved as per MAP resolution and only the remaining grounds in respect of corporate tax issue should be decided by the Tribunal. The ld. AR of assessee submitted a chart for this year also at the time of hearing and in this chart also, it is submitted that ground nos. 1 to 4 and additional ground no. 1 are withdrawn in view of MAP resolution and in the same chart, it is submitted that all the grounds in the appeal of the revenue i.e. ground nos. 1 to 12 in revenue’s appeal are also regarding TP issue and because of MAP resolution, the revenue’s grounds on TP issue should also be rejected and accordingly we reject ground nos. 1 to 4 and additional ground no. 1 of assessee’s appeal and ground nos. 1 to 12 of revenue’s appeal in view of MAP resolution. As per ground no. 5 of assessee’s

IT(TP)A Nos. 1339/Bang/2010, 604 & 686/Bang/2012, 335 & 469/Bang/2013 Page 15 of 22 appeal, this is the grievance of the assessee that CIT(A) has erred in holding that expenditure towards Repairs and Maintenance charges amounting to Rs. 6,27,290/- was capital in nature without considering the submissions made by the assessee. In the chart submitted by ld. AR of assessee at the time of hearing, this is the contention raised that the expenditure in question was incurred on civil works and rain protection screen and it did not result in the addition to capital assets of the assessee and therefore, the same should be allowed as revenue deduction and not be treated as a capital expenditure. Reliance has been placed on following judicial pronouncements. a) Indian Ginning & Pressing Co. Ltd. Vs. CIT [2001] 252 ITR 577 (Guj) b) CIT Vs. Neyveli Lignite Corporation Ltd. (2016) 388 ITR 172 (Mad) c) CIT Vs. MAC Chares (India) Ltd. (2015) 233 Taxman 177 (Kar) 22. At the time of hearing, the bench wanted to see the details of expenditure incurred and in reply it was submitted by ld. AR of assessee that the details are available on page no. 912 of paper book for Assessment Year 2008-09. He pointed out that on 25.03.2008, an amount of Rs. 4,31,083/- was incurred on account of civil work related to HVAC pipeline and other civil works as per its specifications. The bench wanted to see corresponding bill and in reply, it was submitted that the bills are not readily available. He further submitted that an amount of Rs. 1,96,207/- was incurred on 26.03.2008 on account of supply and installation of rain protection screen at Cafeteria of 123.190 sq. mtrs. and it was submitted that the bill for this is also not readily available. It was submitted that if the bills are required then the matter may be restored back to the file of AO for fresh decision with suitable directions. The ld. DR of revenue supported the orders of authorities below. 23. We have considered the rival submissions. Regarding the judgment cited by ld. AR of assessee being the judgment of Hon'ble Karnataka High Court rendered in the case of CIT Vs. MAC Chares (India) Ltd. (supra), we find that in this case, para 9 of this judgment of High Court is relevant which is reproduced hereinbelow.

IT(TP)A Nos. 1339/Bang/2010, 604 & 686/Bang/2012, 335 & 469/Bang/2013 Page 16 of 22 “9. Merely because the income of the hotel has increased, it does not necessarily follow it is because of therefurnishing or repair work done to the hotel rooms. That may be one of the factor. The real test is whetherall those acts constitute replacing the existing asset. The existing asset is the hotel building and its rooms.When no extra flooring space or extra room capacity is added on account of such repairs, it cannot be saidthat a new asset has come into existence. All these repairs are done to preserve and maintain an alreadyexisting asset. In the course of such repairs, if they have upgraded the facilities to international standards,then that would not constitute a new asset. Therefore, the Tribunal was justified in holding that theexpenditure incurred towards repairs and replacement of old parts would be in the nature of revenueexpenditure and not capital expenditure.” 24. From the above Para of this judgment of Hon'ble Karnataka High Court, it is seen that in that case, this finding was given that the repair expenditure were incurred to preserve and maintain an already existing asset, in the course of such repairs, if they have upgraded the facilities to international standards, then that would not constitute a new asset and in the present case, in the absence of bills, we cannot examine the exact nature and hence, we restore this matter back to the file of AO for fresh decision after examining the facts in the light of this judgment of Hon'ble Karnataka High Court and other judgments cited before us as noted above. This ground is allowed for statistical purposes. 25. Ground nos. 6a and 6b of assessee’s appeal are regarding disallowance in respect of broadband connectivity charges of Rs. 22,81,251/- u/s. 40(a)(ia) of IT Act for this reason that no TDS was deducted by assessee. As per the chart submitted by assessee before us, this is the contention raised by him that as per the Tribunal order rendered in the case of Destimony Enterprises Limited vs. ITO (TDS) in ITA Nos. 4124 & 4125/Mum/2015 dated 28.08.2017, copy submitted in the compilation of judgments, it was held that in respect of internet connection charges paid by assessee, the provisions of section 194-I, 194-C and 194-J of IT Act are not applicable and therefore, no TDS was deductible. He submitted that the facts of present case are similar and therefore, in the present case also, this Tribunal order should be followed and issue should be decided in favour of the assessee. The ld. DR of revenue supported the orders of authorities below. He also filed written

IT(TP)A Nos. 1339/Bang/2010, 604 & 686/Bang/2012, 335 & 469/Bang/2013 Page 17 of 22 submissions and in the same, he has raised various submissions but there is argument on this aspect that how this issue is not covered in favour of the assessee by the tribunal order cited by the learned AR of the assessee as noted above by pointing out any difference in facts. 26. We have considered the rival submissions. First of all, we reproduce the relevant paras 292 to 296 from pages 92 to 94 from the order of CIT(A). The same are as under. “292. I have carefully considered the appellant's submissions, The AO has disallowed under section 4o(a)(ia) a sum of Rs. 22,81,451 representing broadband connectivity charges paid to five parties without malting tax deduction at source (TDS). He has argued that under the provisions of the Act, a company making any payment to a resident ought to deduct, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by cheque or draft or by any other mode,whichever is earlier, income-tax thereon at the rates applicable. He has rejected the appellant’s contention that in the absence of a specific contract with the service providers TDS was not called for, stating that provision of Internet service was a service which had anelement of contract implicit in the mode of terms and conditions of service. 293. The AO has not cited the specific provision under which the appellantwas required to make TDS, but his reference to the term contract indicates thathe has invoked the provisions of section 194C(1) dealing with payment tocontractors. The section mandates TDS in respect of contracts for carrying outof any' work, including supply of labour. Clause (iv) of Explanation to section194C defines work to include advertising, broadcasting and telecasting including production of programmes, carriage of goods or passengers by any mode of transport other than by railways, catering, and manufacturing or supplying custom-made products using customers' materials. Thus the scope of section194C is limited to the items of work specifically defined therein and, to suchworks tarried out in pursuance of a contract, which includes a sub-contract interms of clause (iii) of the Explanation. 294. The appellant's refrain for not making TDS under section 194C is thatthere was no contract and that the payment constituted a business income in the hands of the recipient. While the nature of the receipt in the hands of the recipient is entirely beside the point and has no relevance to the appellant'sliability or lack of it under section 194C, there is merit in the AO's argument thatthere is always an implicit contract with Internet Service Providers whoundertake to provide broadband connectivity services on pre-determined termsand

IT(TP)A Nos. 1339/Bang/2010, 604 & 686/Bang/2012, 335 & 469/Bang/2013 Page 18 of 22 conditions which the service receiver is bound to accept. The onlyalternative to not accepting such terms and conditions is not to avail the serviceat all. Therefore, it cannot be said that there was no contract in existence. 295. Having clarified this aspect, one must now consider whether the serviceof providing broadband Internet connectivity constitutes a 'work' within themeaning of section 194C(1). As the definition of work contained in clause (iv) ofExplanation to section 194C is an inclusive one, one has to infer that thedefinition is not exhaustive and is not limited to the items that are specifically named in the definition clause and thus there is scope to interpret the definition to cover broadband Internet service as well. 296. The appellant has made elaborate submission on the ambit and scope of terms such as royalty and fees for technical services, but there is no reference by the AO to those terms or section 194J.The appellant's discussion on theseaspects and the provisions of the Act and the case laws cited in that context aretherefore superfluous. Considering that broadband Internet service is notspecifically excluded from the definition of work in clause (iv) of Explanation to194C, I am inclined to hold that there was a liability on the part of the appellantto make TDS on these payments and consequently, the provisions of section40(a)(ia) were attracted in this case. I therefore confirm the disallowance of Rs.22,81,451 and dismiss this ground of appeal.” 27. From the above paras reproduced from the order of CIT (A), it is seen that as per CIT(A), the AO has invoked the provisions of section 194C of IT Act although not so stated by AO specifically in the assessment order. As per CIT(A) also, TDS was to be deducted by assessee u/s. 194C of IT Act. As per the Tribunal order cited by ld. AR of assessee, we find that specific finding has been given by the Tribunal in this case that for the payment for internet connection charges, neither section 194C is applicable nor section 194-I nor 194-J. Learned DR of the revenue could not point out any difference in facts in the present case and in the case of Destimony Enterprises Limited vs. ITO (TDS) (Supra). Hence, respectfully following this Tribunal order, we hold that the disallowance made by the AO in the present case u/s. 40(a)(ia) is not justified. We delete the same. Ground nos. 6a and 6b are allowed.

IT(TP)A Nos. 1339/Bang/2010, 604 & 686/Bang/2012, 335 & 469/Bang/2013 Page 19 of 22 28. Ground no. 7 is regarding charging of interest u/s. 234B and 234C of IT Act. These grounds are consequential and hence, no separate adjudication is called for. 29. Ground no. 8 of assessee’s appeal is not pressed as per the chart submitted by assessee and accordingly this ground is rejected as not pressed. 30. In the result, the appeal of the assessee is partly allowed in the terms indicated above. 31. Now we take up the revenue’s appeal for Assessment Year 2008-09. The grounds raised by revenue in this year are as under. “1. The order of the learned CIT(A) is opposed to law and facts of the case. 2. The learned CIT (A) erred in holding that the size and turnover of the company are deciding factors for treating a company as a comparable, and accordingly erred in excluding M/s Flextronics Ltd., M/s iGate Global Solutions Ltd., M/s Infosys Technologies Ltd., M/s Mindtree Ltd., M/s Persistent Systems Ltd., M/s Sasken Communications Technologies Ltd., M/s Tata Elxsi Ltd. and M/s Wipro Ltd. in Software development segment; M/s Aditya Birla Minacs Worldwide Ltd, M/s Coral Hubs Ltd, M/s Eclerx Services Ltd, M/s Infosys BPO Ltd, M/s Jindal Intellicom Pvt. Ltd, M/s Mold-tek Technologies Ltd, M/s Wipro Ltd(seg) and M/s Allsec Technologies Ltd in ITES segment. 3. The learned CIT(A) erred in holding that M/s Celestial Biolabs Ltd should be excluded fromthe list of comparables of Software segment and Engineering R&D services segmentbecause of abnormal high profit margin, without giving reasons how functions discharged,assets deployed and risks assumed of such companies were different from the appellantcompany. 4. The learned CIT(A) erred in holding that the TPO was not justified in applying the employeecost filter and directed to include M/s Indus Networks Ltd which was excluded in thesoftware development services segment by using this filter. 5. The learned CIT(A) erred in rejecting the diminishing revenue filter used by the TPO toexclude companies that do not reflect the normal industry trend. 6. The learned CIT(A) failed to appreciate that the different year ending filter applied by theTPO is necessary to exclude companies

IT(TP)A Nos. 1339/Bang/2010, 604 & 686/Bang/2012, 335 & 469/Bang/2013 Page 20 of 22 which do not have the same or comparable financialcycle as the tested party. 7. In facts and circumstances of the case, the learned CIT(A) erred in holding that M/s Avani Cincom Technologies Ltd cannot be taken as a comparable as the segment details are notavailable. 8. The learned CIT(A) erred in excluding M/s Celestial Biolabs Ltd. from the final set ofcomparables of Software segment and Engineering R&D segment. 9. In the facts and circumstances of the case, the learned CIT(A) erred in holding that M/sKALSInformation Systems Ltd cannot be taken as a comparable as the company carriesinventories. 10. In the facts and circumstances of the case, the learned CIT(A) erred in holding that M/sAccentia Technologies Ltd had extraordinary circumstance and, therefore, cannot be taken asa comparable. 11.In the facts and circumstances of the case, the learned CIT(A) erred in holding that M/s Genesys International Corporation Ltd being functionally different, cannot be taken as acomparable. 12. In the facts and circumstances of the case, the learned CIT(A) erred in holding that M/s Clinigene International Ltd and Research Support International Pvt Ltd being functionallydifferent cannot be taken as a comparable company. 13. The learned CIT(A) has erred in directing the AO to treat the expenses incurred on purchaseof Software as revenue expenditure rather than treating it as capital expenditure in view ofthe specific provisions in the I.T.Act and Rules with regard to treatment of computersoftware as forming part of computer for the purpose of allowing depreciation. 14. The learned CIT(A) has erred in directing the AO to allow deduction towards purchase ofsoftware as revenue expenditure without appreciating the fact that computer software formspart of computers for the purpose of allowing depreciation u/s 32 of the I.T.Act read with ITRules 1962 and therefore, the expenditure incurred on purchase of computersoftware/License to use computer software, either for one year or for more than one yearcannot be allowed as revenue expenditure. 15. The CIT(A) has erred in directing the AO to exclude a sum of Rs.7,08,14,999/- incurredtowards freight, telecommunication and Insurance and Rs.4,09,64,305/- incurred in foreigncurrency towards traveling expenses attributable to delivery of software outside India

IT(TP)A Nos. 1339/Bang/2010, 604 & 686/Bang/2012, 335 & 469/Bang/2013 Page 21 of 22 bothfrom the Export Turnover as well as from the Total Turnover for the purpose of computingdeduction u/s10A without appreciating the fact that the status allows exclusion of suchexpenditure only from Export Turnover by way of specific definition of Export Turnover asenvisaged by Sub-clause (4) of Explanation 2 below Sub-section (8) of section 10A and theTotal Turnover has not been defined in this Section. 16. For these and other grounds that may be urged at the time of hearing, it is prayed that theorder of the CIT(A) in so far as it relates to the above grounds may be reversed and that ofthe Assessing Officer may be restored. 17. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above.” 32. From the above grounds, it is seen that ground no. 1 of revenue’s appeal is general and ground nos. 2 to 12 are in respect of TP issues and in view of the MAP resolution, these grounds of revenue’s appeal are to be rejected and we reject the same.

IT(TP)A Nos. 1339/Bang/2010, 604 & 686/Bang/2012, 335 & 469/Bang/2013 Page 22 of 22 reduced by AO from export turnover should also be reduced from total turnover. The CIT(A) has followed the judgment of Hon'ble Karnataka High Court rendered in the case of CIT Vs. Tata Elxsi Ltd. (supra). Now this issue is covered in favour of the assessee by the judgment of Hon’ble Apex Court rendered in the case of CIT vs. HCL Technologies Ltd. (supra) also. Respectfully following these two judgments, we decline to interfere in the order of CIT(A) on this issue. Accordingly these grounds of revenue’s appeal are rejected.

Sd/- Sd/- (LALIET KUMAR) (ARUN KUMAR GARODIA) Judicial Member Accountant Member Bangalore, Dated, the 10th May, 2019. /MS/ Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order

Assistant Registrar, Income Tax Appellate Tribunal, Bangalore.